CareRx Corp

TSX:CRRX

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, everyone, and welcome to CareRx Second 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 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 a 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 and 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 continuous disclosure record, which you can access 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 Mr. Puneet Khanna, President and CEO of CareRx Corporation. Please go ahead, sir Khanna.

[Puneet Khanna, executive]

Thank you, and good morning, everyone. Welcome to our second quarter 2024 earnings call. With me this morning is our Interim Chief Financial Officer, Davide Pernarella. In the second quarter, we delivered financial results consistent with our expectations, with revenue of $92 million and adjusted EBITDA of $7.5 million. As we anticipated, second quarter average bed count was slightly lower than the first quarter as a result of modest bed count churn and our decision to close our Vancouver downtown pharmacy location, which I will discuss shortly. The continued quarterly improvement in our adjusted EBITDA illustrates our ongoing progress from our efforts to increase productivity and drive efficiencies as well as a partial benefit from improved supply terms from the amendment to our existing supply agreement with our principal pharmaceutical supplier.

We remain confident that the progress we are making will continue in future quarters, and I'm thankful to the team for their efforts and our success in growing revenue and margins profitably. In the second quarter, as part of the company's commitment to Board refreshment, and to realign board functions to match the company's strategic focus on operational performance, we announced that Kevin Dalton, Chairman of the Board for the last 6 years will transition to the role of Chairman. Kevin has had a tremendous impact on the governance and stewardship of CareRx, and we are delighted that he will remain on the board and step into the role of Chair of the Compensation, Nominating and Governance Committee in place of Maria Perrella, who will continue to remain Chair of the Audit Committee.

On a personal note, I would like to thank Kevin for his contributions and support that he has provided me over the past year. Kevin was succeeded by Jeff Watson, a current Independent Director of the Board. Jeff has served on the Board of CareRx since 2023 and brings over 3 decades of experience in the health care industry, having most recently served as the President and CEO of Apotex from 2018 to 2023. I'm looking forward to working more closely with Jeff and leaning on his operational and pharmacy industry experience.

We also announced that Andrew Mok would step down as Chief Financial Officer, effective June 7, to pursue another employment opportunity. Andrew has been an outstanding member of the [ company's ] executive leadership team during a period of significant transformation and growth, and we wish him all the best in his future endeavors. At the same time, we announced that Davide Pernarella, previously Vice President, Business Planning and Analysis at CareRx would assume the role of Interim Chief Financial Officer. Davide has worked at CareRx for over 7 years in various roles with increasing responsibility and have intimate knowledge of the financial and business affairs of the company. In addition, Alvin Chau was promoted to position of Senior Vice President, Information Technology and has joined the executive leadership team to further support our operational efficiency and margin enhancement strategy, and lead CareRx's technology and AI initiatives. As I mentioned earlier, in the second quarter, we closed the sale of one of our noncore pharmacy operations in downtown Vancouver Bridge, Columbia, that primarily focused on addiction treatment servicing approximately 950 patients.

This decision was made after careful scrutiny of the profitability of our operations and with the goal of optimizing our resources. In April, 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 the 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 operations. The visit underscored our combined commitment to supporting seniors in Ontario and driving innovation and improving health care outcomes for our community. Finally, subsequent to quarter end, we amended the terms of our procurement agreement with our principal pharmaceutical supplier. This amended agreement improves the company's supply terms and provide for collaboration on new opportunities and pharmacy solutions that seek to improve the quality and efficiency of CareRx's pharmacy distribution capabilities. I would now like to turn the call over to Davide to discuss our second quarter financial results in more detail. Davide?

[Davide Pernarella, executive]

Thank you, Puneet, and good morning, everyone. Before I begin, a reminder that our financial statements and MD&A for the second quarter have been filed with SEDAR and are also available on our website. Revenue for the second quarter of 2024, declined to $92 million from $94.5 million in the second quarter of 2023 and increased from $89.7 million in the first quarter of 2024. The year-over-year revenue decline was driven primarily by a net reduction in the average number of beds serviced. Despite a slight net reduction in the average number of beds service, the quarter-over-quarter revenue increase was primarily due to there being 2 additional days to generate revenues in the quarter. Adjusted EBITDA for the second quarter grew 7% to $7.5 million from $7 million in the second quarter of last year and grew 1% from the first quarter of 2024. Adjusted EBITDA margin in the second quarter increased 70 basis points to 8.2% from the second quarter of 2023 and was flat quarter-over-quarter.

The year-over-year improvement in adjusted EBITDA was primarily the result of efficiencies and cost savings initiatives that commenced during the second half of 2023, as well as a partial benefit from the amendment to the procurement agreement with our major pharmaceutical supplier. While we continue to expect some modest variability in labor costs, for the foreseeable future and may experience some modest variability in our margins and adjusted EBITDA growth. Our pipeline remains robust, and we expect the positive trend to continue. We posted a net loss of $1.4 million in the quarter compared to net income of $1.9 million in the second quarter of 2023 and a $500,000 loss in the first quarter of 2024. This year-over-year elimination of net income was driven primarily by noncash adjustments, including an intangible asset impairment related to the sale of a noncore pharmacy location in BC, higher share-based compensation expense and income tax recovery recorded in the second quarter of 2023 that did not recur in the second quarter of 2024. The decline was partially offset by a decreases in finance cost, depreciation and amortization expense transaction costs, restructuring and other costs, in addition to the impact of cost saving initiatives that commenced during the second half of 2023.

Cash at June 30 was $7.2 million compared to $11.4 million at the end of the first quarter. The decrease in our cash balance was due to repayments made to our operating loans as well as 2 quarters' worth of principal repayments [ to ] term loan and interest payments. Net debt decreased by $2 million to $46.8 million from $48.8 million at the end of the first quarter. Net debt to annualized run rate adjusted EBITDA at the end of the second quarter was 1.6x. We remain committed to returning capital to shareholders through our active share buyback program under the normal course issuer bid supported by our strong capital position, and the belief that our share price does not adequately reflect the fundamental in our underlying business and our near- and long-term growth potential. And with that, I will turn the call back over to Puneet.

[Puneet Khanna, executive]

Thank you, Davide. As we have outlined in previous quarters, we continue to seek opportunities to improve efficiencies and further optimize our operations with the aim of providing the best care and service to our home operator, partners and their residents while creating value for our stakeholders.

We have made great strides in leveraging our purchasing power and reducing our costs through the amendment to our primary pharmaceutical supply agreement. We will continue to leverage our scale to ensure improved terms and services from our other key vendor groups. We continue to streamline and standardize our operational process, which will enhance our service and improve operational efficiencies. Finally, our ongoing initiatives to implement lean and workflow systems across our network and functional areas of the business are ongoing, and we expect to benefit from further efficiencies and productivity improvement. These operational optimization initiatives are designed to lead to margin growth and create a more sustainable long-term operating platform, while we continue to provide the highest level of service to customers. We continue to have many avenues of growth available to us and we are uniquely positioned to capitalize on the near- and long-term secular tailwinds in the senior care sector. We have the capacity and the ability to respond immediately when those growth opportunities present themselves, and our ongoing efforts to optimize our operations will continue to make us even better positioned to do so.

While the specific timing of onboarding can vary and is often out of our hands, this pipeline of opportunities remains highly visible and extremely robust. We will continue to grow through new RFPs, grow alongside our existing partners, new long-term care home construction, tuck-in acquisitions and through the expanding suite of products and services offered to our customers. I would now like to open the call to questions. Operator?

[Operator]

[Operator Instructions]

Your first question comes from the line of David Martin from Bloom Burton.

[Unknown Analyst]

This [indiscernible] on for David. Just a quick question on your new pharmaceutical supplier agreement. Have any benefits in terms of margin being recognized for this quarter as yet?

[Puneet Khanna, executive]

Yes, so what we had expected was a $2 million annualized benefit. And so we saw about 60% of that in Q2. So our supply agreement was retroactive to April 1. However, we had existing inventory on hand that we had previously purchased. And so it just required us to turn that and flush that inventory out. So we saw about a 60% benefit.

[Unknown Analyst]

Okay. And going forward, do you still see the second half of the year in terms of pipeline growth and beds -- bed growth, do you still see being stronger in the second half?

[Puneet Khanna, executive]

Yes, absolutely. So from our -- and as I said in my opening comments, we see and have good visibility to the pipeline for what we've targeted as part of our growth for the second half, more than half of that has been secured at this point. And sort of what we're waiting for now is some of that -- a good chunk of that is our customers who are acquiring beds. And so we are now just waiting for the regulator to transfer those licenses. So we don't expect risk, but there is some timing that is out of our control, but we're ready to go as soon as those licenses get transferred to our customers.

[Unknown Analyst]

Okay. And last question. You did mention that there could be some variability in your margins. Do you expect them to stabilize? Or with this new growth do you expect them to kind of -- which direction do you see them going?

[Puneet Khanna, executive]

Yes. So look, I think we've proven in the last 4 quarters on the operational excellence piece that we can deliver that growth. There is some seasonality with respect to managing labor just with summer vacations and things like that. So that's what causes a bit of that variability or lumpiness from our end. I'll let Davide add to that as well.

[Davide Pernarella, executive]

Yes. Thanks, Puneet. Yes, I think with the continuous improvements in our operational excellence and the margin expansion we've illustrated as some of that labor lumpiness is expected in the summer months, we expect those margins to be relatively stable in the coming quarter.

[Operator]

Your next question comes from the line of Stefan Quenneville from Ventum Capital Markets.

[Stefan Quenneville, analyst]

Just another -- another question on the wholesale agreement. Could you talk to the length of time remaining on it now that you've amended it. And going forward, there's no ratchet up over time. It's sort of -- we're going to be seeing the full impact sort of next quarter and that's sort of a reasonable way to look at it on an ongoing basis. Is that a correct statement?

[Davide Pernarella, executive]

Yes, no, good question. In terms of the length of the agreement, it's long term in terms of how long we'll expect that benefit. So the partial benefit we realized in Q2, as Puneet mentioned, was the impact of just flushing out that inventory. So in Q3, we expect the full benefit to be realized of that initial contribution of [ $200 ] million annualized.

[Stefan Quenneville, analyst]

Excellent. And just to talk a little bit about capital allocation. You guys have been active on the buyback. And you -- but you did mention that you're still looking at tuck-in acquisitions to grow, but it's clear that you're preferentially doing buybacks now with your capital, which I think makes sense. How are you weighing those 2 things, not because of your valuation versus what's out there in terms of tuck-in opportunities? Or is it also that you see your pipeline just growing organically because of opportunities in the RFP sort of bucket? So maybe talk about how you're thinking about weighing those things.

[Davide Pernarella, executive]

Yes. No, good question, Stefan. And you have a great understanding of our business. So you can appreciate from what we've done with respect to operational excellence, we have now built capacity. And you've seen Oakville like it is built for capacity. So we will -- we benefit exceptionally from winning beds. So we will do -- to Davide's point, we do feel our stock is undervalued. So we will continue to buy back on stock. And with respect to tuck-ins that become available for us, really, the way to think about it is we are now looking -- we would be buying those contracts from those pharmacies, like we don't need the bricks and mortar. We would ingest it into our existing sites, which would give us a better return on it because, again, we would put it into our engine.

[Operator]

There are no further questions at this time. I will now turn the call back to Mr. Puneet Khanna. Please continue.

[Puneet Khanna, executive]

Thank you, everyone, for participating in 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 conference call. Thank you for your participation. You may now disconnect.