CareRx Corp

TSX:CRRX

Earnings Call Transcript 2019-Q4

[Operator]

Good morning, everyone, and welcome to Centric Health's 2019 Fourth Quarter and Year-end Results Earnings Call. Please note that today's call is being broadcast live over the Internet and will be archived for replay both by telephone and via the Internet beginning approximately 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 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 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 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 website under www.sedar.com. Centric Health is under no obligation to update any forward-looking statements discussed today, and investors are cautioned not to place undue reliance on these statements. I would now like to turn the call over to David Murphy, President and CEO of Centric Health Corporation. Please go ahead, Mr. Murphy.

[David Murphy, President, CEO & Director]

Thank you, and good morning, everyone. Welcome to our fourth quarter and year-end earnings call. I'm joined this morning by our Chief Financial Officer, Andrew Mok. 2019 was an extraordinarily successful year, during which we transformed our business while posting consistently strong financial results. This continued in the fourth quarter. Revenue from Specialty Pharmacy for the fourth quarter increased 7.9%, resulting in growth of 4.8% for the year. Our revenue growth was driven by the continued increase in the average number of beds serviced, which was up 6% in the quarter and 7.6% for the year. Our top line growth, combined with the benefits from our business reengineering plan completed in 2018 [Audio Gap]was up an impressive 86.7% for the fourth quarter and 62.7% for the year. After being impacted by various regulatory changes in 2018, we have delivered on our commitment to return this business to historical adjusted EBITDA margins in 2019. Our Specialty Pharmacy adjusted EBITDA margin for the quarter was 12.3%. And for the full year, it was 12.1%.We continued to grow our bed count throughout 2019. Our average number of beds serviced in the fourth quarter was 31,457. That's an increase of 1,767 average beds serviced or 6% compared to the fourth quarter 2018. We have consistently grown our market share organically. This market share growth, combined with the acquisition we announced at the beginning of this week, which I will address further later in this call, will make us the largest player in our sector. One of our strategic priorities for 2019 was the deleveraging of our balance sheet. We made steady progress on this throughout the year, working diligently to sell noncore assets and successfully raising funds through multiple private placements. By the end of the year, our efforts resulted in total proceeds of $86.8 million, significantly transforming our balance sheet, as Andrew will address in more detail later. Key to our successful deleveraging strategy was the closing of 2 major transactions in the fourth quarter. In November, we closed the sale of the Surgical and Medical Centres division for gross proceeds of $35 million. This transaction was also meaningful strategically in that it resulted in Centric becoming a pure-play Specialty Pharmacy business. Also in November, we completed a private placement with Yorkville Asset Management, including participation from some of our existing major shareholders and our management team for gross proceeds of $35.2 million. We are grateful for the partnership and support of Yorkville, who are also participating in the financing of our recently announced acquisition. Their belief in our vision and commitment to our strategy has been a critical enabler of our success to date. These 2 transactions, and all our efforts throughout 2019, significantly strengthened our financial health and market position and allowed us to transition to the next phase of our growth strategy. This strategy includes playing a leadership role in the consolidation of our sector. I will speak more about that consolidation later. But for now, I would like to turn the call over to Andrew for his review of our financial results. Andrew?

[Andrew Mok, Chief Financial Officer]

Thank you, David, and good morning, everyone. I'll walk through our fourth quarter and full year financial results, which are available in our financial statements and MD&A, which has been filed with SEDAR and are also available on our website. Our Specialty Pharmacy revenue for the quarter grew 7.9% to $32.2 million compared to the $29.9 million generated in the fourth quarter of last year. This increase was largely attributable to our continued growth in the average number of beds serviced year-over-year. Even more notably, adjusted EBITDA from our Specialty Pharmacy business grew 86.7% to $4 million for the fourth quarter versus $2.1 million in Q4 of 2018. In addition to the higher revenue that I just discussed, the increase in adjusted EBITDA was also due to the impact of cost savings achieved from the business reengineering plan and operational efficiencies resulting from increased scale from the higher number of beds serviced in the year. As a percentage of revenue, adjusted EBITDA from Specialty Pharmacy was 12.3% for the quarter or 10.3% when excluding the impact of IFRS 16. This compares to a margin of 7.1% in Q4 of 2018. Revenue for the full year for the Specialty Pharmacy business was $124.6 million, which was an increase of 4.8% compared to the $118.9 million generated in 2018. Adjusted EBITDA from Specialty Pharmacy was $15 million for the year, which was an increase of 62.7% compared to the $9.2 million generated in the prior year. The adoption of IFRS 16 accounted for $1.8 million of this increase. Before and after the impact of the adoption of IFRS 16, adjusted EBITDA margin in Specialty Pharmacy was 10.6% and 12.1%, respectively, in 2019 compared to 7.8% in 2018. Turning to our balance sheet and more specifically, our bank debt. Following the closing of both the sale of the Surgical and Medical Centres business as well as the private placement in November, we have significantly transformed our balance sheet. As a result of these 2 key transactions, our total bank debt at the end of 2019 was $16.4 million compared to $77.7 million at the end of the third quarter of 2019. Of the $16.4 million, we had approximately $4.7 million outstanding on our revolving facility and $11.7 million on our subordinated facility. This significant reduction in our bank debt has provided the company with the financial strength and flexibility to pursue its acquisition strategy, as evidenced by our recently announced acquisition of Remedy'sRx Specialty Pharmacy business, which David will discuss further as I pass the call back over to him. David?

[David Murphy, President, CEO & Director]

Thank you, Andrew. I now would like to take a few moments to discuss some recent developments. At the start of the week, we announced a truly transformative transaction that would make us the leading Canadian provider of Specialty Pharmacy services to seniors' communities. We signed a definitive agreement on March 23 for the acquisition of Remedy Holdings Inc. and the Remedy'sRx Specialty Pharmacy business for a purchase price of $39 million. The transaction is expected to close in the second quarter of 2020, subject to the satisfaction of customary closing conditions, including the receipt of applicable regulatory approvals and the consent of Centric Health's shareholders. This acquisition would bring together 2 well-established specialty pharmacy businesses, strengthening our service offering and capabilities and creating operational efficiencies and new growth opportunities that we expect to generate substantial value for our shareholders. Remedy's services 18,500 residents in long-term care, assisted living and other institutional settings in the same geographic markets we serve, Ontario and Western Canada. Upon closing, the combined business will provide specialty pharmacy services to more than 50,000 residents. With the scale and combined capabilities this deal will generate, we expect to be able to accelerate our momentum and gain further market share moving forward. There are many reasons why this is the right acquisition at the right time for us and for our shareholders. We believe current industry dynamics, including recent regulatory and other cost pressures and the continued need for uncompromisingly high standards of quality and service, have compelled our sector to consolidate. This is not just a matter of size or about being the biggest. It is about delivering the service offering our customers require in today's environment. The immense challenges of the current COVID-19 pandemic are another clear reminder that home operators need sustainably high service and support from their pharmacy provider. They should not have to accept anything less or make compromises in service because their pharmacy provider cannot compete in a more challenging business environment. We believe that our transformational partnership with Remedy's will allow us to improve our service offering to current customers while also better positioning us to take advantage of near-term opportunities to win new business by differentiating our service offering from our competitors. We believe that we have highly complementary organizations. We have long admired and respected the Remedy's business led by Bruce Moody and Jeff May. They have a talented team and a reputation for high-quality, great service and outstanding customer relationships. They have been one of our most formidable competitors, and we believe they will be incredible partners. By bringing our 2 teams together, we can realize the best of both organizations and create efficient, best-in-class service capabilities. We are also confident in the potential to realize material synergies and long-term value creation from this transaction because of the increased operational scale that it will generate within our shared geographic markets. We are excited about this next phase of our growth strategy and look forward to welcoming Remedy's team upon closing of the transaction. Finally, I wanted to take a few moments to provide a business update with respect to the current COVID-19 pandemic. As a provider of pharmacy services, Centric Health's operations are an essential service. Our sites remain fully operational, and our company continues to play a vital role in ensuring the safe and timely delivery of medications to seniors in the homes and services. To date, the COVID-19 pandemic has had no material impact on the company's financial performance. We all recognize our responsibility and the heightened importance of the services we provide right now, and our employees are working tirelessly to meet the needs of our customers at this difficult time. Our team is in frequent contact with both our suppliers and our home operator partners to minimize disruptions, and we are taking all precautionary steps we can to protect our employees. I am extremely grateful to our entire team for their dedication and incredible efforts. We would also like to thank home operators across the country, including our frontline care workers, who are all there doing to keep our seniors safe and well. That concludes our report on the Q4 2019 results and other developments. With that, we would now like to open the line for questions. Operator?

[Operator]

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

[Doug Cooper, Managing Director and Head of Research]

Congratulations on all the hard work you've done to turn around the company and put it on a position for growth here moving into 2020. Looking at the organic growth this year and more importantly maybe into next year, could you just talk about what are the opportunities? How many beds are going to come up for bid in 2020 going into 2021? And how do you think you're positioned to win those?

[David Murphy, President, CEO & Director]

Thank you. I won't get too specific. But look, suffice it to say that we feel confident that we're in a period the next 12 to 18 months where we should be able to do a lot more of going after competitive beds than needing to defend our existing contracts. Our existing contracts have some term on them. There are a lot of major contracts that are up in the next year. This industry is obviously in a significant amount of flux based on everything that's happened in the last year or so. So we're pretty bullish. Obviously, right now, it's just hard to focus on that, given everyone's focus is on supplying our customers and getting through this pandemic. And we obviously don't expect significant changes in market share right now. Everyone is just focused on getting the job done and servicing our customers. But over the longer term, over the next, say, 12 months, there's probably more potential at least for beds -- for bed growth than we've had in the time I've been here. It's still up to us to show up and put our best foot forward and win the business. But we do believe there's a lot of business out there.

[Doug Cooper, Managing Director and Head of Research]

Okay. And how much operating leverage do you think there is on the corporate overhead that you have today? So for example, if every new bed brings in somewhere between $3,500 and $4,000 a year at a segment margin of 13%, how much of that 13% or 12% to 13% would drop to EBITDA, do you think?

[David Murphy, President, CEO & Director]

Yes. I'll let Andrew handle the details. I mean I think it's a bit more complicated question to ask because it depends on whether it's on a stand-alone basis or postmerger with Remedy's. So on a stand-alone basis, I think we do -- we're pretty confident that we have the capacity to absorb a more than average year of organic growth without needing to add much, if any, corporate costs. But obviously, the Remedy acquisition changes that. It may, I think, ultimately provide more synergies and more capacity for absorbing more volume and dropping as much of it to the bottom line. But bear with us as we get through this integration. I think we should be able to give a clearer sense of that after that's done. Andrew, I don't know if you'd add anything to that.

[Andrew Mok, Chief Financial Officer]

No, I wouldn't add anything further, David. I think Doug, yes, David is right. On a stand-alone basis with our core business, we're pretty fixed at the corporate level, and we could definitely absorb more incremental bed growth. With the combined entity, obviously, there's going to be a bit of a transition period there and so difficult to say right now. We may need to add a little bit but not a lot. I think a lot of that 13% your referenced would go right down to the bottom line.

[Doug Cooper, Managing Director and Head of Research]

Okay. So post the transaction, assuming it all closes here for RHI and the debt with Crown and Yorkville, is there any bank debt left in the company on a pro forma basis?

[David Murphy, President, CEO & Director]

No, the refinancing with Crown Capital will take out all existing bank debt. So really, our debt will be held by Crown Capital with a subordinated debt to Yorkville. And the only other debt will be, as you mentioned, the vendor takeback, which forms part of the purchase price of the Remedy's deal.

[Doug Cooper, Managing Director and Head of Research]

Okay. So let's just -- do you still have access to bank debt, if you needed it in case there was an opportunity, for example, with one of the other major players to acquire them?

[David Murphy, President, CEO & Director]

I think it'd be best to look at Crown Cap as our senior lender right now. I think between Crown and Yorkville, both of these organizations are -- bought into our strategy, to our growth vision. I think both are not only open to but hopeful that we're going to do additional acquisitions down the road. So at this point, we feel very confident that our soon-to-be-new lending partners will be able to finance our growth journey, whether that's organic or future acquisitions.

[Doug Cooper, Managing Director and Head of Research]

Okay. And not to belabor the point, but you mentioned that maybe the number of beds coming up for bid this year is the most since you've been at the company. When I look around at who could possibly be bidding, Medical Pharmacies, I think, has their issues. Rexall and -- or I guess McKesson now and Loblaws, maybe it's obviously not their prime focus. And the rest of them are sort of small, independent kind of companies. Do you feel -- I guess, how confident are you that you can win more than your fair share or more than your market share, I guess, is the question. Like how competitive can those other players be at this point?

[David Murphy, President, CEO & Director]

Yes. Look, I think -- let me focus my remarks on us. I don't want to disparage competitors, especially right now with everything that everyone's doing to try to deal with this crisis. But look, we wouldn't have done this deal with Remedy's unless both organizations, Bruce Moody and Jeff May and the Remedy's team and our team, believe that together, we are going to be the most formidable competitor for every existing opportunity that comes up. It doesn't mean we're going to win them all. It doesn't mean -- this is an industry where history matters, relationships matter, service experience matters. So we're not going to win every piece of business we go after, but we do believe that the combined entity, particularly after we're fully integrated, is going to be very formidable. And I like our chances in any tender. But I'll probably leave it at that, at that point. But certainly, we believe we're not just touting this merger because we have the highest bed count. We're touting this merger because we believe we're better positioned to get more beds from this point forward.

[Doug Cooper, Managing Director and Head of Research]

Okay. Final question. Any update on cannabis or Karie?

[David Murphy, President, CEO & Director]

Sure. On Karie, we continue to feel good about our equity investment in them. Remember, first and foremost, we are an investor in AceAge, the company. We were, I think, the first sizable outside investor. AceAge continues to make traction. Most of their traction at this stage has been in the European market, which is obviously a much bigger market and also a market where I think reimbursement schemes or sort of mechanisms are more favorable to the device. They've started deploying devices. There's been, I think, devices sent to Europe late 2019 and continued to be deployed throughout the first quarter. And I know they're on the verge of a couple of other European distribution opportunities in other countries. So we continue to feel very good about them as an equity investment. In Canada, we do continue to get traction. I think as everyone knows, it's been a little slower than expected but I think for reasons that we all understand. I spent most of my career in medical devices, and I know that it's not a whole lot uncommon for even Canadian medical device companies to initially get more traction in markets outside of Canada. So in terms of contributing meaningfully to our current financial results, it isn't moving the needle yet. But again, first and foremost, we're supportive of AceAge. We're a significant equity owner and bullish about the value of that investment going forward. So -- and on cannabis, still early days, Doug. I think we've really valued our partnership with Canopy Growth. We've done a lot of work jointly with them on resident education, clinicians -- prescribing physician training and education in order to drive volume. Still not, I would characterize, as a material part of our business yet, although I would say that there are a couple fairly large studies that have been underway in long-term care. I think we're all awaiting the data of those studies. I think there is a cautious optimism that if some of that data is as we expect, it will be -- that it might be a real accelerant for medical cannabis in long-term care and assisted living. But it's still early days as it is for that whole space, I guess.

[Operator]

Your next question comes from Doug Loe from Echelon Wealth Partners.

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

Congratulations on the quarter and the acquisition. A couple of things for me. David, first of all, you didn't specifically mention McKesson in any of your remarks. Just wondered how relevant that relationship is going to be strategically in your view over the next few quarters, either with regard to gaining new client beds, future acquisitions. I'm thinking mainly about what you might be thinking about for expanding your bed count into Quebec.

[David Murphy, President, CEO & Director]

So Doug, I think at this point, the primary focus as it relates to our day-to-day McKesson relationship really is on the medication supply. As you know, McKesson is our wholesaler and distributor of medication across the country. It's a relationship that's a couple of years old. We're grateful for it. I think we're particularly grateful for it in the current environment because they've been very supportive in terms of making sure that medication supply to our homes has continued uninterrupted. I think that the next focus is obviously going to be about the McKesson relationship as it relates to bringing together us and the Remedy organization. Remedy does have a long-standing relationship with McKesson, too. So we're hopeful that we can find a way to continue that. But I think that's the main focus. I think the other -- the Rexall side of McKesson or geographic expansion is probably just not on our short-term radar.

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

Okay. That's great. And then just a really boring question. I mean we can all do the math on what your pro forma debt is probably going to be post-transaction. But I want to make it easy for us and do the calculation on what you expect it to be, say, at the end of Q2 after the transaction has been consummated.

[Andrew Mok, Chief Financial Officer]

Sure. The 3 components that I mentioned earlier, the Crown Capital, Yorkville and if you count the vendor takeback in the purchase price, that adds up to $40 million. So that will be the debt. That doesn't count the convertible debentures. But as you know, the lion's share of those have mandatory conversion features that result in us mostly looking at that as equity on a fully diluted basis. But I think the short answer is $40 million.

[Operator]

I have no further questions at this time. I turn the call back over to the presenters for closing remarks.

[David Murphy, President, CEO & Director]

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

[Operator]

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