Good morning, and welcome to CareRx first quarter 2024 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 one hour following the completion of the call. Details of how to access the webcast replay are available in today's news release announcement, announcing the company's financial results, as well as 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 websites 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 results are detailed in CareRx's continuous disclosure record, which can be accessed 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. I would now like to turn the call over to Puneet Khanna, President and Chief Executive Officer of CareRx Corporation. Please go ahead, sir.
Thank you, and good morning, everyone. Welcome to our first quarter 2024 earnings call. With me this morning is our Chief Financial Officer, Andrew Mok. In the first quarter, we delivered financial results consistent with our expectations, with revenue of CAD 89.7 million and Adjusted EBITDA of CAD 7.4 million. As we anticipated, first quarter average bed count was relatively flat to the fourth quarter. The bed count grew throughout the quarter, and we ended Q1 at a modestly higher level than the end of Q4. We expect second quarter bed count to be comparable to Q1. However, our pipeline of opportunities in the second half of 2024 is extremely robust, and we expect bed count to grow through the second half of the year.
The continued quarterly improvement in our Adjusted EBITDA margin illustrates our ongoing progress from our efforts to increase productivity and drive efficiencies. As we previously outlined, we've identified a number of initiatives designed to grow our margins. In particular, we expect to see the contribution from our improved inventory procurement program take effect in the second quarter of this year. We remain 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. Once again, I must thank our team for their success in progressing towards this goal. In March, the Ontario Ministry of Health announced the postponement of the previously scheduled changes to long-term care pharmacy funding for a further year.
These changes, which were scheduled to go into effect on April 1, 2024, would have reduced the fixed professional fee under the fee per bed capitation model from an annual amount of CAD 1,500 per bed to CAD 1,400 per bed. We have a collaborative relationship with the Ontario government and are optimistic that together, a permanent, mutual, beneficial platform for funding will be developed. We look forward to building on this partnership as we continue to demonstrate the value of long-term care pharmacy. Subsequent to quarter end, CareRx hosted the Honorable Doug Ford, Premier of Ontario, at the company's Oakville pharmacy to showcase CareRx's leadership in technology and innovation in support of improving healthcare outcomes for residents in long-term care homes across Ontario.
The Premier was joined by the Minister of Long-Term Care, two members of Provincial Parliament, and several senior leaders from CareRx's home operating partners. The delegation received a demonstration of CareRx's automated high-volume medication packaging equipment, optical verification robotics, and the use of lean management principles that drive continuous improvement in pharmacy operations. The visit underscored our combined commitment to supporting seniors in Ontario and to drive innovation and improve healthcare for our community. We continue to believe that the CareRx stock price does not reflect the intrinsic value of the business. As a result, in March, we entered into an automatic share purchase plan with a designated broker to allow for the continued repurchase of shares under the normal course issuer bid during our post-quarter, pre-scheduled blackout period.
I would now like to turn the call over to Andrew to discuss our First 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 first quarter have been filed with SEDAR+ and are also available on our website. Revenue for the first quarter of 2024 declined to CAD 89.7 million, from CAD 91.4 million in the first quarter of 2023, and from CAD 91.1 million in the fourth quarter of 2023. The year-over-year and quarter-over-quarter revenue decline was driven primarily by a modest net reduction in the average number of beds serviced. Adjusted EBITDA for the first quarter grew by more than CAD 600,000 or 9% to CAD 7.4 million from CAD 6.8 million in the first quarter of last year, and was essentially flat to the CAD 7.5 million reported in the fourth quarter of 2023.
As Puneet mentioned earlier, our adjusted EBITDA margin in the first quarter grew to 8.3%, up 80 basis points from the first quarter of 2023, and up 10 basis points from the fourth quarter of 2023. The year-over-year improvement in adjusted EBITDA and the year-over-year and sequential improvement in adjusted EBITDA margin was primarily the result of efficiencies and cost savings initiatives that commenced during the second half of 2023. I'd like to highlight that the progress we've made in improving our margins occurred despite the ongoing challenges we face in the healthcare 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, and we may experience some modest variability in our margins and Adjusted EBITDA growth from time to time, we are encouraged by our ongoing progress and expect this positive trend to continue. We posted a net loss of CAD 500,000 in the quarter, a CAD 1.6 million improvement compared to CAD 2.1 million in the first quarter of 2023, and a loss of CAD 3.2 million or sorry, an improvement of CAD 3.2 million dollars compared to the CAD 3.7 million dollar loss in the fourth quarter of 2023.
This year-over-year and quarter-over-quarter improvement in our net loss was driven primarily by decreases in finance costs and share-based compensation expense, and the impact of cost savings initiatives that commenced during the back half of last year. The decline was partially offset by the impact of a reduction in the average number of beds serviced. Cash at March 31st was CAD 11.4 million, compared to CAD 7 million at the end of the fourth quarter. The CAD 4.4 million dollar increase in our cash balance was due to an increase in operating cash flow in the quarter, in addition to reduced outflows related to interest and CapEx. Net debt decreased by CAD 6.4 million, to CAD 48.8 million from CAD 55.2 million at the end of the fourth quarter.
Net debt to annualized run rate Adjusted EBITDA decreased to 1.6 times from 1.8 times. With that, I will turn the call back over to Puneet.
Thank you, Andrew. We continue to seek opportunities to improve efficiencies and further optimize our operations, with the aim of continuing to provide the best care and service to our home operator partners and their residents, while creating value for our stakeholders. Our strategy is threefold. Firstly, procurement. We will continue to leverage our size and purchasing power with our vendors and suppliers in order to reduce our costs. Secondly, standardization, which is designed to enhance our services while streamlining operational processes. Finally, our ongoing initiatives to implement lean and workflow systems across our network and functional areas of the business have started to bear fruit, and we expect to benefit from further efficiencies and productivity improvements.
These operational optimization initiatives will lead to margin growth and create a more sustainable long-term operating platform, while we continue to provide the highest levels of service to our customers.
We continue to have a number of avenues by which we can grow in the near and long term. We will continue to grow organically by winning new beds, increasing the suite of products and services we offer to our customers, such as Revicare, our medical supplies business, and Boomer, a proprietary, award-winning, pharmacist-led medication reconciliation program, and leveraging our scale and capabilities to provide a superior pharmacy servicing offering. As mentioned, our pipeline of opportunities in the second half of 2024 is extremely robust, and we expect bed count to grow through the second half of the year. Our existing customers, many of whom are large and regional home operators, have active growth plans through their own expansion and consolidation 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 service providers, we will continue to seek accretive acquisitions to further grow our bed count. As a leader in the 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?
Thank you, sir. Ladies and gentlemen, if you would like to ask a question at this time, please press star followed by one on your touchtone phone. You will then hear a three-tone prompt acknowledging your request. If you would like to withdraw from the question queue, please press star followed by two. If you're using a speakerphone, we ask that you please lift the handset before pressing any keys. Please go ahead and press star one now if you do have any questions. Your first question will be from Charlie at Desjardins. Please go ahead.
Hi, good morning, Puneet and Andrew.
Hi, good morning, Gary Ho. How are you?
I'm good. Yeah, so you mentioned that you had a pretty robust pipeline of organic bed growth through the second half of 2024. I'm just wondering if you could provide more color into those pipeline, like what kinds of RFPs or small opportunities are you seeing? How are you positioning yourself to win those deals?
Yeah. So, there's a number of RFPs that we have either bid on and are in the process right now of working through. Those are both a combination of for-profit and nonprofit opportunities. Then there are others we've already built into the pipeline that we know will be released either later this summer or into the fall. We've already had them on our roadmap. So we have a very clear line of sight of the number of opportunities, and it's a mix, Gary, of both small to mid-size and large opportunities.
Yeah. Thank you for that. And, on the government side, so it's good to see the continued performance in the capitation fee reduction. Just wondering how your discussions with the governments are going, and what are the possibilities of a permanent pause, as well as, whether the upcoming election could swing it, either way.
Yeah, you know what? So the minister, as well as the staff, is very supportive in understanding of the value that we bring into the ecosystem, in the long-term care ecosystem. And even the operators themselves and their associations now are aligned with us, understanding that we are a critical service provider to those homes. And so, you know, we have more holistic support, and so those conversations will continue over the summer and the fall into how do we, at minimum, have a permanent freeze, but how we have opportunities potentially to look at increasing as well as we move forward.
Thank you for taking my question. I'll pass it on.
Thanks, Gary.
Next question will be from Kyle McPhee at Cormark Securities. Please go ahead.
Hi, everyone. Great to see the ongoing EBITDA margin expansion and keeping your year-end goals for EBITDA margin. I'm curious if you see any temporary sources of disruption before getting there, or should this be a fairly steady path of margin expansion through the rest of this year?
Hey, good morning, Kyle. Sorry. Go ahead, Andrew.
Thanks. Yeah, good morning, Kyle. I think that, as I mentioned in the kind of prepared portion of my remarks, we generally expect to continue on the same trend and feel good about our previously stated objective in terms of where we're gonna land by the end of the year. What will cause some variability, not necessarily in the growth of the margin quarter over quarter, but just the quantum of the growth, when you're going from one quarter to the next, will be on the labor cost side.
While we've made significant progress there towards reducing overtime and consulting labor, there still are periods, whether that's driven specifically by local geographies or just kind of what's happening in that quarter, particularly when you see quarters that end around stat holidays and things like that, you may see a little bit of an increase in those types of costs. But overall, we expect to continue on that trend, and that's probably the biggest, I guess, thing that would impact the pace at which we're improving margin.
Okay, thanks for that. And I think you have a meaningful drug procurement deal expiring very near term. Where are you in the process of lining up a new deal, leveraging your much bigger scale? And is that a source of margin expansion that's necessary or additive to get to the kind of, you know, year-end margin goals you've been pointing to? And then also related to that, when do you think we'd see that flowing through your quarterly results? Is that a Q3 dynamic?
Yeah. So the negotiation still remains ongoing, but we are—we feel good about both, where the discussions are today and our ability to get that completed on the timelines that we plan for, which is by the midpoint of this year. That is a part of our plan to get to those double-digit margins by the end of this year, so it is a, a necessary component, but we feel good about being able to get there. In terms of effective date, as Puneet mentioned in his opening comments, we do expect to see that impact retroactively benefit, the second quarter of this year. So you should see that in our August reporting.
Okay, appreciate that color. And then on bed count, I mean, great to hear you expect a pivot to bed count growth in the back half of this year. Can you provide color on, on, you know, in recent quarters, just why that normal course bed churn was not being offset with new adds? Is part of that CareRx just opting not to service beds that are maybe not profitable or any dynamic like that?
Yeah, good question, Kyle. So there's a little bit of, as we standardize some of the smaller homes, you know, want more of a customized feel. And so there's a little bit of churn on that. But predominantly, you know, as I stated for Q1, like we did add a few hundred beds over our close for Q4. Really, it's a function of some of those RFPs that were delayed that we had in our hopper that now we've got firmer line of sight into, and then some of the new builds. And just with some construction delays, they just didn't turn on. And we sort of knew that going into Q4, that the ones that were turning on in Q1 weren't gonna happen in a timely fashion.
That's why we sort of gave that guidance to say, "You know what? It looks like Q1 will be flat.
Got it. Okay. And are you willing, you know, you called the pipeline robust. Are you willing to put a, you know, a bookend on how many beds are up for grabs before the end of the year?
There's north of 5,000.
Okay. Thank you. That's it for me.
Thanks.
Once again, ladies and gentlemen, as a reminder, please press star one on your telephone keypad if you have any questions at this time. Your next question will be from David Martin at Bloom Burton & Co. Please go ahead.
Good morning, and congratulations on the margin improvements you've achieved. You mentioned that there are other workflow improvements that you're working on, and I assume that's in addition to the BD Rowa robots. I'm wondering if you can give some color on those other initiatives.
Yeah. Good morning, David. Yeah, you know, some of the other initiatives we are working on are workflow related with respect to implementing electronic workflow systems. You know, I think you know, folks who have done the tours of our pharmacy, healthcare is still fairly paper driven, and so we are looking at streamlining some of those pieces. Even you know, my personal vendetta against the fax machine in healthcare, we are working to get that out, to find more streamlined processes to drive into the system so that we just really go into sort of more of a paperless modern workflow. So there's... That, that's a big component of things we're looking at going forward.
Okay. Andrew also mentioned that labor costs could be variable, moving forward. Is that because you're renegotiating, employment contracts as you go, or what, why would that be variable?
Andrew, did you want to clarify on that?
Yeah. So, no, it's not a renegotiation of contracts, David. It's just... I was just speaking to the fact that for us, the biggest challenge that we've faced over the last two years is relating to increased reliance on needing overtime hours and third-party pharmacist labor. And that was initially due to vacant positions that we were dealing with, and then kind of an ongoing challenge in terms of just having a full staff complement across all of our sites. So it's not a matter of needing to renegotiate employment contracts. It's just a matter of being able to continue to hold steady in each site as it relates to that need to pull in overtime and contract labor.
That's what these operational efficiency initiatives are designed to try to assist with, because they're taking overall required hours out of those pharmacy sites. But my comments were more just in, from time to time, we may continue to need to use some overtime, which will cause some variability in terms of that cost savings component.
But in general, are you seeing a reduced need for that overtime labor?
Yes.
Yeah.
We have had quarter-to-quarter improvement all the way from the middle of last year into this year.
Okay, and-
We expect that trend to continue. It's just the quantum of progress each quarter may vary.
Okay, thanks. One last question. What about revenue per bed? That's been fairly stable recently. Is there any reason to believe there might be volatility in that?
No, we expect revenue per bed to be fairly stable going forward as well.
Okay, thanks. That's it for me.
Thanks, David.
Thank you. Next is a follow-up from Kyle McPhee at Cormark Securities.
Hi. Can you give us CapEx guidance for the rest of the year? It was a pretty thin CapEx quarter in Q1, so wondering what the rest of the year looks like.
Yeah. The CapEx in the quarter was a little bit light, Kyle. That's more from just the timing of payments. As we've talked about in the past, generally speaking, our maintenance CapEx runs around 1.5% of revenue, roughly 1.5%-2%. We do expect this to be a bit of a heavier year from a CapEx perspective in the back half of the year, just because of some of these operational efficiency initiatives, namely, with putting more high volume packaging technology in place, as well as a few other projects. For the remainder of the year, we're expecting to see, as a kind of round number, roughly CAD 10 million in overall CapEx.
Got it. Okay. And the... I think we all knew your cash interest expense was gonna come down nicely because of your new capital structure. It was even lower than I thought it is. Is that also just the timing of actual cash payments?
It was just because of where the quarter end fell and when the payment happened, which was immediately after quarter end. So we paid about CAD 1 million post-quarter as it relates to interest.
Got it. Okay, thank you. That's it.
Thank you. Next question will be from Stefan Quenneville at Echelon Capital Markets. Please go ahead.
Thanks for taking my question. Just really quick, can you give us a sense of what your M&A pipeline is looking like and the environment for potential M&A these days?
Yeah, Andrew, did you want to take that one?
I can. Yeah. Morning, Stefan. Yeah, as we've talked about in the past, our M&A pipeline, you know, continues to be robust, although we are not, at this stage right now, aggressively pursuing M&A activities. You know, obviously, we're always keeping an ear to the ground and particularly paying attention to opportunities for small tuck-in acquisitions, where we can bring customer contracts directly into sites that already exist. Obviously, those being much more accretive, especially considering the fact that we have a robust site network across the country now. So we are continuing to evaluate those opportunities, but, we're trying to find that right balance right now, both because of overall cost of capital, but because of our other priorities as it relates to, operational efficiencies and organic growth.
Okay, and, just another quick one for me. On the renegotiation of your purchasing agreement, can you help sort of frame the sort of quantum of margin impact that might have for you guys, you know, you know, in the short term and maybe over the long term? Are we talking tens of basis points or hundreds of basis points of margin expansion?
I think what we've previously said is that in terms of our overall objective to get to the double-digit margin for the end of the year, about a third of that impact was going to be from improved inventory procurement. So we are targeting initially up to CAD 2 million of savings from this and expect that that would improve as volumes continue to increase over time.
Great. That's it for me. Thanks.
Thanks, Stefan.
Thank you. At this time, Mr. Khanna, we have no other questions registered. Please proceed, sir.
Thank you, everyone, for participating in today's call and 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 conclude the conference call for today. Once again, thank you for attending, and at this time, we do ask that you please disconnect your lines. Have a good weekend.