CareRx Corp

TSX:CRRX

Earnings Call Transcript 2024-Q1

[Operator]

Good morning, and welcome to CareRx First Quarter 2024 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 today's news release announcement, 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 this 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 results are detailed in CareRx continuous disclosure record which can be accessed on the SEDAR + database under www.sedar.ca. 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 Puneet Khanna, President and Chief Executive Officer of CareRx Corporation. Please go ahead, sir.

[Puneet Khanna, executive]

Thank you, and good morning, everyone. Welcome to our first quarter 2024 earnings call. With me this morning is our Chief Financial Officer, Andrew Mok.

In the first quarter, we delivered financial results consistent with our expectations, with revenue of $89.7 million and adjusted EBITDA of $7.4 million. As we anticipated, first quarter average bed count was relatively flat to the fourth quarter. Though bed count grew throughout the quarter, and we ended Q1 at a modestly higher level than the end of Q4. We expect second quarter bed count to be comparable to Q1. However, our pipeline of opportunities in the second half of 2024 is extremely robust, and we expect bed count to grow through the second half of the year.

The continued quarterly improvement of -- in our adjusted EBITDA margin illustrates our ongoing progress from our efforts to increase productivity and drive efficiency. As we previously outlined, we've identified a number of initiatives designed to grow our margins. In particular, we expect to see the contribution from our improved inventory procurement program take effect in the second quarter of this year. We remain confident that the progress we are making will continue in future quarters to our stated internal goal of exiting 2024 with double-digit adjusted EBITDA margins. Once again, I must thank our team for their success in progressing towards this goal.

In March, the Ontario Ministry of Health announced the postponement of the previously scheduled changes to long-term pharmacy funding for a further year. These changes, which were scheduled to go into effect on April 1, 2024, would have reduced the fixed professional fee under the fee per bed capitation model from an annual amount of $1,500 per bed to $1,400 per bed. We have a collaborative relationship with the Ontario government and are optimistic that together, a permanent mutual beneficial platform for funding will be developed. We look forward to building on this partnership as we continue to demonstrate the value of long-term care pharmacy.

Subsequent to quarter end, CareRx hosted the Honorable Doug Ford Premier of Ontario at the company's Oakville Pharmacy to showcase CareRx's leadership in technology and innovation in support of improving health care outcomes for residents and long-term care homes across Ontario. The Premier was joined by the Minister of Long-Term Care, 2 members of provincial parliament and several senior leaders from CareRx's home operating partners.

The delegation received a demonstration of CareRx's automated high-volume medication packaging equipment, optical verification robotics and the use of lean management principles that drive continuous improvement in pharmacy operation. The visit underscored our combined commitment to supporting seniors in Ontario and to drive innovation and improve health care for our community.

We continue to believe that the CareRx stock price does not reflect the intrinsic value of the business. As a result, in March, we entered into an automatic share purchase plan with a designated broker to allow for the continued repurchase of shares under the normal course issuer bid during our post-quarter prescheduled blackout period. I would now like to turn the call over to Andrew to discuss our first quarter financial results in more detail. Andrew?

[Andrew Mok, executive]

Thank you, Puneet, 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 2024 declined to $89.7 million from $91.4 million in the first quarter of 2023 and from $91.1 million in the fourth quarter of 2023. The year-over-year and quarter-over-quarter revenue decline was driven primarily by a modest net reduction in the average number of beds serviced.

Adjusted EBITDA for the first quarter grew by more than $600,000 or 9% to $7.4 million from $6.8 million in the first quarter of last year and was essentially flat to the $7.5 million reported in the fourth quarter of 2023. As Puneet mentioned earlier, our adjusted EBITDA margin in the first quarter grew to 8.3%, up 80 basis points from the first quarter of 2023 and up 10 basis points from the fourth quarter of 2023.

The year-over-year improvement in adjusted EBITDA and the year-over-year and sequential improvement in adjusted EBITDA margin was primarily the result of efficiencies and cost savings initiatives that commenced during the second half of 2023.

I'd like to highlight that the progress we've made in improving our margins occurred despite the ongoing challenges we faced in the health care labor market, which we've outlined in previous quarters. While we continue to expect some degree of variability in labor costs for the foreseeable future, and we may experience some modest variability in our margins and adjusted EBITDA growth from time to time, we are encouraged by our ongoing progress and expect this positive trend to continue.

We posted a net loss of $500,000 in the quarter, a $1.6 million improvement compared to $2.1 million in the first quarter of 2023 and a loss of $3.2 million -- sorry, an improvement of $3.2 million compared to the $3.7 million loss in the fourth quarter of 2023.

This year-over-year and quarter-over-quarter improvement in our net loss was driven primarily by decreases in finance costs and share-based compensation expense and the impact of cost savings initiatives that commenced during the back half of last year. The decline was partially offset by the impact of a reduction in the average number of beds serviced.

Cash at March 31 was $11.4 million compared to $7 million at the end of the fourth quarter. The $4.4 million increase in our cash balance was due to an increase in operating cash flow in the quarter in addition to reduced outflows related to interest and CapEx. Net debt decreased by $6.4 million to $48.8 million from $55.2 million at the end of the fourth quarter. Net debt to annualized run rate adjusted EBITDA decreased to 1.6x from 1.8x. And with that, I will turn the call back over to Puneet.

[Puneet Khanna, executive]

Thank you, Andrew. We continue to seek opportunities to improve efficiences and further optimize our operations with the aim of continuing to provide the best care and service to our home operator partners and their residents while creating value for our stakeholders.

Our strategy is threefold. Firstly, procurement. We will continue to leverage our size and purchasing power with our vendors and suppliers in order to reduce our costs. Secondly, standardization which is designed to enhance our services while streamlining operational processes. Finally, our ongoing initiatives to implement lean and workflow systems across our network and functional areas of the business have started to bear fruit, and we expect to benefit from further efficiencies and productivity improvements. These operational optimization initiatives will lead to margin growth and create a more sustainable long-term operating platform while we continue to provide the highest levels of service to our customers.

We continue to have a number of avenues by which we can grow in the near and long term. We will continue to grow organically by winning new beds, increasing the suite of products and services we offer to our customers, such as Revicare, our medical supplies business and BOOMR, a proprietary award-winning pharmacist-led medication reconciliation program and leveraging our scale and capabilities to provide a superior pharmacy servicing offering.

As mentioned, our pipeline of opportunities in the second half of 2024 is extremely robust and we expect bed count to grow through the second half of the year. Our existing customers, many of whom are large and regional home operators have active growth plans through their own expansion and consolidation activities, and we will benefit from this expansion and grow with them as they build and acquire new homes.

Additionally, as more than 80% of the Canadian market remains serviced by other pharmacy service providers, we will continue to seek accretive acquisitions to further grow our bed count. As a leader in this sector, we are well positioned to capitalize on its wealth of growth opportunities. With that, I'd now like to open the call to questions. Operator?

[Operator]

[Operator Instructions]. Your first question will be from Chi Le at Desjardin.

[Chi Le, analyst]

Yes. So you mentioned that you have a pretty robust pipeline of organic bed growth through the second half of 2024. I'm just wondering if you could provide more color into those pipeline, like what kinds of IPs or small opportunities are you seeing? And how are you positioning us to win those deals?

[Andrew Mok, executive]

Yes. So there's a number of RFPs that we have either bid on and are in the process right now of working through and those are both a combination of for-profit and nonprofit opportunities. And then there are others we've already built into the pipeline that we know will be released either later this summer or into the fall, and we've already had them on our road map. So we have a very clear line of sight of the number of opportunities, and it's a mixed fee of both small to midsize and large opportunities.

[Chi Le, analyst]

And on the government side, so it's good to see the continued to pose performance in the capitation fee reduction. Just wondering how your discussions with the government are going. And what are the possibilities of a permanent pause as well as whether the upcoming election could swing it either way?

[Andrew Mok, executive]

So the minister as well as the staff is very supportive and understanding of the value that we bring into the ecosystem -- in the long-term care ecosystem. And even the operators themselves and their associations now are aligned with us, understanding that we are a critical service provider to those homes. And so we have more holistic support. And so those conversations will continue over the summer and the fall into how do we at minimum, have a permanent freeze but have opportunities potentially to look at increasing as well as we move forward.

[Operator]

Next question will be from Kyle McPhee at Cormark Securities.

[Kyle McPhee, analyst]

Great to see the EBITDA margin expansion and keeping your year-end goals for EBITDA margin. I'm curious if you see any temporary sources of disruption before getting there? Or should this be a fairly steady path of margin expansion through the rest of this year?

[Puneet Khanna, executive]

Go ahead, Andrew.

[Andrew Mok, executive]

Kyle, I think that as I mentioned in the kind of prepared portion of my remarks, we generally expect to continue on the same trend and feel good about our previously stated objective in terms of where we're going to land by the end of the year. What will cause some variability, not necessarily in the growth of the margin quarter-over-quarter, but just the quantum of the growth when you're going from 1 quarter to the next will be on the labor cost side.

And while we made significant progress there towards reducing overtime and consulting labor, there still are periods whether that's driven specifically by local geographies or just kind of what's happening in that quarter, particularly when you see quarters that end around stat holidays and things like that. You may see a little bit of an increase in those types of costs. But overall, we expect to continue on that trend. And that's probably the biggest, I guess, thing that would impact the pace at which we're improving margin.

[Kyle McPhee, analyst]

And I think you have a meaningful drug procurement deal expiring very near term. Where are you in the process of lining up a new deal, leveraging your much bigger scale and is that a source of margin expansion that's necessary or additive to get to the kind of year-end margin goals you've been pointing to? And then also related to that, when do you think we see that flowing through your quarterly results? Is that a Q3 dynamic?

[Andrew Mok, executive]

Yes. So the negotiation still remains ongoing, but we are -- we feel good about both where the discussions are today and our ability to get that completed on the time lines that we plan for, which is by the midpoint of this year. That is a part of our plan to get to those double-digit margins by the end of this year. So it is a necessary component. But we feel good about being able to get there. In terms of effective date, as Puneet mentioned in his opening comments, would you expect to see that impact retroactively benefit the second quarter of this year? So you should see that in our August reporting.

[Kyle McPhee, analyst]

Okay. Appreciate that color. And then on bed count, I mean great to hear you expect a pivot to bed count growth in the back half of this year. Can you provide color on in recent quarters, just why that normal course bed churn was not being offset with new ads? Is this part of that CareRx just opting out to service beds that are maybe not profitable or any dynamic like that?

[Andrew Mok, executive]

Yes. Good question, Kyle. So there's a little bit of -- as we standardize some of these smaller homes, you want more of a customized feel. And so there's a little bit of churn on that. But predominantly, as I stated for Q1, like we did add a few hundred beds over or close for Q4. Really, it's a function of some of those RFPs were delayed that we had in our hopper that now are -- now we've got firm -- more firmer line of sight into and then some of the new builds.

And just with some construction delays, they just didn't turn on and we sort of knew that going into Q4 that the ones that we're turning on in Q1 weren't going to happen in a timely fashion. And that's why we sort of gave that guidance to say, it looks like Q1 will be flat.

[Kyle McPhee, analyst]

Got it. Okay. And are you willing -- you called the pipeline robust. Are you willing to put a bookend on how many beds are up for grabs before the end of the year?

[Andrew Mok, executive]

There's north of 5,000.

[Operator]

[Operator Instructions]. Your next question will be from David Martin at Bloom Burton.

[David Martin, analyst]

Congratulations on margin improvements you've achieved. You mentioned that there are other workflow improvements that you're working on. And I assume that's in addition to the BD ROA robots. I'm wondering if you can give some color on those other initiatives.

[Puneet Khanna, executive]

Yes. David, some of the other initiatives that we are working on are workflow related with respect to implementing electronic workflow systems. I think to have done the tours of our pharmacy, health care is still fairly paper driven. And so we are looking at streamlining some of those pieces even. My personal vendetta against the fax machine in health care, we are working to get that out to find more streamlined processes to drive into the system, so that we just really going to sort of more of a paperless modern workflow. So that's a big component of things we're looking at going forward.

[David Martin, analyst]

Okay. Andrew also mentioned that labor costs could be variable moving forward. Is that because you're renegotiating employment contracts as you go? Or why would that be variable?

[Puneet Khanna, executive]

Andrew, did you want to clarify on that?

[Andrew Mok, executive]

Yes. So it's not a renegotiation of contracts, David. It's just -- I was just speaking to the fact that for us, the biggest challenge that we've faced over the last 2 years is relating to increased reliance on needing overtimers and third-party pharmacist labor. And that was initially due to vacant positions that we were dealing with and then kind of an ongoing challenge in terms of just having a full staff compliments across all of our sites.

So it's not a matter of needing to renegotiate employment contracts. It's a matter of being able to continue to hold steady in each site as it relates to that need to pull in overtime and contract labor. That's what these operational efficiency initiatives are designed to try to assist with because they're taking overall required hours out of those pharmacy sites. But my comments were more just from time to time we may continue to need to use them over time, which will cause some variability in terms of that cost savings component.

[David Martin, analyst]

But in general, are you seeing a reduced need for that overtime labor?

[Andrew Mok, executive]

Yes. We have had quarter-to-quarter improvement all the way from the middle of last year into this year. So we expect that trend to continue. It's just the quantum of progress each quarter may vary.

[David Martin, analyst]

Right. And one last question. What about revenue per bed? That's been fairly stable recently. Is there any reason to believe there might be volatility in that?

[Andrew Mok, executive]

No. We expect revenue per bed to be fairly stable going forward as well.

[Operator]

Next, a follow-up from Kyle McPhee at Cormark Securities.

[Kyle McPhee, analyst]

Can you give us CapEx guidance for the rest of the year? It was a pretty thin CapEx quarter in Q1. So wondering what the rest of the year looks like.

[Andrew Mok, executive]

Yes. The CapEx in the quarter was a little bit light, Kyle. That's more from this the timing of payments. As we've talked about in the past, generally speaking, our maintenance CapEx runs around 1.5% of revenue, roughly 1.5% to 2%. Would you expect this to be a bit of a heavier year CapEx perspective in the back half of the year just because of some of these operational efficiency initiatives, namely with putting more high-volume packaging technology in place as well as a few other projects. For the remainder of the year, we're expecting to see as a kind of round number of roughly $10 million in overall CapEx.

[Kyle McPhee, analyst]

Got it. Okay. And the -- I think we all knew your cash interest expense was going to come down nicely because of your new capital structure, it was even lower than I thought. Is that also just the timing of actual cash payments?

[Andrew Mok, executive]

It was -- it was just because of where the quarter end fell and when the payment happened, which was immediately after quarter end. So we paid about $1 million post quarter as it relates to interest.

[Operator]

Next question will be from Stefan Quenneville at Echelon Capital Markets.

[Stefan Quenneville, analyst]

Just really quick. Can you give us a sense of what your M&A pipeline is looking like and the environment for potential M&A these days?

[Puneet Khanna, executive]

Yes, Andrew, did you want to take that one?

[Andrew Mok, executive]

I can. Morning, Stefan. Yes, as we've talked about in the past, our M&A pipeline continues to be robust, although we are not at this stage right now aggressively pursuing M&A activities. Obviously, we're always keeping an ear to the ground and particularly paying attention to opportunities for small tuck-in acquisitions where we can bring customer contracts directly into sites that already exist.

Obviously, those being much more accretive, especially considering the fact that we have a robust site network across the country now. So we are continuing to evaluate those opportunities. But -- we're trying to find that right balance right now, both because of overall cost of capital, but because of our other priorities as it relates to operational efficiencies and organic growth.

[Stefan Quenneville, analyst]

Okay. And just another quick one for me. On the renegotiation of the -- your purchasing agreement, can you help sort of frame the sort of quantum of margin impact that would have for you guys in the short term and maybe over the long term? Are we talking tens of basis points or hundreds of basis points of margin expansion?

[Andrew Mok, executive]

So the -- I think what we've previously said is that in terms of our overall objective to get to the double-digit margin for the end of the year, about 1/3 of that impact was going to be from improved inventory procurement. So we are targeting initially up to $2 million of savings from this and expect that, that would improve as the volumes continue to increase over time.

[Operator]

And at this time, Mr. Khanna, we have no other questions registered. Please proceed, sir.

[Puneet Khanna, executive]

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

[Operator]

Thank you, sir. Ladies and gentlemen, this does conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Have a good weekend.