CareRx Corp

TSX:CRRX

Earnings Call Transcript 2020-Q2

[Operator]

Good morning, everyone, and welcome to CareRx' 2020 Second Quarter Earnings 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 for 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 today in today's call or answers that may be given to questions asked could constitute forward-looking statements that are subject to risks and uncertainties related 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 periodical results and resignation (sic) [ registration ] statement, and -- that you can access these documents in SEDAR database at 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, President, CEO & Director]

Thank you, and good morning, everyone. Welcome to our second quarter earnings call. I am joined this morning by our Chief Financial Officer, Andrew Mok. The second quarter was certainly an eventful and transformational one for our company. We completed our acquisition of Remedy'sRx Specialty Pharmacy on May 7, making us the largest provider of specialty pharmacy services to Canadian seniors. Then in June, we rebranded as CareRx Corporation, a brand that reflects the strategic focus and core values of the combined organization.Also in June, we successfully executed a share consolidation and strengthened our financial position with the closing of a bought deal private placement, raising gross proceeds of $11.5 million.Our second quarter financial results include the contribution of the Remedy's business for a little more than half of the quarter. The addition of Remedy's drove significant year-over-year growth in revenue, adjusted EBITDA and the average number of beds serviced.Revenue for the quarter was up 26.2% as a result of the beds added to our platform through the acquisition. And adjusted EBITDA increased 26%, resulted in -- resulting in an adjusted EBITDA margin of 7.1% for the quarter, which was in line with our expectations.I will now turn the call over to Andrew to discuss our financial results for the quarter in more detail. I will add some additional comments later in the presentation. Andrew?

[Andrew Mok, Chief Financial Officer]

Thank you, David, and good morning, everyone. I'll walk through our second quarter financial results, which are available in our financial statements and MD&A that have been filed with SEDAR and are also available on our website.Our revenue for the quarter increased 26.2% to $39.7 million compared to the $31.5 million generated in Q2 of last year. The increase was the result of the Remedy's business, which added $9.5 million of revenue in the quarter from less than 2 months of contribution since the date of the acquisition. This revenue contribution was partially offset by the impact of the amendment to the Ontario Drug Benefit Act, or ODBA, which came into effect at the start of the year.Excluding Remedy's and the ODBA amendments, our revenue decreased slightly due to the COVID-19 pandemic, which caused short-term occupancy reductions in some of the homes we service, resulting in a temporary reduction in the average number of beds under care.The contribution from the Remedy's business partway through the quarter also had a significant impact on our adjusted EBITDA, which was up by 26% to $2.8 million compared to $2.2 million for the second quarter of last year. We also achieved a 30.4% reduction in our corporate costs year-over-year, which were $1 million for the quarter, down from $1.5 million in the second quarter of 2019. Our ability to realize corporate cost savings allowed us to fully offset the net impact of the amendments to the ODBA, which was a reduction to adjusted EBITDA of $0.4 million as we had anticipated.Cost savings in the quarter also partially offset the impact of the COVID-19-related temporary reduction in the number of beds serviced in Q2.Turning over to the private placement. On June 4, we announced the closing of a bought deal private placement of special warrants, which was completed through a syndicate of underwriters led by Beacon Securities and included Cormark Securities and Echelon Wealth Partners.Pursuant to the offering, we issued 57.5 million special warrants at a price of $0.20 each, raising gross proceeds of $11.5 million. This included the exercise in full of the underwriters over-allotment option of 7.5 million special warrants. We filed the final prospectus on August 10, and the special warrants converted into 2,875,000 common shares on August 13.With the closing of this transaction, we further strengthened our balance sheet and positioned ourselves to accelerate the integration of the Remedy's business and to continue our pursuit of further growth opportunities.This concludes my part of the presentation. I will now turn the call back over to David to discuss our growth, strategy and outlook. David?

[David Murphy, President, CEO & Director]

Thank you, Andrew. With the Remedy's acquisition complete, I think it is helpful to remind everyone of the increased size and scale of our national platform. In addition to the significant increase in our bed count, the Remedy's acquisition doubled the number of seniors homes we are servicing across Canada. We now have the largest national platform in the sector, safely and effectively delivering 1.4 million prescriptions per month. We will increase efficiencies and further strengthen the platform in the coming months as we fully integrate the Remedy's business. We are confident that the footprint we are building will generate meaningful competitive advantages in terms of service capabilities, scale and cost structure that will position us for further growth.We continue to be very optimistic about our ability to deliver significant growth in the months and years to come. For Canadian seniors home operators, many of whom will be making decisions about their pharmacy provider in the next year or so, we offer a clear value proposition. We are committed to and more focused on the seniors housing sector than any of our competitors. We are investing in and growing our business at a time when many of our competitors are defensive and cutting back. We are building the strongest operating platform and service capabilities and the best team in the sector. And we are building a culture that not only emphasizes great service and high quality but also embraces partnership with and support for home operators. For all these reasons, we are confident in our ability to continue to win new business and increase our market share moving forward.In addition, we continue to actively pursue acquisition opportunities. With our strengthened financial position and operational footprint, we believe we are now the obvious consolidator in a sector in which further consolidation is both necessary and inevitable. Additional acquisitions will create further scale advantages that will allow us to both improve our service offering to customers and generate meaningful efficiencies and synergies that will create value for our shareholders.In closing, our growth strategy and priorities are clear. The integration of the Remedy's business is underway. We expect some of the synergies created by the acquisition to be reflected in the second half of 2020, and the full integration will be completed by the first half of 2021. And as I mentioned on the previous slide, we are aggressively pursuing both organic growth opportunities and potential acquisitions.Before opening the call to questions, I want to take this opportunity to express my sincere gratitude to our entire team, especially our employees working in our fulfillment centers. This has been an unprecedented and extraordinary period. And while the company accomplished a great deal in the second quarter of 2020, the most important thing we did by far was that despite the challenges of COVID-19, we continue to provide incredible support to our home operator partners and ensure uninterrupted service to their residents. I'm very proud of the team we have and very grateful for their incredible efforts in these past few months.With that, 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]

I guess a couple of financials and a couple of sort of outlook questions. First, on the litigation, any comments on that? I, obviously, read in the notes, it had to do with some acquisitions in the past that Remedy did. I also noticed there's a VTB still owed by Remedy. Is that potentially an offset? Or what -- can you give just a bit more color on the litigation?

[David Murphy, President, CEO & Director]

Doug, yes, actually, the arbitration judgment was not related to legacy Remedy's acquisition. It was related to an acquisition that, I guess, we would call it, legacy Centric Health made back in 2015. So that was -- it is -- the arbitration was subject to confidentiality terms. So there's only so much we can say. But high level, as I said, related to a legacy acquisition, there was a dispute over some contingent consideration -- deferred consideration. Unfortunately, although we thought we had a strong case, the arbitrator ruled in favor of the former vendors. It just happened, so we're still early stages in terms of understanding what our options are moving forward.

[Doug Cooper, Managing Director and Head of Research]

Sure. Sure. The restructuring -- $7.8 million of restructuring costs in the quarter. Any color on that? And do you feel that's the end of the restructuring costs? Or are there any more to come in future quarters, do you think?

[David Murphy, President, CEO & Director]

Yes. I'll let Andrew itemize that. I think it's -- I wouldn't necessarily characterize it as restructuring. I think it was a myriad of things, including the reserve for that arbitration judgment. But Andrew, I'll turn it over to you.

[Andrew Mok, Chief Financial Officer]

Yes. Doug, just to clarify, the provision for that arbitration that we just talked about, the $4.2 million, that's included in that number there that you see. That makes up the bulk of it. Otherwise, the majority of it is related to Remedy's kind of acquisition-related costs as well as a few other onetime costs. I mean, in terms of the integration, I think we are expecting, obviously, to incur some more costs there as we move into the second half of 2020, and we're working on integrating the business. But I think that should be in terms of the actual acquisition-related costs.

[Doug Cooper, Managing Director and Head of Research]

Okay. Moving on to just a couple, I guess, outlook questions. David, I noticed that the Ford government is actively building a new long-term care facility. Do you think this is just the first one of many to come given the aging population? And maybe just give a sort of view of what's happening? Obviously, the spotlight has been on the long-term care industry during the COVID crisis?

[David Murphy, President, CEO & Director]

Yes. Good question, Doug. I think as it relates to our business, we do believe that one of the many things that COVID has shone a light on is the underinvestment in long-term care, particularly in Ontario, but likely across the country. And so I think the response as it relates to more investment in building new modern homes is welcome and long overdue. And I think it just -- it speaks to what we believe is a really positive underlying demographics in terms of how this market is going to continue to grow. Obviously, the rest of the sort of what COVID means for long-term care, I don't know that I would make any comments beyond that at this point.

[Doug Cooper, Managing Director and Head of Research]

Okay. And my final one, you announced a new initiative, Pharmacy At Your Home (sic) [ Pharmacy At Your Door ]. What kind of milestones should we anticipate to look forward to see the progress in that business? Or is this sort of partnerships to secure patients/customers? And maybe just comment on what kind of milestones we look for.

[David Murphy, President, CEO & Director]

Yes. Good question. So Pharmacy At Your Door launched 3 or 4 weeks ago. We will probably let a full quarter get completed before we provide a more fulsome update. But fundamentally, I think you're right. It's about the number of subscribers or residents that we sign up and the extent to which we can find strategic partnerships to aggregate and reach a number of residents with a single partnership. But it's still early days. So we will definitely provide a more fulsome update on that initiative at the end of Q3.

[Operator]

Your next question comes from the line of Kyle McPhee from Cormark Securities.

[Kyle McPhee, Analyst of Institutional Equity Research]

On the Remedy'sRx integration, the synergies, are you guys ready to start quantifying what's planned or maybe at least quantify just the initial low-hanging fruit? And when might we see the benefits start to show in the numbers? I know you said second half in your prepared remarks, but is that more of a Q4 and beyond thing? Or should we start to see anything in Q3?

[David Murphy, President, CEO & Director]

Yes. I would expect you won't see anything material, Kyle, and good morning, by the way, until Q4. On an overall basis, I think we're going -- there's some competitive and other sensitivities that come with sort of announcing in advance what we're going to do and how many it's going to save. And so we're not going to do anything until we've actually executed. As I said before, I know a number of our analysts have made estimates on what the synergy potential of this deal would be, and then those numbers are ones that we're comfortable with. But we'll basically continue to announce what we do as we do it. But you should see a material impact by Q4. And then as I said earlier, the first half of 2021, we will be complete.

[Kyle McPhee, Analyst of Institutional Equity Research]

Got it. Okay. Then on the organic bed add opportunities, all the contracts going to RFP later this year. Is that -- are the time lines still firm on that? Has there been any pushback or change due to COVID?And then separate from those big chunky contracts later this year, are there any kind of smaller normal course opportunities near term? Or has that also been kind of put on hold because of the COVID?

[David Murphy, President, CEO & Director]

Good question. So no major opportunity to this -- to date has been delayed because of COVID, but there's no doubt, and right -- appropriately so, our home operators are focused as a top priority on the COVID situation. So at this point, there's been no change. I wouldn't be surprised if not necessarily time line shifted, but if the processes will run differently and potential onboarding of new homes happened a little more slowly. But at this point, nothing shifted because there was nothing major that was scheduled to happen in the last 4 months.And yes, there are -- we continue to focus on all new bed growth opportunities, not just large ones. No doubt that this period of last few months has been -- sort of put the brakes on most pharmacy conversions. We are starting to see much more activity now. And we're obviously really focused on telling the CareRx story and articulating the points of difference we have to offer. So we still believe we will add beds in the fourth quarter and that we're well positioned on some of these bigger opportunities.

[Kyle McPhee, Analyst of Institutional Equity Research]

Okay. And just a follow-up on the Pharmacy At Your Door. Is this adding to headcount or OpEx or anything like that? Or are you fully leveraging your existing infrastructure and people?

[David Murphy, President, CEO & Director]

Operationally, we're fully leveraging the -- our existing sites. There was only some start-up marketing costs that were incurred in the first 30 or 60 days. But at this point, that's it.

[Kyle McPhee, Analyst of Institutional Equity Research]

Okay. And last one for me. Good to see that your bed count didn't change significantly on the occupancy issues with the senior[Technical Difficulty]

[David Murphy, President, CEO & Director]

I'm not sure if it's me or Kyle, but I lost him.

[Andrew Mok, Chief Financial Officer]

I think we lost Kyle.

[Operator]

Your next question comes from the line of Justin Keywood.

[Justin Keywood, Director of Equity Research]

I just wanted to follow up on the litigation. I'm wondering, is there any other unresolved legacy -- legal issues to be aware of?

[David Murphy, President, CEO & Director]

I think -- Justin, I think we do always disclose any ongoing issues in our -- in risk factors and other sections of the MD&A as we did with this one. This really is the last, I think -- I used the word legacy just because, obviously, it predates my time here, but this is the last legacy dispute that relates to a prior acquisition. And as I said earlier, I can't get into too many of the details, but we believe we had a strong case. We believe that the judgment was not correct, and we'll take it from there.

[Justin Keywood, Director of Equity Research]

Okay. And then just following up on the synergies and the margin progression. If I heard correctly, this would mostly show in Q4 here. But any color on just if we should see some improvement from Q2? Or maybe that would be a bit of a pause and then -- just trying to get some color on how that would progress?

[David Murphy, President, CEO & Director]

Yes, good question. I think we won't give sort of detailed guidance, but I would be cautious on Q3. I think we're very happy with how the Remedy business performed. I think the sort of prorated contribution in Q2 was exactly where we expected it to be, and so we feel good about the day 1 run rate of the combined business being where it needs to be. I think just keep in mind, Q3 will accelerate some integration and transitional efforts which may have some onetime costs. So I think you will start to see both meaningful synergies and meaningful margin expansion starting more likely in Q4.

[Justin Keywood, Director of Equity Research]

Okay. That's helpful. And then just one question for me. Just on the CapEx, I noticed it's a bit lower than the typical run rate in the first half of the year. Should we expect increased investments in the back half?

[David Murphy, President, CEO & Director]

I will defer that answer to Andrew.

[Andrew Mok, Chief Financial Officer]

Justin, yes, I think that's right. You would expect to see some more CapEx activity in the back half of the year. Obviously, when we knew we were moving ahead with the acquisition and looking to do some integration work there, we held back on some of the projects that we were planning for the first half of the year just to take a better sort of sense as to what we wanted to do with the combined business. So as we work through the integration activities, I can expect that we'll have that pickup in the second half of the year.

[Justin Keywood, Director of Equity Research]

And what should we expect there as far as the investment?

[Andrew Mok, Chief Financial Officer]

Some of the timing could slip into the second or the first half of 2021, but I think that we're expecting to see somewhere around $1.5 million to $2 million for the second half of the year.

[Operator]

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

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

David, in your introductory remarks, I mean, you obviously kind of referred to acquisitive growth as being one way that you can grow the business. Obviously, the legacy Classic Care and Pharmacare and CareRx acquisitions, including Remedy, have been a way that you have grown that business. But this is kind of thinking more thematically that you can either acquire competitors, you can win their business, and then just sort of -- and I know that, that will sort of vary on a case-by-case basis. But just sort of wondering on a thematic level, just how maybe you're conceptualizing how you might grow over the next 12 to 18 months as it relates to the relative proportion of acquired assets versus just winning contracts from competitors?And then my second question is just kind of relating to the potential for home care opportunities to grow. Just wonder if there's any update on your relationship with AceAge and Karie device? And I'll leave it there.

[David Murphy, President, CEO & Director]

Sure. Doug, thanks for those questions. Yes, on the first point, that's a discussion we have on a regular basis as a Board and a management team. And I would tell you that we are firmly resolved to pursue a two-pronged strategy. We really think that there is opportunity for both above-average organic growth and continued acquisitions. This is a space where pharmacy relationships historically have been very sticky and providers -- excuse me, home operators don't necessarily change easily. We do believe we're building something that might change that dynamic and, I think, appeal to a number of operators who would be interested in engaging us as their pharmacy provider. And so we're going after that from a sales and marketing perspective as aggressively as possible.But I very much do believe that further M&A is a meaningful part of the growth strategy. Obviously, that's just difficult to predict in terms of timing and deals and valuations take on lives of their own. But we're head down focusing on both, and I fully expect to report on both big customer wins and further acquisitions in the next 6 to 12 months.And sorry, on AceAge, not a lot to report. They continue to make real headway in the European market. I think they've signed an additional distribution deal and moving into other countries in Europe. And so I think -- I don't recall off the top of my head what the current projections are. But I think they will, by the end of 2020, have a meaningful installed base in Europe. As I said on past calls, Europe has been the focus. I think COVID, in general, just like it slowed down sales opportunities in the home operator space for organizations like ours, it certainly has had the same impact on AceAge. So it really is predominantly Europe in terms of its focus, but making really good strides.

[Operator]

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

[Kyle McPhee, Analyst of Institutional Equity Research]

Sorry about that. I think I got cut off. I just -- it's good to see that your bed count didn't get hit temporarily from COVID. Can you just confirm the exit bed count in Q2? And if there was any dips linked to COVID after the quarter?

[David Murphy, President, CEO & Director]

Yes. So there was a slight dip as we acknowledged, but I think relatively small. It's -- I think the exit bed count was right around almost exactly 50,000. We did see whereas normally in this space just because occupancy rates are so high, our week-to-week bed count just doesn't fluctuate that much at all. That was a bit different, as you'd expect, this -- the last few months based on vacancies, delayed admissions, et cetera. But the net bed loss was quite small, and we exited right around 50,000. And since quarter end, the number has gone up. So if anything, we're starting to see the temporary downticks in occupancy start to reverse themselves. And so our July 30 bed count and our weekly bed count this week have been a steady improvement from the June 30 number.

[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 CareRx. Again, we are pleased with the quarter we announced today, and we remain well positioned to continue to grow, gain market share and generate value for our shareholders. We look forward to reporting on our progress again next quarter. Thank you.

[Operator]

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