CareRx Corp

TSX:CRRX

Earnings Call Transcript 2020-Q3

[Operator]

Good morning, everyone, and welcome to CareRx' Third Quarter 2020 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 yesterday's news release announcing company's financial results as well as on the company's website at www.carerx.ca. Today's call is being -- 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 in today's call are 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' periodical results and registration statements, and you can access these documents in the SEDAR database under 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 third quarter earnings call. I am joined this morning by our Chief Financial Officer, Andrew Mok.We are very pleased with our third quarter execution and results. We delivered a strong financial performance while also making tremendous progress on the integration of our recent Remedy's acquisition. Most importantly, we are pleased with how this combined team has come together and how they performed during a very important quarter for us. Despite significant integration and transformation activities underway and against the overall backdrop of the COVID-19 pandemic, our team continues to pride itself on outstanding execution and delivering great results. Because of their efforts, we are well positioned to complete the Remedy's integration ahead of schedule to realize the financial expectations for that acquisition and to accelerate our execution of further growth opportunities that exist in our business and market. In short, Q3 underscored why I continue to be so confident in this team and the future of this business. Starting with these financial highlights. The third quarter, our first with a full quarter of contribution from the Remedy's acquisition, demonstrates the size and scale of the combined entity. Importantly, this quarter's results reflect a pre-synergy view of the combined company. Although integration activity took place during the quarter, which will create meaningful synergies for the company, these synergies were not a material contributor to our Q3 revenue or adjusted EBITDA.Revenue increased 46% to nearly $46 million, and adjusted EBITDA increased 37% to just over $3.8 million. The average number of beds increased 48 -- excuse me, 58% compared to the prior year to 49,344. We do continue to see a slight reduction in bed service attributable to lower occupancy rates in some of the homes that we service as a result of the COVID-19 pandemic. After the initial wave of COVID-19, we saw an uptick in bed count during June and July and then a slight reduction again in August and early September as the second wave began.The exit bed count at September 30 was 49,359, just above the quarterly average, and it has remained stable at that level since the end of the quarter. Importantly, this slight reduction in bed service has not had a material impact on our financial performance. Although it is difficult in the current pandemic to predict when occupancy rates will return to pre-COVID levels, we see no current signs of further reductions in bed count as a result of COVID-19.As mentioned earlier, a significant focus during Q3 was the integration of the Remedy's acquisition. During the quarter, we commenced a consolidation of fulfillment centers in our national site network. Because of overlap and duplication in the respective footprints of the 2 companies and the operational and financial benefits of aggregating volume into a single facility, this consolidation is a major integration priority and is the largest driver of synergies from the acquisition. This site consolidation is taking place in all our key geographic markets, Ontario, Alberta and British Columbia. A total of 7 sites will be consolidated as part of this initiative, which will now be completed by the end of 2020. Two sites were consolidated during Q3, two more were completed in October and the remaining three sites will be consolidated by year-end. With the successful and accelerated execution of this initiative, we now expect to be able to deliver a fully synergized financial performance starting in Q1 of 2021.Although these consolidation efforts will drive meaningful financial synergies, these are not the only benefits. The emphasis throughout the integration has been on bringing the best of 2 businesses together, strengthening our team, sharing best practices and collectively building a stronger and more efficient national platform that will serve our customers better. In some cities, we have consolidated operations into one of the previous CareRx facilities while in other cities, we have moved operations into our Remedy site. Upon completion, we believe we will have the strongest national footprint in the sector with both the capabilities and the capacity to absorb additional volume from further growth initiatives. I would like to take this opportunity to thank our entire team for their incredible dedication and execution in completing this initiative on budget and ahead of schedule.I will now turn the call over to Andrew, who will cover the financial results in more detail, and I will then make some concluding remarks. Andrew?

[Andrew Mok, Chief Financial Officer]

Thank you, David, and good morning, everyone. As a reminder, our financial statements and MD&A for the third quarter have been filed with SEDAR and are also available on our website.In the third quarter of 2020, revenue increased $14.2 million or 45% to $45.6 million from $31.4 million in the third quarter of 2019. This increase was driven primarily by the contribution of the Remedy's business of $15.8 million in the quarter, which was partially offset by the impact of the amendments to the Ontario Drug Benefit Act, which came into effect at the beginning of this year. In addition, as David mentioned, during the quarter, the growth from the Remedy's acquisition was slightly offset by short-term occupancy reductions in some of the homes we service due to COVID-19.Turning to our profitability. Adjusted EBITDA increased $1 million or 37% to $3.8 million in the quarter -- third quarter of 2020 compared to $2.8 million for the third quarter of last year. The increase was driven by a $1.2 million contribution from the Remedy's business and, as David discussed, this contribution did not include the benefit of synergies from the consolidation of our fulfillment centers, which had a negligible impact in the quarter.As we expected, in Q3, the net impact of the Ontario regulatory changes was $0.3 million. Cost management continued to be a core focus for the team during the quarter and our continued success in that regard resulted in a 15% year-over-year decrease in corporate costs to $1.1 million from $1.2 million. These corporate cost savings and other operating cost savings achieved in the quarter offset the net impact of the amendment to the ODBA.Turning to our balance sheet. We finished Q3 with $18.3 million in cash. I will note that there are -- that our cash provided from operations for Q3 of $1.5 million included the impact of a $1.6 million payment made in the quarter related to a pre-closing tax liability that was assumed as part of the Remedy's acquisition, and that resulted in a reduction to the closing cash consideration. Additionally, subsequent to quarter end, we completed the divestiture of a nonoperating shell subsidiary. As a pre-1954 charter company, this subsidiary had stand-alone value and was divested for $1.5 million in gross proceeds, which will be recognized in the fourth quarter.Highlighting the significant progress that we've made on deleveraging the balance sheet over the last 2 years, net debt at the end of Q3 stood at $39.1 million and on an annualized basis, our Q3 net debt to adjusted EBITDA was 2.6x.I will now turn the call back over to David for some concluding remarks. David?

[David Murphy, President, CEO & Director]

Thank you, Andrew. Q3 was a milestone quarter for our company, establishing a new baseline from which to continue the execution of our growth strategy and drive long-term shareholder value. As a reminder, our growth strategy consists of 3 key components. First, we will continue to aggressively pursue organic growth opportunities to increase the number of beds under contract. We believe that we have built a superior value proposition for home operators and their residents that our competitors are unable to match, and we continue to have active discussions with prospective customers about new business opportunities. We remain confident that in the next 12 months or so, we will have the opportunity to add a significant number of beds as competitor contracts expire and home operators use RFPs and other methods to identify the best long-term pharmacy solution for their homes. Our site consolidation and integration activities have been designed with growth in mind. And with the integration almost completed, we have both capacity to add more beds and the capabilities to seamlessly execute the onboarding of new contract wins. We will respect customer and other sensitivities in not making extensive public comments about current and prospective business opportunities, but we will update the market when these opportunities culminate in new customer contracts. In addition, we continue to pursue accretive acquisition opportunities that will increase scale, generate efficiencies and further cement our position as the leader and the consolidator in this sector. The Remedy's acquisition was, in our view, a catalyst transaction in this regard and our M&A pipeline is currently as active as it has ever been. With the Remedy's integration almost completed, we are fully prepared to execute and integrate further acquisitions whenever they materialize. Finally, we continue to be committed to innovation and to exploring strategic adjacencies that will allow us to leverage our capabilities. One such adjacency is the at-home pharmacy market. During Q3, we launched Pharmacy At Your Door, a new digital business, providing free same-day delivery of pharmacy services to seniors and other Canadians in their homes. This new venture seeks to leverage our capabilities, technology and national network of fulfillment centers to provide a superior and differentiated option for people who want their pharmacy needs fulfilled without having to visit their community pharmacy. We launched Pharmacy At Your Door in the Greater Calgary area and expanded it to Edmonton subsequent to quarter end. At this point, we have primarily leveraged our existing team and infrastructure with minimal investment in terms of fixed cost or capital expenditure.Although the contribution from this initiative is not yet material to our financial performance, our early experience has created further interest in this space, and we are more confident that we have the capabilities to succeed in this emerging market segment. Although our core business serving home operators remains the overwhelming focus, we continue to assess options for expanding or accelerating Pharmacy At Your Door moving forward.An essential ingredient of our strategy the past 2 years has been to assemble the best team in our sector, and we have continued to strengthen an already great team during 2020. This week, we welcome Puneet Khanna to the CareRx team as Senior Vice President, Corporate Development. Puneet is one of the most well-known and well-respected leaders in the seniors care pharmacy space, and he has an incredible track record for building outstanding customer relationships and driving exceptional growth. After a year or so working outside the pharmacy sector, Puneet was ready to return. And I think it is a testament to CareRx that we are the organization he wanted to join, that the brand and leadership position we are building is what he wanted to be a part of. Puneet knows our business well, understands our customers' needs and has a vision for the future of our industry. CareRx is very fortunate to have Puneet onboard, and I know that he will be a major contributor as we continue to execute on our growth strategy.With the Remedy's integration proceeding better than planned and on track for completion this year, 2021 promises to be a year of continued progress and growth. As a reminder, despite our size and leading market position, our market share accounts for less than 15% of the total market. Significant opportunities still exist for further market share gains. We have set ourselves up to successfully capitalize on these opportunities with our strengthened combined organization and a national footprint that has additional capacity to scale and absorb new beds.And the underlying market itself continues to grow, aided by highly favorable demographic trends. We believe that the experience of COVID-19 will lead to further investment in the long-term care sector and accelerated growth in the number of beds. Indeed, we are already seeing in some provinces increased investment in the construction, expansion and renovation of long-term care homes in order to build capacity and improve quality. We believe that we are better positioned than any of our competitors to benefit from market growth, and we look forward to working with our home operator partners to shape the future of senior's care pharmacy and together provide the best possible care to the residents that we serve.In closing, we are excited about the progress we have made and the successful execution of our strategy to date. We are confident about our ability to continue our growth trajectory in the months and quarters to come and look forward to updating you on our progress in Q4 and beyond.With that, I would now like to open the call to questions. Operator?

[Operator]

[Operator Instructions] And your first question comes from the line of David -- I'm sorry, Doug Cooper with Beacon Securities.

[Doug Cooper, Managing Director and Head of Research]

David, congratulations on a nice progress in the quarter. So the bed count 49,359, you said it's maybe a little under 100% occupancy. What would that bed count be if it was 100% occupancy?

[David Murphy, President, CEO & Director]

I don't think I can give you an exact number, Doug. I think the 100% is something that's never completely achieved. That is to be -- I think it'd just be -- just about 50,000 off the top of my head is my rough math.

[Doug Cooper, Managing Director and Head of Research]

Okay. So we're not talking -- 90% capacity, 98% or something or whatever the number.

[David Murphy, President, CEO & Director]

Yes. Obviously, it varies by home, but on an overall basis, that's right.

[Doug Cooper, Managing Director and Head of Research]

Okay. You talked about the savings from closing the fulfillment centers, in particular, 2 in the quarter, 2 subsequent, I guess, have finished since the quarter and 3 to go before the end of the year. Can you indicate what -- how much the savings would be from those fulfillment centers, closing them?

[David Murphy, President, CEO & Director]

Yes. At this point, I think the approach we tried to take in the beginning is not to give guidance about that. I would say -- I know a number of analysts, including yourself, have made an estimate as to what that would contribute. We're not uncomfortable with that estimate. I think it winds up with our internal targets, which we believe we have met, but probably I'll leave it at that and consistent with our general philosophy of not providing guidance.

[Doug Cooper, Managing Director and Head of Research]

Okay. The Pharmacy At Your Door progressed. I mean you started in Calgary, moved to Edmonton. What kind of metrics should we look for to judge the success? I guess, can we talk about -- obviously, in the institutional side, we're talking about beds. Should we talk about doors? Or how -- what kind of metrics should we be judging it by?

[David Murphy, President, CEO & Director]

I think, fundamentally, the underlying metrics are the same. It's about the number of people that we -- customers that we have. So I think that's fundamentally the right way to think about it. The revenue per person in that space is less than the seniors housing space. But generally speaking, it is a growth plan. And I think the -- from the perspective of assessing how it's going, I think the pace of our expansion is going to -- is going to tell you that because we're going to continue to evaluate results, learn from the experience and decide how fast to expand to other cities in the country.

[Doug Cooper, Managing Director and Head of Research]

So the rollout, let's assume it's successful. You got Calgary, Edmonton. Would you then expand to BC or you think Ontario?

[David Murphy, President, CEO & Director]

I think it's most likely that the next place we go will be British Columbia.

[Doug Cooper, Managing Director and Head of Research]

Okay. And then final, just on the organic growth, I'm assuming that some of these RFPs have been pushed out because of COVID. Can you give us any indication of how they're lining up?

[David Murphy, President, CEO & Director]

Yes. Actually, there was 1 -- there was 1 RFP that was moved from the fall to January. But as of now, that's it. So we're not of the view that it's going to be a major source of delay. For sure, appropriately so, our home operators #1 and probably #2 and #3 priorities right now are COVID-19, as it should be. But based on the discussions we're having, we don't currently feel like there will be any meaningful delays in terms of home operators going to market as it relates to their pharmacy services.

[Operator]

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

[Kyle McPhee, Analyst of Institutional Equity Research]

Just a quick follow-up on the integration synergies. Whatever that full run rate of savings is going to be, will that be realized in January and beyond? Or do we have to wait longer to see the full savings show up? I'm not sure if you're still carrying the leases or if you just kind of close down some of the other expenses relating to those facilities.

[David Murphy, President, CEO & Director]

No, you should see -- everything we're doing this year, the full impact should get in Q1, Kyle.

[Kyle McPhee, Analyst of Institutional Equity Research]

Got it. Okay. So you've got out of the lease obligations?

[David Murphy, President, CEO & Director]

Yes. I believe it's case by case. Most of those leases were fairly short term. There was a couple of lease and obligations, a couple of cases where we were able to sublease. But nothing that's going to burden the P&L in any meaningful way past year-end.

[Kyle McPhee, Analyst of Institutional Equity Research]

Got it. Okay. And only remaining question for me. On your corporate OpEx, it keeps coming down nicely. Can we just annualize the Q3 number? So kind of $4.2 million is an appropriate number to use on an annual basis for that line item?

[David Murphy, President, CEO & Director]

I'll let Andrew weigh in because I think he'll be mad at me if I answer that question without checking with him first.

[Andrew Mok, Chief Financial Officer]

Yes. Kyle, I think, yes, that's an appropriate estimate for the go forward. Don't anticipate that it's going to be materially different in Q4 or beyond.

[Operator]

Your next question is from the line of Justin Keywood of Stifel GMP.

[Justin Keywood, Director of Equity Research]

Just on the M&A, there was mention of a pretty active pipeline right now. But I'm just wondering, given the backdrop of COVID-19, does this pause any of these files? Or maybe it perhaps accelerates some of the discussions with some of the smaller operators out there. But any additional color around M&A would be helpful.

[David Murphy, President, CEO & Director]

Sure. Justin, thanks. Yes, I would not -- certainly wouldn't say that it's paused anything. As I mentioned, we're not going to talk in great detail, but we're having a lot of active discussions. I don't necessarily think it accelerates either. I think at the end of the day, I won't get -- I won't try to speculate on potential sellers' motivations. But I think, for the most part, the broader trend towards consolidation, some smaller operators impacted by regulatory changes in the last few years and looking to exit. So I think that's a much more of a longer-term theme. I don't see it being affected in a meaningful way by COVID. And as I mentioned, certainly, based on the activity we're seeing, we certainly don't think it's been slowed down.

[Justin Keywood, Director of Equity Research]

And is there any due diligence required at the customer sites, like any physical due diligence? Or could it be done in a virtual means for these potential acquisitions?

[David Murphy, President, CEO & Director]

Yes. Yes, certainly, I suspect the whole M&A market is learning to due diligence differently. And so in general, I would say that the vast majority of diligence that would be required in our sector anyway in an acquisition can be done virtually if necessary.

[Justin Keywood, Director of Equity Research]

Okay. And then my last question, there's been several announcements in Ontario about increased investments in the long-term care space, and I think you mentioned this in the opening remarks. I wonder, there was also a particular mention of increasing the one-on-one care for residents. And I'm just wondering, does that impact your business at all positively or negative?

[David Murphy, President, CEO & Director]

I think on a broad basis, and we're excited to see -- start to see the dialogue shift a little bit from a COVID perspective in the last few months because the experience of the long-term care sector with COVID from our perspective was related to a long-term systemic underfunding of the sector, and so we're encouraged to see the increased investment. And so I would say, at the end of the day, on a collateral basis, our sector will benefit from investment in the long-term care sector. And so that will mean expansion of the number of beds, improvement in the quality of homes, increasing the number of single rooms as opposed to double and greater occupancy. I mean in the first instance, that's mostly just about great care for residents. But to the extent that there's more investment in the sector, there are more beds and higher quality homes. We obviously look at it as a net benefit for any supplier of long-term care and certainly for pharmacy services suppliers.

[Operator]

Your next question is from the line of Tania Gonsalves with Canaccord Genuity.

[Tania Rae Gonsalves, Analyst of Healthcare]

A couple from me. I know it's still early, but can you talk about what kind of patients are signing up for Pharmacy At Your Door? Is it mostly patients at retirement homes that previously weren't customers or new patients living at home?

[David Murphy, President, CEO & Director]

It's a great question. At this point, actually, it's a very diverse group. And so I would identify 3 or 4 categories. They're roughly evenly distributed. In the first instance is we did do a little bit of broad-based marketing and word-of-mouth type spreading of the word in the Calgary area. So we did get a number of individuals at home sign up for the service. We also signed up a couple, what I would call, corporate partnerships. So partnerships with employers in the Calgary area who made the services available to their employees, and employees took us up on that. So that's -- we call that a corporate partnerships bucket. And then the third, I said 3 or 4, it's definitely 3. The third category is what you said, Tania. We're finding that there's a type of a resident in a retirement home who is healthy, active enough, but they're not on medication management services that maybe historically would have driven to the pharmacy, the community pharmacy to get their medications. And that's been a source of additional registrants for us, people that signed up for the service in order to receive it without leaving their home.

[Tania Rae Gonsalves, Analyst of Healthcare]

Excellent. Okay. And then just turning to -- I know there's a lot of talk on the U.S. election right now. If we do have rules change there and they're able to start importing medications from Canada, would that put any kind of pricing pressure on drugs that you're buying here?

[David Murphy, President, CEO & Director]

Yes. We certainly don't see any reason, any of that would impact our business. We have a long-term wholesale and distribution relationship with a leading wholesaler. Most of the economics in that contract are fairly fixed. So -- but that's not something that we would expect would trickle down in a way that would affect us either from an economics or a supply perspective.

[Tania Rae Gonsalves, Analyst of Healthcare]

Okay. And last one here. Interesting to see you were able to divest that little shell company. Are there any more so hiding on the balance sheet that you could possibly divest and have a nice little gain?

[David Murphy, President, CEO & Director]

Potentially. Nothing immediate. So the -- largely, a creature that's unique to Ontario. So in a nutshell, there's a provision in Ontario Pharmacy Law where in order for a corporation or a non-pharmacist to operate a pharmacy business, they need this, what's called, a pre-1954 charter company. Because they're in relatively scarce supply, they do have value even as shelves. By virtue of our acquisition activities, we had an excess supply of them. We do currently have two. So we would evaluate the potential of potentially divesting the additional one. That isn't a shell company, though. So it's a more complicated endeavor. So potentially, but not in the next couple of months.

[Operator]

At this time, there are no further questions, I'll hand the floor back over for any closing remarks.

[David Murphy, President, CEO & Director]

Thank you. And thank you, everyone, for participating on today's call and for your continued interest in CareRx. We look forward to reporting on our progress again next quarter. In the meantime, keep well and take care. Thank you.

[Operator]

Thank you. This does conclude today's conference call. You may now disconnect.