CareRx Corp

TSX:CRRX

Earnings Call Transcript 2019-Q3

[Operator]

Good morning, everyone, and welcome to Centric Health 2019 Third Quarter Earnings 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 one 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 the 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 and uncertainties related to Centric Health's full 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 statements, 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 & Director]

Good morning, everyone, and welcome to our third quarter earnings call. I'm joined this morning by our newly appointed Chief Financial Officer, Andrew Mok. Andrew has served as interim CFO since November of last year, and I congratulate him on his recent appointment as our permanent CFO.We achieved strong performance in the third quarter, continuing the momentum we have built over the past year. Most significantly, adjusted EBITDA from our Specialty Pharmacy operations increased 204.1% or more than triple what it was in Q3 of 2018. Our Specialty Pharmacy adjusted EBITDA margin for the quarter was 12.9%, meeting our previous guidance and marking our fourth consecutive quarter of sequential improvement in operating margins and adjusted EBITDA. We delivered double-digit growth in revenue, which was up 12.4% from continued expansion in the number of beds serviced. And we announced 2 transactions that significantly reduce our debt and better position Centric for future growth, the first being the sale of our Surgical and Medical Centres division and the second being a sizable private placement. I will speak about both of these in a few moments.The strength of our team and the quality of our service offering continues to translate into revenue growth with existing and new customers. In the third quarter, we serviced an average of 31,281 beds compared to 29,040 in the third quarter of last year. This represents an increase of 2,241 beds or 7.7%. Since the beginning of 2018, we have added more than 3,000 beds, representing growth of more than 10%. We believe this to be the fastest organic growth rate in the industry.During the third quarter, we announced the sale of our Surgical and Medical Centres business to the Kensington Private Equity Fund and its manager, Kensington Capital Advisors. Since announcing our new strategic direction last year, we've been working to find a new home for our Surgical and Medical Centres business. This was not because we didn't believe there is a promising future for this business, but we believe that the best path for Centric Health is as a focused provider of pharmacy and other health care services to Canadian seniors.This $35 million all-cash transaction significantly strengthens our balance sheet as we will use the net proceeds from the sale to pay down our debt. We are working with Kensington to ensure a smooth transition for our employees, clinicians and patients across the country. At the end of September, we announced a private placement with Yorkville Asset Management and including participation from some of our existing major shareholders, including Jack Shevel, Ewing Morris as well as our management team. The private placement is comprised of $27.5 million in 8.25% unsecured convertible debentures and up to $10.2 million in common shares priced at $0.12 per common share. The private placement is expected to close later this month with the proceeds to be used to pay down debt and for working capital purposes. We are excited about the new relationship with Yorkville. They are experienced and knowledgeable health care investors, and we will benefit greatly from this partnership in the months and years ahead. We are also grateful for the ongoing support of our existing major shareholders, Dr. Shevel and Ewing Morris, whose participation in this transaction is a testament to their belief in the company and confidence in our strategic direction.Combined, the sale of our Surgical and Medical Centres business and the private placement represent growth proceeds of $72.7 million. And when including our private placement back in March and the sale of 2 of our retail pharmacies earlier in the year, our deleveraging strategy has generated proceeds of up to $89.1 million. This is a significant accomplishment and a real transformation for our company.We are, obviously, very pleased with the momentum in our Specialty Pharmacy operations over the past several quarters. And proceeds from the sale of Surgical and the private placement will further support this momentum while providing us with increased financial flexibility, strengthening our ability to not only continue our organic growth trajectory but also helping us lead the much-needed market consolidation in the Canadian institutional pharmacy sector.It is our view that consolidation within the seniors pharmacy space is not only likely but will be very beneficial, creating increased efficiencies, enhanced market strength and enabling the consolidator to deliver the highest standards of care to home operators and residents, while also creating value for shareholders.Combined, our improved operating performance and vastly improved financial health and flexibility, better position Centric Health for growth. We have a solid strategy and a great team to execute it. Today, more than ever, I'm excited to transition to the next phase of the journey. With that, I'd like to turn the call over to Andrew for his review of our financial results. Andrew?

[Andrew Mok, Chief Financial Officer]

Thank you, David, and good morning, everyone. I'll walk through our third quarter financial results, which are available on our financial statements and MD&A, which have been filed with SEDAR and are also available on our website.Revenue for the quarter for the Specialty Pharmacy business was $31.4 million, which was an increase of 12.4% compared to the $27.9 million generated in the third quarter of last year. The revenue increase for the quarter was due to growth in the average number of beds serviced and revenue initiatives implemented as part of our Business Re-Engineering Plan that was executed during the third and fourth quarters of 2018. Together, these 2 contributors more than offset the impact of the regulatory changes that came into effect in the second quarter of last year.Even more notably, the strength of our third quarter results is most evident when looking at these substantial improvement in adjusted EBITDA from our Specialty Pharmacy business. Over the quarter, it was $4 million, which is an increase of $2.7 million or 204.1% from the $1.3 million we earned in Q3 of last year. In addition to the higher revenue that I just discussed, the increase in adjusted EBITDA was also due to the impact of cost savings achieved from the Business Re-Engineering Plan and operational efficiencies resulting from increased scale from the higher number of beds serviced in the year. As a percentage of revenue, adjusted EBITDA from Specialty Pharmacy was 12.9% for the quarter or 11.3% when excluding the impact of IFRS 16. This compares to a margin of 4.8% in Q3 of last year. As David mentioned, this was our fourth consecutive quarter of sequential growth in adjusted EBITDA.Turning towards our leverage. We continue to make solid progress towards the completion of our strategic priority of strengthening our balance sheet and reducing total debt. Following the closing of both the sale of the Surgical and Medical Centres business as well as the private placement transaction David just spoke about, we will have significantly transformed our balance sheet. As a result of these 2 key transactions, we anticipate that our total bank debt will decrease from approximately $77.7 million to $15.9 million on a pro forma basis. This dramatic reduction in our bank debt will provide the company with the financial strength and flexibility to pursue its acquisition strategy and capitalize on consolidation opportunities that exist in the long-term care pharmacy industry. With that, we would like to now open the line for questions. Operator?

[Operator]

[Operator Instructions] Your first response is from Doug Cooper of Beacon Securities.

[Doug Cooper, Managing Director and Head of Research]

Congratulations on a nice quarter. First of all, on the bed count, can you give me, I just want to confirm my numbers from prior quarter, the average bed count in the prior couple of quarters, Q1 and Q2?

[Andrew Mok, Chief Financial Officer]

Q1 was 30,409. Q2 was 31,265.

[Doug Cooper, Managing Director and Head of Research]

And this is 31,281. Is that right?

[Andrew Mok, Chief Financial Officer]

That's right.

[Doug Cooper, Managing Director and Head of Research]

And that's average? What was the period-ended bed count? Was it materially different?

[David Murphy, President, CEO & Director]

No. The period-end bed count was essentially the same as the average.

[Doug Cooper, Managing Director and Head of Research]

Okay. What do you project, is there any RFPs in place to -- for Q4 into sort of visibility for the remainder of the year or into early next year in terms of bringing on the new beds?

[David Murphy, President, CEO & Director]

Yes. I think and I'd probably say the same thing that I said last call. I don't know that we'll project an exact year-end bed count, but there's lots of activity in the marketplace. We are very confident that in the next 5 quarters, we'll be able to add sort of similar number of beds that we've added in the last 5 quarters. The exact timing of onboarding is difficult to peg, but yes, we definitely feel like the existing growth rate is sustainable.

[Doug Cooper, Managing Director and Head of Research]

Okay. So that was around -- I think you said the beginning of 2018, it was -- you're up 3,000. Is that what you said?

[David Murphy, President, CEO & Director]

That's right.

[Doug Cooper, Managing Director and Head of Research]

Okay. When do you expect to -- I know you said you expect to close the transaction with Kensington at the end of November. Is there anything in particular delaying that? And when do you expect to close the private placement? Is there -- you need a share -- I guess a share vote for that?

[David Murphy, President, CEO & Director]

Sure. Yes, on the surgical closure, Doug, I think from a timing perspective, the major factor that was out of our control was various regulatory approvals that were required in the provinces in which the Surgical business operates. They took a little bit longer than expected, not because of anything related to the transaction but because sometimes governments just don't move as quickly as we would like. But the good news is that as of a couple of days ago, we now have all required regulatory approvals. So the timing is a little more in our control, and we do feel good about our ability to close by the end of November. On the private placement, I suspect that'll actually close before the Surgical transaction. The major next step is we have a shareholder meeting Thursday morning and very confident that, that will go well. And then we'll be able to close the transaction relatively quickly after the shareholder meeting. So at a drop-dead latest, by the end of the month, we'll have both transactions done.

[Doug Cooper, Managing Director and Head of Research]

Okay. In terms of regularly changes, there was some relatively recent news in Ontario. Can you maybe comment on that and the potential impact on the business?

[David Murphy, President, CEO & Director]

Sure. Yes, we did have a note on it in our MD&A. It's not a 100% final, but I think directionally, it's pretty clear where Ontario is going. And as you know, Doug, this is something we've been expecting and planning for. I think I mentioned on the last call that we've been in ongoing discussions with the government in the last few months. Essentially, Ontario is going to adopt a funding model. That's actually very similar to that in a number of other provinces of the country, most notably, British Columbia. Instead of billing services as they are provided, everything really just gets rolled into a single fee per resident per month. It's a model that we're very familiar with and in B.C., in particular, we've had some success with. I think worth mentioning -- you referenced some of the media attention, I think worth mentioning from our perspective, unlike many of our competitors in this space, we were not really that significantly exposed to Ontario LTC. As you know, our stronger market share is in Western Canada. And even within Ontario, most of our beds are retirement beds, which aren't impacted by these changes. So look, as we've discussed in the past, periodic regulatory intervention is a fact of life in our industry, but I think we've demonstrated in the past year that if you have an efficient operating model and a strong team, you can still maintain a growth trajectory despite these changes. And we're very confident we'll be able to do so heading into 2020.

[Doug Cooper, Managing Director and Head of Research]

Okay. A couple more things for me quickly. Balance sheet pro forma, $15.9 million pro forma debt. What is the availability and how quickly once all these things close maybe can you move to your consolidation strategy?

[David Murphy, President, CEO & Director]

Yes. I think on -- look, we don't see an obstacle in terms of our consolidation strategy. Obviously, I'm not going to comment on exact timing of transactions but the moves we've already made have been made with the intent to move forward with that strategy to the extent that accretive acquisition opportunities are available. So I think with our existing debt, we have the flexibility to do what we need to do there.

[Doug Cooper, Managing Director and Head of Research]

And how much availability do you have on the facility once all this is paid down?

[Andrew Mok, Chief Financial Officer]

I think that if we were looking at an acquisition, Doug, we would probably look at a potential refinancing in conjunction with that. But we have, as you may recall from one of our previous disclosures, we had an acquisition facility, which is part of one of the amendments we did. We capped at the $4 million that it was at. So I think that we would be looking at a refinancing in conjunction with an acquisition. But if you look at our capital structure right now, pro forma will have less than $5 million of senior debt compared to the $11.6 million of sub debt. So while our lenders have been very supportive of us, then we're not in a rush to do so. I think it would make sense for us going forward to evaluate all the alternatives in front of us and look to restructure the overall debt.

[Doug Cooper, Managing Director and Head of Research]

Okay. And just so I've maybe got my share count correct. Fully diluted, I have roughly 532 million on a fully diluted basis. Is that in the ballpark?

[David Murphy, President, CEO & Director]

Assuming the closure of the transactions, I think the major input that still needs to get settled is the upsize option on our private placements. So depending on where that lands, we can move one way or the other. But I think it's in the ballpark of where we would land if that upsize option was fully maximized.

[Doug Cooper, Managing Director and Head of Research]

Okay. And finally, any update on Karie?

[David Murphy, President, CEO & Director]

Really more of the same. I think we continue to feel very good about our investment in AceAge. They continue to ramp up both in terms of adding devices in Canada but as you know, they are mostly focused on a very, very large order in Europe, which will start to ship within the next couple of months. So good purchase order activity and even more importantly, really good feedback, I think, from the residents that are using the devices. So we continue to feel very good about that investment and probably more good news to come on that front.

[Operator]

[Operator Instructions] Your next response is from Doug Loe of Echelon Wealth Partners.

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

You didn't specifically mention McKesson in your commentary in the MD&A. I just wondered if there's any update on the directionality of the alliance.

[David Murphy, President, CEO & Director]

I think we're probably exactly the same as when we last discussed it, Doug. As most people know, we are in a multiyear strategic relationship with McKesson for the procurement and distribution of our medications. And so I think we're in year 3 of 10. It's a very strong relationship, very -- I think it's a change strategically that I think the company is very happy. It made a very, very strong relationship, and I think that's really it at this point in time.

[Operator]

There are no further questions in the queue at this time.

[David Murphy, President, CEO & Director]

Okay. Thank you, once again, 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]

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