CareRx Corp

TSX:CRRX

Earnings Call Transcript 2018-Q3

[Operator]

Good morning, everyone. Welcome to Centric Health Third Quarter 2018 Results Conference Call. Please note that today's call is being broadcast live over the Internet and will be archived for replay both by telephone and via the Internet beginning approximately 1 hour following the completion of the call. Details of how to access the replays are available in yesterday's news release, announcing the company's financial results as well as on the company's website at www.centrichealth.ca.Today's call is accompanied by a slide presentation. Those listening via telephone can access the slide presentation from the company's website in the Investors section under Events & Presentations by loading the webcast and choosing the nonstreaming audio option.Before we begin, let me remind you that certain matters discussed in today's conference call or answers that may be given to questions asked could constitute forward-looking statements that are subject to risks or uncertainties relating to Centric Health'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 Centric Health’s periodical results and registration statement. And you can access these documents in the SEDAR database under www.sedar.com. Centric Health 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 Centric Health Corporation. Please go ahead, Mr. Murphy.

[David Murphy, President, CEO & Additional Director]

Thank you, and good morning, everyone. Welcome to our conference call to discuss our third quarter results and other key developments. Joining me for today's call is our Chief Financial Officer, Leslie Cho.This morning, I would like to discuss our progress in repositioning the company for profitable growth. This will include an update on our new strategic direction, the business reengineering plan, leadership changes and other strategic growth initiatives. But first, I will start with a summary of our third quarter results, which Leslie will expand upon later in the call.Our third quarter results were in line with our expectations as we absorbed the first full quarter impact of previously disclosed regulatory changes in our Specialty Pharmacy business. Our revenue for the quarter increased to $40.5 million from $40.1 million in Q3 of last year. Specialty Pharmacy revenue grew 1.6% as a result of a higher number of average beds serviced during the quarter. Surgical and Medical Centres revenue was relatively flat compared to Q3 of last year.Adjusted EBITDA from continuing operations was $1.7 million for the quarter compared to $4.1 million in Q3 of 2017. The decrease was as expected driven mostly by the regulatory changes and other gross margin compression in Specialty Pharmacy and was partially offset by initiatives under the business reengineering plan.Adjusted EBITDA for our Specialty Pharmacy business was $1.5 million for the quarter. The net impact of the regulatory changes in the quarter was $1.8 million. Surgical and Medical Centres posted another solid quarter with adjusted EBITDA of $1.5 million, representing growth of 3.4% and an adjusted EBITDA margin of 14.2%. Year-to-date adjusted EBITDA growth in this division is 15.6% compared to 2017.Corporate office expenses were just under $1.4 million, representing a 9.2% decrease, primarily due to labor savings compared to Q3 of 2017.During the third quarter, we communicated a series of decisive actions we are undertaking in order to overcome recent regulatory challenges and better position us for future growth. This includes a more focused strategic direction, the development of new growth platforms, the reengineering of our operations and the deleveraging of our balance sheet.In the last 3 months, we have made substantial progress in executing on these initiatives and positioning Centric Health to establish itself as the leading provider of pharmacy and other health care services to Canadian seniors.We have commenced a review of existing businesses and assets that may not fit with our new strategic direction, and we are exploring potential divestitures in order to reduce debt and pursue future growth opportunities. As part of this review process, we have retained Scotia Capital to act as the company's financial advisor.As mentioned on previous calls, we have been executing an expansive business reengineering plan in our Specialty Pharmacy business in order to substantially offset the impact of recent regulatory changes. The plan includes changes to our operating and service model, centralization of certain functions, workforce reductions and increased labor efficiencies and initiatives to digitize and automate pharmacy operations.During the third quarter, we successfully completed a number of initiatives as part of this plan. I'm pleased to report that we are on track for completing the remaining initiatives by the end of the year. We expect a return to normalized results in Q1 of 2019, and we expect to deliver double-digit adjusted EBITDA margins in 2019.We continue to grow the number of beds in our Specialty Pharmacy business, winning new contracts for multisite regional home operators in Ontario and British Columbia. These new contracts are expected to add about 2,300 beds, so that we would have approximately 31,000 beds under contract nationally by the end of 2018. The new beds will leverage our existing operational infrastructure and capacities within each respective province. We continue to pursue other contracts and additional beds. 2018 is the first year in which we have had a national business development team, and this team is a great success, strengthening our customer relationships and articulating a strong and consistent value proposition to seniors and home operators across the country.In September, we entered into multiyear supply and service agreements with Canopy Growth Corporation, making Canopy Growth our preferred education partner and supplier of choice of medical cannabis for seniors. Canopy Growth is now actively working with us to educate our clinical pharmacists as well as other health care partners, seniors and their families on the benefits and potential applications of medical cannabis. We have also entered into a separate business development agreement with Canopy Growth, under which they have advanced us funds to help with improved education and assistance programs.We are very excited about this partnership. With our combined capabilities, we are well positioned to play a significant role in enabling greater penetration of medical cannabis in the homes we service, while ensuring that seniors and home operators have the best possible support and oversight for medical cannabis treatments.During the third quarter, we made an additional investment of $200,000 in AceAge Inc. to fund the production of its home-based automated drug delivery appliance carry. We currently have a 19.5% ownership interest in AceAge, with the ability to increase our investment up to 32.5%. AceAge has now launched the first pilot Karie units. As a result of some manufacturing delays, the majority of the first 2,000 units are now targeted to be completed in the first quarter of 2019.We continue to regard the Karie device as an important component of our Aging at Home Strategy, which opens up a new market of more than 4 million Canadian seniors living at home. We look forward to updating you in the new year once these units have been deployed.As many of you are aware, we've had a -- made a number of changes to the executive team in the last month. Nina Freier recently joined us as our Chief Human Resources Officer. She comes to us from Sienna Senior Living and was with Rexall Pharmacy Group before that. So she is well acquainted with both the senior care -- senior's care and pharmacy sectors. Nina is a results-oriented HR leader with a demonstrated track record of developing and implementing best-in-class HR strategies. Her broad expertise includes talent acquisition and management, labor relations and transformational organizational change. We look forward to Nina helping us advance employee engagement and achieving our strategic objectives.On the business development front, Mitchell Sinclair has joined the Specialty Pharmacy team as Vice President of Business Development. He spent the past 7 years with Cardinal Health, where he was Vice President of Sales for a business that has a significant presence in long-term care and retirement homes. Mitchell brings over 25 years experience in sales and sales leadership. His well-established relationships within seniors care make him a strong addition to our team as we seek to continue winning new national and regional contracts and strengthening our brand and value proposition with customers.And Ryan Stempfle has been promoted to Vice President and General Manager Western Canada in our Specialty Pharmacy Division. He will be responsible for the company's pharmacy operations in Alberta, British Columbia and Saskatchewan. Ryan joined Centric Health as part of the company's acquisition of Pharmacare in 2015 and was instrumental in many of the customer contracts we have won in recent months.We look forward to the impact these new additions will have on Centric, and we will continue to build an experienced management team with a demonstrated track record of delivering growth and achieving results in Canadian health care.Also on the team front, unfortunately, our CFO, Leslie Cho, will be leaving the company at the end of this month. We are grateful to Leslie for his many contributions to Centric over the past 4 years and wish him much success in the next chapter of his career. Our search for a new CFO is well underway.Tim Matthews, currently Chief Operating Officer of the Specialty Pharmacy Division, will be leaving us later this year after the completion of the business reengineering plan. Tim has been instrumental during the past 2 years in strengthening the pharmacy business and establishing a more efficient national platform for its operations. Again, I am grateful to both Leslie and Tim for their significant contribution to Centric Health and wish them the very best moving forward.In closing, over the last few months, we have laid out a new strategic direction, added new members to our executive team, established new growth platforms and accelerated the reengineering of operations and deleveraging of our balance sheet. As we approach the end of this transition year and position ourselves for a strong 2019, I believe Centric is poised for an exciting new chapter in its history.With that, I would like to turn the call over to Leslie, who will go over our financial results in more detail.

[Leslie Cho]

Thanks, David, and good morning, everyone. Our complete results for the quarter are available in our financial statements and MD&A, which have been filed with SEDAR and are also available on our website.On a consolidated basis, the company reported revenue of $40.5 million and adjusted EBITDA of $1.7 million, representing an adjusted EBITDA margin of 4.1%. This compares with revenue of $40.1 million and adjusted EBITDA of $4.1 million or 10.2% of revenue in the third quarter of last year.Looking at our segmented results. Specialty Pharmacy had revenue of $29.7 million, an increase of 1.6% compared to the $29.2 million in Q3 of last year. Adjusted EBITDA decreased to $1.5 million from $4.1 million, and adjusted EBITDA margin decreased to 5.1% from 14.1%. Both revenue and adjusted EBITDA were negatively impacted by the regulatory changes that we had previously discussed. Additionally, while overall bed service during the quarter was higher than a year ago, a larger proportion of these beds generated lower margins compared to the bed composition last year.Within our Surgical and Medical Centres segment, revenue was $10.8 million, on par with Q3 of last year. Adjusted EBITDA increased 3.4% and the margin improved to 14.2% from 13.6% last year. The higher adjusted EBITDA was due to a net increase in higher margin services performed as well as labor savings achieved through operational efficiencies.As David mentioned earlier, corporate cost for the third quarter were $1.4 million, representing a 9.2% decrease compared to the third quarter of last year. The decrease was the result of labor cost savings. Importantly, our run rate for corporate office expenses as a proportion of revenue from continuing operations remains below our target of 4%.We recently reached an arrangement with our senior and subordinated lenders to facilitate our compliance with covenants through a transitionary period as we complete our business reengineering plan and execute on our strategic direction. We received a waiver for all financial covenants for Q3 of 2018 and also established a framework for receiving waivers of future financial covenants based on financial targets derived from results of an independent third-party review and subject to approval by our lenders.In addition, interest payments on subordinated debt facilities and any additional cost and fees are to be accrued for up to 6 months and settled through the proceeds of any divestitures or refinancing activities, which will help assist with short-term liquidity.We are thankful to have the support of our lenders and appreciate their confidence in Centric's future. They have provided us with additional flexibility, allowing us to focus on repositioning Centric for profitable growth.As at the end of Q3 2018, our total debt-to-adjusted EBITDA was 6.5x. We continue to maintain a target of total debt to adjusted EBITDA at less than 3.5x over the medium term. We will continue to explore opportunities to improve our balance sheet, including divesting noncore businesses and other noncore assets and through other sources of financing such as the issuance of additional equity, convertible debt or subordinated debt if required.David and I will now be happy to take any questions.

[Operator]

[Operator Instructions] I do not see any questions at this time. Oh, we now have a question with Mr. Doug Loe.

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

Yes. David, I mean, you mentioned your new alliance with Canopy, which you, of course, press released earlier in the year. Without getting too deep into how you expect that relationship to sort of unfold and impact your pharmacy operations in the medium term. I know you're probably still sort of developing the strategy in a bit more detail, but I just wondered if there's any details that you might be able to share with us on some of the logistical things that you might expect to do in partnership with Canopy, let's say, over a next 3- to 4-quarter time horizon.

[David Murphy, President, CEO & Additional Director]

Sure. Thanks for the question. Yes, we're very excited. It is, as you say, early days, but in terms of our short-term action plan with Canopy, the -- our main priority right now, and where we've been spending most of our time in the couple of months since the announcement of the deal is in homes. We have partnered with Canopy to get into our homes across the country to educate them and introduce Canopy to them in order to give our homes an opportunity to ask questions and understand what role medical cannabis can play in our homes, and what role we as Centric can play in facilitating that. So our main focus is customer focus. Operationally, as we've said for a while, we have applied for a distribution license. But the main gateways to achieving our license were really 2 things: One, securing our license -- excuse me, securing our supply, which is what we've done with Canopy, and the remaining steps are operational change we had to make in order to set ourselves up to successfully pass the Health Canada audit. So we will ultimately get our license. The beauty of the Canopy Growth deal we've made with them is there are essentially 2 phases to it. There is an ability to generate revenue and facilitate direct sales by Canopy to homes even before we achieve our license. As a result, at this point, we're not prioritizing the securing of a license right now. We are prioritizing getting into homes, educating our residents in order to create demand that we should be able to fulfill. Initially via the Phase 1 of the deal and then, ultimately, once we get our distribution license, the expectation is we would play a more conventional intermediary and a full distributor into those homes. So that's where we're at, and as I said, the main focus has been education and introductions in homes. And we're pretty far along, Doug, in doing that in the last 8 weeks.

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

Okay, perfect. And then just one more thing that's still related to pharmacy. So in your commentary, David, I mean you talked about your potential for new contract wins in that business, which I assume you're bidding for with some frequency. It strikes me that all of that funding pressure that you experienced in Ontario, but now are experiencing in Alberta, BC and elsewhere on generic pricing and dispensation fees. We know all the metrics. It strikes me that some of the smaller vendors that have smaller market share in that space would be suffering as much as you are, if not more so without the ability to sort of offset the revenue hit across larger platform. So just wondering if -- without getting too specific on anything, just in general terms, if you see any opportunities to actually acquire smaller vendors as compared to sort of competing with them with new contracts in order to drive top line?

[David Murphy, President, CEO & Additional Director]

Yes, I think everything you say is true in terms of the shifting dynamics in the marketplace. Obviously, acquisitions have not been a main focus for us in the last few months, but what you say is true. I strongly believe that after the completion of our business reengineering plan, after the execution of our strategic direction, we have an operation and we have a balance sheet that positions us to compete as strongly as anyone. And certainly much more strongly than some of the smaller operators in our space. And so although we're obviously a public company, who has to deal with some of these challenges more publicly than others, I think what you say is true. I think we also have the means to offset some of these challenges and get to a place where we're healthier competitively than we were before that. So at this point, we're having, as you know, some pretty good success in winning contracts straight up against our competitors. That's the easier and cheaper way to grow the business. But over the long run, as we come out of the next few months with, as I said again, a more efficient operation and a stronger balance sheet, we'll absolutely be open to inorganic means of strengthening our position.

[Operator]

[Operator Instructions] We do not have any questions over the phone line at this time. I will turn the call over to the presenters.

[David Murphy, President, CEO & Additional Director]

Thank you for participating on today's call and for your continued interest in Centric Health. We look forward to reporting on our progress again next quarter.

[Operator]

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