CareRx Corp

TSX:CRRX

Earnings Call Transcript 2022-Q3

[Operator]

Good morning, everyone, and welcome to CareRx Third Quarter 2022 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 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 or answers that may not be giving [indiscernible] to questions asked may constitute forward-looking statements that are subject to risks or 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 periodical results and registration statements, and you can access these documents in the SEDAR database under www.new.sedar.com. [indiscernible] 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, executive]

Thank you, and good morning, everyone. Welcome to our third quarter 2022 earnings call. With me this morning is our Chief Financial Officer, Andrew Mok.

Once again, during the third quarter, we delivered year-over-year growth in revenue and adjusted EBITDA. In addition to organic growth, the acquisitions we made over the last 1.5 years have contributed significantly to this year-over-year growth. During the third quarter, we signed a new long-term agreement with a large national customer, which includes a 5-year extension for over 4,500 beds currently serviced by the company and will also result in the onboarding of over 1,200 new beds. As well, we announced another step in the continued growth of our national footprint with the planned expansion into Atlantic Canada, where we expect to commence servicing homes in the third quarter of 2023.

Turning to some of the specific financial highlights. Revenue for the second quarter grew 37% to just over $97 million with growth driven by an 18% year-over-year increase in the average number of beds serviced to 96,517. This growth was driven by the contribution from the MPGL LTC Pharmacy Business, a full quarter of contribution from the Hogan LTC Pharmacy Business and contribution from new beds onboarded during the second half of 2021 and first half of 2022. Adjusted EBITDA for the third quarter increased 12% year-over-year to $7.7 million. This growth was driven primarily by the organic and acquisitive growth I just described.

With another quarter of year-over-year growth in the third quarter, our business continues to deliver an outstanding growth trajectory. Over a 3-year period, we have more than tripled our bed count and revenue, and we have increased quarterly adjusted EBITDA by just under 3x to $7.7 million, which represents a compound annual growth rate of just under 42%. As I previously mentioned, during the third quarter, we signed a new long-term agreement with a large national customer, which includes a 5-year extension for over 4,500 beds currently serviced by CareRx, of which approximately 3,400 beds are expected to be acquired by the customer from another existing customer. This contract will also result in the onboarding of over 1,200 new beds.

As a result of the transfer of the 3,400 acquired beds from another customer and the onboarding of the 1,200 beds not currently serviced, this customer will become one of CareRx's largest going forward. This contract extension and new business further supports the value proposition we bring to our customers and highlights the strength of our service offering as the only national pharmacy services provider that is focused solely on congregate care communities. We are confident that we will continue to deliver new organic contract wins that will allow us to continue to deliver a strong long-term growth trajectory.

On October 3, we announced the signing of a multiyear contract to provide pharmacy services to residents in multiple seniors living facilities in Atlantic Canada, initially servicing up to 600 residents. CareRx is currently in the process of establishing pharmacy operations in Atlantic Canada and expects to commence servicing homes in the third quarter of 2023. Our expansion to Atlantic Canada is another significant step in our growth journey and further strengthens our position as the national leader in seniors pharmacy services.

I would now like to turn the call over to Andrew to discuss our third quarter results in more detail. Andrew?

[Andrew Mok, executive]

Thank you, David, and good morning, everyone. Before I begin, a reminder that our financial statements and MD&A for the third quarter have been filed with SEDAR and are also available on our website. Revenue for the third quarter of 2022 increased $26.1 million or 37% to $97.4 million from $71.3 million for the third quarter of 2021. Growth was driven primarily by the full quarter contribution of the prior year acquisition of the LTC Pharmacy division of Medical Pharmacies Group Limited, which was acquired during the third quarter of 2021 and the contribution of the Hogan LTC Pharmacy Business that was acquired on May 30, 2022. The increase was also driven by organic growth resulting from beds from new contracts onboarded during the second half of 2021 and first half of 2022.

Adjusted EBITDA for Q3 increased $0.8 million or 12% to $7.7 million from $6.9 million for the third quarter of last year. As was the case with revenue, adjusted EBITDA growth was driven primarily by the full quarter contribution of the MPGL and Hogan acquisitions and from new contracts that were onboarded during the second half of 2021 and first half of 2022. As expected and consistent with what we disclosed in the prior quarter, the commencement of the offboarding of a large customer contract had an impact of approximately $0.5 million on adjusted EBITDA for the quarter. Adjusted EBITDA for Q3 of this year was also further impacted by approximately $900,000 related to incremental costs associated with a higher-than-average number of open pharmacy staff positions as a result of current labor market challenges that continue to be experienced in the quarter, including overtime, contract labor and recruitment costs.

These incremental costs are expected to persist into 2023. Our net loss in the quarter decreased to $1.8 million from $3.9 million last year, primarily due to the full quarter contribution of the MPGL acquisition and decreases in finance costs and transaction and restructuring costs, which were partially offset by the previously mentioned contract loss, incremental costs incurred as a result of the current labor market and a lower positive impact from the change in the fair value of derivative financial instruments.

Turning to our balance sheet. Cash at September 30 was $17.9 million, up $2.7 million from $15.2 million at the end of the second quarter of 2022. The increase in cash in the quarter was driven primarily by cash provided by operating activities, which included the positive impact from the reversal of certain negative working capital movements from the prior quarter and was partially offset by CapEx and finance costs. Net debt at September 30 was $75.3 million, a decrease of $4.1 million compared to the prior quarter. Net debt to annualized run rate adjusted EBITDA was 2.4x at the end of the quarter.

And with that, I will now turn the call back over to David for some concluding comments. David?

[David Murphy, executive]

Thank you, Andrew. As I mentioned earlier and in our Q2 call, short-term profitability is expected to be impacted by the offboarding of a large customer contract throughout the remainder of this year and by the challenges and cost pressures created by the current labor market. However, we continue to demonstrate our ability to deliver an outstanding long-term growth trajectory. Future growth will continue to be driven by both organic growth within our existing markets and acquisitions, and it will increasingly be supplemented by geographic expansion. Our planned expansion to Atlantic Canada will allow us to deliver higher quality and enhanced support to seniors housing operators in the region, creating a foundation to further expand our presence and market share in Atlantic Canada in the years ahead.

And the new long-term agreement with an existing large national customer that we signed in the quarter, which includes 1,200 new beds that are being transitioned from a large competitor demonstrates our value proposition and the depth of our relationships within our existing customer base. Our business development and acquisition pipeline remains very robust and active, and we continue to see an accelerated expansion in the number of seniors housing beds being developed across the country to support the rapidly growing seniors demographic in Canada. Our existing customers continue to add a disproportionate percentage of new beds in the sector, and we expect to continue to benefit from their growth and acquisition activity.

With that, I would now like to open the call to questions. Operator?

[Operator]

[Operator Instructions] Your first question comes from Chi Le from Desjardins.

[Chi Le, analyst]

My first question would be about the labor shortages [indiscernible]. So perhaps you could prepare as per your breakdown between the different buckets, overtime, contract or recruitment costs within the $0.9 million that you expected that you experienced in 3Q?

[David Murphy, executive]

Yes. I think on an overall basis, I'll let Andrew answer more specifically, although I think it's probably the simplest way of putting it is it's roughly in 3 equal parts. All of them though are fundamentally dealing with the same underlying issue, which is because of the lack of a full complement of staff in our pharmacies, the work still needs to get done. And so as a result, we're experiencing higher than normal overtime. Sometimes over time has its limits, obviously, as it relates to getting our existing staff to work extra hours so we needed to pull in some contract labor. And as you say, recruiting, we're trying to be as aggressive and as innovative as we can in terms of filling positions more quickly. And so there's recruiting costs associated with that. So I think roughly, they're pretty much equal and proportion, but I'll let Andrew add any color he might want to add?

[Andrew Mok, executive]

Yes, as David said, I think it's roughly even, but it's weighted more towards the overtime and contract labor. So you could probably say it's about 40-40-20 in terms of the split between the 3.

[Chi Le, analyst]

And is there anything you would note in terms of the loss productivity or unfilled orders? I know that you probably complemented that with contract and overtime as well, but anything to note there?

[David Murphy, executive]

I'm sorry, could you repeat the first part of your question again, Chi, I didn't hear it clearly?

[Chi Le, analyst]

Is there anything you would note in terms of loss productivity or loss sales due to the labor even though you probably have accounted for it partially due to the -- from the contract and the part-time labor as well?

[David Murphy, executive]

Yes, I don't think anything that would have a financial impact. I would say though that the labor market challenges for us are not primarily about the financial impact. I think the effects of them are the need for a pretty all-consuming focus on day-to-day operations. So I would just say, making sure we can fill orders and do what our customers and their residents need is an all hands on deck sort of undertaking. And so no impact except that's where our focus is, and it's obviously more challenging when we're short staffed than it has been historically.

[Chi Le, analyst]

And my last question would be on the margins. It seems like it's previously set to 7.9%. Can you split between the impact of the contract loss versus the labor challenges? And my second part would be assuming the labor challenge persist, what could be the new baseline for EBITDA margin going forward?

[David Murphy, executive]

On the first question, I think if you look at Q2 to Q3, the major drivers of the change both in EBITDA in dollars and in margins are the impact of the offboarding and the incremental labor costs. I think the offboarding is more of an impact. But I think it's -- those are the 2 things. And I think you can do your own math on what that looks like. I think we're not in an environment where I think we're comfortable being that precise as it relates to forward-looking margin expansion. I think the offboarding is fairly easy to quantify. I think it's basically proceeding as expected. There'll be a further impact in Q4. And I think we feel comfortable we can rebuild and grow margins based on both top line growth and continued efficiencies. The wildcard is exactly when the labor market stabilizes and that I think makes us a little more cautious to put any stakes in the ground as it relates to where we see margins moving over the course of the next 4 quarters. But obviously, they should expand after we fully offboard the one contract.

[Operator]

Your next question comes from Kyle McPhee from Cormark Securities.

[Kyle McPhee, analyst]

Great to see you adding beds organically. Just some clarifying questions on that. The 1,200 new beds you announced, what was the timing for you to start servicing those?

[David Murphy, executive]

Q4 and into Q1, Kyle. So they'll likely not have a big impact on Q4, but we should get most of the first quarter from them.

[Kyle McPhee, analyst]

And then just to clarify, the 3,400 beds that client is acquiring, those are beds you already service?

[David Murphy, executive]

That's correct. So an existing large customer of ours is in the process of divesting them and selling them to this customer.

[Kyle McPhee, analyst]

And regarding the 5,800 beds you're offloading, can you give us some color on how many were offloaded during Q3? So we know how much is left for Q4?

[David Murphy, executive]

So as of September 30, almost exactly half were offboarded to about 2,900 of the 5,800.

[Kyle McPhee, analyst]

And any other -- can you give us your exit bed count number for the quarter?

[David Murphy, executive]

It's almost exactly 95,000, just a little bit above 95,000.

[Kyle McPhee, analyst]

And then just -- can you provide any color on kind of your expected pace of ongoing organic wins? Over the last couple of months, you've now announced 1,800, which is great to see. Is that kind of a reasonable quarterly pace we should expect or will that accelerate or decelerate?

[David Murphy, executive]

It's always difficult to make quarterly predictions because these things do ebb and flow. But we're really confident in what we're seeing in terms of activity and wins. The way I look at it, to your question earlier, we're at roughly 95,000 beds at the end of September, even though half of the offboarded beds have been offboarded. And that's pretty much right where we were at the beginning of the year. So we've already offset the first half. And based on the new contract, Atlantic Canada, and a few other smaller wins, I think we're well on track to offset the other 2,900. So whether it's $2,000 a quarter, I mean, that might be optimistic, but there's certainly enough opportunities out there that we feel very confident about our ability to get back to where we were and then grow from there.

[Operator]

Your next question comes from Sepehr Manochehry from Eight Capital.

[Sepehr Manochehry, analyst]

I wanted to understand a little bit about what Q4 looks like now that earlier this year, you guys did launch some expanded offerings under the Revicare brand, and I gather there's some potential higher-margin services you could also provide. Is there kind of a quarter-over-quarter growth expectation on the top line as we saw this quarter? Or are you expecting the bed count to kind of counter some of that?

[David Murphy, executive]

Yes, I think it still remains the case, Sep, that the bed count is the primary driver of revenue. And there are additional revenue sources over and above the bed count, which is a myriad of things, including the retail locations we operate and Revicare and other things, as you said. So we are happy with how all those are growing. And I think the -- probably the delta between the revenue we reported and analysts' consensus is, I think that maybe -- you haven't fully captured not you personally, but analysts have less than fully captured that other revenue, and so that will continue to be the case. Will it grow? Yes. Will it be material? Probably we're not at the point yet where Revicare or any specific line item are going to be a material, observable driver of an increase, but we are very happy with the progress to date, given that it's less than a year since we rebranded and relaunched Revicare. But I think for the most part, bed count should still be the major driver of quarter-over-quarter revenue movements.

[Sepehr Manochehry, analyst]

And in terms of, I guess, timing at the home operators is kind of Q4 year-end period of time when they do assess those contracts? Or is there any seasonality to, let's say, RFPs or based on things that you've put out there and maybe you're waiting to hear back? Are you expecting kind of counter weighing in Q4 or is there visibility on timing of that sort of kind of?

[David Murphy, executive]

Do you mean Revicare specifically or more broadly?

[Sepehr Manochehry, analyst]

No, no, just more broadly in terms of like bed wins on RFPs that may be out there. Is there kind of any seasonality there?

[David Murphy, executive]

Not generally. Obviously, the post-COVID period has been a bit unusual in terms of how activities happened compared to the past. But I think for the most part, there's not a lot of seasonality, contracts expire. When they expire, customers look to the market when they're ready to look for a new pharmacy provider. And other than the usual December and January, you don't see as much activity, which is true in most sectors. I wouldn't point to any seasonality as it relates to new beds. There's a little bit of seasonality in terms of sort of medication use, but that's probably baked into prior year comparables.

[Sepehr Manochehry, analyst]

And just a last one on potential strategic adjacencies. Obviously, you guys have this national footprint. Is it more on the retail side that you would see strategic opportunity or would it be other care settings? Like I know you've talked about other institutional care settings. I just wanted to understand, is there one of those 2 that you see as kind of growth alley and what's the progress there?

[David Murphy, executive]

We consider our strategic sweet spot and our focus to be pharmacy services to congregate care settings or to people and populations with complex medication needs. That's where our focus is. Retail is, there are other organizations that are much larger and more focused in that space. So for sure, our focus is driving growth in our core competency and that includes seniors housing. As you know, it also includes other congregate care settings. And I think we continue to make progress there, admittedly off a low base. That's where we believe we are strongest and where we think most growth will come from.

[Sepehr Manochehry, analyst]

Is there any kind of outlook that you have on that sort of outside of senior homes area? Like how you see the breakdown of maybe getting to that 2024 130 beds? Like what portion of that would be other care settings?

[David Murphy, executive]

I don't think we have ever itemized our path to that I think, but it will include both organic growth in our existing space, acquisitions and enhanced penetration in those other settings. It's I think only a couple of thousand of our 95,000 beds today are in those settings. So I don't think we publicly disclosed a specific target, but fair to say, it will require above-average growth in that segment of the space in order to reach our target.

[Sepehr Manochehry, analyst]

Congrats on the growth.

[Operator]

Your next question comes from Tania Armstrong-Whitworth from Canaccord.

[Tania Gonsalves, analyst]

With respect to the beds in Atlantic Canada, I'm wondering if they will -- that those 600 new beds that you added, will they begin generating revenue in Q4 of this year or is that not expected until Q3 '23?

[David Murphy, executive]

It will be Q3 '23. I think both the contract we signed with the initial customer and the work we're doing to establish operations there, all contemplate a July 1 start. So they will generate revenue from there, but not prior to that.

[Tania Gonsalves, analyst]

And then I noticed that you've delayed the completion of the medical pharmacies integration into 2023 as well. Could you let us know what projects are remaining to be completed and what the time line for those look like?

[David Murphy, executive]

Yes, for sure. So as a reminder, that integration, the lion's share of it was site consolidation, which has now been completed, except for one that we previously disclosed has been deferred into next year. The rest, the sort of $1.5 million of remaining synergies is a broad bucket of things that include some shared service synergy assumptions, management and other labor cost reductions. We continue to have a clear line of sight on getting to that. But to the answer to my question earlier about our labor market challenges, we really are all hands on deck on just making sure day-to-day operations are in good shape as it relates to meeting customer expectations. And so as a result, certain things have just needed to be deprioritized or deferred.

So primarily, those are labor savings that we expect to be realized now next year instead of in the fourth quarter of this year.

[Tania Gonsalves, analyst]

And then lastly, just, I mean, mega-sites and BD Rowa machine rollout, if you could provide an update on how that's progressing?

[David Murphy, executive]

Yes, I think the same theme applies, Tania. As you know, we opened the site in the spring. So we are already getting benefit from the aggregation of what was previously multiple sites into a single site in terms of efficiencies and labor cost reductions. We've not currently deployed the BD Rowa machines for the same reason I just mentioned, which is that is -- although an exciting project, it's a project that does require some work and change management. And so we've focused on stabilizing day-to-day operations, getting past this labor market challenge. BD Rowa at this point doesn't have a definitive go-live date. I suspect it will be late this year or early next year.

[Operator]

Andrew, your next question comes from Chelsea Stellick from iA Capital Markets.

[Chelsea Bedrejo, analyst]

My couple of questions. One of them in regards to the 1,200 beds, what geography will those be in?

[Andrew Mok, executive]

Western Canada, Alberta and British Columbia.

[Chelsea Bedrejo, analyst]

And then I guess my other question is the onboarding of these new beds and then also the 60, how would they be impacted by the labor pressures or will they be? Would there be a delay in the onboarding?

[Andrew Mok, executive]

Yes, it's a great question. I mean, we're fortunate. One of the many things that came from the medical pharmacies acquisition is medical pharmacies had and we now have a dedicated new business onboarding team. So this team basically focuses on adding new beds. So we have the bandwidth and the executional capabilities to onboard those beds, and I believe all of them have already been scheduled. So I wouldn't point to any impact there. Except, obviously, in general, there are more vacancies, which we always have to be mindful of. But I think we're pretty confident that we have a clear path to onboarding those beds and to advancing our Atlantic Canada expansion.

[Chelsea Bedrejo, analyst]

I guess in general, when do you expect these to like ease? I mean, should we expect sort of a similar impact next quarter or like what is your outlook for the end, I guess?

[Andrew Mok, executive]

Yes, it's a good question. I wish I had some wisdom on this sort of broader health care, human resources challenges that really seem to be pretty systemic right now across multiple spaces. I certainly think it's fair to assume that Q4 won't be any better than Q3. I don't think we have much ability to forecast beyond that. It depends on what you read in terms of whether things are starting to turn or when they'll turn. But I think certainly for Q4, I would expect it to look very similar to what it did in Q3.

[Chelsea Bedrejo, analyst]

I just look at -- some of the other companies that I've looked at when it comes to this labor pressures on this end, it's something around the timing of like universities, graduates entering the market. Is that something that you think that you'll also see or like are you working on any sort of campus recruitment efforts or anything like that?

[Andrew Mok, executive]

Yes, to answer the second part of your question, we are significantly ramping up campus-related recruitment activities, but I don't want to put everything into sort of May graduations. But that will certainly help and should augment the pool of qualified candidates.

[Chelsea Bedrejo, analyst]

And then just a final question for me. How much of the $4.5 million in synergies from MPGL were realized this quarter?

[Andrew Mok, executive]

I think on a run rate basis, $3 million of the $4.5 million have been achieved.

[Operator]

[Operator Instructions] Your next question comes from Doug Loe from Leede Jones Gable.

[Douglas W. Loe, analyst]

Congratulations on the quarter. Just a modest working capital question for you to kind of wind things down. I mean you're -- I mean, you exited 2021 with a modest working capital deficit and the deficits continue to mount for 2022 acquisitive growth can kind of distort working capital for a quarter or so. But anyway just wonder if you have any comments on any sort of reversals in that trend that might be expected to transpire over the next few quarters? And just comment if that could impact your cash position as it relates to cash you could deploy for future acquisitions?

[David Murphy, executive]

You're right. I mean, it's been a noisy year with -- from a working capital perspective for a few reasons. I think Andrew can probably help sort through the go-forward implications of the movement you've seen in the last couple of quarters. So I'll turn it over to him.

[Andrew Mok, executive]

I think that the primary driver of the working capital movements over the last couple of quarters has related to AP and specifically payables related to our inventory purchases, more of a timing issue. We knew from last quarter, we had made a large payment on our inventory payables, just kind of by function of how timing of payments worked out last quarter, which we knew would partially reverse this quarter, and we saw that impact as you see in terms of the improved cash position. We would similarly expect that trend to continue to reverse through Q4, such that by the end of the year, you'll probably see a more normalized picture of what our working capital looks like.

[Operator]

Your next question comes from Stefan Quenneville from Echelon Capital Markets.

[Stefan Quenneville, analyst]

Most has been covered. I just have a quick question about the kind of competitive dynamic due to the sort of, I guess, industry-wide labor shortages. Are you seeing any opportunities either because competitors are dropping the ball in terms of service levels because of shortages on their part or seeing any maybe tuck-in M&A opportunities because of the similar challenges people may be having operationally?

[David Murphy, executive]

Thanks for the question. It's a good one. I hesitate to say too much publicly competitively, I think you're right, though, we're all dealing with the same issues, which does put a strain on day-to-day operations. I think our general view on this is that our size, scale and capabilities are allowing us to weather that better than others. As it relates to acquisitions, our pipeline is never -- has never shrunk. It's always been pretty active. And I think there's reason to believe that some of these challenges might make that more -- that pipeline more abundant moving forward. But as I said before, it's a competitive space. There's good companies, good operators. We're all dealing with the same challenges, but we like our chances to get through it in a better position than others.

[Operator]

[Operator Instructions] There are no further questions at this time, please proceed.

[David Murphy, executive]

Thank you, and thank you, everyone for participating in today's call and for your continued interest in CareRx. We look forward to reporting our continued progress next quarter. Thank you.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. Thank you for participating, and I ask that you please disconnect your lines.