CareRx Corp

TSX:CRRX

Earnings Call Transcript 2022-Q1

[Operator]

Good morning, everyone, and welcome to the CareRX First Quarter 2022 Financial Results Conference Call. [Operator Instructions] 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 on 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 non-streaming 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' future financial and business performance. Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect the results are detailed in CareRx 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 turn the call over to David Murphy, President and CEO of CareRx Corporation. Please go ahead, Mr. Murphy.

[David Murphy, executive]

Thank you, and good morning, everyone. Welcome to our first quarter 2022 earnings call. With me today is our Chief Financial Officer, Andrew Mok. The first quarter was a very solid start to 2022 with continued strong growth in revenue and adjusted EBITDA. The 3 acquisitions we made in 2021 were a significant driver of that growth with each of these acquisitions continuing to contribute revenue, adjusted EBITDA and synergies in line with expectations.

In particular, we continue to make great progress with the integration of the Medical pharmacies, long-term care pharmacy acquisition, and we continue to expect that integration to be substantially completed by the end of the third quarter of 2022. Our year-over-year performance was also driven by organic growth and in particular, the 5,000 beds we added during 2021 from new customer contracts.

Finally, during the quarter, we announced our fifth acquisition in 2 years, signing an agreement to acquire Hogan Long-Term Care Pharmacy.

Turning to some of the specific financial highlights. Revenue for the first quarter grew 108% year-over-year to just over $93 million, with growth driven primarily, a 95% year-over-year increase in the average number of beds serviced to 95,204. As I mentioned, this increase was mainly driven by our acquisitions, but also included organic growth from new contracts onboarded throughout the prior year.

I will note here that our Q1 bed count was dampened slightly by the impact of the COVID Omicron variant. As explained during our last earnings call in March, our bed count was most significantly impacted in January, followed by a gradual recovery in occupancy levels. Our bed count as of March 31, 2022, was 95,750. We are seeing continued gradual improvements during the second quarter, but we are still slightly below the pre-Omicron levels.

We currently expect average bed count for the second quarter of 2022 to be just over 96,000. Adjusted EBITDA for the first quarter increased 111% year-over-year to $8.6 million. This growth was driven primarily by the organic and acquisitive growth I just described. With another quarter of strong year-over-year growth in Q1, our business continues to deliver an outstanding growth trajectory. Over a 3-year period, we have more than tripled our bed count and revenue, and we have increased quarterly adjusted EBITDA from breakeven to $8.6 million, which represents an annualized adjusted EBITDA increase of [Technical Difficulty].

As of today, we have consolidated a total of 5 pharmacy sites., we expect to complete 3 more in 2022 with an additional site consolidation expected to be deferred to the first half of 2023 due to required renovations at an existing site. The contribution from cost savings synergies in the first quarter was approximately $500,000 or $2 million annualized, and we remain on track to achieve the total expected annualized cost saving synergies of approximately $5 million upon completion of the integration. We expect the integration to be substantially completed by the end of Q3 with the exception of the 1 site consolidation that I just mentioned, which represents approximately $500,000 of the annualized synergy target.

At the end of the first quarter, we announced a definitive agreement to acquire the long-term care pharmacy business of Hogan Pharmacy Partners, a long-term care pharmacy servicing approximately 725 residents in long-term care and retirement homes in Ontario. The purchase multiple is 5.7x the expected adjusted EBITDA contribution of the business before expected growth and cost synergies. Hogan has distinguished itself from other long-term care pharmacies in Ontario through a unique award-winning technology-enabled pharmacy services model.

The Hogan model provides significant value-added resources to long-term care homes and residents, including freeing up nursing time to focus on direct resident care and significantly reducing wait times for first doses of medication when residents transition into long-term care homes. On closing, we will sign a new 7-year contract with Hogan's largest customer, which is expected to add over 1,200 beds over 4 years. This will increase the total incremental beds serviced as a result of the acquisition to approximately 2,000. We expect this transaction to close during this quarter.

On our last call in March, I discussed our imminent plans to open our first high-volume fulfillment center in the Greater Toronto area. I'm pleased to report that in April, we commenced operations at our new site strategically located in Oakville, Ontario. We have taken advantage of the scale we have achieved over the past few years to create a facility capable of servicing 30,000 beds, more than 3x that of our previous largest facility. As I noted last quarter, we will be the first pharmacy of any kind in Canada to use the state-of-the-art BD Rowa Dose medication packaging system, which is being installed at our new Oakville facility. This technology enables high-volume dispensing of medications at speeds that exceed those of conventional packaging solutions currently in use with the additional benefit of improving safety and reducing medication packaging errors and waste.

During the quarter, we also secured long-term contract extensions with 3 of our 4 largest customers, including our 2 largest customers, representing approximately 18,000 beds serviced in total. Importantly, these beds will be under contract for an average of 5.5 years from the end of 2021. We regard these long-term extensions as further validation of the strength and quality of our service offering and the uniqueness of our value proposition as the only national pharmacy services provider that is focused solely on congregate care communities.

Our bed count will be impacted, however, by a recent decision by another customer to award a request for proposal to another pharmacy services provider. This decision is expected to result in the off-boarding of approximately 5,800 beds throughout the second half of this year. Although, we are disappointed by this decision, we are proud of our consistent track record of retaining a very high percentage of our existing customers, and we are confident that we will continue to deliver new organic contract wins as we did in 2021 that will offset the impact of this loss and help us maintain our strong growth trajectory.

I would now like to turn the call over to Andrew to discuss our first quarter results in more detail. Andrew?

[Andrew Mok, executive]

Thank you, David, and good morning, everyone. Before I begin, a reminder that 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 2022 increased $48.3 million or 108% to $93.2 million from $44.9 million for the first quarter of 2021. This growth was driven by the SmartMeds, Rexall and Medical Pharmacies acquisition completed in 2021 as well as organic growth driven by beds onboarded throughout the prior year from new contracts won. As David mentioned, all acquisitions continue to contribute in line with our expectations.

Q1 revenue was dampened slightly by the reduced average number of beds serviced due to the impact of the Omicron variant, which was the most pronounced in January. Adjusted EBITDA for the first quarter increased $4.5 million or 111% to $6.6 million from $4.1 million -- sorry, to $8.6 million from $4.1 million for the same period in the prior year. Again, growth was driven primarily by the contributions of the acquisitions completed during last year as well as organic growth.

Adjusted EBITDA also included approximately $0.5 million of the total $5 million in expected cost savings synergies from the Medical Pharmacies acquisition, and we remain on track to substantially complete the integration of the acquisition by Q3 of this year. Before moving on, I'll take the opportunity here to note that under the existing agreement between the pan-Canadian Pharmaceutical Alliance and the Canadian Generic Pharmaceutical Association, effective April 29, there were further pricing adjustments for a small portion of the medications we provide. Pricing for select generic molecules was reduced from approximately 18% to 15% of their relevant brand reference prices. Based on these pricing changes, we estimate that the gross impact of the announced pricing changes will lower adjusted EBITDA by approximately $0.5 million for the remainder of 2022.

Turning to our balance sheet. Cash at March 31 was $28.5 million, down $7.1 million from $35.6 million at the end of the fourth quarter. The ending cash balance and cash used in operations were primarily impacted by the timing of working capital movements, including a $6.3 million reduction in accounts payable during the quarter. Net debt at March 31 was $64.6 million, an increase of $7 million in the quarter, which related to that cash movement that I just discussed. Net debt to annualized run rate adjusted EBITDA was 1.9x, consistent with Q4.

And with that, I will now turn the call back over to David for some concluding comments. David?

[David Murphy, executive]

Thank you, Andrew. The first quarter of 2022 was a strong start to the year. During the quarter, we continued to execute in areas that will support our growth in the near and long term. Following our recent acquisitions as well as organic growth, we have captured a market share that is large enough that we are positioned to deliver increased scale and efficiencies and enhanced service capabilities. But at the same time, with more than 3/4 of the Canadian markets still serviced by smaller competitors, our growth potential remains very significant. We believe we are in as strong position as we have ever been to capitalize on multiple opportunities for continued growth.

Organic growth will come on 3 fronts. First, we expect to continue to benefit from our existing customers, expanding through acquisitions, building new homes or redeveloping existing homes and receiving new bed license allocations. Second, we expect to continue to win new contracts based on our differentiated capabilities and value proposition. And third, we expect to increase penetration within existing homes that we already service. With our significant increase in scale and vastly improved service offering as well as an organizational focus on service and continuous improvement, I've never been more confident in our team's ability to execute in each of these growth areas.

At the same time, we remain a natural consolidator in a highly fragmented market, and we believe there are numerous opportunities to make additional accretive acquisitions that will further expand our footprint, increase our scale and generate additional synergies. Execution on our growth strategy will create value for our shareholders while continuing to elevate our capabilities as a world-class institutional pharmacy partner for our customers in providing exceptional care to their residents.

Finally, before we take questions, you may have seen our news release earlier this week announcing that we have published our first environmental, social and governance report, long before they arise in importance for the investment community, ESG initiatives have been a fundamental part of our identity and are reflected in our core values: collaboration, accountability, responsiveness and excellence. The report itself, among other things, outlines our commitment to health and safety, employee engagement, diversity, equity and inclusion, data privacy and security, corporate governance and energy and waste management. There are many achievements that we are proud of in these areas, but we are also committed to continuously raising the bar across the ESG spectrum. The report is available to view or for download in the Corporate Governance section of our website, and I do hope you will take a look.

With that, I would now like to open the call to questions. Operator?

[Operator]

[Operator Instructions] And we will take our first question from Kyle McPhee from Cormark Securities.

[Kyle McPhee, analyst]

Just on the topic of contracts that may still be at risk, you mentioned you've locked up 3 of your 4 biggest clients for 5.5 or more years. What about the 1 big client not locked up? Or was that the bed loss you just announced? And then just in general, can you share any color on how many of your existing beds are up for RFP within the next year or so?

[David Murphy, executive]

Kyle, yes, you can assume that the contract loss was the 1/3 of the top 4. For the most part, having locked up our 3 of our top 4, our renewal profile looks very good. I think in our top 15 customers, I think there's only 1 potential RFP and it's much smaller. So we feel very good. Our long-term renewal record is very good. The contract profile is still -- our average term with our large customers is still quite large. So our focus is growth and adding new customers rather than needing to spend that much time on retention going forward.

[Kyle McPhee, analyst]

Got it. And then does this incident of loss beds change how you will attack upcoming RFPs for beds you're trying to add or beds you're trying to protect, maybe just share some color on how you compete.

[David Murphy, executive]

I think the bed loss is very recent news. It's happened in the last few days. So I think we want to take a little more time to have a more fulsome debrief. But I think we do have to put this into perspective, we literally locked up 3 of our largest customers in the last few months. I think we've -- our profile and our track record has been very good. I think we're confident in our approach. Unfortunately, there is a sort of can't win them all element to this, but there are outliers at times. We're disappointed by it. I think we're always trying to be better. But I think we're pretty confident that we have the best formula for the vast majority of customers in terms of service and quality.

[Kyle McPhee, analyst]

Got it. And the 3 of the 4 clients that you locked up, was that part of an RFP? Or was that just you preemptively locking them in?

[David Murphy, executive]

There was only 1 of the 3 that was a full RFP process. So as is always the case in this business is, it's tough to the customer to decide how we want to make these decisions. And 1 was a full RFP that we won and the other is a little different.

[Kyle McPhee, analyst]

Got it. And just last quick one. Last year, you organically added just over 5,000 beds, as you mentioned. That's essentially offset with this bed loss. But looking forward, is your pipeline big enough to organically re-offset these bed losses or more than offset it? Is your pipeline big enough to do that?

[David Murphy, executive]

Yes, definitely. Our pipeline is bigger this year than it was last year. Last year, you'll recall there was still a fairly significant COVID overhang. So although January this year was a bit slow, you can see just by virtue of some of our announcements that activity has picked up. So absolutely, our pipeline right now is as large as it's been for -- certainly since pre-COVID.

[Operator]

We will now take a question from Sepehr Manochehry from Eight Capital.

[Sepehr Manochehry, analyst]

Congrats on the quarter. I just wanted to understand a bit of the growth levers outside of the senior care and other institutional clients. Are there initiatives or partnerships that you look to? Or are there just outreach opportunities that you think that will take place in the back half of this year after you're done the integration of medical pharmacies outside of the -- to kind of expand outside of the senior care space?

[David Murphy, executive]

I would say we are continuously looking at adjacencies and at ways to leverage our capabilities to grow both inside and outside our core business. At the same time, we're now based on the activities over the last few years, we're now pushing $400 million institutional pharmacy focused on congregate care settings. And yet, as I mentioned, we have just over 20% market share. There's terms of organic. We're not in a few provinces in Canada still. So I think our focus remains what we think is a pretty attractive growth trajectory in our core business. I think you'll find that to the extent that we move into adjacencies or do other things, we'll talk about them when there's something to talk about.

And I would point to Revicare, in Q1, we did announce the launch of that business. We're excited about that, and I think it's a very logical and I think potentially quite appealing growth path for us. But I think we'll generally try to talk about these things once there's something more concrete to talk about.

[Sepehr Manochehry, analyst]

Understood. And I guess touching on Revicare and you being a full-service supplier, that's something that's increasingly in need in rural areas. And with the new model that you're taking on with the recent tuck-in acquisition and having these medication cabinets, opening you up to kind of increase access to rural regions. Is that something that accelerates your tuck-ins in rural areas? Are you looking to more maybe rural regions? And I guess, what's the kind of reach beyond the distribution side? Is it 100 kilometers kind of radius that you look to? Or how do we think about that?

[David Murphy, executive]

I think the -- I mean, there's probably not a hard and fast rule on radius, although our coverage now is very good, and we have sites in places like Thunder Bay, Sudbury, where we can cover sort of smaller markets very well. So I think we continue to believe that our customers value and expect you to be proximate to where they are. And so I think that's still the general model. I think you're right in the sense that perhaps whether it's the Hogan model or other distribution methods or innovations do potentially allow for a different approach. But we still generally believe that our scale and our -- the number of sites we have is an advantage. And so to the extent that we can -- we want to leverage that rather than trying to service people from further away. That's what our competitors try to do, and we think that's a weakness.

[Sepehr Manochehry, analyst]

And I guess to finish off the Hogan models like margin profile relative to your current model, is there some similarities, differences? Or is it better, worse?

[David Murphy, executive]

Yes. I mean it's definitely different. I think the cabinets themselves are one important difference, although there has the Hogan model and the work that the Hogan folks did, I think has got the attention of the government in Ontario. So there's actually some funding in place for some of the capital associated with those cabinets. So the CapEx is different. At the same time, the actual operating margin profile is a bit better because Hogan has been able to generate additional revenue from homes for additional services that they are able to provide that essentially allow the homes to lower their own costs and thus generate some additional revenue for the operator. So we're still sorting that out. I think, but it is our general thesis that Hogan is relatively small and had some trouble scaling that solution more broadly. And as part of CareRx, I think we believe there's an ability to scale it more successfully and more quickly.

[Operator]

And we will take the next question from Tania Armstrong from Canaccord.

[Tania Gonsalves, analyst]

I'm not sure if you've disclosed this before, but could you remind us what your retention rates typically is or typically has been over the last few years with customers?

[David Murphy, executive]

Historically, it's 95% plus on a per bed basis. And I think on a sort of major contract basis, certainly in my time here, it was 100% until the last couple of days.

[Tania Gonsalves, analyst]

Okay. And then in terms of these generic price decreases, you've typically had really good success offsetting any of these impacts. Do you have in mind operational changes that you can make to offset this $0.5 million impact as well?

[David Murphy, executive]

Yes, for sure. I think you're right. It's always been something our team prided itself on in terms of being able to adjust to offset those types of effects. So we do believe that. I think the -- in a steady state, I think we would confidently say we would fully offset that impact. I think in the context of this year, though, of course, we've got a lot of initiatives planned to expand margins over the course of the next few quarters. And so we believe we'll offset this impact sense that it won't reduce our current run rate. But to the extent that you pull levers to offset that impact, it probably does slow down the path on margin expansion. So I think that's probably how we're thinking about it.

[Tania Gonsalves, analyst]

And I think you kind of led into my next question on margin expansion, just a number of initiatives you have underway. Were there any -- maybe not one-time items, but items related to those initiatives and your other operating expense line item that could have impacted margins this quarter?

[David Murphy, executive]

I'd say a little bit probably. I mean nothing if you'll recall last quarter, we called out a few things that were more pronounced. Things like some labor overtime or some collections, AR related issues. I would say those things were present, but not in the same sense. So you're right. There is a lot of initiatives in flight. And our team is very good at being responsible in managing through that. But fair to assume that there's probably a pile of little things that might have added a little bit of cost.

[Tania Gonsalves, analyst]

Okay. And last one for me, could you give us some insight into the timeline you're -- you have for consolidating some of your fulfillment center footprint into this new mega site. Congratulations, by the way, on getting it up and running on time.

[David Murphy, executive]

Yes. I think we've just for sensitivity reasons, tried to not be too specific on that. But I think what I would say is we built this to service 30,000 beds. It's up and running now, but I think we're only at late -- by the end of the month, I think we'll be at 13,000 or 14,000. So it's our intention to get close to that 30,000 within a year or less. And so that will require some movement of bed. But that's probably as far as we'll go at this point publicly.

[Operator]

[Operator Instructions] We will now take the next question from Gary Ho from Desjardins.

[Gary Ho, analyst]

First question, you guys secured 3 of the largest 4 customer contract wins there. Just wondering if you can share some of the customer feedback on renewing with you versus others in the market? And what are some of the growth initiatives you have planned for these large customers over the contract life.

[David Murphy, executive]

I think in general, I mean, every customer has their own set of sort of what matters to them, but I think the consistent refrain is the quality of the service offering, the breadth of our capabilities, the ability to do things consistently across the country. There's also, I think, just some sort of one-off extraordinary things our team has done to take care of the customers. We had 1 customer, going back to the fall of last year during the BC floods who had some issues getting service to remote locations than we literally -- we chartered a helicopter and we flew medication into them. So I think there is an appreciation of just what we can do and what we're willing to do from a service perspective that exceeds our competitors.

And I think there's also a recognition that as strong as we are today, we're getting better by virtue of the integration and the optimization efforts we're doing. And the fact that we literally are the only company that's fully committed to the space, this is all we do, this is all we care about and gets a lot of mileage. So that's I think they're probably high level narrative around why we were successful in renewing those customers and why we think that same story -- that same story scales to new customers as well.

And then in terms of growth, I think the -- in all cases, from a renewal perspective, getting the long-term contract locked up allows us to do other things in terms of supporting our customers' needs. As an example, the virtual care initiative we started last year, which was with 1 customer. I think we now have the ability to bring that to bear in all of our major customers' initiatives to drive increased penetration in terms of residents served and also support their needs as they expand. I think I mentioned on the last call, our top customers tend to be the most growth oriented, the most acquisitive in terms of adding new beds, building new homes. And so I think we can work with them with the comfort of a long-term contract in place to support their needs.

[Gary Ho, analyst]

And then my second question -- just going back to your new mega site build-out. Wondering how that's going and tracking versus your expectations? And then as well, just given the increased construction costs and just general inflation, does that change your views on future mega site builds?

[David Murphy, executive]

I mean, fortunately, we got the site done. And so to the extent that there -- all these construction and supply chain pressures happen that really happened only at the very, very tail end. So we're up and running. It's still early, as I mentioned, we still have work to do to move more volume into those sites. The BD Rowa machines, although they're on site, they're being installed now, so they're not operational. So we still have to use the rest of this year to prove the concept, understand exactly what's the best way to optimize the facility is and what the actual sort of margin and other advantages are from the new technology and from the larger volumes. So I think we've got time that we never plan to open a second site like that this year. And so we've got lots of time, I think, to sort that out and also weigh that against the macro picture in terms of construction supply chain inflation, et cetera.

[Gary Ho, analyst]

And then just lastly, you mentioned the COVID run impact in January. Can you talk about some of the bed loss recouping in subsequent months? I know you gave us Q2 expectations number, but how does that look just looking out for the rest of the year?

[David Murphy, executive]

Yes. I think if you look at -- if you start with Q4, Omicron really hit mid-December, but mostly manifested in terms of our business in January. I think we're pretty confident in saying now that we're almost back to the pre-Omicron level, and then we should be back there by the end of this quarter. I think what I just said is consistent with how some of the publicly traded home operators have talked about this, and that's consistent with what we're seeing. So a big dip in January, a steady increase from there. And I think by the end of June, we should be back where we were in mid-December pre-Omicron.

[Operator]

And we will now take the next question from Chelsea Stellick from iA Capital Markets.

[Chelsea Bedrejo, analyst]

Just a couple of questions from me. I know you probably can't share obviously who won the contract, but I'm mainly wanting to know what province it came out of just to help understand the impact from my understanding, historically, looking at 3,800 per bed, roughly $5 million to $6 million a quarter an impact. Am I on the right track on that?

[David Murphy, executive]

Yes. So I think yes, we generally don't talk about the specific customer name, I can tell you that Ontario is the location where all the contract existed. I think we've never really talked about specific contract profitability either, but I think most of our analysts are doing yourself you have a good sense of per bed economics. So I think you can safely use your math on that respect. The question, I think, becomes what sort of offsetting costs can we -- cost levers can we pull to offset the impact. And we're pretty confident that there are a number of them, including, I think, some of the remaining site consolidations actually, in a strange way, get a little bit easier because there's fewer beds in these sites. And so it allows us to perhaps move more quickly and certainly to set higher synergy targets associated with those consolidations. So like we've always done, we know how to manage our costs to offset impacts, and that's the spirit in which we're approaching this as well.

[Chelsea Bedrejo, analyst]

And this one is just more on GPL -- just that 1 site consolidation that was deferred to first half of '23. Why was this deferred? And I guess just by way of clarity, is that $5 million in realized synergies expected then by the first half of 2023 or is it still within 2022? I guess rephrased like how much in cost savings synergies would be realized from that final consolidation in the first half of '23.

[David Murphy, executive]

Yes. The final consolidation is roughly $0.5 million of the $5 million. So I think you can confidently model that $4.5 million of the $5 million will be achieved by the end of Q3. The reason for the delay is essentially, we're moving 2 sites into one in one part of the country and largely because we have more beds than we expected. There is some construction and renovation required in one of the sites in order to accomplish that objective. And I think that the need for that plus the sort of general climate in terms of construction-related activities right now. It just means we just can't get it done as fast as we would like. But we're still trying to do it sooner than first half of 2023, but we believe that's the sort of outside date on when it will be completed.

[Chelsea Bedrejo, analyst]

And the final question for me is just how much of the year-over-year revenue growth was organic?

[David Murphy, executive]

In Q1, you mean?

[Chelsea Bedrejo, analyst]

Yes.

[David Murphy, executive]

So I think high level, I mean, we added about 5,000 beds over the course of 2021. So that's probably a high level, probably $20 million in revenue. So I think that's, I think rough math, that would be the organic contribution and then the rest is acquisitions.

[Andrew Mok, executive]

And just to clarify, I think you meant $20 million annualized, David, so about $5 million for the quarter.

[David Murphy, executive]

Sorry, thanks.

[Operator]

I think there are no further questions at this time. Mr. Murphy, I would like to turn the conference back to you for any additional or closing remarks.

[David Murphy, executive]

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]

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.