CareRx Corp
TSX:CRRX
Earnings Call Analysis
Q4-2023 Analysis
CareRx Corp
In the closing quarter of 2023, CareRx announced consistent performance with revenues totaling $91.1 million alongside an adjusted EBITDA of $7.5 million. This marks a continuing trend of improved profitability, with a promising trajectory targeted at achieving double-digit EBITDA margins by the year 2024.
The firm witnessed a revenue dip in Q4, descending to $91.1 million from $94.3 million in the previous year's quarter. This decline originated mainly due to a shift in drug mix between branded and generics, a change that's anticipated to persist in impacting future revenue but not negatively affect profitability.
Adjusted EBITDA ascended to $7.5 million, marking a 6% enhancement year-over-year, due in part to cost-saving initiatives and an ongoing push for operational excellence. The company successfully enhanced margins despite continued strains in the healthcare labor market, indicating strong adaptive capabilities and an effective cost management structure.
CareRx reduced its net loss to $3.7 million in Q4 compared to $4.7 million in the same period of the previous year, reflecting prudent financial management. The improvement resulted mainly from reduced share-based compensation expense and changes in fair value of contingent consideration liabilities. However, there was a slight uptick in net loss from the prior quarter due to lower average beds serviced and specific refinancing adjustments.
A pivotal financial maneuver for CareRx was a $70 million debt refinancing move that promises to simplify the balance sheet and enhance capital structure, ultimately expected to save up to $1 million annually in interest expenses. This strategic move entailed repaying existing debts, resulting in a reduced net debt to $55.2 million and affirming the company's commitment to long-term financial stability.
At the end of the quarter, cash on hand stood at $7 million, a decrease from previous records primarily due to the comprehensive debt refinancing. Despite this, CareRx bolstered its operating cash flow throughout the year to $27.4 million, demonstrating a robust increase of 23% over the previous year and underpinning the company's focus on operational efficiency.
Looking ahead, CareRx aims to streamline operations with a focus on procurement best practices and lean principles to ramp up productivity. Growth avenues also include winning new contracts (beds) and expanding product offerings like Revicare and BOOMR. The company also plans to capitalize on the expansion activities of its clients and is eyeing acquisition opportunities to grow its market share in a sector where a significant portion remains untapped.
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Good morning, everyone, and welcome to CareRx Fourth 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 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 and uncertainties related to CareRx' 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' continuous disclosure report, which you can access on the SEDAR+ database, under www.sedarplus.ca. 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. And now I would like to turn the call over to Puneet Khanna, President and CEO, of CareRx Corporation. Please go ahead, sir.
Thank you, and good morning, everyone. Welcome to our fourth quarter 2023 earnings call. With me this morning is our Chief Financial Officer, Andrew Mok. In the fourth quarter, we delivered consistent financial results with a revenue of $91.1 million and adjusted EBITDA of $7.5 million. This is the third consecutive quarter improvement in our adjusted EBITDA, and adjusted EBITDA margin illustrates continued progress from our efforts to increase productivity and drive efficiencies. While there may be occasional variability quarter-to-quarter, we are confident that the progress we are making will continue in future quarters to our stated internal goal of exiting 2024 with double-digit adjusted EBITDA margins. Our success moving towards this goal in the back half of 2023 is a testament to the tremendous team at CareRx, who have embraced a performance-driven culture. In the fourth quarter of 2023, we also accomplished our stated goal of completing a comprehensive debt refinancing transaction. As Andrew will outline shortly, this is an extremely important milestone in our efforts to simplify our balance sheet, improve our financial flexibility and reduce our cost of debt. I would now like to turn the call over to Andrew to discuss our fourth quarter financial results in more detail. Andrew?
Thank you, Puneet, and good morning, everyone. Before I begin, a reminder that our financial statements and MD&A for the fourth quarter have been filed with SEDAR+ and are also available on our website. Revenue for the fourth quarter of 2023 declined to $91.1 million from $94.3 million in the fourth quarter of 2022 and from $93.8 million in the third quarter of 2023. The year-over-year revenue decline was driven primarily by a change in the mix of branded and generic drugs dispensed during the fourth quarter of 2023. As disclosed previously, 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, nor is it expected to have a negative impact going forward? The decrease in revenue from the third quarter of this year was primarily driven due to a small net reduction in the average number of beds serviced. Adjusted EBITDA for the fourth quarter grew by $400,000 or 6% to $7.5 million from $7.1 million in the fourth quarter of last year and increased 3% from $7.3 million in the third quarter of 2023. Our adjusted EBITDA margin in the fourth quarter grew to 8.2%, up 600 basis points from the fourth quarter of 2022 and up 400 basis points from the third quarter of 2023. The year-over-year and sequential improvement in adjusted EBITDA and adjusted EBITDA margin was primarily the result of certain cost savings initiatives implemented during the second half of 2023 and our ongoing focus on operational efficiencies. I'd like to highlight that the progress we've made in improving our margins occurred despite the ongoing challenges we face in the health care labor market, which we've outlined in previous quarters. While we continue to expect some degree of variability in labor costs for the foreseeable future, we may experience some variability in our margins and adjusted EBITDA growth from quarter-to-quarter. We are encouraged by our ongoing progress and expect this positive trend to continue. We posted a net loss of $3.7 million in the quarter, a $1 million improvement compared to a $4.7 million loss in the fourth quarter of 2022. This improvement in our net loss was driven primarily by decreases in share-based compensation expense and a change in fair value of contingent consideration liabilities in addition to the impact of certain cost savings initiatives implemented during the second half of 2023. This was partially offset by the impact of a reduction in the average number of beds serviced. Compared to the previous quarter, net loss increased by $2.3 million from a loss of $1.4 million due to the reduction in the average number of beds serviced and certain adjustments related to the refinancing transaction. In December, we announced the completion of a comprehensive $70 million refinancing transaction with a syndicate of lenders led by a Canadian Schedule I chartered bank and arranged and managed by Crown Private Credit Partners. Under the terms of the refinancing, the lenders agreed to provide a $20 million senior secured revolving operating loan and a $50 million senior secured term loan. With the proceeds of these facilities and cash on hand, we repaid $78 million of existing debt, including our existing $58 million term loan and $20 million subordinated debt. Additionally, the March 2019 convertible debentures were repaid in full ahead of their maturity. $47 million of the term loan and a portion of the operating loan were initially drawn at closing with future draws on the term loan available to fund certain capital expenditures. The credit facilities have a 5-year term with a floating interest rate that will initially accrue at a rate of prime plus 2.75% at closing with downward adjustments to as low as prime plus 2% as the company's net senior debt to trailing 12-month EBITDA declines. This transaction greatly simplifies our balance sheet and further strengthens our capital structure. Compared to our previous term loan and subordinated debt, we expect to initially save up to $1 million annually in interest charges. Cash at December 31 was $7 million compared to $36.4 million at the end of the third quarter. As I outlined in the previous slide, the decline in our cash balance is due to the comprehensive debt refinancing transaction we completed and associated reduction in our outstanding debt. Net debt decreased to $55.2 million from $56.2 million at the end of the third quarter and total debt decreased to $62.2 million from $93.4 million last quarter. Net debt to annualized run rate adjusted EBITDA decreased to 1.8x from 1.9x. I'd also like to take the opportunity to highlight that as a result of our focus on improving operational efficiencies, we consistently grew operating cash flow throughout the year, which in 2023 amounted to $27.4 million, a $5.1 million increase or 23% over 2022. And with that, I will turn the call back over to Puneet.
Thank you, Andrew. In previous quarters, we outlined our strategic priorities, which guide our near- and long-term focus. Fundamentally, we have a commitment -- an unwavering commitment to quality and service while continuing to improve our financial and operational performance and capitalize on our leadership position in order to grow in an expanding market. We've identified a number of opportunities to drive greater operational performance and grow more profitably. Through our strong vendor partnerships, we can increase our purchasing power through procurement initiatives and best practices. In addition, with a lean mindset, we are focused on eliminating waste through the rollout of a standard operating model and continuing to implement policies and procedures throughout the network that are aimed at enhancing both quality and operational efficiencies. These lean principles we have embraced across the organization will increase productivity and promote a culture of continuous improvement. These initiatives will lead to margin growth and create a more sustainable long-term operating platform, which we continue to provide -- while we continue to provide the highest levels of service to our customers. We have many paths for growth available in the near and long term. We will continue to grow organically by winning new beds and increasing the suite of products and services we offer to our customers such as Revicare and BOOMR, while leveraging our scale and capabilities to provide a superior pharmacy services offering. Our existing customers, many whom are large national and regional home operators, have active growth plans through their own expansion and acquisition activities, and we will benefit from this expansion and grow with them as they build and acquire new homes. Additionally, as more than 80% of the Canadian market remains serviced by other pharmacy providers, we will continue to seek accretive acquisitions to continue to grow our bed count. As the leader in this sector, we are well positioned to capitalize on this wealth of growth opportunities. 2023 was a very eventful year at CareRx. Early in the year, we focused our efforts on our internal processes and procedures. We identified a number of areas we could optimize with the goal of improving our operating efficiency, generating cost savings within our business and creating a more sustainable long-term operating platform. We have made tremendous progress, but we are still confident that we can further optimize the business, while strengthening our capabilities and service offerings and truly becoming a world-class institutional pharmacy provider for our customers and their residents. In support of this goal, in the first quarter, we commenced packaging of medications dispensed from our BD Rowa high-volume packaging solution at our Oakville fulfillment center. We have been pleased with the progress we've made transitioning to high-volume packaging technology, and we expect to drive further efficiencies and margin improvement while also improving safety, reducing medication packaging errors and waste. As stated earlier, we have made great strides with our operational optimization efforts as evidenced by the consistent growth in adjusted EBITDA and operating cash flow throughout the year as well as a notable improvement in adjusted EBITDA margin. We continue to see many opportunities for improvement, and we expect to make continued progress in 2024. One of our strategic priorities we discussed throughout 2023 has been to strengthen our balance sheet and improve cash generation, and we're very pleased to have made tremendous progress in those 2 areas. In Q1, we completed a $16 million common share financing in order to provide greater financial flexibility in what has clearly been a volatile and uncertain economic climate. As Andrew outlined earlier, the comprehensive debt refinancing transaction we recently completed is a giant step forward for CareRx as it reduces our cost of debt, simplifies our capital structure and significantly improves our financial flexibility. Finally, as I complete my first fiscal year as CEO at CareRx, I would like to sincerely thank our entire team for their tremendous efforts and many accomplishments as well as our customers and our partners for their ongoing support. With that, I would now like to open the call to questions. Operator?
[Operator Instructions] And your first question will be from Gary Ho at Desjardins.
Just first on the margins, very strong this quarter, and you highlighted several items in your MD&A. And Puneet, I think in your opening remarks, you reiterated the double-digit target exiting 2024. Maybe you can talk about over the last few months, what you're seeing in the business and our initiatives that's underway. Maybe elaborate on the procurement benefits that you just highlighted that gives you confidence in hitting that margin exiting this year?
Gary, really what we saw in the back half and particularly in Q4 with the operational efficiencies, so we gained some margin there, particularly with the reduction of overtime hours.
And then, Gary, maybe -- it's Andrew, just to add. In terms of the other initiatives you alluded to that we've highlighted, some of it as it relates to operating expenses, it's really driven off of all the procurement initiatives that we've been working on. So we've been looking at opportunities to reduce operating costs, particularly as it relates to things like software costs as well as medical supplies, and we made some good progress there in Q4, which was some of the driver of the margin. And then obviously, as you know, we've been doing a lot as it relates to inventory, not just simply on the procurement side of the things, but also on the inventory management side of things. And so all of those really drove the improvement in the margin for the quarter, and we believe we're going to continue to make progress in those areas through 2024 to get to that target.
Okay. That makes sense. And then my next question, just on, the bed count was down again sequentially. Maybe you can explain the puts and takes in Q4. Was there a contract loss, a small one perhaps. And outlook for 2024 and possible the cadence of bed count growth as we look out through the quarters in 2024?
Yes. It was just a number of small contracts that were lost, nothing significant. I think we had given guidance in Q3 to say just because of some timing issues, we expected there to continue to be a decline. As we move into this year, for Q1, we see a bit of a leveling out. There'll be -- there might be a slight decline just because we'll see the full impact of some of those smaller losses and the timing of the new stuff coming will be in Q2. So you'll see the bed growth come back in Q2, but it's very back half loaded for this year.
Okay. And just a follow up...
Sorry, go ahead.
Yes. No, go ahead.
I mean -- yes, and I think as we've mentioned also in previous quarters, the way we've stratified our agreements, we have none of our major customers expiring in the next 2 years. So we don't see that churn level impacting us going forward, and we should be able to pick up the beds in the back half.
Okay. And then, yes, my follow-up to that was of the smaller contracts that you lost. Can you elaborate -- provide a bit of color who you lost that to? And the reason, is it pricing, is it -- like who is taking those contracts away from you, a bit of color on that.
Yes. You know what -- there's nothing that we can draw any substantial conclusion. Again, just the bunch of little things across no 1 specific competitor or pharmacy winning the business. I think it's just -- it's part of that sort of baseline churn that occurs within the business. And it was just -- from our end, the ones we have lined up, timing just hasn't worked out on these ones. So there is -- but there's nothing further to read into that.
Next question will be from Kyle McPhee at Cormark Securities.
I see in your MD&A, you disclosed extra costs for overtime contract, labor and recruitment was $4.5 million in 2023. Can you tell us how much of that was incurred in Q4. We're essentially trying to quantify progress with getting those temporary types of cost eliminated. And then based on your ongoing efficiency and cost saving plans and the labor market conditions, do you think that specific bucket of temporary cost can disappear by the end of the year?
Kyle, the costs that we incurred in Q4 were consistent with what we would have incurred in previous quarters. And so I'll just say, I think last quarter, we messaged that it was about $1.5 million for the quarter, so consistent quarter-over-quarter. We did make a little bit of progress, as Puneet mentioned, as it relates to overtime. That's a general reduction over time, whether that be part of what we characterize as being incremental in the past or otherwise. As we've messaged previously, we don't expect that labor costs are going to continue to get worse, and that was the case through 2023, they kind of held steady. Obviously, we're working to continue to find opportunities to bring that down. But for the quarter, it was not that different than what we saw in previous quarters, a little bit less just from the overtime reductions and not more than what we saw in the past. In terms of kind of what we look at going forward, as we've talked about, we're continuing to look at opportunities to reduce overall labor requirements. So that's not just simply looking at the overtime, but looking at areas to provide our team with the tools to be more efficient operationally. So whether that's using high-volume packaging technology or whether that's through our own internal processes or really looking to reduce the need for overall hours to begin with. We believe we're going to continue to make progress through 2024 there. But as we've kind of messaged, it may be a little bit lumpy quarter-to-quarter, but all to get to the end objective for the end of the year.
Next question will be from Stefan Quenneville at Echelon Capital Markets.
Nice to see the progress on the margin. In terms of the labor cost, I'm sorry to belabor these guys, when you talked about it being lumpy, is sort of the expectation that we're going to see a bit of a spike, say, in -- like in Q2 as those beds that you were expecting, I guess, in this quarter are sort of push back from last year. The onboarding is going to require a little more effort, or it's just like is it something -- is it specific to that that you're talking about in terms of the lumpiness?
Stefan. No, this is a good question. The lumpiness is really with respect to there are certain geographies where we will -- it will be a little bit more difficult to pull out or reduce over time because of the labor market. In my comments I also sort of rooted that fundamentally, our primary focus is quality and service, so we won't sacrifice quality of service just to drive overtime down. And so there is that balance, and we've got to look at certain markets in certain locations as we move forward. I think the other piece being sort of with that lean mindset we've seen opportunities and been to sort of our fulfillment in where we've changed certain workflows to drive efficiency and quality, and then as we layer on some of these other initiatives, we do know we are going to give back or add some more hours in, but for that long-term stability, it is the right thing to do. So there's a bit of an ebb and flow to it. But sort of our guiding principle is not to impact any service levels.
[ Got it. While we're on the subject, can you just give us a sense of how many beds are being serviced by the BD Rowa machines sort of end of the year and maybe as of sort of today? Where are you on that?
Yes. So it's 12,500 in Oakville, now being serviced, [ out of those ] machines, so the full site is on it.
By the end of 2024, to answer the second part of your question, Stefan, we look to essentially double that in terms of what we're servicing through high-volume packaging solutions.
Great. And then just one final question on the funding environment. You missed one comment on what's going on there. I don't think Ontario has announced what they're doing for 2024 yet officially. And just wondering, I know last year, they were ready until the day before to actually announce the ongoing pause on that, just maybe give us a sense of what's happening on that front, please?
Good memory. So we're -- we continue to have a good conversation. We believe we will continue to get the freeze. What we're waiting for is that official announcement, and we're hoping it's not the day before this time.
[Operator Instructions] Your next question will be from David Martin at Bloom Burton.
This is [ Girish ] on for David. Just a couple of quick questions. The first one is that you had mentioned you had a number of RFPs pushed into 2024 last quarter. Can you provide some updated expectations on these going forward, and if you still expect to convert?
Yes. [ Girish, ] so we are in the process of responding to current active RFPs as well as we've mapped out, which RFPs will be released. So I think that's -- to my earlier comments, that's where we see those will get decided in Q2 and with starts in Q3 and Q4, and that's why we've sort of back half loaded this year.
Okay. And in the short term, are these the main opportunities that you're seeing for that growth, or is there anything else we should be looking out for?
There's continued organic growth opportunities where we can go direct and win the business. And the team is -- the BD team is soliciting those opportunities as well.
There are also a number of new beds as we've previously talked about from a redevelopment and construction standpoint. Our customers alone account for over 1,000 beds that we expect to come onboard this year just through new construction or development.
Okay. And one other thing you mentioned was your strong partnerships with the vendors to give you purchasing power. What sort of things are you getting that allow for improved profitability? And what sort of drugs are you getting that are cheaper?
So there's a couple of different things. I mean, on the drug procurement front, I think as most people know, our largest and primary supplier of drugs is McKesson. And so through our relationship with them as well as what they've been able to assist us with from a formulary perspective we're obviously getting good pricing as it relates to our generic drug purchases and any commercial terms that we receive as part of those. And so just given the increased size of the business and our scale now, we're able to continue to leverage that relationship to continue to get the best possible financial terms on those. But even beyond that, where we are really focused on is looking at opportunities to consolidate spend where we may be more regionally focused or may still be using some legacy vendors from the acquired businesses that we acquired over the last few years to really drive that purchasing power through more single vendor or dual vendor opportunities.
Okay. And just one last point of clarity. Drug profitability, that was a flow-through cost. Is that correct? And what kind of -- like with the vendors, does this help with profitability?
The drug cost is a flow-through in addition to a markup that's added on top and separate and apart from that on generic drug purchases, there are separate financial terms that come with that or commercial terms that come with that.
Next question will be from Julian Hung at Stifel.
This is Julian in for Justin today. My first question is regarding the professional service fee cap. On average, how much of that $1,500 is devoted to CareRx, and it seems like medications would be a more essential service than some other pharmacy services. So would the decline actually impact CareRx as much?
So just to clarify, Julian, the $1,500 capitated fee that you're referencing, that all goes to CareRx or whatever pharmacy provider that's providing the services. It's meant to just cover the cost of all of the dispensing activities and the clinical services, drug costs themselves are billed separately and apart from that capitated fee.
Okay. Got it. And regarding the RFPs that are up for grabs from your competitors in 2024, is that more or less than what you see in most years?
It would be higher this year. What we saw post-COVID, there was a delay in a slow -- slowing down and a lot of those are coming to market in the next 24 months.
And just one last question on the CPCP loan. Was there an interest rate disclosed on that debt?
Yes. So initially, it's at prime plus 2.75%. The grid goes all the way down to prime plus 2% just based on where we are from a debt-to-EBITDA perspective.
And at this time, Mr. Khanna, it appears we have no further questions. Please proceed. I apologize, we do have a follow-up from Stefan Quenneville at Echelon.
I just wanted to ask, I was surprised no else did. Can you guys talk a bit about what your sort of M&A pipeline might be looking like these days? I know you've been very focused on just getting the operations really humming along. But what does that look like? Are you seeing any opportunity?
Stefan, we definitely see opportunities there. We've always kept the pipeline active even if we were focused internally. And obviously, as we've talked about before, given the kind of current macro environment and the cost of capital, a lot more disciplined in terms of what we're looking at from an M&A perspective. But given we've done a lot of that internal legwork through 2023, we do want to focus more on that M&A pipeline into this year. Definitely opportunities there, more so kind of on the tuck-in or kind of midsized, but we are looking at some opportunities right now.
And at this time, we have no other questions. Please proceed.
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.
Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.