CareRx Corp

TSX:CRRX

Earnings Call Transcript 2021-Q1

[Operator]

Good morning, everyone, and welcome to CareRx's First Quarter 2021 Financial Results Conference Call. Please note that this 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 are available in yesterday's news release announcing the company's financial results, as well as the company's website at www.carerx.ca. Today's call is accompanied by a slide presentation. Those listening on their phones can access the slide presentation from the company's website in the Investors section under Events and Presentations by loading the webcast and choosing the nonstreaming audio option. Certain matters discussed in today's call, or answers that may be given to questions asked, could constitute forward-looking statements that are subject to risks or uncertainties relating to CareRx'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 CareRx's periodical results and registration statements. And you can access these documents in the SEDAR database under www.sedar.com. CareRx 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 hand the call over to David Murphy, President and CEO of CareRx's Corporation. Please go ahead, Mr. Murphy.

[David Murphy, President, CEO & Director]

Thank you, and good morning, everyone. Welcome to our earnings call for the first quarter of 2021. I am joined this morning by our Chief Financial Officer, Andrew Mok. Continuing the momentum from 2020, CareRx has had an exciting start to 2021, marking one of the busiest and most eventful periods in the company's history. We announced 3 acquisitions in less than 90 days, including our largest and most meaningful to date that, in aggregate, will expand our bed count by approximately 85% from where we were at the end of the first quarter. We closed the first of these acquisitions in April and are targeting to complete the others during the summer. They will not only further transform our revenue and profitability profile, but also significantly expand our scale, which will enable us to realize cost advantages in ways that were not previously available to us. Our financial results for Q1, highlighted by significant year-over-year growth in revenue and adjusted EBITDA, reflect last year's successful execution on our growth strategy, and in particular, the scale and synergies generated by our Remedy's acquisition last May. Turning to the numbers. Revenue for Q1 increased 47% year-over-year to just under $45 million, driven by growth in the number of beds serviced, which was attributable primarily to the Remedy's acquisition. The average number of beds serviced during the quarter was 48,703, up 55% year-over-year. This was down slightly, however, from Q4, as the impact of the COVID-19 pandemic on seniors homes peaked in December and January. The impact of this third wave of COVID did have an impact on revenue in the quarter, which again was particularly pronounced in the month of January. We have since seen bed counts trend favorably, with successive improvements in February and March, and the strongest indication of normalization coming in April. In addition, the onboarding of the 1,100 bed contract that we won in Q4 of last year, which was set to start in January, was delayed as a result of the pandemic. The bulk of that onboarding occurred late in Q1 and was subsequently fully completed in mid-April. As a result, this contract contributed minimal revenue to Q1. Adjusted EBITDA for Q1 doubled from the same period last year to $4.1 million from $2 million, driven by the addition of the Remedy's beds as well as the full quarterly contribution of the $3 million in annual cost saving synergies from the Remedy's integration. This growth was partially offset by the impact of COVID-19, including the previously mentioned impact on beds serviced as well as certain costs incurred in assisting our home operator partners facing COVID-19 outbreaks during the beginning of the quarter. The resulting EBITDA margin increased to 9.1% from 8.8% in Q4 and 6.7% in Q1 last year. As a reminder, this is the first quarter in which we realized the full synergies of the Remedy's acquisition, several quarters ahead of our initial projections, attributable to our team's outstanding work in completing the integration well ahead of our original schedule. This gives me great confidence with respect to the integration of the even larger Medical Pharmacies acquisition, and our ability to realize the expected synergies from that transaction. Turning to that acquisition. On April 19, we announced that we have entered into a definitive agreement to purchase the long-term care pharmacy business of Medical Pharmacies. The acquisition includes 18 facilities serving approximately 36,000 residents in the same provinces that we already serve. This acquisition alone expands our bed count by over 70% and further cements the leadership position we have been building in the sector over the past few years. The Medical Pharmacies business is expected to contribute run rate annualized revenue of approximately $150 million and adjusted EBITDA of between $10 million and $12 million. In addition, we are estimating cost saving synergies to be a minimum of $5 million. The purchase price is $70 million in cash, plus 1 million common shares, with the cash portion to be financed through a $55 million equity offering and $39 million in incremental debt as part of a refinancing, both of which we announced concurrent with the transaction. Andrew will speak to these in more detail. The acquisition is subject to a number of regulatory approvals, including approval by the Competition Bureau. Subject to those approvals, we look forward to completing the acquisition sometime around midyear. We followed our Medical Pharmacies news rather quickly with the announcement of a definitive agreement with Rexall to purchase a portion of its long-term care pharmacy business, following their strategic decision to exit this business entirely. The portion of the business we are acquiring serves approximately 4,200 residents of long-term care, assisted living and other congregate care settings across Ontario and Northern Alberta, and includes a fulfillment center in Sudbury, Ontario. It is expected to contribute run rate annualized revenue of approximately $14 million and nominal adjusted EBITDA prior to any benefits from the integration of the operations of the 2 businesses. Importantly, there is additional opportunity here to work with Rexall to transition beds in Western Canada beyond the portion of the business we are acquiring, as Rexall winds down the remainder of its business. Before I turn the call over to Andrew, there were a number of additional highlights during and subsequent to the end of the quarter that I would like to mention. In January, we announced the acquisition of SmartMeds Pharmacy, which was completed on April 1 and added approximately 2,400 beds in Ontario. SmartMeds is expected to contribute run rate annual revenue of [ $13 ] million and run rate annual EBITDA of approximately $1.5 million prior to any integration synergies. Earlier, I discussed the onboarding activity for the new 1,100 bed contract in Ontario. Although onboarding delays minimized the contribution of this contract to our Q1 results, it was fully onboarded by mid-April. Some of these additional beds are being serviced by a new CareRx location in Thunder Bay, which was purchased from Medical Pharmacies in a transaction that is separate from the broader acquisition. The Thunder Bay site, plus the Medical Pharmacies and Rexall acquisitions, will provide us with a significantly expanded footprint and presence in Northern Ontario, a region where CareRx has not historically had meaningful market share. Earlier, I discussed the normalization of our bed count since its low point in January as vaccination rates in seniors' homes increased and outbreaks decreased, we have begun to see a gradual increase in the number of beds serviced. In April, in addition to the new beds from the onboarded contract and the SmartMeds acquisition, we saw an increase of approximately 750 beds, driven by higher occupancy rates within the homes we service. We are optimistic that this normalization will continue throughout Q2 and into the summer. Finally, outside of the growth in our core seniors care pharmacy business, following expansion to the greater Edmonton area in Q4, we recently launched Pharmacy At Your Door in the Greater Vancouver area. Results continue to be positive. And although we are taking a measured long-term approach here we are increasingly positive on the prospects for growth in this market and our ability to leverage our site network and fulfillment capabilities to deliver a customer pharmacy experience that is superior to new competitive entrants into this space. We believe Pharmacy At Your Door can be a steady contributor to our growth over the next several years. I would now like to turn the call over to Andrew to discuss our Q1 results in more detail. Andrew?

[Andrew Mok, Chief Financial Officer]

Thank you, David, and good morning, everyone. First, as a reminder, our financial statements and MD&A for the first quarter have been filed with SEDAR and are also available on our website. Revenue for the first quarter of 2021 increased $14.5 million or 47% to $44.9 million from $30.4 million in the first quarter of 2020. This increase was primarily attributable to the contribution of the Remedy's business. As David discussed, Q1 revenue growth was dampened by the temporary COVID-19 related reduction in our average bed count, due to COVID-19 outbreaks that occurred in the first half of the quarter at some of the homes that we service as well as the delay in the onboarding of the 1,100-bed contract awarded in Q4, which shifted toward the end of Q1 and into Q2. Adjusted EBITDA in Q1 increased $2.1 million or 100% to $4.1 million from $2 million in Q1 of last year. The increase was driven primarily by the contribution from the Remedy's business, which, as David noted, included the realization of a full quarter of the annualized cost saving synergies of over $3 million. Again, adjusted EBITDA was dampened by the temporary reduction in bed count and additional costs incurred to assist our home care partners with managing COVID-19 outbreaks. Turning to our balance sheet. We ended Q1 with $28.7 million in cash, which was up from $19.6 million at the end of the fourth quarter of 2020. The increase was primarily the result of the bought deal financing and concurrent private placement we completed in February of just under 5 million shares, which included the full exercise of the overallotment option at a price of $4.25 per share for total gross proceeds of $21.2 million or $19.6 million net of financing fees. This was partially offset by the closing cash payment for the SmartMeds acquisition of just over $4 million, the settlement of an earn-out related to 1 of our historical acquisitions, and capital expenditures of just over $1 million each. Additionally, the proceeds from the equity raise were also partially offset by cash used in operating activities of $1.7 million in the quarter, which was primarily due to a $2.3 million payment made during the quarter related to the settlement of the previously disclosed arbitration award related to one of the company's historical acquisitions, as well as the timing of certain other working capital movements and transaction fees incurred related to the recently announced acquisitions. And to be clear, the quarter end numbers do not reflect the equity financing or debt refinancing we announced subsequent to quarter end with the Medical Pharmacies transaction. With the exception of the amendment to the Yorkville facility, which is expected to be effective on or about May 19, those are expected to be completed concurrently with the closing of the Medical Pharmacies acquisition. Net debt at the end of Q1 decreased to $29.5 million from $38.5 million at the end of Q4, primarily due to the increased cash position, which reduced our net debt:annualized run rate adjusted EBITDA to 1.8x from 2.4x at the end of Q4. As a reminder, that metric was 4.3x this time last year. So we made some significant progress here that we expect to continue with the contribution of the recently announced and completed acquisitions. Subsequent to quarter end, we entered into a bought deal private placement of just over 8.9 million subscription receipts that will generate aggregate gross proceeds of approximately $45 million, as well as a concurrent binding term sheet with Yorkville for just under 2 million additional sub receipts for additional gross proceeds of approximately $10 million. Upon completion of these offerings, the total proceeds of $55 million will be used to fund a portion of the cash component of the consideration for the Medical Pharmacies acquisition as well as associated transaction costs. We also entered into binding commitment letters with our lenders, Crown Capital and Yorkville, to refinance our existing credit facilities, providing for a new $60 million senior debt facility and an increase of $6 million to our subordinated facility. The proceeds from this refinancing will lower our overall cost of capital and be used to repay the existing senior credit facility and fund a portion of the cash consideration for the Medical Pharmacies acquisition. I will now turn the call back over to David for some concluding comments. David?

[David Murphy, President, CEO & Director]

Thank you, Andrew. In the last 12 months, we have delivered on our consolidation strategy, adding more than 60,000 beds in total through 4 separate acquisitions. When all these transactions are completed, that will translate into a nearly 300% increase in our bed count since the end of Q1 last year. Even with the success of the past year, though, CareRx remains very well positioned to continue to execute on our growth strategy. The Canadian Seniors care pharmacy market remains very fragmented. After closing of the Medical Pharmacies and Rexall transactions, we will still represent just 21% of the market. Meaningful organic growth opportunities continue to exist, both from winning new customer contracts and from robust projected growth in the underlying market itself. The most important benefit from the accelerated success of our consolidation strategy is that it affords us the opportunity to deliver a truly superior and differentiated service offering to our home operator partners. Our future growth will depend on their confidence in us and the outstanding service, quality and support we provide to them. We are very confident in our ability to demonstrate that differentiation to them and earn their continued trust. We are not only the largest player in the sector. We are now the only national pharmacy provider with a singular focus on servicing the unique and complex needs of congregate care settings, and long-term care and retirement homes in particular. We have the largest fulfillment network, the strongest team, a team that will be meaningfully augmented by the addition of approximately 700 future colleagues from Medical Pharmacies. And we will continue to incorporate and build upon the best of the various legacy companies that constitute CareRx, including Medical Pharmacies and Rexall, to deliver a truly market-leading platform built around quality, technology and clinical and service excellence. Before opening the call to questions, I would again like to acknowledge the entire CareRx team for their tireless efforts, especially through this challenging time. To achieve what we have achieved this past year is incredible, but to have achieved it despite the additional challenges and stresses of the pandemic is further testament to the talent and commitment of our people. I would now like to open the call to questions. Operator?

[Operator]

[Operator Instructions] And your first question is from the line of Doug Cooper with Beacon Securities.

[Doug Cooper, MD & Head of Research]

Just want to confirm, first of all, I guess, the bed count. I know there's a slide in your presentation, but I just want to sort of line by line, if I could go through, $48.7 million was the end of -- or the average in the period, you said you onboarded 750, I guess, that were "vacant" during the pandemic. There's the 1,100 beds contract that you finished onboarding in, I guess, March, April, 40,200 between Rexall and Medical Pharmacies, and the 2,400 from SmartMed. So it's about 93,000. Is that in the ballpark?

[David Murphy, President, CEO & Director]

Yes. I think that's right, Doug. I think if you take a quarter end bed count, which is just under 49,000. And then the moving pieces in April are about 400 additional beds of the 1,100 that got onboarded in April, 2,400 from SmartMeds and the 750 that I mentioned as a sort of normalization, that gets you to somewhere around 52,500. Your math on the 2 acquisitions that are upcoming is obviously right. And then really, the missing piece is just sort of some further normalization. There's probably another 1,500 beds by our count that would constitute full normalization back to pre-COVID levels, it still hasn't happened yet.

[Doug Cooper, MD & Head of Research]

Okay. And we've discussed in the past some RFPs outstanding. Where do those stand? And what's your expectation on those, timing of those?

[David Murphy, President, CEO & Director]

Yes. I mean, as we discussed at the Q4 call, obviously the successive waves of COVID has really had a chilling effect on any serious big attempts of home operators to consider making a pharmacy transition. Just it's -- the impact of this has been fairly devastating, not just in terms of impact on the residents but also on staff. So we're continuing to see a reluctance of home operators to consider pharmacy transitions until things are more normalized. So none of those opportunities have gone away. We continue to believe that there are meaningful competitive opportunities available to us. They've just been delayed because of COVID. And my own view on that is that we may end up regarding that as a bit of a blessing because fundamentally, organic growth in this sector will come down to the ability to provide a meaningfully differentiated offering in a sector that historically has not had a lot of differentiation. And so from our perspective, the ability to make these acquisitions the last year or so, and to be able to offer something that we believe will be demonstrably superior to any other offering in the country, is going to put us in good stead when these home operators turn their minds more seriously to considering their pharmacy options.

[Doug Cooper, MD & Head of Research]

Okay. Just on the Rexall 4,200 beds. I think they had around, what, between 15,000 and 20,000. Like, what's their plan with the rest of those?

[David Murphy, President, CEO & Director]

Yes. The actual number, Doug, now is closer to 11,000...

[Doug Cooper, MD & Head of Research]

That's after your 4,200?

[David Murphy, President, CEO & Director]

No, before, before. So I won't speak for them. I would say what's publicly known is that they have indicated to customers in the market an intention to wind down that business. Almost all of the difference between what they have and what we purchased are in British Columbia. So it really comes down to their own plans for winding down that business. And I would just say we're -- we obviously have a good relationship with them by virtue of having done the transaction. And so we're certainly willing to present ourselves to customers as an option to take those beds. But fundamentally, it will come down to Rexall's decision to wind down and their time line. And then obviously, the customers will have a choice as it relates to who they might want to partner with instead.

[Doug Cooper, MD & Head of Research]

Okay. And final one on the bed count to Quebec. You've talked about national platform. Is there any plans to move into Québec? I'm assuming that's the sort of biggest hole.

[David Murphy, President, CEO & Director]

Yes. I think our -- obviously, our focus for the last year has been on doing synergistic acquisitions of companies that do the same thing that we do in the same space, and that's been a focus. So we'll have to integrate that. But yes, we continue to have a desire to be national, and our gaps are Manitoba, Québec and Atlantic Canada. And so I think a stronger company, better capitalized, I think we may have more options for geographic expansion in the next 12 to 18 months.

[Doug Cooper, MD & Head of Research]

Okay. And my final one, maybe for Andrew. Can you just give us, obviously a lot has changed in the balance sheet and capital structure since the since the quarter ended. Can you just give us -- just confirm where we stand, basic and fully diluted shares and the total debt outstanding as of today?

[Andrew Mok, Chief Financial Officer]

Sure. So -- and just to clarify, Doug, are you looking for that pre or post the announced equity financing the subscription receipts?

[Doug Cooper, MD & Head of Research]

Like as everything is closed and done and everything all.

[Andrew Mok, Chief Financial Officer]

Sure. So at that point, the issued and outstanding shares, and it depends on what your assumption would be on exercise of overallotment options, et cetera. But on the base deal, the outstanding shares would be just over 42 million. And on a fully diluted basis, it would be just over 56 million. And then from a debt perspective, it would be just over -- from an actual debt standpoint, it would be $80 million plus the $25 million of November 2019 convertible debentures and $13 million of March 2019 convertible debentures.

[Doug Cooper, MD & Head of Research]

Right. And those convertible debentures will be included, obviously, in the $56 million of fully diluted shares, correct?

[Andrew Mok, Chief Financial Officer]

That's correct.

[David Murphy, President, CEO & Director]

That's correct.

[Operator]

Your next question is from the line of David Newman with Desjardins.

[David Francis Newman, Analyst]

Been very busy. That's great to see. And obviously executing very quickly here, that's just terrific. So now you're over 90,000 beds and looks like your run rate EBITDA is around $40 million plus in 2022. And not really giving full benefit to the synergies. But more importantly, as you kind of build out maybe mega sites including new packaging equipment and things like that. Do you think you could hit -- start hitting your aspirational EBITDA levels like 13%, 14% margin? As, a, you soak up excess capacity today in the facilities and you basically build out these mega sites. What's your -- what's the path forward here on the margin front?

[David Murphy, President, CEO & Director]

Yes. I mean, the short answer on the margin side is, yes, we do. I think we're going to continue to be cautious, though, as it relates to talking about sites. I mean, at the end of the day, we have to make the right decisions as it relates to site consolidation, and our approach in the Remedy's transaction is when we make decisions, we're going to first tell our employees and then tell our customers and then publicly announce. And so I don't want to get too far ahead of ourselves on site consolidation. But you are right, David, that in addition to the normal rationalization of duplication that comes from an acquisition, we do see an opportunity, particularly in our large metropolitan markets, to move towards facilities that will service a much higher volume of beds than has historically been seen in the Canadian market. So I don't think we'll go further than that at this point in terms of time lines for savings projections. But we do certainly see an iterative improvement in margin that comes from the efficiencies of a significant increase in the number of beds that will go through some of our larger sites.

[Doug Cooper, MD & Head of Research]

Very good. And then -- and on the -- in Rexall in BC, on the 6800 incremental beds, have you had any direct conversations with any of the long-term care and retirement customers in the province with Rexall's blessing as of yet? Or is that to come?

[David Murphy, President, CEO & Director]

Yes, we have, but I probably wouldn't go further than that at this point.

[David Francis Newman, Analyst]

Okay. And then as you look at -- it's become a bit of a 2-horse race here with MediSystem with the consolidation of the market, and you're clearly in the pole position. Do your moves actually create more capitulation by the small independents who cannot compete with you, especially as you develop the scale and you can -- you have much more flexibility and an even stronger paying Canadian presence? I have to think there's smaller independents out there that will capitulate. And similarly, if I look at your long-term care and retirement home customers, they also might want to migrate towards you. Do you think there'll be an aura effect here?

[David Murphy, President, CEO & Director]

It's a good question. I think -- I mean, to be clear, if you say 2-horse race, those 2 national players, ourselves and the one you mentioned, still have a pretty small percentage of the overall market. So there's a long -- there's still a lot of choice, and this business has always been a localized business. Operating (sic) home operators make choices that are local. So look, obviously, we wouldn't have done the deals if we don't believe it gives us advantages in terms of what we can offer. But as I was saying earlier, at the end of the day, it is about showing competitive difference. There's no shortcuts in this sector. Home operators rightfully expect very high quality and very high service, and how big you are doesn't necessarily get you anything. So we still -- there's a lot of good competitors that are smaller, local that are still very formidable. But obviously, in the long run, we believe that we're going to have a set of capabilities of resources and sort of technology that will be very attractive. But I don't think this happens easily. I think it's still a very competitive market.

[David Francis Newman, Analyst]

Do you have to -- do you think you have to digest for a little bit here now before you kind of really pursue the M&A angle again? Or do you still think you can do the sort of tuck-unders?

[David Murphy, President, CEO & Director]

I mean obviously, our primary priority is going to be getting the integration right. We've done a lot in the last year. But we wouldn't rule out anything. I think the types of deals we've done in the last year, the as I said earlier, highly synergistic acquisitions of companies in the same geography. There's still things that interest us. I think we'd like to get the integration done, but sometimes you can't control the timing of good opportunities. And more broadly as to the previous question from Doug Cooper we may be in a position to consider other things, whether that's geographic expansion or acquisitions that don't necessarily require our existing teams in our existing geographies to do a lot of heavy lifting on integration. So I think it's fair to expect that next year will not look like the last year, but I wouldn't rule out further M&A.

[David Francis Newman, Analyst]

Excellent. And then a quick last one for Andrew, just on a quick sort of housekeeping. I can probably do the math myself. But what does this -- after all the raises close and X-ing out the over-allotment, what's your liquidity position after all this shakes out?

[Andrew Mok, Chief Financial Officer]

Just from a cash standpoint?

[David Francis Newman, Analyst]

Cash and availability, yes.

[Andrew Mok, Chief Financial Officer]

Yes. So from a cash standpoint at closing, we estimate that it will be about $20 million on hand. No, I guess, additional availability in the sense that the credit facilities are fully drawn. The term facilities. Yes.

[Operator]

Your next question is from the line of Chelsea Stellick of IA Capital Markets.

[Chelsea Stellick, Equity Research Analyst]

I think most of my questions were asked, but I do have one that wasn't. I'm just looking to get, I guess, more color on sort of the delay of the onboarding of those 1,100 beds on the Ontario contract. I know this was at the request of the home operator as written in the release, but do you foresee any similar delays and sort of reasoning for this delay translating to some of the other anticipated beds that you're onboarding in the near term?

[David Murphy, President, CEO & Director]

Sure. Chelsea, yes, the first part of the question, the overall umbrella in terms of the reason for the delay was COVID. In some cases, that was actual outbreaks in specific homes. And others, it was more just the staff -- the concerns about staff, resources and fatigue. And the last thing we want to do starting a new customer relationship is have the transition be something that stretches the team. So yes, look, do I think future wins might be -- until we are at a truly normalized place, might be a little slower than normal? I think that's possible. But I don't think that's a material risk, just because most -- for the most part, I'm not sure that many customers are going to actually make the award until they're ready to do the onboarding. So I suspect that, that's just sort of a function of the normalization process that's happening right now.

[Operator]

[Operator Instructions] And your next question is from the line of Justin Keywood with Stifel GMP.

[Justin Keywood, Director of Equity Research]

I just had a broader question. You mentioned in your opening remarks, the market share for CareRx is now 21%, and I believe that's up from 12% last year and also close to a goal of basically doubling the business. And I'm just wondering now, are you seeing any new trends or just with your current pipeline that gives you confidence that you can still increase that market share? And if there are any new broader goals for the organization?

[David Murphy, President, CEO & Director]

Yes. It's a great question. We did publish that goal of getting to 100,000 beds by 2023 last year. I can say it did not contemplate making the acquisitions that we've made, or making all of them. So for sure, our sights are higher. And in fact -- I'm not sure if I'd guarantee it because there's still some work to do -- but our goal now is to get to that 100,000 number by the end of this year, that's what we're marching towards. But yes, Justin, I think we'll -- I think with our Board, just have to recalibrate in terms of what goals we set and how much sort of a public ambition we set. But categorically, our goals have changed because we'd always said that we looked at our growth, our doubling of beds as roughly a 50-50 proposition between organic growth and M&A. And so per my earlier comments, we still believe there's lots of organic growth opportunities that come from us just showing the market what we can do from a differentiated service offering perspective.

[Justin Keywood, Director of Equity Research]

Okay. And just the next largest competitor as far as their market share, I believe it's -- would it be 7% or 8% still?

[David Murphy, President, CEO & Director]

Yes, I think it's in the range of about 35,000 beds, to the best that we are aware.

[Operator]

And at this time, we have no further questions. I'll turn it back over to the presenters for any closing remarks.

[David Murphy, President, CEO & Director]

Thank you, and thank you, everyone, for participating on today's call and for your continued interest in CareRx. We look forward to reporting on our continued progress next quarter. Thank you.

[Operator]

Thank you. This does conclude today's conference call. You may now disconnect.