CareRx Corp

TSX:CRRX

Earnings Call Transcript 2020-Q1

[Operator]

Good morning, everyone, and welcome to Centric Health's 2020 First Quarter Earnings Call. Please note that today's call is being broadcast live over the Internet. And the webcast will be available for replay beginning approximately 1 hour following the completion of the call. Details of how to access the webcast replay is available in yesterday's news release announcement, announcing the company's financial results as well as the company's website at www.centrichealth.ca. Today's call is being accompanied by a slide presentation. Those listening via telephone can access this slide presentation from the company's website in the Investors section under Events and Presentations, by loading the webcast and choosing the non-streaming audio option. Before we begin, let me remind you that certain matters discussed in today's conference. Or answers that may be given to questions asked could constitute forward-looking statements that are subject to risks and uncertainties related to Centric Health's future financial and business performance. Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect results are detailed in Centric Health's periodical results and registration statements, and you can access these documents in the SEDAR database under www.sedar.com. Centric Health is under no obligation to update any forward-looking statements discussed today, and investors are cautioned not to place undue reliance on these statements. I would now like to turn the call over to David Murphy, President and CEO of Centric Health Corporation. Please go ahead, Mr. Murphy.

[David Murphy, President, CEO & Director]

Thank you, and good morning, everyone. Welcome to our first quarter earnings call. I hope that all of you listening today and your families are safe and well. I am joined this morning by our Chief Financial Officer, Andrew Mok. We had a successful and eventful first quarter. Financial highlights included revenue growth of 3%, driven by an increase in our average number of beds serviced compared to the same period a year ago, and our adjusted EBITDA was up 10% versus the first quarter of 2019. During the quarter, we completed a $28 million senior secured debt refinancing with Crown Capital and Yorkville Asset Management. The proceeds were used to repay our existing credit facilities in full and for working capital purposes. The new credit facilities also provided for additional tranches to finance the transformational Remedy's acquisition, which closed last week. I will discuss the acquisition in more detail later in the call. But first, I would like to provide an update on our business in the context of the COVID-19 pandemic. Most of us have been affected in one way or another by this pandemic some of us are fortunate as the impact has been limited to how and where we work and having to stay at home. But there are many others that have not been this fortunate. Many of the residents of seniors' communities around the country, including those of the home operators we serve, have multiple chronic health conditions. As such, these people are vulnerable to any virus or infection and particularly affected by COVID-19. And because they have chronic health conditions, it is all the more important that they continue to have access to the medications that they need during this pandemic. As a provider of pharmacy services, Centric Health's operations are an essential service. Our team is working tirelessly to meet the needs of our seniors and is in frequent contact with both suppliers and home operator partners to mitigate against and minimize any disruptions. At this time, all our pharmacy sites are fully operational. COVID-19 has not had a material impact on our financial results to date. On that note, I would now like to turn the call over to Andrew for his review of our first quarter financial results.

[Andrew Mok, Chief Financial Officer]

Thank you, David, and good morning, everyone. I'll walk through our 2020 first quarter financial results, which are available in our financial statements and MD&A, which have been filed with SEDAR and are also available on our website. Our revenue for the quarter grew 3% to $30.4 million compared to the $29.5 million generated in Q1 of last year. The increase was attributable to the higher average number of beds serviced year-over-year, the impact of which was partially offset by the amendment of the Ontario Drug Benefit Act, or ODBA for short, that came into effect at the start of this year. For those unfamiliar, the ODBA amendments ended the fee-for-service model that was previously in effect in Ontario for pharmacies servicing residents in long-term care homes, which included payments of dispensing fees for drugs supplied and fees for certain clinical services. Instead, the amendment imposed a capitation model where pharmacy service providers receive a fixed professional fee for all pharmacy services provided to the residents in long-term care homes, with that fee being based on the number of beds in the home. Turning to our profitability. Adjusted EBITDA for the quarter grew 10% to just over $2 million for the quarter compared to $1.85 million for the first quarter of last year. The increase was largely attributable to a 22% reduction in corporate costs achieved through labor savings, which was partially offset by a slight decline in specialty pharmacy adjusted EBITDA, as we anticipated, as the impact of the ODBA amendments more than offset the benefit from our higher bed count.The net impact of the ODBA amendments in the first quarter was a reduction to adjusted EBITDA of approximately $0.5 million. The quarterly impact of the amendments is expected to decline in the second quarter and onwards as the full quarter impact of certain cost savings initiatives implemented in response to the regulatory changes will be realized. These cost savings initiatives occurred partway through the first quarter.During the first quarter and subsequent to quarter end, we completed the execution of our deleveraging plan and strategic direction to establish company as the leading provider of specialty pharmacy services to Canadian seniors. At the start of the year, we completed the divestiture of our interest in the Performance Orthotics business. At the end of the first quarter, we entered into definitive credit agreements with Crown Capital Partners and Yorkville Asset Management for up to $42.7 million in total gross proceeds. Utilizing these proceeds to refinance our existing credit facilities, finance the Remedy's acquisition, which we closed on May 7, and for working capital purposes.Following the closing of the Remedy's acquisition, the total outstanding indebtedness to Crown Capital Partners is $27 million with a further $3 million tranche to be drawn subject to the company meeting certain conditions, and the total outstanding indebtedness to Yorkville Asset Management is $12.7 million.The transactions completed year-to-date significantly strengthened our financial health and position the company to play a leading role in the consolidation of our sector. I will now turn the call back over to David to discuss what the Remedy's acquisition means to our business. David?

[David Murphy, President, CEO & Director]

Thank you, Andrew. We discussed the Remedy's acquisition on our fourth quarter call just over 6 weeks ago, but there are certainly several aspects of the acquisition that are worth repeating. First and foremost is the fact that the addition of Remedy's make Centric Health, the largest and leading provider of specialty pharmacy services in the Canadian market. Making the deal even more appealing since our Q4 call, as expected, Remedy's completed a tuck-in acquisition of Integrity Pharmacy, Inc., or iPharm, a regional specialty pharmacy serving over 800 residents of seniors' homes in Ontario. With the addition of iPharm, the Remedy's acquisition contributes approximately 19,300 beds to our bed count, which now stands at over 50,000 residents post closing.In addition to increased scale, the acquisition is highly complementary to Centric. Importantly, Remedy's substantially augments our client base in geographies where we already had a strong presence, Ontario and Western Canada. As such, it is important to highlight that we have just acquired one of our most formidable competitors, and we are very happy that they are now our partners. Remedy's is well-known for its focus on quality, compliance operational efficiency and optimal health outcomes. They have built a strong business over the past several years. We believe this transaction brings together 2 organizations that are committed to providing the highest level of care for Canadian seniors. We look forward to building on our respective strengths, and we are confident in the potential to realize material synergies and long-term value creation from this transaction because of the increased operational scale that it will generate within our shared geographic markets. This is an exciting time for Centric Health, and I would like to take this opportunity to welcome the entire Remedy's team. Joining our leadership team as our newly appointed Chief Operating Officer is Jeff May who served as Remedy's Executive Vice President and General Manager since 2015. Jeff is a highly respected and accomplished industry veteran with over 30 years of pharmacy and other healthcare experience in Canada. He has been instrumental in Remedy's significant success over the past several years, and we look forward to him now being a big part of our ongoing success.Another driving force behind Remedy's success has been Bruce Moody, who we have appointed to Centric's Board of Directors. Bruce is the Founder and Former Principal Shareholder and CEO of Remedy'sRx Specialty Pharmacy. We look forward to his guidance and contributions to our Board moving forward. In addition, Peter Brown has been appointed as a Board Observer and will be nominated for election as a Director at our upcoming Annual General Meeting. Since 1997, Peter has served as a partner at Newpoint Capital Partners. The specialty pharmacy sector in Canada remains highly fragmented, and we continue to see meaningful opportunity for consolidation. With over 50,000 beds, we are now the leader with an 11.9% market share. And significant opportunities exist for Centric to continue to grow our market share moving forward. We believe that we have further strengthened our competitive advantage with the recent acquisition and that we are well positioned to win new business and add bed service during the next 12 to 16 months.In addition, we will continue to pursue potential accretive acquisition opportunities that will further strengthen our market presence. With the acquisition now complete, it is time for the next step in our strategic transformation. This morning, we announced our intention to rebrand Centric Health as CareRx Corporation. Centric Health is a brand that reflects our history as a diversified healthcare services company. Today, we are a pure-play provider of specialty pharmacy services, and we believe that we need a brand that better reflects our strategic focus and core values. While our pharmacies currently operate under several different banners across the country, including CareRx in British Columbia, we see this moment as an opportunity to unify our combined company, including the Remedy's organization under a single national brand. Any change in name is subject to shareholder approval, which we will seek at our upcoming Annual and Special Meeting of Shareholders on June 18. If the name change is approved by shareholders, then subject to customary Toronto Stock Exchange approvals, we also plan to have the company's trading symbol for its common shares on the TSX change to CRRX.Before opening the call to questions, I want to take this opportunity to say that I'm extremely grateful to our entire team, Centric and Remedy's for their continued dedication and incredible efforts during these challenging times. I would also like to thank home operators across the country, including their frontline care workers for all they are doing to keep our seniors safe and well.I would now like to open the call to questions. Operator?

[Operator]

[Operator Instructions]Your first question comes from the line of Doug Cooper from Beacon Securities.

[Doug Cooper, Managing Director and Head of Research]

David, just first question on the segment margin, 10.5% in the quarter, down from, I guess, 12.3% in Q4 and a high of 12.9% in Q3. Can you specifically, how much -- how many basis points did the Ontario impact have? And can you give us some guidance of where you can claw that back, do you think, over the next few quarters?

[David Murphy, President, CEO & Director]

Thanks. I'll let Andrew sort of itemize the variance. I would remind you that Q1 for various reasons from a seasonality perspective is generally a slightly lower both absolute value and percent margin. So the Q4 to Q1 comparison is not necessarily apples-to-apples. But Andrew, maybe you could help with some of the -- specifying the ODB impact on segment margin.

[Andrew Mok, Chief Financial Officer]

Doug, the impact of the ODB changes in Q1 was about 1.5% of that margin difference.

[Doug Cooper, Managing Director and Head of Research]

So in other words, pro forma, would have been 12% versus 11% the last year?

[Andrew Mok, Chief Financial Officer]

That's correct.

[Doug Cooper, Managing Director and Head of Research]

Okay. So with that going...

[David Murphy, President, CEO & Director]

And Doug, in terms of answering the rest of the question. So as Andrew mentioned, we did implement a number of cost-saving initiatives, they're now fully implemented, but we didn't realize the full benefit of that in the first quarter. So we continue to believe -- I believe we issued guidance that the normalized impact will be something like $350,000, $360,000 a quarter. So you'll expect to see that benefit in the remaining quarters. And then obviously, we continue to believe there are growth and other efficiency opportunities over the course of the year that we can use to more fully offset that impact.

[Doug Cooper, Managing Director and Head of Research]

Great. Just on the growth opportunities. I know there's a number of RFPs outstanding. Can you give us any sort of visibility on when those will come? When you'll be bidding on them? And when they may be awarded?

[David Murphy, President, CEO & Director]

Yes, sure. As I mentioned, there is, I think, starting in the fourth quarter of this year and rolling into next year, I think a substantial number out of the ordinary number of potential competitive RFPs. So we probably won't get into too much detail on this call for sort of competitive and sensitivity reasons. But starting in the fourth quarter and rolling into 2021, there's certainly well-above-average number of potential opportunities that we have confidence that we have a significant chance of winning.

[Doug Cooper, Managing Director and Head of Research]

Okay. And I guess just my final question from a balance sheet perspective. I just want to confirm, as of today, May 13, the total debt, let's exclude the converts, you have the $27.5 million convert and then the 12.5% -- $12.5 million convert. So the actual term debt is -- now with the drop of from Crown and the drop from Yorkville in the last couple of days, is it $27 million for Crown and $12.7 million for Yorkville? Is that -- is there anything more that I'm missing?

[David Murphy, President, CEO & Director]

That's correct. The only other thing would be there is a $4 million vendor take back as part of the acquisition. So that would be the only other thing I would add.

[Operator]

Your next question comes from the line of Doug Loe from Echelon Wealth.

[Douglas W. Loe, Analyst of Healthcare and Biotech]

David, just wanted to circle back on the Remedy'sRx acquisition. Congratulations on closing that last week, by the way. Just I think we all have expectations that there would be some pretty substantial operational administrative cost synergies just based on the fact that there's abundant geographic overlap between, now, CareRx and Remedy'sRx. Any sort of general time frame over which you think you might be able to integrate tablet dispensation, equipment technologies, administrative offices, and so forth? I want to make sure we have realistic expectations on when synergies could be realized, is that a -- it's more of a 2021 expectation when all those things can be fully realized? Or do you think that, that can happen in the sort of earlier, say, before the end of this year?

[David Murphy, President, CEO & Director]

Yes. Good question. Thanks, Doug. And so, although, I don't think we're going to provide guidance on the actual quantum of the synergies. In terms of how we expect the integration to happen from a timeline perspective. Certainly, we do expect benefits by the end of this year. But I think it is safe to say that our goal now would be to have the integration completed in full by sometime in 2021.

[Douglas W. Loe, Analyst of Healthcare and Biotech]

That's great. And then maybe just quickly -- I asked this question before, I see that you had AceAge and Karie that to modest mention in your MD&A. Any sort of an update there on how Karie device manufacturing and roll over to home care could transpire over the next 2 to 3 quarters?

[David Murphy, President, CEO & Director]

Yes. Good question. I think the update is basically the same as last quarter. Thankfully, their manufacturing and production schedule has not been impacted by COVID. So they continue to ship units to Europe. I would say what I said last quarter, though at this point, at this stage of the development, I think we can expect the bulk of their volume to be shipped outside of Canada, which is as an equity investor that we don't care necessarily where it goes. It's more about the business being successful. I continue to think the Canadian ramp is going to be a little slower. And so that's not going to be where the bulk of their units go in the next sort of 12 months or so.

[Operator]

[Operator Instructions]Your next question comes from the line of Kyle McPhee from Cormark.

[Kyle McPhee, Analyst of Institutional Equity Research]

First question for me. Just aligned with your commentary, I also see lots of contracts up for bedding starting later this year. And clearly, you guys can win your fair share of those. So on that topic, what is your capacity to add new beds without having to add any new material fixed OpEx or infrastructure? Or I guess, in other words, what's your capacity utilization from your footprint after digesting Remedy's?

[David Murphy, President, CEO & Director]

Kyle, good question. I think we're very confident that the combined network has ample capacity to handle even the sort of best-case scenario in terms of the number of beds we might win in the next 12 months. So obviously, we're still -- it's early stages of integration. But I would emphasize, our intent here is to integrate with the intention to grow to make sure that we have sufficient capacity remembering that when you win beds, it's highly dependent on where in the country -- the customers are located and the volume is generally spread out across multiple sites, either across the country or across provinces. So we're confident that even in a best-case scenario, we have capacity there to absorb new beds.

[Kyle McPhee, Analyst of Institutional Equity Research]

Got it. Okay. And then just on the Ontario regulatory change, you mentioned the hit in Q1 was $0.5 million. And it will go down with some cost savings. Can you just give some color on what those cost reactions are?

[David Murphy, President, CEO & Director]

Sure. It's a number of operating costs and labor reductions in Ontario. I think it will go deeper than that, except to say they have all been fully operationalized. So there's no more work to do there.

[Kyle McPhee, Analyst of Institutional Equity Research]

Okay. And then just on COVID, apologies if you addressed this at the start of the call. It took me a while to go through the queue and get on. Just on COVID. Just looking for some added color on what you're seeing in April and May, stuff like -- I mean, has there been material changes to how or the cost of doing business for you guys? Or is there any impact on occupancy levels at the seniors' facilities you guys are servicing?

[David Murphy, President, CEO & Director]

Yes. Good questions. On the cost side, not at all. We don't see any sort of unusual or nonrecurring costs. And even on the occupancy side, I mean obviously, we've expected that in terms of the slight decreases in bed count based on delays in admissions or readmissions. We're not seeing anything meaningful yet. Small reductions in a couple of homes. Fortunately, we've not had any of our customers that are sort of at the high end of the significant outbreaks. So really, a potential for very small, but nothing material that I think will move the needle on revenue.

[Kyle McPhee, Analyst of Institutional Equity Research]

Got it. Okay. And then just on your corporate OpEx, it's been falling nicely for a number of quarters in a row. Are we kind of at a steady state now? Or is there more room to -- for that to fall?

[David Murphy, President, CEO & Director]

Yes, good question. Yes. I think we made some really substantial progress, and I give Andrew a lot of credit for that. I think if we hadn't done the acquisition, perhaps there might be opportunities for further savings. But I think we're at a place now where I think we've appropriately rightsized that cost center now that we're not a multidivisional company anymore, it's an integrated business. So I think you can probably expect that will stay the same. And then obviously, we've got to focus on getting the Remedy's folks integrated as well.

[Kyle McPhee, Analyst of Institutional Equity Research]

Got it. Okay. And then just last quick 1 for me. Can you confirm what your exit bed count was as opposed to the average in Q1?

[David Murphy, President, CEO & Director]

I believe that was 31,300. Andrew, do you have the exact number?

[Andrew Mok, Chief Financial Officer]

31,382, Kyle.

[Operator]

There are no further questions at this time. I'll turn the call back over to the presenters.

[David Murphy, President, CEO & Director]

Thank you, everyone, for participating on today's call and for your continued interest in Centric Health. We look forward to reporting on our progress again next quarter. In the meantime, keep well and take care.

[Operator]

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