CareRx Corp

TSX:CRRX

Earnings Call Transcript 2020-Q4

[Operator]

Good morning, everyone, and welcome to the CareRx's Fourth Quarter and Year-end 2020 Financial Results Conference Call. Please note that this call is being broadcast live over the Internet and the webcast will be available for replay beginning approximately 1 hour following the completion of the call. Details of how to access the webcast replay are available in yesterday's news release announcing the company's financial results as well as the company's website at www.carerx.ca. Today's call is being accompanied by a slide presentation. Those listening on their phones can access the slide presentation from the company's website in the Investor 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 be given to questions asked could 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 the results are detailed in CareRx's periodical results and registration statements, and you can access these documents in the SEDAR database under www.sedar.com. CareRx is under no obligation to update any forward-looking statements discussed today and investors are cautioned not to place undue reliance on these statements.I would now like to turn the call over to David Murphy, President and CEO of CareRx Corporation. Please go ahead, Mr. Murphy.

[David Murphy, President, CEO & Director]

Thank you, and good morning, everyone. Welcome to our fourth quarter and year-end earnings call. I'm joined this morning by our Chief Financial Officer, Andrew Mok.The fourth quarter of 2020 was a tremendous finish to what was a truly transformational year for CareRx. It was a quarter that further underscored the strong momentum in our business while demonstrating the power of operating leverage in our business model as we add beds to our national pharmacy platform.As Andrew will explain in more detail, the Remedy's acquisition and the early completion of the integration of that acquisition contributed meaningfully to adjusted EBITDA growth in the quarter.Revenue for Q4 once again reflected growth in the number of bed serviced year-over-year, attributable primarily in this quarter to the Remedy's acquisition. The average number of beds serviced during the quarter was 48,768, up 55% year-over-year, but down slightly from Q3 as we continue to experience a temporary reduction in the average number of beds serviced as a result of COVID-19.Q4 revenue increased 44% year-over-year to $46.4 million. For the full year of 2020, revenue grew by 30%.Completion of the Remedy's integration generated approximately $0.5 million in cost-saving synergies in Q4. Roughly 2/3 of the $750,000 in savings we expect to generate quarterly on a go-forward basis or $3 million on an annualized basis. As a reminder, these cost savings resulted primarily from the consolidation of our pharmacy fulfillment network and a reduction in the number of sites to 18 by the end of 2020. These synergies helped us deliver 65% growth in adjusted EBITDA in Q4 as well as an increase in EBITDA margin to 8.8%.2020 was reaffirmed in terms of both the growth opportunity that exists for us and our ability to execute on it. We now have a multiyear track record of growing our bed count from both new customer contract wins and acquisitions. And in the last few months, we have announced an additional new contract and an acquisition that has positioned us to continue that growth trajectory moving forward.Just as importantly, I should emphasize that our team's ability to execute on the integration of acquisitions and the onboarding of new beds has been critical to translating growth initiatives into meaningful improvement in financial performance. Our execution in 2020 was a clear testament to the capabilities of our team and gives me tremendous confidence as we continue to pursue our growth strategy moving forward.Our momentum has carried forward into 2021. In January, we announced a meaningful tuck-in acquisition, entering into a definitive agreement to acquire SmartMeds Pharmacy, which serves more than 2,400 residents in long-term care, assisted living and other institutional settings in Ontario.The closing consideration will be $4.5 million; $4 million in cash and $475,000 in shares. The business is expected to contribute run rate annual revenue of $13 million and run rate annual EBITDA of approximately $1.5 million prior to any benefits from the integration of the operations of the 2 businesses. We are currently aiming to close that transaction by March 31.SmartMeds was compelling to us for a number of reasons. It is a well-run organization with significant customer loyalty and a broad range of customers in both long-term care and other institutional settings. It also has an excellent reputation as a leader in innovation, quality, customer service and technology.We also continued to execute on our organic growth strategy, winning a new 1,100 bed multiyear contract with an Ontario-based seniors home operator. The new bed spanned 13 seniors' communities -- seniors housing communities in Ontario. We began onboarding those beds with the commencement of the contract in January.Finally, in February, we strengthened our balance sheet with the completion of a very successful equity offering, the public component of which was upsized by 30% immediately after launch or total gross proceeds of just over $21 million, including the full exercise of the overallotment option. The offering provides us with additional capital to fuel the execution of our growth strategy, which I will discuss after turning things over to Andrew to discuss our Q4 results in more detail. Andrew?

[Andrew Mok, Chief Financial Officer]

Thank you, David, and good morning, everyone. First, as a reminder, our financial statements and MD&A for the quarter and the full year have been filed with SEDAR and are also available on our website.Revenue for the fourth quarter of 2020 increased $14.2 million or 44% to $46.4 million from $32.2 million in the fourth quarter of last year. This increase was primarily attributable to the contribution of the Remedy's business of $15.1 million, which was slightly offset by the impact of the amendments to the Ontario Drug Benefit Act, which came into effect on January 1 of last year. In addition, as David mentioned earlier, growth was also slightly offset by temporary occupancy reductions in some of the homes we serviced due to COVID 19.I will take this opportunity to remind you that as per our announcement in mid-January, the Ontario Ministry of Health made the decision to pause its previously scheduled changes to long-term care pharmacy funding for a year. The change would have seen the annual capitated fee decrease to $1,400 per bed from $1,500 per bed on April 1 this year. That step down is now scheduled to resume on April 1 of 2022.Turning to adjusted EBITDA. Adjusted EBITDA in Q4 increased by $1.6 million or 65% year-over-year to $4.1 million from $2.5 million in Q4 of last year. The increase was driven by a $1.6 million contribution from the Remedy's business, which included $0.5 million in cost-saving synergies that were achieved during the quarter. Again, we expect annualized cost savings from the Remedy's integration to be $3 million and expect to fully realize those in Q1 of 2021 and onwards.Turning to our balance sheet. We finished Q4 with $19.6 million in cash. That's up from $18.6 million in the prior quarter. Cash flows during the quarter included cash provided by operations of $2.8 million and the $1.5 million of proceeds from the divestiture of one of our nonoperating subsidiaries at the beginning of the quarter, which were partially offset by capital expenditures of $0.7 million and cash used in financing activities of $2.1 million.Net debt at the end of Q4 stood at $38.5 million and our run rate net debt to adjusted EBITDA was 2.4x for Q4, decreasing from 2.6x in the prior quarter and 5.7x a year ago.As David mentioned earlier, subsequent to quarter end, we completed a bought deal public offering with a concurrent private placement of just under 5 million shares at a price of $4.25 per share for total gross proceeds of $21.2 million, which included the full exercise of the overallotment option. The offering gives us additional financial flexibility as we continue to aggressively pursue opportunities under our growth strategy.I'll now turn the call back over to David for some concluding comments. David?

[David Murphy, President, CEO & Director]

Thank you, Andrew. 2020 was truly an incredible year. Despite the challenges of the COVID-19 pandemic, we made and successfully integrated the largest pharmacy acquisition in our history, we became the largest and fastest-growing pharmacy provider to seniors' homes in Canada, we executed a successful rebranding of the company, we strengthened our national fulfillment network and enhanced our team and capabilities, we continue to transform our balance sheet and improve our financial performance, and perhaps most importantly, we further strengthened our value proposition to our home operator partners and helped support them through an incredibly challenging period.But in many respects, we are just getting started. Having nearly doubled our bed count in the past 3 years, it is our intention to do the same thing in the next 3 years with a target of 100,000 beds serviced by 2023. We are now the only major pharmacy player that is singularly focused on servicing the unique and complex needs of congregate care settings. And we have become the obvious consolidator in a market that for many reasons requires further consolidation. The benefits and enhanced capabilities that come with increased scale will allow us to provide a superior pharmacy service offering to our customers while also driving the fundamental metrics that underpin shareholder value.We are building a clear track record of being able to identify compelling acquisition opportunities, transact successfully and at attractive multiples, and integrate in a manner that drives meaningful financial synergies while also strengthening our service capabilities to customers.The M&A pipeline remains very active and it is our goal to execute on additional transactions this year. This roll-up strategy, supplemented by what we continue to believe is a significant organic growth opportunity, gives us multiple paths to achieve our 100,000-bed target.I would like to close by thanking our team for their incredible dedication and contributions during this past year. Although we are proud to say that COVID-19 did not have a material impact on our financial results, that does not mean it did not affect us. It profoundly affected our lives, how we worked together and on-boarded new team members from the Remedy's acquisition. It had a devastating impact on the vulnerable residents of our home operator partners as well as their families. And it created business challenges and pressures for us as we managed through lower occupancy levels, and increased costs associated with outbreaks and other activities.But our team resolved not to let this pandemic stop us from achieving our objectives, the most important of which was being the partner our customers required in their time of need. I am proud to be part of this team and I look forward to us writing the next chapter of our growth story together in 2021.I would now like to open the call to questions. Operator?

[Operator]

[Operator Instructions] And your first question here comes from the line of Doug Cooper from Beacon Securities.

[Doug Cooper, MD & Head of Research]

Congratulations on a great Q4 and 2020. Just an update though, you gave a pretty comprehensive update on the pharmacy side. Just on the pharmacy at-home, is there an update to how things are progressing there?

[David Murphy, President, CEO & Director]

Yes. Good question, Doug. It's still early days. As you know, we've -- we launched that venture late in the summer. At this point, it's an Alberta-only venture, so Calgary and Edmonton. We're really encouraged. We think this is a space that has a lot of interest, but also starting to drive some increased adoption of alternate methods of receiving pharmacy services.We're going slow. We're not going to invest an excessive amount of capital until we really believe in the story. But it's gone well and I think we obviously have paid attention as well to what's happened in the broader sector in terms of the attention on this virtual pharmacy world.So more to come. I think we haven't determined yet what the pace of our ramping up of that business will be. But I'd say we're very satisfied with the progress to-date and you should see us expand that further in 2021.

[Doug Cooper, MD & Head of Research]

Okay. And on the Think Research partnership, [ if I can ask ], can you expand a little bit of that? Or what do you expect to get out of that?

[David Murphy, President, CEO & Director]

Sure. I mean first and foremost, Think Research is just a great company and a great group of people, and so we're excited to be partnered with them. We actually had a pre-existing partnership 2 or 3 years ago, mostly focused on helping us drive some automation in our workflow.The partnership we announced most recently is really focused on increasing the number of residents in retirement homes that use our pharmacy services. As you know, Doug, there is a subset of the retirement residents that are generally more independent, healthier, don't use our medication management services, and it's always been part of our growth plan to -- just to put a more compelling case in front of them for why they should use our services.The partnership with Think essentially allows us to collaborate with them to offer to a retirement resident the ability to see a doctor virtually and also fill their prescriptions without leaving their room or their home, which obviously particularly in a COVID world is really compelling option.So that's the essence of the partnership. It's just rolled out, although I heard even this week that some of the homes that we've started it in on a pilot basis have already started to ask about how fast we can ramp it up to other homes. So like I said, great company, great partnership. And fundamentally, it's really about driving increased penetration for us in retirement homes.

[Doug Cooper, MD & Head of Research]

Okay. Great. And then final one for me, just an update on Karie. Is there anything to speak about there?

[David Murphy, President, CEO & Director]

Yes. Nothing. I think we announced late in the fourth quarter that they had done a Series A financing. So I think, really excited to see that. It included some really high-caliber investors, including Longliv Ventures, which is a division of the CK Hutchison group. So I think they're in good shape from a capital perspective. Their European distribution agreements continued to drive expanded volume. You may have noticed that we -- in our year-end financials, we wrote up the value of that investment to reflect the growth in our equity investment over the few years since we made it.So we feel good. Still predominantly I would characterize it as an equity investment. The Canadian activity has been slow, although there have been renewed Canadian pilots and sales activities in the last few months. So cautiously optimistic that it may also contribute to our business in Canada moving forward.

[Operator]

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

[Justin Keywood, Director of Equity Research]

On the SmartMeds acquisition, if I'm calculating it correctly, I think it implies a 5x to 6x purchase EBITDA multiple. And I'm just wondering, is that a multiple that you can continue to acquire at or any views of the target multiples that are out there for M&A?

[David Murphy, President, CEO & Director]

Good question. I think every deal has its own life cycle and valuation. But yes, I think high level, I think, if you look at the last 2 deals we've done. You start to get a general indication of where valuations are. I think it will differ depending on whether you're talking about a smaller tuck-in single-site operator versus something larger than that. But yes, I think the approximate multiple is 5x on that deal. And I would say, although we're not -- we're always a bit conservative in terms of giving specific synergy targets, we also do think about this on a fully-synergized basis as well in terms of what multiple we will pay once we fully integrate the business. So obviously, our expectation will be that will be even lower on a fully synergized basis. But I think directionally, yes, that is -- that plus the Remedy's deal probably gives you an indication of how we look at deal structure and valuation.

[Justin Keywood, Director of Equity Research]

Okay. And then just in the target to still double beds under management, are you going to characterize that if that will be primarily through the near-term RFPS -- and I know there's quite a substantial opportunity there -- or through consolidation and what that split could roughly be?

[David Murphy, President, CEO & Director]

Yes, it's a good question. I mean candidly we wouldn't publicize that target if we didn't think we had multiple paths to getting there. It will definitely be both organic growth and M&A. Personally I would like to see at least half of that growth come from organic growth. And although COVID unfortunately has slowed down things in the last few months, we still believe that that sort of opportunity is out there. But I think I would characterize it as a target balance, almost 50-50. But obviously, we have levers we can pull to the extent that the best-laid plans don't materialize and we have an active enough M&A pipeline that, if necessary, we can ramp that up as well.

[Justin Keywood, Director of Equity Research]

Okay. And then we saw the kind of scale benefits show in the quarter and the margin expansion. Any indication of what the margins could trend towards in the business as we look out 3 or 4 years and you're seeing the additional beds contribute under management?

[David Murphy, President, CEO & Director]

Yes, it's a good question. I don't know that we want to provide that much sort of forward guidance on our targets. I mean high level, I think we always said that at a normalized bed count, so once we return to the pre-COVID levels and fully synergized, that the Remedy's deal should get us close to that 10% margin. That's certainly not where we're going to stop. And it is our view that the 100,000-bed version of CareRx will have meaningfully better margins than that 10% number. I don't know that I would throw anything out there specifically at this point. But certainly, we're not doing this in order to be the same margin at 100,000 beds as we would be at 50,000.

[Operator]

Your next question comes from the line of David Newman from Desjardins.

[David Francis Newman, Analyst]

So when you look at the environment right now with the vaccinations, I think last count it was like 90% through the long-term care and retirement homes. So they're almost getting 100% here. Are you seeing any pickup in the utilization? Or again, I think some things were kind of pushed out on the RFP front or deal activity. Anything that you're seeing that maybe the activity is starting to turn the corner?

[David Murphy, President, CEO & Director]

Yes. So it's a really good question. I mean the short answer as of today is nothing yet, but I do think we're increasingly optimistic that it's coming. So yes, as you know, David, it's been a strange few months. On the one hand, the second wave of COVID was quite devastating in terms of outbreaks in long-term care homes. December and January were really difficult. And so the homes are really been all hands-on deck-on, managing outbreaks, managing testing requirements and then obviously shifting to vaccination.Fortunately, as you know, there are a number of home operators who are publicly-traded. So I would always defer to their comments and their predictions more than mine, they're the experts. But I think what seems to be the case now is I think there is increasing confidence that we are going to see in the near-term a normalization of a number of things, including occupancy levels. And for us, that will mean a meaningful pop in our bed count. But I don't think anyone is comfortably yet predicting when that happens.So I hope by May, when we deliver our Q1 results in May, I think we should have a more clear outlook on when normalization is going to happen. But as of now, there really isn't any evidence of that. And certainly on the RFP side, the COVID-related holding pattern is certainly still in place.

[David Francis Newman, Analyst]

Okay. Any plus or minus on the 100,000 target? In other words, if things get delayed or they accelerate, any plus or minus that you guys -- 5%, 10% around that number?

[David Murphy, President, CEO & Director]

No, not at all. I think nothing -- certainly not for a 2023 target. And even for us, I don't think our year-end number in terms of targeting has changed. It's just -- I think that we just have to be cognizant of what the first half is going to be in terms of returning to normal.

[David Francis Newman, Analyst]

Okay. And then -- and if you look at the -- obviously, the ODBA and the provincial governments and the delaying and all that, are they starting to, in your view, recognize more value of your role and that this will be maybe permanently put on hold?

[David Murphy, President, CEO & Director]

Yes. Certainly, on the first part of your question, yes. I think we've had really constructive discussions with the government, particularly with the Ministry of Long-Term Care. Obviously, our entire sector, it's not just pharmacy, but the long-term care sector is -- there's been a meaningful spotlight on it in the last year. And I think good things will come of that. Included in that, I think, is the recognition that a cut to pharmacy is a cut to long-term care. And I don't think there's a -- I think the pause that was announced, I think, was a clear indication of the lack of any desire to make such a cut.We're in ongoing discussions. And obviously it would be our hope that we could turn temporary pause into something more permanent. More to come on that, but we certainly are happy with the dialogue we've had with the governments, particularly in Ontario where the most recent change was made.

[David Francis Newman, Analyst]

Okay. And then last one from me, guys. The Pharmacy At Your Door, you're making good progress in Alberta, maybe be [ CNX ] kind of thing. But would you look to accelerate that? Again, it's kind of a land-grab right now, as you know, on the whole virtual pharmacy online space. Would you look at maybe doing an acquisition there rather than just obviously getting more bed count, but maybe kind of accelerate that because that's obviously one of the key drivers and I think, long term, more people wanting to stay in their homes. Maybe acquiring somebody that doesn't have fulfillment centers and things like that where you have a natural advantage, is that something that you would look at?

[David Murphy, President, CEO & Director]

Yes. Good question. So we're certainly open-minded on strategic options in that space. And obviously, we've paid attention to some of the financing evaluations that have happened. I wouldn't necessarily characterize it as a land grab because I think a lot of this stuff is still valuations and financing based on potential revenue as opposed to anything that's actually real.But yes, we -- I mean we -- obviously, we're trying to build something that's real, that isn't just hype, but actually offers customers a meaningful difference in terms of what they can get from a retail pharmacy. And you're right in saying that our fulfillment capabilities really do differentiate us from other start-ups in the space.So we're open-minded. I would say there's probably some caution about purchasing something in this market. I just think valuations are something we just need to pay attention to, but we're definitely open-minded about something more than just purely organic as it relates to growth.

[Operator]

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

[Tania Rae Gonsalves, Analyst of Healthcare]

I think most of my questions have been asked, but just a couple for me here. In terms of your M&A pipeline today, could you talk to the number of targets in that pipeline? And do you have a sweet spot in terms of size? That's -- obviously, it can range, seeing you acquired Remedy's last year. But is there a sweet spot in terms of how much revenue you're looking to acquire per target?

[David Murphy, President, CEO & Director]

Yes. I think it -- certainly, on the last part of your question, it's target-specific. I think we want to acquire well-run businesses with sustainable customer contracts that we can purchase at good multiples. So that could manifest itself in a number of different sizes. I don't think I would -- I'd give color on how many targets. It's certainly multiple. And I mentioned earlier, I think high level -- the high-level balance we're thinking about is sort of a 50-50 organic and M&A play. But that really will be target-dependent.In terms of capacity, I think on tuck-ins, just because a tuck-in acquisition tends to be isolated to a single geographic area, we're very confident we can do multiple tuck-ins in parallel just because the integration efforts can be sort of a divide and conquer concept. Obviously, something larger if presented itself at the right value, we would obviously be very interested in that, and that might change everything in terms of the revenue contribution and the integration activities related to it.

[Tania Rae Gonsalves, Analyst of Healthcare]

Okay. Perfect. And then on the ODBA, the payment decline, had they come into effect in April as expected, what would be -- what kind of impact would that have had on your revenue?

[David Murphy, President, CEO & Director]

Roughly, I mean, it depends, I guess, on what you used for bed count because we're a little bit lower because of COVID. But I think high level, the net impact would have been roughly $650,000.

[Operator]

Your next question here comes from the line of Doug Loe from Leede Jones Gable.

[Douglas W. Loe, MD & Analyst]

Most of the questions around your acquisitive growth have been asked here. But maybe just returning to a theme that I've asked on prior conference calls. I mean now that you've achieved your considerable scale and you're now the largest long-term CareRx provider in the country, just kind of wonder how you're thinking about the relative proportions of the way you scale up your bed count by winning new business rather than buying new business through acquisitions. So maybe just kind of walk me through how you might be thinking about the relative balance there because I think winning your beds is more cost-effective than buying them, depending on valuations.And then second question is just the delay of the declines in reimbursement per bed in the industry, of course, benefits your competitors as much as they do you, at least for the next year or so. So again, just kind of returning to the acquisition multiples, just wondered -- it's still early days, but if you're seeing any multiple creep that you might want to consider as you're determining whether you would want to do an acquisition now as opposed to a year from now when the valuations might creep down a bit? And that's it for me.

[David Murphy, President, CEO & Director]

Yes. Good question, both, Doug. I mean on the mix, as I said, I continue to say we really do feel like this is a mix between organic and M&A. It's certainly the roll-up aspect of the strategy has always been a big part of it. But we also, I think, recognize that unlike the way this sector has operated for the last 5 or 10 years, there is -- I think there is more differentiation in the space in terms of pharmacy providers. There are customers that are, I think, interested in understanding what their options are. So we're still very bullish on organic growth.In the last year, I would say, for sure my bullishness on M&A has gone up in the last year, and that's partly about the opportunities. It's partly also just about our ability to transact, finance, integrate. I'm definitely more bullish on M&A. But I would not say I'm less bullish in any way on the organic side. The reality is COVID is just stalled that out a little bit. But as I said, I feel like we're on the verge of some normalization there.And on multiples, no, we've not seen any changes related to capitation. I mean at this point, the ODB announcement was a pause. So there's nothing that's fundamentally changed from a longer term basis. And we've got to plan ourselves on the assumption that that capitation ramp will continue to go down and that's certainly how we would approach any target. So nothing's changed there.

[Operator]

Your next question comes from the line of Paul Stewardson from iA Capital Markets.

[Paul Stewardson]

Just calling in for Chelsea and congrats on the year. Just a couple of questions. I'll start with, in terms of -- you had the February financing. You've been talking for a while about sort of deleveraging. Now that you have that extra $20 million, is that where you want it to be? Or is further delevering still in the works?

[David Murphy, President, CEO & Director]

Yes, good question. I certainly think debt repayment is an option. It's probably not our preferred use of capital. As I said, we believe we have the opportunity to do further M&A. And so using our cash for that or even for CapEx associated with the onboarding of new beds is probably the preferred use of capital and that obviously in itself delevers us by growing our earnings. But certainly, to the extent that that doesn't materialize, we do have the ability to pay down some of our debt, if that's the right play. But I think we want to run the gross options to ground in the next few months first.

[Paul Stewardson]

Sure, sure. Okay. Yes, fair enough. And then just in terms of a little bit of granularity for the SmartMeds acquisition. I know you don't guide for the synergy amount, but can you guide for the timing, which quarters that will hit in?

[David Murphy, President, CEO & Director]

Yes. Really, at this point, our focus is entirely about closing the deal and welcoming the SmartMeds employees to the company. So unfortunately, I don't know that we do more than say that. That's the main focus right now. And they obviously have a retail pharmacy as well that's relatively -- I wouldn't say new to us, we're experienced in operating retail pharmacies, but we don't currently do it now. So I think we want to just get to know these people in the business before we make any more definitive commitments around the future.

[Paul Stewardson]

Sure. Sure. And so you haven't necessarily decided to divest the retail pharmacy yet?

[David Murphy, President, CEO & Director]

No. I think, obviously, that's been what we've done with retail pharmacies in the past, but it's a very profitable pharmacy. And I just don't think we want to be too quick in making a decision in that regard.

[Operator]

[Operator Instructions] And I'm not showing any further questions that are coming into the queue. So I'll turn the call back over to David Murphy for any closing comments.

[David Murphy, President, CEO & Director]

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

[Operator]

And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.