CareRx Corp

TSX:CRRX

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Operator]

Good morning, everyone, and welcome to CareRx's Third Quarter 2023 Financial Results Conference Call. Please note that this call is being broadcast live over the Internet, and the webcast will be available for replay beginning approximately 1 hour following the completion of the call. Details of how to access the webcast, replay are available in today's news release announcing the company's financial results as well as on the company's website at www.carerx.ca. Today's call is accompanied by a slide presentation. Those listening on their phones can access the slide presentation from the company's website in the Investors section under Events and Presentations by loading the webcast and choosing the nonstreaming 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 results are detailed in CareRx's continuous disclosure record, which you can access on the SEDAR+ database under www.sedar.ca. CareRx is under no obligation to update forward-looking statements discussed today. Investors are cautioned not to place undue reliance on these statements. I would now like to turn the call over to Puneet Khanna, President and CEO of CareRx Corporation. Please go ahead, sir.

[Puneet Khanna, executive]

Thank you, and good morning, everyone. Welcome to our third quarter 2023 earnings call. With me this morning is our Chief Financial Officer, Andrew Mok. In the third quarter, we delivered results that were in line with our expectations with revenue of $93.8 million and adjusted EBITDA of $7.3 million, while the impact of market issues -- labor market issues that we have previously outlined now reflected in our run rate. The improvement in our adjusted EBITDA margin compared to the second quarter are the early signs of progress from our efforts to drive cost efficiencies, optimize our processes and capitalize on the technological and operational enhancements. I am proud of our team's commitment to drive the margin initiatives, and we expect additional savings in future quarters. This quarter, we also launched a normal course issuer bid to repurchase up to 1 million shares. The NCIB will give us flexibility to return additional value to shareholders and will be regularly evaluated against other investment opportunities and our internal leverage guidelines. I would now like to turn the call over to Andrew to discuss our third quarter financial results in more detail. Andrew?

[Andrew Mok, executive]

Thank you, Puneet, and good morning, everyone. Before I begin, a reminder that our financial statements and MD&A for the third quarter have been filed with SEDAR+ and are also available on our website.

Revenue for the third quarter of 2023 declined $3.6 million or 4% to $93.8 million from $97.4 million for the third quarter of 2022 and decreased slightly from $94.5 million in the second quarter of this year. The year-over-year revenue decline was primarily driven by a change in the mix of branded and generic drugs dispensed during the third quarter of 2023. As disclosed last quarter, this change in drug mix is expected to have a recurring impact on revenue in future quarters, but it did not negatively impact the company's profitability in the quarter and is also not expected to have a negative impact going forward.

The decrease in revenue from the second quarter was primarily due to a small net reduction in the number of beds serviced. Adjusted EBITDA for the third quarter declined $400,000 or 5% to $7.3 million from $7.7 million for the third quarter of last year and increased 3.8% from $7 million in the second quarter of this year. Near-term profitability continues to be affected by challenges in the health care labor market, primarily due to scarcity and increased competition for pharmacy staff, which has resulted in a higher number of open positions and a longer time to fill these vacancies. The year-over-year decrease in adjusted EBITDA was driven primarily by incremental costs associated with these continued health care labor market challenges as CareRx has had to incur incremental costs totaling approximately $1.6 million to ensure the company is able to continue to provide its essential services to our customers without disruption. We feel we are seeing early signs of progress in our efforts to meet the cost challenges we have been faced with in recent quarters. And as a result of our organizational focus on improving our internal efficiencies and margin-enhancing initiatives, our third quarter adjusted EBITDA grew 3.8% from $7 million in the second quarter of 2023. We posted a net loss of $1.4 million in the quarter, an improvement of $400,000 or 22%, compared to a loss of $1.8 million in Q3 of last year, primarily due to decreases in a share-based compensation expense, transaction and restructuring costs, finance costs and the loss on the change in fair value of contingent consideration liabilities. The decline was partially offset by a lower gain on the change in fair value of derivative financial instruments, a decrease in income tax recovery and incremental costs incurred as a result of the current labor market. Compared to the previous quarter, net income declined due to a decrease in income tax recovery. Cash at September 30 was $36.4 million, up from $36 million at the end of the second quarter of 2023. The increase in cash in the quarter was driven by improved cash from operating activities. Net debt at September 30 was $56.2 million, a decrease of $2.4 million compared to the prior quarter. This was driven by the increase in our cash balance as well as the commencement of scheduled repayments on our senior debt. Net debt to annualized run rate adjusted EBITDA at the end of the third quarter decreased to 1.9x from 2.1x at the end of the second quarter. I would also reiterate that our debt is and has always been fixed rate, so we've seen no increase in our cost of debt as interest rates have risen. And with that, I will turn the call back over to Puneet.

[Puneet Khanna, executive]

Thank you, Andrew. Our strategic priorities guide our near- and long-term focus. We have an unwavering commitment to quality and service, while at the same time, continuing to improve our financial and operational performance, and capitalize on our leadership position in order to grow in an expanding market. We also have a responsibility to advocate for positive change for Canada's most vulnerable populations, our long-term care partners and the industry as a whole. For those of you who follow us on LinkedIn, or as you can see in the slide, we recently met with the Ontario Minister of Long-Term Care at one of our pharmacy fulfillment centers in order to demonstrate the critical nature of our pharmacy and clinical services, promote our value in the health care ecosystem and outline the needs of the long-term care pharmacy sector in order to continue to provide the highest levels of service. As we outlined last quarter, the transition to BD Rowa at our Oakville fulfillment center has validated our initial thesis for high-volume packaging robotics. This innovative technology enables the optimization of medication dispensing at speeds that exceed conventional packaging solutions currently used in Canada with superior quality and less wastage. As we continue to roll out the use of this type of technology, we expect to drive enhanced operating margins through higher prescription volumes without additional labor costs while improving safety and reducing medication packaging errors and waste. We are pleased with the ramp-up in our transition at our Oakville fulfillment center to date, having migrated over 11,000 beds to this technology by the end of the third quarter. We are on track to have 13,000 beds online in Q4 and continue to expect to achieve run rate savings of approximately $500,000 per year.

We will continue to evaluate the business case for the deployment of additional machines at certain of our other pharmacy fulfillment centers. We see many opportunities to drive greater long-term operational performance and grow more profitably. This is our focus in the near term. These efficiencies and cost-saving initiatives will help to alleviate the impacts of the labor market challenges, expand margins and create a more sustainable long-term operating platform while continuing to provide the highest level of service to our customers. We continue to introduce lean principles within many of our pharmacies, which is a form of management and operations processes, rooted in reducing waste and continuously improving efficiencies. These principles are highly applicable to our high-volume production business and we intend to continue to leverage lean methodology in order to further strengthen our high-performance culture and to assist in making data-driven decisions, which will advance our efforts to drive sustained profitable growth. We have already begun to see the tangible signs of progress as evidenced by the improvement in our adjusted EBITDA margin compared to last quarter. We remain extremely optimistic about the medium and long-term outlook of our business. The number of long-term care beds across the country will continue to grow in response to the continued growth of the seniors population in the years to come. Our existing customers have active growth plans through expansion and acquisitions, and we will grow with them as they build and acquire new homes.

Additionally, we continue to increase the suite of products and services we are offering our customers. We will also continue to capitalize on the opportunities to expand our geographic footprint. We have experienced tremendous growth over the last few years, but more than 3/4 of the Canadian market remains serviced by other pharmacy service providers. As the leader in the seniors care pharmacy sector, we are well positioned to capitalize on this wealth of growth opportunities. With that, I would now like to open the call to questions. Operator?

[Operator]

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]

Our first question comes from the line of Stefan Quenneville of Echelon Capital Markets.

[Stefan Quenneville, analyst]

I just wanted to get your -- I just want to make sure you're maintaining your guidance to be at a double-digit margin run rate by the end of next year, if that was still the case. And also maybe just some talk about your sort of pipeline in terms of M&A and bids in terms of bed growth over the next 12 months, what that's looking like?

[Puneet Khanna, executive]

So with respect to pipeline, I'll start there. The pipeline we expect to have significant -- or have growth going into Q1 of next year, expecting it to be a little bit light into the back half of this year, just with some construction delays, and we will see that grow into next year.

[Andrew Mok, executive]

In terms of the M&A pipeline, Stefan, as we've always said, there's a number of acquisition targets out there, and we continue to have discussions with a number of targets. But just given what our current operational focus is right now and obviously, broader kind of market and cost of capital conditions, we remain very disciplined there as it relates to how we assess those opportunities. And so all I would say there is we continue to look at that, but that's not the kind of main priority that we're working on right now. And then to answer your last -- the other question about guidance, yes, I can confirm that we continue to remain focused on that same target of getting to double-digit margins on an exit run rate for next year.

[Stefan Quenneville, analyst]

Okay. And can I just ask a kind of follow-up, more of a [ FA ] question than specific on operations. In terms of your discussions with like, obviously, provincial payers, you mentioned that you had the Minister in. Can you characterize the reimbursement environment sort of that you're seeing currently and how you see it evolving going forward? And then while we're talking sort of big picture government stuff, there's also talk about National Pharmacare program. Just maybe I would like to get your thoughts on that as well. And that's it for me.

[Puneet Khanna, executive]

All right. Yes. From a government standpoint, we see the reimbursement model is being stable at this point. And we think there's some opportunity for some upside in there as well.

[Andrew Mok, executive]

In terms of the National Pharmacare piece, I think it's still early days there as there hasn't really been a real formal kind of, I guess, discussion of if or when that's going to happen. I mean, as you know, for us, seniors in Canada, their drugs are already primarily covered by the provincial drug plans. So it's a little bit less impactful for us than it would be maybe for others.

[Operator]

[Operator Instructions]

It seems we have a follow-up from Stefan at Echelon.

[Stefan Quenneville, analyst]

I want to, say, give other people a chance that it's a competitive world out there, so I'll just take over. Could you guys talk a bit about your balance sheet initiatives? I know you've talked about simplifying your balance sheet, kind of lower your cost of capital on the debt side. Could you talk about where that's heading? And just any progress there?

[Andrew Mok, executive]

Yes, you got it. We've always talked about the objective being to continue to go on the journey of simplifying and improving our balance sheet and improving our overall cost of capital. All I would say there for now is that we continue to have positive discussions on that front. I think we'll be in a position to have more news to come by the end of the year.

[Operator]

And we've had one further question come for at this time, that's from the line of Julian Hung at Stifel.

[Julian Hung, analyst]

This is Julian stepping in for Justin today. I just wanted to ask about the industry overall. With pharmacy strikes going on in the U.S., do you see labor challenging -- labor challenges increasing in the industry overall?

[Puneet Khanna, executive]

Julian, yes. I think we shared in Q1 that we thought that was the lowest point for us with respect to labor. And we've seen that continue to improve with respect to vacancies and labor even overtime hours within the pharmacy. And so I think we have a bit of a unique offering versus retail. And we're seeing that there's some desirability with respect to our closed door locations for pharmacists who are looking for other opportunities.

[Operator]

[Operator Instructions] There seems to be no further questions at this time. So I'll hand the floor back to our speakers for the closing comments.

[Puneet Khanna, executive]

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