CareRx Corp

TSX:CRRX

Earnings Call Transcript 2018-Q4

[Operator]

Good morning, everyone. Welcome to Centric Health's Fourth Quarter 2018 Results Conference Call. Please note that today's call is being broadcast live over the Internet and will be archived for replay by both 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 phone 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 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 the investors are cautioned not to place undue reliance on these statements.I would now like to turn the call over to David Murphy, President and CEO of Centric Health Corporation. Please go ahead, Mr. Murphy.

[David Murphy, President, CEO & Additional Director]

Thank you, and good morning, everyone. Welcome to our fourth quarter and year-end results conference call. Joining me for this morning's call is our Interim Chief Financial Officer, Andrew Mok.This morning, I would like to discuss the substantial progress we have made in strengthening our business, executing on our new strategic direction and repositioning the company for profitable growth. The second half of 2018 was truly a transformative period for Centric Health. As many of you know, the year began with unprecedented regulatory changes that significantly impacted the profitability of our core business. By the end of the year, however, we had completed a significant reengineering of our business to offset this impact. And in parallel with the execution of this reengineering plan, we upgraded our leadership team, won new customer contracts and established exciting new strategic partnerships to drive future growth.And just as importantly, we have articulated and begun to implement a clear focused strategic direction, one which will improve the financial health of the company, enable future organic and inorganic growth and maximize value for our shareholders, employees and customers.As expected, we completed our Business Re-Engineering Plan at the end of the fourth quarter. The plan included changes to our operating and service model, centralization of certain functions, workforce reductions and increased labor efficiencies and initiatives to digitize and automate pharmacy operations. Importantly, we met all financial targets established for the plan. As Andrew will discuss, the impact of the Business Re-Engineering efforts was partially reflected in Q4 operating results, as Q4 adjusted EBITDA for Specialty Pharmacy increased by almost 50% compared to Q3. This sequential quarterly improvement in operating margins and EBITDA will continue in 2019. Adjusted EBITDA margins in the first quarter of 2019 are expected to increase to approximately 9% and are anticipated to increase to double-digit margins thereafter.As part of our transformation, we made a number of changes to our management team in the fourth quarter of 2018. All of these were previously announced, but I would like to quickly highlight them again. In October, we appointed Nina Freier to the role of Chief Human Resources Officer. Before joining Centric, Nina was with Sienna Senior Living and was with Rexall Pharmacy Group before that. In November, we appointed Andrew Mok as our Interim Chief Financial Officer. Andrew is a key talent for Centric and his leadership and contributions in the last few months have been central to the successful parallel execution of multiple strategic initiatives.Also in November, Mitchell Sinclair joined the team as Vice President of Business Development. Mitchell has over 25 years' experience in sales and sales leadership and extensive experience and established relationships within the seniors care space. We are already benefiting from Mitchell's presence, as we seek to continue our recent progress in winning new customer contracts and strengthening our brand and value proposition with customers.Finally, Ryan Stempfle was promoted to Vice President and General Manager for our Western Canada Specialty Pharmacy operations. Ryan has played a critical leadership role in winning new beds out West, executing our Business Re-Engineering Plan and strengthening our operating platform in Alberta, British Columbia and Saskatchewan.Speaking of adding new beds, as a result of previously announced new contract wins, our average number of beds serviced in the fourth quarter of 2018 was up by more than 2,000 compared to the fourth quarter of 2017. And this recent growth trend will continue as we have on-boarded approximately 1,500 additional beds during the first quarter of 2019, increasing our overall number of beds serviced to more than 31,000 nationally.As many of you know, in September, we entered into multiyear supply and service agreements with Canopy Growth Corporation, making Canopy our preferred education partner and supplier of choice of medical cannabis for seniors. Our clinical pharmacists have now completed training on the benefits and potential applications of medical cannabis and we are conducting ongoing training and education sessions for prescribers, residents and their families. We are pleased to announce that deliveries to residents commenced subsequent to year-end. This is an exciting milestone for us, but we are just getting started and remain very optimistic about our partnership with Canopy and the role we can play in ensuring that seniors and home operators have the best possible support and oversight for medical cannabis treatments.We continue to make progress on our strategic priority to strengthen our balance sheet. In the third quarter of 2018, we completed the divestiture of our retail pharmacy operation located in Richmond, British Columbia. In February, we completed the sale of our retail pharmacy location in Medicine Hat, Alberta for approximately $2.3 million. Both of these divested assets were classified as discontinued operations in our year-end filings.In addition, our Surgical and Medical Centres segment has been classified as assets held-for-sale and reported as discontinued operations as required by IFRS.Finally, as we announced a couple of weeks ago, we completed a $12 million private placement of convertible preferred shares to Ewing Morris & Co. Investment Partners Ltd., which Andrew will discuss in a few minutes.While there is still work to do, we have made significant progress in transforming the company and positioning us for an exciting 2019. I will make further closing comments later in the call, but first I would like to hand the call over to Andrew for his review of our financial results. Andrew?

[Andrew Mok, Interim CFO & Senior Director of Finance]

Thanks, David, and good morning, everyone. Our complete quarterly and annual results are available in our financial statements and MD&A, which have been filed with SEDAR and are also available on our website.I'll begin with the results for the fourth quarter. Despite the impact of the regulatory changes that came into effect earlier in the year, revenue in Specialty Pharmacy increased by 1.6% to $30.9 million compared to $30.4 million in the fourth quarter of 2017. This growth was primarily attributable to new contract wins that resulted in the on-boarding of additional beds throughout the second half of 2018.Quarter-over-quarter, Specialty Pharmacy revenue increased by approximately 5.8% from the $29.2 million reported in Q3, which highlights the progress that we have made in mitigating the impact of these regulatory changes. The increase compared to last year was achieved through revenue initiatives implemented as part of the Business Re-Engineering Plan as well as the increase in the average number of beds serviced in Q4.For the fourth quarter, Specialty Pharmacy adjusted EBITDA decreased by 38.5% to $2.1 million from the $3.5 million reported for Q4 2017, as the regulatory changes did not take effect until Q2 2018. However, quarter-over-quarter, our Q4 adjusted EBITDA for Specialty Pharmacy increased by 49.5% compared to Q3, which highlights the significant impact of Business Re-Engineering Plan initiatives that were implemented throughout the second half of the year as well as the increase in the average beds serviced during the fourth quarter.For the year, our Specialty Pharmacy operations earned revenue of $123.7 million, which was an increase of 1.4% compared to the prior year revenue of $122 million. The increase in revenue was achieved primarily due to the higher average number of beds serviced in the current year despite the impact of the regulatory changes.Specialty Pharmacy's adjusted EBITDA for the year decreased by 62.8% (sic) [ 41.9% ] to $9.6 million compared to $16.6 million in 2017. The decrease was primarily a result of the gross margin compression driven by the regulatory changes, which was partially offset by the overall increase in the average number of beds serviced and the Business Re-Engineering Plan initiatives that were completed during the year.Adjusted EBITDA margin in Specialty Pharmacy decreased to 7.8% in 2018 from 13.6% in 2017. Corporate costs for the year were $5.6 million, down slightly from $5.7 million in 2017. Furthermore, corporate costs remained in line with our target of less than 4% of total revenue, including discontinued operations.We continue to make progress on improving our balance sheet as we look to provide the company with long-term stability and a path for continued success. Earlier this month, we completed the private placement to Ewing Morris, that David mentioned previously for gross proceeds of $12 million through the issuance of 30 million convertible preferred shares at an issue price of $0.40 per share. The preferred shares, which mature in 2024, pay a 9% dividend semiannually. Upon maturity, the preferred shares will be redeemed for $0.40 per share plus any accrued and unpaid dividend. The preferred shares are convertible into common shares at the holder's option on a one-to-one basis and are redeemable at the company's option in certain circumstances.Proceeds from the private placement were used to repay senior indebtedness. Following the closing, Ewing Morris holds an approximate 12.2% ownership interest in the company on [ an as converted ] partially diluted basis. In addition, we also received a waiver for all financial covenants under our credit agreements for the fourth quarter of 2018 and the first quarter of 2019 and have received revised covenants from our lenders which will provide us with more flexibility.Furthermore, with regards to the timing of certain accrued interest payments on our senior and subordinated debt facilities, these amounts will be deferred and settled to the proceeds from future divestitures. We appreciate the support that our lenders have given us and their [ cost wins ] and Centric's vision and strategic direction. Their continued support enables us to focus on repositioning the company for further growth and sustainable profitability.With that, I would like to turn the call back over to David for concluding remarks before we open the call up to questions. David?

[David Murphy, President, CEO & Additional Director]

Thanks, Andrew. Following our private placement, we are pleased to announce that John Ewing has joined our Board of Directors effective March 27. John is the Co-President and Chief Investment Officer of Ewing Morris. We welcome John to the board and look forward to his contributions and counsel moving forward. And more broadly, we are just very excited about the partnership with Ewing Morris and their support of our vision and strategic direction.In closing, while we have a lot to be proud of, we know there is more to be done. As we turn the page on 2018, with our successful Business Re-Engineering now behind us and with a strong team in place, our collective focus and resolve is to continue the progress we have made and to finish the job of strengthening our balance sheet, so that we can truly unlock Centric's tremendous potential and, ultimately, deliver on our strategy of being the leading provider of pharmacy and other health care services to Canadian seniors.I'm very confident that our team has the talent, experience and drive to lead us through what we anticipate will be an exciting new chapter for Centric Health.I would like to close by thanking our management team and all Centric employees for their contributions over the past year. And of course, I would like to thank our shareholders for their continued support and their confidence in our turnaround plan. I look forward to reporting on further progress in the quarters that follow.With that, we would now like to open the line for questions.

[Operator]

[Operator Instructions] Your first question comes from Doug Cooper from Beacon Securities.

[Doug Cooper, Managing Director and Head of Research]

Few things. First of all on the balance sheet, after taking into consideration the $12 million private placement and the sale of the pharmacy for $2.4 million, where does the net debt stand now?

[Andrew Mok, Interim CFO & Senior Director of Finance]

So right now, we are sitting at about $83 million -- $80 million.

[Doug Cooper, Managing Director and Head of Research]

That's after the -- you used the $12 million private placement to pay down?

[Andrew Mok, Interim CFO & Senior Director of Finance]

That's correct.

[Doug Cooper, Managing Director and Head of Research]

Okay. So I think if I looked, it was sort of $84 million at year-end or bank debt was anyway. So you had some -- I guess, you drew down some further lines in Q1 and then paid it down against it or how should we think about that?

[Andrew Mok, Interim CFO & Senior Director of Finance]

Yes, that's right. I mean, there were some use of proceeds kind of earmarked for these, including some kind of debt pay downs that are upcoming including the one at Q1. So really, the kind of pay down of the revolver will switch over into pay down of the term loan. There won't be any change in net debt for that piece.

[Doug Cooper, Managing Director and Head of Research]

Okay. In terms of timing on the divestitures, what -- any update on that?

[David Murphy, President, CEO & Additional Director]

Yes, Doug, I think from the time we announced our new strategic direction and review of noncore assets, we haven't really commentated publicly on specific transactions or provided interim updates. So I think, we prefer to keep that practice consistent and announce something when there's something to announce.

[Doug Cooper, Managing Director and Head of Research]

Okay. Moving on to margins. You indicated you expect double-digit beyond Q1. Historically, the group got, sort of, 14% to 16% margins. What are your expectations when you say double-digit?

[David Murphy, President, CEO & Additional Director]

It's a good question. I don't know how far -- I mean, what we said today is probably further than we have normally gone in terms of guidance, but we understand the need to do that with where things have come from and candidly with being so late in March. Look, what I would say, Doug, is, if you look at the last 2 quarters that Centric posted before the regulatory changes, so that would be Q4 2017 and Q1 2018, we did probably $3.4 million, $3.5 million in EBITDA margins, probably 11%, 12% margins. We are very confident that after we posted a few quarters this year, that you will see that we have -- despite some quite significant regulatory changes, which really put at risk almost all of that profitability, that we will be back at those levels. We obviously aim for higher than that, but one quarter at a time.

[Doug Cooper, Managing Director and Head of Research]

Right. And if revenues, sort of, running -- well, I'll just use the quarter you just did, $31 million annualized, it's $125 million, so corporate costs, we should still be thinking about sort of 4% or slightly under?

[David Murphy, President, CEO & Additional Director]

Yes, I think that's right. I think we're obviously in a transitional state because of the classification of one of our operating segments as discontinued operation. It makes the full P&L a little harder to, sort of, reconcile from a metrics perspective. But yes, we will continue to manage -- in our current state, we'll continue to manage corporate costs as aggressively as we have. The company showed nice progress the last few years, getting that down. And then to the extent that the company changes its shape or the final state looks differently, obviously, we'll have to reassess from there.

[Doug Cooper, Managing Director and Head of Research]

Okay. A couple of other quick ones. Beds, you said 31,000 around at the end of Q1. Is there any big RFPs coming up? Or what do you think the exit target should be, given maybe some RFPs out there?

[David Murphy, President, CEO & Additional Director]

Yes. I mean, there's nothing -- there's no, sort of, large national chain up in the near future, but there are -- it's a fairly active pipeline of mid-sized opportunities. So I mean, look, I think we've successfully grew our bed count by about 10% over the course of 2018. I wouldn't take it for granted that we can do that this year, but that's the sort of target we're setting for ourselves in terms of how we could grow by December 31.

[Doug Cooper, Managing Director and Head of Research]

Okay. Can you discuss or do you have a sort of funnel, like how many beds would be in your funnel right now?

[David Murphy, President, CEO & Additional Director]

I don't think we've historically disclosed at that level of granularity. We can consider doing that in the future. But there are lots of opportunities in all the provinces that we do business with right now.

[Doug Cooper, Managing Director and Head of Research]

Okay. And finally, cannabis, the first delivery is in Q1. How should we think about that revenue model? And what do you foresee the growth there?

[David Murphy, President, CEO & Additional Director]

Yes, I think, as I mentioned, all the deliveries happened subsequent to year-end. So we'll consider what the right way to provide an update on that is. It's a new business for us and it's not -- the ramp here is not going to be -- it's not going to change the world in a few months. So I think we'll provide a more full update either at the Q1 mark or the mid-year mark in terms of what that looks like and what its contribution proportion is to our P&L.

[Doug Cooper, Managing Director and Head of Research]

Okay. And finally, just on the regulatory aspect, we have a relatively new government in Ontario. There's potentially new government in Alberta. Any changes on the horizon that you could possibly see?

[David Murphy, President, CEO & Additional Director]

Nothing we see as imminent, there's -- it's always -- the world we live in always -- there's always the risk of that, but there's nothing that we anticipate, if anything there was a potential -- in Alberta, there was a potential additional shoe that could have dropped in terms of a hold back that the Alberta government had the right to implement after one year of the new regulatory regime. They've recently announced that they're not going to exercise that hold back. So there won't be any further regulatory pressure. So knock on wood, we're in a relatively steady state for the time being.

[Operator]

[Operator Instructions] Your next question comes from Doug Loe from Echelon Wealth Partners.

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

It means that [ Doug ] hit most of the key points in the quarter, I think. But I just wanted to see if you had any commentary on how your partnerships with AceAge and specifically on the Karie device, obviously, for deployment at the home care markets. And -- so any update there would be helpful? And then, also, you haven't specifically mentioned your alliance with McKesson Canada in the last couple of quarters. Just wondering what level of involvement their existing pharmacy operations might be in your strategy to add bed count, specifically in other provinces where you don't currently have operations? I'll leave it there.

[David Murphy, President, CEO & Additional Director]

Sure. Thanks, Doug. On Karie, I think the update there is consistent with the last update we provided late last year, which is their manufacturing of Karie units has ramped up in the first quarter of this year. I think they have devices coming off the line every day. They are involved in a multi-site study for the devices and have begun to make end-customer sales. So they're on track in that respect. And more broadly, we continue to feel like this is an investment that will be a very successful one for us in the long term. At the same time, it's early days. And so there's not -- especially with everything else going on at Centric, there's not necessarily going to be meaningful material update every quarter. But they're on track with the last update we provided, in November it was. And then, on McKesson, I mean, obviously, McKesson is a huge organization and they have multiple aspects to their operation. Our main interface with them is they are our supplier and distributor of the bulk of the pharmaceuticals that we dispense to customers. And we have a good strong relationship. I think we're a fairly large partner for them. The relationship is good. We're entering, I think, the third year of that partnership. That's really it, Doug, at this stage any other, they obviously have operations -- retail pharmacy operations. They have a small business that overlaps with ours in terms of seniors care and that sort of the nature of the relationship. They're big enough that, that they're both a supplier and, I guess, a competitor, but we make it work.

[Operator]

[Operator Instructions] I have no further questions at this time. I turn the call back over for closing remarks.

[David Murphy, President, CEO & Additional Director]

Thank you, and thanks to everyone for participating in today's call and for your continued interest in Centric Health. We look forward to reporting on our Q1 progress in May and hopefully to seeing some of you at our upcoming Annual General Meeting. Thank you.

[Operator]

Thank you, everyone. This will conclude today's conference call. You may now disconnect.