CareRx Corp

TSX:CRRX

Earnings Call Transcript 2017-Q4

[Operator]

Good morning, ladies and gentlemen. Welcome to Centric Health Fourth Quarter 2017 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 and 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 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 Jack Shevel, Chairman and interim CEO, Centric Health Corporation. Please go ahead, Dr. Shevel.

[Jack Shevel, Interim CEO & Executive Chairman]

Thank you, and thanks to everyone joining us. Welcome to our conference call to discuss our fourth quarter and year-end 2017 results and other key developments. With me for today's call is our Chief Financial Officer, Leslie Cho.For today's call, I will provide an overview of our recent highlights, Leslie will then review our financial results for the fourth quarter, and then I will return with some comments on our outlook and growth strategy before opening up the call for questions.Last year was a completion of the journey we started about 3 years earlier to focus Centric on 2 core businesses and restructure the balance sheet. The divestiture of these businesses helped us in 2 ways. Firstly, it helped us to pay down debt and also provided the financial flexibility to invest in the significant growth opportunities available to us in the ongoing businesses. Since the beginning of 2016, we have effectively transformed the balance sheet, reducing debt by $233 million and annual finance costs from $26 million to $6 million in 2017.Secondly, to bolster the Specialty Pharmacy business, we made strategic acquisitions that would build Centric into a market leader. The purchase of Fast Speciality Pharmacies in Alberta, Saskatchewan, British Columbia, and the latest being the acquisition of Salus Pharmacy (sic) [Pharmacare] in Calgary transformed us into a true national provider.With the announce now, substantially, completed and the appointment of Tim Matthews as the national COO of this division, we can finally start to rationalize the platform and take advantage of our scale and best practices.In 2016, we signed a new contract with a national provider of retirement home and long-term care facilities, which we placed a large contract that was expiring over the course of 2017. Unfortunately, due to technical issues with the new digital pin, and in the interest of patient safety, the onboarding of the New Contract was delayed by 6 months. During the course of this month, the final beds under this New C were transitioned and the company can now focus on maximizing returns for shareholders.Looking at 2017, revenue grew at only 1%, while adjusted EBIDTA grew at 12%. Revenue growth was affected by the delay of beds transitioning, fixed staffing costs and further reductions in ODB tariffs. The growth in adjusted EBIDTA reflects the margin improvement from the strong performance in our Surgical business for the period ended 2017. The revenues split between the 2 businesses continues to be 75:25.Looking specifically at our Pharmacy business, with the national contract base now onboard, our focus is on providing optimum care to over 28,000 residents. In November of last year, we acquired Salus Pharmacare, a specialty pharmacy in Calgary, presently servicing over 700 assisted living beds with the potential to service an additional 700 seniors in independent living facilities. This acquisition increased our market share in Calgary and made us a leading pharmacy provider to assisted living and long-term care homes in Alberta.Since 2015, the Surgery division has had a compound annual growth rate of 6% on the revenue line and 31% on EBITDA, a great turnaround by any measure under some difficult circumstances. Utilization has increased from 20% in 2012 to 49% currently, bolstered by strong performance from bariatric surgery. Interprovincial referrals also increased last year. We see this as an opportunity for future growth that we will be focusing on in 2018.One of the most exciting development in 2017 was the strategic investment we made in AceAge, the entity responsible for the development of Karie. Karie is a home-based automated drug delivery appliance that makes it simple to follow complex medication regimes by automatically delivering prescription drugs in the correct dosage at the right time. This is the biggest concern for cheniors, the children of seniors. The device uses the compliance medication packaging that is generated from our automated PACMED and PacVision systems and is placed in an easy-to-load cartridge. When it's time for each dose, Karie provides visual and audio alerts. It can also be set automatically to notify a family member or caregiver if a dose is ever missed. Face recognition ensures further safety and security.As we announced last week, Karie is entering the manufacturing phase, and we expect to be delivering devices by this summer. This device, designed and manufactured solely in Canada, has international patent registration rights. I will go into more detail on our marketing plan later in the presentation.The success we have had to date is the result of a talented, cohesive team that is committed to innovation with each other -- with each member focused on service excellence. I would also like to pay tribute to our 918 stock complement for their dedication and passion.Most recently, we added Tim Matthews as the Chief Operating Officer of our National Pharmacy division. Tim had been part of Centric since 2013 in business development and joins us again after a stint at PwC; Ryan Stempfle, Pharmacist, MBA, was appointed National Business Lead; and Paul Rakowski joins us as VP and General Counsel with an MBA and Bachelor of Science degree. We have made significant progress on our CEO search and expect to make an announcement during April.Now Leslie will provide you with a financial overview.

[Leslie Cho, Chief Financial Officer]

Thank you, Jackie, and good morning, everyone. In the interest of time, I'll restrict my remarks to the fourth quarter. Our complete results for the quarter and full year are available in our financial statements and MD&A, which have been filed with SEDAR and are also available on our website.Consolidated revenue for the fourth quarter grew marginally to $42.3 million from $41.8 million for the same quarter of the prior year. Adjusted EBITDA from continuing operations declined 6.8% to $4.1 million from $4.4 million in Q4 2016. Adjusted EBIDTA margin for Q4 2017 was 9.6% compared to 10.5% in Q4 2016.Results for the fourth quarter continue to be impacted by the timing differences between the transition of contracts, resulting in the delay in the onboarding of new beds as we had previously discussed. In addition, there were labor inefficiencies identified along with additional costs related to the transition of beds that could not be eliminated in the short-term.I'll now walk through the quarterly results for each of our 2 business segments separately.Beginning with our Specialty Pharmacy segment, fourth quarter revenue remained relatively flat year-over-year at $31.1 million compared to $31.4 million. Adjusted EBITDA for Specialty Pharmacy decreased 26.5% to $3.6 million from $4.9 million in Q4 of the prior year, and adjusted EBITDA margin was 11.6% in the fourth quarter compared to 15.6% in Q4 2016.The Specialty Pharmacy segment continues to be impacted by the temporary change in Ontario government's regulations relating to pharmacy reimbursement for certain drugs provided under the Ontario Drug Benefit program.As described in Q3, the payments related to certain prescription fees and drug costs were temporarily reduced by 2.8% in order to recover savings that were not achieved in the government's 2015 reduction. The impact of this in the fourth quarter was approximately $130,000, and we are estimating the impact of the reduction to be between $650,000 to $750,000 annually. In addition, the timing of the contract transition, highlighted labor inefficiencies and excess costs that could not be eliminated in the short-term. During the fourth quarter, we initiated a business reengineering plan that we will discuss in more detail in a few moments.Moving to our Surgical and Medical Centre segment. Revenue for the fourth quarter of 2017 increased 8.7% to $11.3 million from $10.4 million in the same period of the prior year. Higher surgical volumes and a more favorable case procedure mix contributed to this year-over-year growth. Adjusted EBITDA for Surgical and Medical Centres grew by 33.3% to $1.6 million from $1.2 million, and margin expanded to 14.3% from 11.3% in Q4 last year.Corporate costs for the fourth quarter of 2017 were $1.2 million, down from $1.7 million for Q4 of the prior year. The decline in corporate costs is primarily due to the reversal of accrued performance bonuses that were not achieved. As a percentage of revenue, corporate expenses in Q4 2017 were 2.8% compared to 4.1% in Q4 2016. As projected at the end of 2016, we reported corporate office expenses of less than 4% of revenue in each quarter of 2017, which we expect to continue through 2018.In 2017, we generated $16.1 million in positive cash flow from operating activities. Cash flow from operations in 2017 reflects additional amounts received from a drug supply agreement, while 2016 was negatively affected by the timing of payments related to the sale of our Physiotherapy and Rehabilitation segment. Going forward, we continue -- we expect to continue to see positive cash flow generated from operations.Turning to our balance sheet. You can see the impact of our deleveraging and balance sheet simplification plan as we ended the year with a total debt to adjusted EBITDA ratio of 4.8x. Over 2018, we will continue to improve on our leverage as we aim to achieve a ratio of below 4x in the short to medium term. In addition, the annualized run rate cash interest payments as of Q4 2017 was approximately $6 million, substantially less than the $12 million paid in 2016 and $26 million paid in 2015, a big step towards the company generating positive free cash flow.As we witnessed over the last 3 years, the pharmacy industry continues to face regulatory pressure. At the end of January, the Canadian Generic Pharmaceutical Association and the pan-Canadian Pharmaceutical Alliance announced the April implementation of a 5-year initiative aimed at reducing the prices of many commonly used generic drugs. We are currently estimating the impact of this to be approximately $2 million on an annualized basis. We are also looking at the new pharmacy funding framework being implemented in Alberta and are in the process of determining the impact that it may have on our pharmacy business as well as mitigation plans to minimize any potential impacts.With these continued pricing pressures from government payers as well as an overall critical look at our business, we initiated a business reengineering plan to help offset and reduce the impact that these funding changes may have. The plan focuses on efficiency in our facilities by increasing our reliance on automation, redesigning our workflows to optimize labor models, consolidating smaller sites and utilizing high-volume centers and lowering our overall cost structure. With this plan, the company has targeted annualized cost savings of $4 million to be achieved by the end of 2018. And as we continue to grow our bed count, we expect to see further operating leverage benefits.In addition to the reengineering plan, we remain focused on expanding our service offering, target market and geographic outreach, including the introduction of the Karie device, entering new geographies and developing a medical cannabis solution for seniors.I'd now like to turn the call back to Jackie for some remarks on some of these initiatives and on the growth outlook for the businesses.

[Jack Shevel, Interim CEO & Executive Chairman]

Thank you, Leslie. The past is now behind us, the demographics remain compelling, and we have 2 underutilized platform from which to launch. We are focusing on operational excellence with top line initiatives. In Specialty Pharmacy, we intend to leverage our national footprint of over 28,000 beds and the relationships we have built with the retirement home operators to expand and introduce new services.The landscape remains right for consolidation. And automation, robotics and AI will be introduced over the coming years to further enhance efficiencies and safety. Most exciting is the Karie device, which will not only help us to increase our penetration in retirement homes, but also opens up a whole new market of more than 3 million seniors taking more than 5 meds per day who are aging at home. The device would also be an attractive option for home operators who are embracing new technologies and will offer savings to traditional medication management.Medication management and adherence remains the biggest concern for cheniors. It is estimated that 8% to 12% of all hospital admissions are due to nonadherence in this population, many of which could be avoided.Prototypes are currently being tested and will be showcased at the Ontario Long Term Care and Retirement Home Conference in April. The first 2,000 devices will be available this summer through Centric with preferential pricing. The average drug consumption for a senior aging at home is estimated to be $3,000 annually. Karie will level -- will levy a separate monthly fee of approximately $60 to $80 to remind and monitor patients, their families or loved ones about the medications. Initially Centric will be the only pharmacy offering the Karie device in Canada.Centric currently owns 17.5% of AceAge with the opportunity to ultimately increase its stake to 32.5%.Québec remains a natural expansion opportunity for us, given our relationship with national customers, and it has the second largest retirement home population in Canada. We have been looking into the landscape over the past few months, meeting with potential partners and intend to launch a pilot project in the second half of 2018.In 2015, we applied for -- through Health Canada for sales-only license to distribute medical cannabis. And while there is no guarantee that a license will be granted, we are developing our list of cannabis solution as part of our future plans.There is greater stability in our Surgery division and government outsourcing represents 15% to 20% of revenues. Our Bariatric Centers of Excellence showed good growth as did private-paid spinal surgery. Margins are affected by the case mix and sensitive to volume increases.New doctors continue to apply for admission rights and there's an increase of interprovincial referrals. We expect this to continue to grow with the launch of our new website in April and expanded social media marketing initiatives. Our dedicated surgery centers are set up to provide optimum patient outcomes for these elective procedures and alleviate the long wait times seen in the public system.As one of the largest providers of specialty pharmacy services and private surgery centers, Centric is uniquely positioned to address the challenges of the Canadian healthcare system.As the population continues to age and costs and wait times increase, our solutions and facilities will increasingly become a clear option for many Canadians.With new leadership, a young entrepreneurial team focused on operations and some new innovative growth strategies, Centric is well positioned to leverage off its existing infrastructure.I'd now like to open the call to questions. Back to you, Sharon.

[Operator]

[Operator Instructions] You first question comes from Neil Maruoka with Canaccord Genuity.

[Neil Maruoka, Analyts]

First question to Leslie. I missed your comment earlier, Leslie, where you had talked about the impact, $650,000 to $750,000 annually. Just trying to wrap my head around some of the changes in the funding, so my understanding -- well, first of all if you could just talk about what exactly that related to that -- what changes?

[Leslie Cho, Chief Financial Officer]

Sure. That was the change that we had announced last quarter in the Ontario pharmacy business. They had reduced the certain dispensing fees and drug reimbursements by 2.8%. This was a temporary reduction to recover some of the amounts that they had intended to recover back in 2015 when they made the previous cut. And so that's the estimated impact that, that will have on an annualized basis for us.

[Neil Maruoka, Analyts]

Right. But that's transient until 2019?

[Leslie Cho, Chief Financial Officer]

Correct, yes.

[Jack Shevel, Interim CEO & Executive Chairman]

The savings, anticipated savings, I think, that they were looking for was $35 million. So as soon as they reach that, then this 2.8% will come back.

[Neil Maruoka, Analyts]

Right. And so then you were talking about the changes in the generic pricing, the pan-Canadian pricing, that impact is $2 million, offset by the $4 million in cost savings that you expect to achieve?

[Leslie Cho, Chief Financial Officer]

Correct, yes.

[Neil Maruoka, Analyts]

And then for the changes in the Alberta funding framework, you have not provided any guidance as to what that impact would be, do you have any early assessment?

[Leslie Cho, Chief Financial Officer]

Not at the moment, no. We're still looking at the impact that, that will have as well as any potential changes we can make to our workflow to offset that.

[Neil Maruoka, Analyts]

Okay. And then second question just on the ramp of the Québec beds. Jackie, you had said -- talked about a pilot project to be launched in the second half of 2018. Can you give us some idea of the size of that project and are you kind of slowing down the approach to the ramp in Québec?

[Jack Shevel, Interim CEO & Executive Chairman]

Yes. I think we are actually -- we are slowing it down to an extension. Obviously, the whole conversation is being delayed longer than we anticipated, and we want to focus on the existing operations, plus I think the launch of Karie is taking precedence and then the cannabis strategy and play as well is an exciting adventure. The Québec market is different, and that many of the homes are lot, lot large and have resident pharmacies in them. So the consolidation is not as easy. There is a difficult legal framework. It is a big market and national customers that we have, have in excess of 12,000 beds in the province. So we're looking to pilot probably on 1,000 beds in 2 or 3 homes just to get a good understanding, and Québec was one of the first that really embraced this pan-Canadian in terms of the drugs. So they've all sorts of caps on their drug pricing, et cetera, and I think just wanted to take a little bit longer to absorb the effect of that legislation and whether there would be any additional sort of impacts. So I think that once we're comfortable and that model is there, we will be able to move ahead more -- but we see it more as a 2019 expansion phase really having any meaningful impact.

[Neil Maruoka, Analyts]

Right. Okay, and finally just on your cannabis strategy. Have you -- are you in talks with any of the LPs out there? And are there particular focus that you're going to have in terms of dosage forms because I assume that you won't be distributing dried bud into old age homes?

[Jack Shevel, Interim CEO & Executive Chairman]

Correct. So if we have, so we've -- we believe we're uniquely positioned within the homes. You know the seniors, what drugs they are one, what drugs hopefully they will transition off, in terms of introducing medical cannabis. And the homes are also looking for assistance and policies to help manage it. So we've spoken with many LPs. I think our view is, we want to be able to offer a larger range of products and the base that's out there on the market for these patients. And you correctly say, this is going to take more of a form in terms of oils, and we expect it to be more pharmaceutical, the preparation is coming out and then also cream. So we have a compounding -- we have compounding capabilities, which I think positions us well. And we will probably look to come to some arrangement with -- between 2 and 4 LPs in terms of the supply.

[Operator]

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

[Jack Shevel, Interim CEO & Executive Chairman]

Thank you very much, and thank you to all the participants and those who are listening via the webcast. We look forward to speaking to you on our next call.

[Operator]

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