Good morning everyone, and welcome to CareRx third quarter 2022 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, 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 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 in response to questions asked only constitute forward-looking statements that are subject to risks and 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 periodic results and registration statements. 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. 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.
Thank you, and good morning, everyone. Welcome to our third quarter 2022 earnings call. With me this morning is our Chief Financial Officer, Andrew Mok. Once again, during the third quarter, we delivered year-over-year growth in revenue and adjusted EBITDA. In addition to organic growth, the acquisitions we made over the last 1.5 year Have contributed significantly to this year-over-year growth. During the third quarter, we signed a new long-term agreement with a large national customer, which includes a 5-year extension for over 4,500 beds currently serviced by the company and will also result in the onboarding of over 1,200 new beds. As well, we announced another step in the continued growth of our national footprint with the planned expansion into Atlantic Canada, where we expect to commence servicing homes in the third quarter of 2023.
Turning to some of the specific financial highlights, revenue for the second quarter grew 37% to just over CAD 97 million, with growth driven by an 18% year-over-year increase in the average number of beds serviced to 96,517. This growth was driven by the contribution from the MPGL LTC pharmacy business, a full quarter of contribution from the Hogan LTC Pharmacy Business, and contribution from new beds onboarded during the second half of 2021 and first half of 2022. Adjusted EBITDA for the third quarter increased 12% year-over-year to CAD 7.7 million. This growth was driven primarily by the organic and acquisitive growth I just described. With another quarter of year-over-year growth in the third quarter, our business continues to deliver an outstanding growth trajectory.
Over a three-year period, we have more than tripled our bed count and revenue, and we have increased quarterly adjusted EBITDA by just under three times to CAD 7.7 million, which represents a compound annual growth rate of just under 42%. As I previously mentioned, during the third quarter, we signed a new long-term agreement with a large national customer, which includes a five-year extension for over 4,500 beds currently serviced by CareRx, of which approximately 3,400 beds are expected to be acquired by the customer from another existing customer. This contract will also result in the onboarding of over 1,200 new beds. As a result of the transfer of the 3,400 acquired beds from another customer and the onboarding of the 1,200 beds not currently serviced, this customer will become one of CareRx's largest going forward.
This contract extension and new business further supports the value proposition we bring to our customers and highlights the strength of our service offering as the only national pharmacy services provider that is focused solely on congregate care communities. We are confident that we will continue to deliver new organic contract wins that will allow us to continue to deliver a strong long-term growth trajectory. On October 3rd, we announced the signing of a multi-year contract to provide pharmacy services to residents in multiple seniors living facilities in Atlantic Canada, initially servicing up to 600 residents. CareRx is currently in the process of establishing pharmacy operations in Atlantic Canada and expects to commence servicing homes in the third quarter of 2023. Our expansion to Atlantic Canada is another significant step in our growth journey and further strengthens our position as the national leader in seniors pharmacy services.
I would now like to turn the call over to Andrew to discuss our third quarter results in more detail. Andrew.
Thank you, David, 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 2022 increased CAD 26.1 million or 37% to CAD 97.4 million from CAD 71.3 million for the third quarter of 2021. Growth was driven primarily by the full quarter contribution of the prior year acquisition of the LTC Pharmacy division of Medical Pharmacies Group Limited, which was acquired during the third quarter of 2021, and the contribution of the Hogan Pharmacy Partners Ltd. business that was acquired on May 30th, 2022. The increase was driven by organic growth resulting from beds from new contracts onboarded during the second half of 2021 and first half of 2022.
Adjusted EBITDA for Q3 increased CAD 0.8 million or 12% to CAD 7.7 million from CAD 6.9 million for the third quarter of last year. As was the case with revenue, adjusted EBITDA growth was driven primarily by the full quarter contribution of the MPGL LTC Pharmacy Business and Hogan LTC Pharmacy Business acquisitions and from new contracts that were onboarded during the second half of 2021 and first half of 2022. As expected and consistent with what we disclosed in the prior quarter, the commencement of the off-boarding of a large customer contract had an impact of approximately CAD 500,000 on adjusted EBITDA for the quarter.
Adjusted EBITDA for Q3 of this year was also further impacted by approximately CAD 900,000 related to incremental costs associated with a higher than average number of open pharmacy staff positions as a result of current labor market challenges that continued to be experienced in the quarter, including overtime, contract labor, and recruitment costs. These incremental costs are expected to persist into 2023. Our net loss in the quarter decreased to CAD 1.8 million from CAD 3.9 million last year, primarily due to the full quarter contribution of the MPGL LTC Pharmacy Business acquisition and decreases in finance costs and transaction and restructuring costs, which were partially offset by the previously mentioned contract loss, incremental costs incurred as a result of the current labor market, and a lower positive impact from the change in the fair value of derivative financial instruments.
Turning to our balance sheet, cash at September 30th was CAD 17.9 million, up CAD 2.7 million from CAD 15.2 million at the end of the second quarter of 2022. The increase in cash in the quarter was driven primarily by cash provided by operating activities, which included the positive impact from the reversal of certain negative working capital movements from the prior quarter and was partially offset by CapEx and finance costs. Net debt at September 30th was CAD 75.3 million, a decrease of CAD 4.1 million compared to the prior quarter. Net debt to annualized run rate adjusted EBITDA was 2.4x at the end of the quarter. With that, I will now turn the call back over to David for some concluding comments. David.
Thank you, Andrew. As I mentioned earlier, and in our Q2 call, short-term profitability is expected to be impacted by the off-boarding of a large customer contract throughout the remainder of this year and by the challenges and cost pressures created by the current labor market. However, we continue to demonstrate our ability to deliver an outstanding long-term growth trajectory. Future growth will continue to be driven by both organic growth within our existing markets and acquisitions, and it will increasingly be supplemented by geographic expansion. Our planned expansion to Atlantic Canada will allow us to deliver higher quality and enhanced support to seniors housing operators in the region, creating a foundation to further expand our presence and market share in Atlantic Canada in the years ahead.
The new long-term agreement with an existing large national customer that we signed in the quarter, which includes 1,200 new beds that are being transitioned from a large competitor, demonstrates our value proposition and the depth of our relationships within our existing customer base. Our business development and acquisition pipeline remains very robust and active, and we continue to see an accelerated expansion in the number of seniors housing beds being developed across the country to support the rapidly growing seniors demographic in Canada. Our existing customers continue to add a disproportionate percentage of new beds in the sector, and we expect to continue to benefit from their growth and acquisition activity. With that, I would now like to open the call to questions. Operator.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touch tone phone. You will hear a 3-tone prompt acknowledging your request, and your questions will be pulled in the order they are received. Should you wish to withdraw from the polling process, please press star followed by the number two. One moment please for your first question. Your first question comes from Chi Le from Desjardins Capital Markets. Please go ahead.
Good morning, David and Andrew.
Good morning, Chi.
Hi. Yeah, my first question would be about the labor shortages among the healthcare staff. Perhaps you could provide us with a breakdown between the different buckets, you know, overtime contract or recruitment costs within the CAD 0.9 million that you experienced in Q2.
Yeah, I think on an overall basis, I'll let Andrew you know answer more specifically, although I think it's probably the simplest way of putting it is it's roughly in three equal parts. All of them, though, are fundamentally dealing with the same underlying issue, which is because of the lack of a full complement of staff in our pharmacies, you know, the work still needs to get done. As a result, we are experiencing higher than normal overtime. Sometimes, you know, overtime has its limits, obviously, as it relates to getting our existing staff to work extra hours, so we've needed to pull in some contract labor. As you say, we're recruiting, we're trying to be as aggressive and as innovative as we can in terms of filling positions more quickly.
There's recruiting costs associated with that. I think roughly, you know, they're pretty much equal in proportion, but I'll let Andrew add any color he might wanna add.
Yeah. Morning, Chi. Yeah, as David said, I think it's roughly even. It's weighted more towards the overtime and contract labor. You could probably say it's about 40/40/20 in terms of the split between the three.
Thank you for that. Is there anything you would note in terms of the lost productivity or, you know, unfilled orders? I know that you probably complemented that with contract and overtime as well, but anything to note there?
I'm sorry. Could you repeat the first part of your question again, Chi? I didn't hear it clearly.
Yeah. Is there anything you would note in terms of lost productivity or, you know, lost sales due to the labor, even though you probably have accounted for it partially due to the like from the contract and the part-time labor as well?
Yeah, I don't think anything that would have a financial impact. I would say though that, you know, the labor market challenges, you know, for us are not primarily about the financial impact. I think the effects of them are, you know, the need for a pretty all-consuming focus on day-to-day operations. I would just say, you know, making sure we can fill orders and do what our customers and their residents need is a you know is an all hands on deck sort of undertaking. No impact except, you know, that's where our focus is, and it's obviously more challenging when we're short-staffed than it has been historically.
Thanks, David. My last question would be on the margin. It seems like it's really set to 7.9%. Can you split between the impact of the contract loss versus the labor challenges? My second part would be, you know, assuming the labor challenges persist, what could be the new baseline for EBITDA margin going forward?
On the first question, I think if you know look at Q2 to Q3, you know, the major drivers of the change both in EBITDA in dollars and in margins are the impact of the off-boarding and the incremental labor costs. I think the off-boarding is more of an impact, but I think it's you know. Those are the two things and I think you can do your own math on what that looks like. I think you know we're not in an environment where I think we're comfortable being that precise as it relates to forward-looking margin expansion. I think the off-boarding is fairly easy to quantify. I think it's basically proceeding as expected.
There'll be a further impact in Q4, and I think we feel comfortable we can rebuild and grow margins based on both top line growth and continued efficiencies. The wild card is exactly when the labor market stabilizes, and that, I think, you know, makes us a little more cautious to put any stakes in the ground as it relates to where we see margins moving over the course of the next four quarters. Obviously, they should expand after we fully off-board the one contract.
Thank you. I'll pass the line.
Thank you, Chi.
Thank you. Your next question comes from Kyle McPhee from Cormark Securities. Please go ahead.
Hi, guys. Great to see you adding beds organically. Just some clarifying questions on that. The 1,200 new beds you announced, what's the timing for you to start servicing those?
Q4 and into Q1, Kyle. They'll likely not have a big impact on Q4, but we should get most of the first quarter from them.
Got it. Okay. Just to clarify, the 3,400 beds that client is acquiring, those are beds you already service?
That's correct. An existing large customer of ours is in the process of divesting them and selling them to this customer.
Got it. Okay. Regarding the 5,800 beds you're offloading, can you give us some color on how many were offloaded during Q3, so we know how much is left for Q4?
As of September 30th, almost exactly half were off-boarded, so about 2,900 beds of the 5,800 beds.
Got it. Okay. Can you give us your exit bed count number for the quarter?
It's almost exactly 95,000 beds. Just a little bit above 95,000 beds.
Got it. Okay. Just can you provide any color on kinda your expected pace of ongoing organic wins? You know, over the last couple of months, you've now announced 1,800, which is great to see. Is that kind of a reasonable quarterly pace we should expect or will it accelerate or decelerate?
It's always difficult to make quarterly predictions 'cause these things do ebb and flow. You know, we are really, you know, confident in what we're seeing in terms of activity and wins. You know, the way I look at it, to your question earlier, we're at roughly 95,000 beds at the end of September, even though half of the off-boarded beds have been off-boarded. That's pretty much right where we were at the beginning of the year. We've already offset the first half and based on the new contract, Atlantic Canada and a few other smaller wins, I think we're well on track to offset the other 2,900beds.
You know, whether it's 2,000 beds a quarter, I mean, that might be optimistic, but there's certainly enough opportunities out there that we feel very confident about our ability to get back to where we were and then grow from there.
Okay. Thanks for the comments. That's it for me.
Thanks, Kyle.
Thank you. Your next question comes from [Setha Kandasamy ] from [Clarus Capital]. Please go ahead.
Hi, and thanks for taking my question. I wanted to understand a little bit about what Q4 looks like now that earlier this year you guys did launch some expanded offerings under the Revicare brand. I gather there's some potential higher margin services you could also provide. Is there kind of a quarter-over-quarter growth expectation on the top line as we saw this quarter, or are you expecting the bed count to kinda counter some of that?
Yeah, I think it still remains the case, [Seth], that the bed count is the primary driver of revenue. You know, there are additional revenue sources over and above the bed count, which is a myriad of things, including the retail locations we operate and Revicare and other things, as you said. We are happy with how all those are growing. I think you know, probably the delta between the revenue we reported and analysts' consensus is, I think that maybe you haven't fully captured, not you personally, but analysts have less than fully captured that other revenue, and so that will continue to be the case. Will it grow? Yes. Will it be material?
Probably we're not at the point yet where Revicare or any specific line item are going to be a material, observable driver of an increase. We are very happy with the progress to date, given that it's, you know, it's less than a year since we rebranded and relaunched Revicare. I think for the most part, bed count should still be the major driver of, you know, quarter-over-quarter revenue movements.
Understood. In terms of, I guess, timing at the home operators, is kind of Q4 year-end period a time when they do assess those contracts or is there any seasonality to, let's say, RFPs or based on things that you've put out there and maybe are waiting to hear back, are you expecting kind of counterweighing in Q4 or is there visibility on timing of that sort of kind of?
Do you mean Revicare specifically or more broadly?
No, just in terms of more broadly in terms of like bid wins on RFPs that may be out there. Is there kind of any seasonality there?
Not generally. Obviously, you know, the post-COVID period has been a bit unusual in terms of how activities happen compared to the past. I think for the most part, you know, there's not a lot of seasonality. Contracts expire when they expire. You know, customers look to the market when they're ready to look for a new pharmacy provider. Other than the usual, you know, December and January, you don't see as much activity, which is true in most sectors. I wouldn't point to any seasonality as it relates to new beds. There is a little bit of seasonality in terms of sort of medication use, but that's, you know, probably baked into prior year comparables.
Understood. Just a last one on potential strategic adjacencies. Obviously, you guys have this national footprint. Is it more on the retail side that you would see strategic opportunity or would it be other care settings like I know you've talked about other institutional care settings? Just wanted to understand, is there one of those two that you see as kind of growth area and what's the progress there?
Yeah. We consider our strategic sweet spot and our focus to be pharmacy services to congregate care settings or to people and populations with complex medication needs. That's where our focus is. Retail is, there are other organizations that are much larger and more focused in that space. For sure our focus is driving growth in our core competency, and that includes seniors housing. As you know, it also includes other congregate care settings, and I think we continue to make progress there, admittedly off a low base. Yeah, that's where we believe we are strongest and where we think most growth will come from.
Is there any kind of outlook that you have on that sort of outside of senior homes area? Like how you see the breakdown of maybe getting to that 2024 130,000 beds? Like what portion of that would be other care settings?
I don't think we've ever itemized our path to that. I think it but it will include both, you know, organic growth in our existing space, acquisitions and enhanced penetration in those other settings. It's, I think only a couple thousand of our 95,000 beds today are in those settings. I don't think we've publicly disclosed a specific target, but fair to say, you know, it will require above average growth in that segment of the space in order to reach our target.
Got it. Okay. Well, thanks for the insight. Appreciate it, and congrats on the growth.
Thanks, [Seth].
Thank you. Your next question comes from Tania Armstrong-Whitworth from Canaccord Genuity. Please go ahead.
Hello?
Is that not expected to occur until Q3 2023?
Sorry, Tania. I'm not sure what happened, but we only heard the last few words of your question.
Oh, sorry about that. With respect to the beds in Atlantic Canada, I'm wondering if those 600 new beds that you added will begin generating revenue in Q4 of this year, or is that not expected until Q3 2023?
Yeah. It will be Q3 2023. I think both the contract we signed with the initial customer and the work we're doing to establish operations there all contemplate a July 1st start. They will generate revenue from there, but not prior to that.
Okay. Understood. I noticed that you've delayed the completion of the Medical Pharmacies integration into 2023 as well. Could you let us know what projects are remaining to be completed and what the timeline for those look like?
Yeah, for sure. As a reminder, that integration, the lion's share of it was site consolidation, which has now been completed, except for one that we previously disclosed has been deferred into next year. You know, the rest, the 1.5 million of remaining synergies is a broad bucket of things that includes some shared service synergy assumptions, management and other labor cost reductions. We continue to have a clear line of sight on getting to that. But to the answer to my question earlier about our labor market challenges, we really are all hands on deck on just making sure day-to-day operations are in good shape as it relates to meeting customer expectations.
As a result, certain things have just needed to be deprioritized or deferred. You know, primarily those are labor savings that we expect to be realized now, next year instead of in the fourth quarter of this year.
Okay, excellent. Lastly, just on the mega site and BD Rowa machine rollout, if you could provide an update on how that's progressing?
Yeah. I think the same theme applies, Tania. As you know, we opened the site in the spring, so we are already getting benefits from the aggregation of what was previously multiple sites into a single site in terms of efficiencies and labor cost reductions. We've not currently deployed the BD Rowa machines, you know, for the same reason I just mentioned, which is although an exciting project, it's a project that, you know, does require some work and change management. We've focused on, you know, stabilizing day-to-day operations, you know, getting past this labor market challenge. BD Rowa at this point doesn't have a definitive go-live date. I suspect it'll be late this year or early next year.
Okay, excellent. That's all for me. Thank you, gentlemen.
Thanks, Tania.
Thank you. Your next question comes from Chelsea Stellick from iA Capital Markets. Please go ahead.
Hello. Couple questions. One of them in regards to the 1,200 beds, what geography would those be in?
Western Canada, Alberta and British Columbia. Good morning, Chelsea.
Morning. Okay, awesome. I guess my other question is, you know, the onboarding of these new beds and then also the 60, how would they be impacted by the labor pressures or will they be? Would there be a delay in the onboarding if labor pressures?
Yeah, it's a good question. I mean, we're fortunate. One of the many things that came from the Medical Pharmacies acquisition is Medical Pharmacies had, and now we have a dedicated new business onboarding team. This team basically focuses on adding new beds. We have the bandwidth and the executional capabilities to onboard those beds, and I believe all of them have already been scheduled. I wouldn't point to any impact there, except obviously in general, you know, there are more vacancies which, you know, we always have to be mindful of. I think we're pretty confident that we have a clear path to onboarding those beds and to advancing our Atlantic Canada expansion.
Okay, awesome. I guess, like, in general, when do you expect these to, like, ease? I mean, should we expect sort of a similar impact next quarter or like, what is your outlook for the end, I guess?
Yeah, it's a good question. I wish I had, you know, some wisdom on this sort of broader healthcare human resources challenges that, you know, really seem to be pretty systemic right now across multiple spaces. I certainly think it's fair to assume that Q4 won't be any better than Q3. I don't think we have much, you know, ability to forecast beyond that. It depends on what you read in terms of whether things are starting to turn or when they'll turn. I think certainly for Q4, I would expect, you know, it to look very similar to what it did in Q3.
Okay. You know, just from some of the other companies that I've looked at when it comes to this, labor pressures on this end, it's something around the timing of, you know, like universities, graduates, entering the market. Is that something that you think that you'll also see or like are you working on any sort of, campus recruitment efforts or anything like that?
Yes. To answer the second part of your question, we are significantly ramping up, you know, campus-related recruitment activities. I don't wanna put everything into sort of May graduations, but that will certainly help and should augment the pool of qualified candidates.
Okay. Just a final question from me. How much of the CAD 4.5 million in synergies from MPGL LTC Pharmacy Business were realized this quarter?
I think on a run rate basis, CAD 3 million of the CAD 4.5 million have been achieved.
Perfect. Thank you so much. That's all for me.
Thanks, Chelsea.
Thank you. Ladies and gentlemen, as a reminder, should you have a question, please press star followed by the number one. Your next question comes from Doug Loe from Leede Jones Gable. Please go ahead.
Yeah, thank you. Yeah, good morning, David. Congratulations on the quarter. Just a boring working capital question for you to kind of wind things down. I mean, you exited 2021 with a modest working capital deficit, and the deficits continued to mount for 2022. You know, acquisitive growth can kind of distort working capital for a quarter or so. But anyway, just wonder if you have any comments on any sort of reversals in that trend that might be expected to transpire over the next few quarters. Just comment on if that could impact your, you know, your cash position as it relates to cash you could deploy for future acquisitions.
Yeah. Good morning, Doug. Thanks for the question. You're right. I mean, it's been a noisy year with from a working capital perspective for a few reasons. I think Andrew could probably help sort through the you know go forward implications of the movement you've seen in the last couple quarters. So I'll turn it over to him.
Yeah. Morning, Doug. You know, I think that the primary driver of the working capital movements over the last couple quarters has related to AP and specifically payables related to our inventory purchases. More of a timing issue. We knew from last quarter we had made a large payment on our inventory payables just kind of by function of how timing of payments worked out last quarter, which we knew would partially reverse this quarter, and we saw that impact as you see in terms of the improved cash position. We would similarly expect that trend to continue to reverse through Q4, such that by the end of the year you'll probably see a more normalized picture of what our working capital looks like.
No, that's perfect. Thanks for the feedback.
Thanks, Doug.
Thank you. Your next question comes from Stefan Quenneville from Echelon Capital Markets. Please go ahead.
Hi, guys. Thanks for taking the question. Most has been covered. I just have a quick question about the kind of competitive dynamic due to these sort of, I guess, industry-wide labor shortages. Are you seeing any, you know, opportunities, either because, you know, competitors are dropping the ball in terms of service levels because of shortages on their part, or seeing any, maybe tuck-in M&A opportunities because of the similar challenges people might maybe having operationally?
Thanks for the question. It's a good one. I hesitate to say too much publicly or competitively. I think you're right, though, we're all dealing with the same issues, which, you know, does put a strain on day-to-day operations. I think our general view on this is, you know, that our size, scale, and capabilities are allowing us to weather that, you know, better than others. You know, as it relates to acquisitions, you know, our pipeline has never, you know, shrunk. It's always been pretty active. I think, you know, there's reason to believe that some of these challenges might make that pipeline more abundant moving forward. You know, as I said before, it's a competitive space. There's good companies, good operators.
We're all, you know, dealing with the same challenges, but we like our chances to get through it in a better position than others.
Okay, great. Thanks, guys.
Thank you.
Thank you. As a reminder again, should you have a question, please press star followed by the number one. There are no further questions at this time. Please proceed.
Thank you. Thank you everyone for participating in today's call and for your continued interest in CareRx. We look forward to reporting our continued progress next quarter. Thank you.
Ladies and gentlemen, this concludes your conference call for today. Thank you for participating, and please disconnect your lines.