Good morning, everyone, welcome to CareRx First Quarter 2023 Financial Results Conference Call. Please note that this call is being broadcast live over the internet, 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 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 relating 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 record, which you can choose to access on the SEDAR database under www.sedar.com. CareRx is under no obligation to update any forward-looking statements to discuss today, and investors are cautioned not to place undue reliance on these statements. I would now like to turn the call over to David Murphy, President and CEO of CareRx Corporation. Please go ahead, Mr. Murphy.
Thank you, and good morning, everyone. Welcome to our first quarter 2023 earnings call. With me this morning are our Chief Financial Officer, Andrew Mok, and our Chief Operating Officer and incoming President and Chief Executive Officer, Puneet Khanna. In the first quarter, we delivered results that were in line with our expectations, with revenue of CAD 91.4 million and Adjusted EBITDA of CAD 6.8 million. These results reflect the full impact of the off-boarding of a large customer contract in the second half of 2022. While we continue to deal with ongoing challenges in the healthcare labor market, which Andrew will address in more detail, our financial performance in the quarter is a testament to our team's exceptional work in managing and mitigating these challenges, adding new beds, and improving our overall performance.
With the full impact of both the customer off-boarding and the labor market issues now reflected in our run rate, we are well positioned to resume our growth trajectory and drive margin expansion in the quarters ahead. We also closed a bought deal and private placement financing in the quarter for total gross proceeds of just over CAD 16 million. This financing further strengthens our balance sheet and also reinforces our shareholder support for the company and our long-term strategy. Finally, as you know, we recently announced that I will be leaving CareRx effective May 31st to pursue another opportunity. Puneet Khanna, our current Chief Operating Officer, will assume the role of President and CEO at that time and will be nominated as part of a slate of directors to be elected at our upcoming AGM on June 6th.
I am delighted that the board has selected Puneet as our next CEO. His leadership abilities, combined with the deep knowledge of our sector, our team, and our customers, make him the ideal leader for the next chapter of CareRx's growth journey. Leading CareRx has truly been the most rewarding experience of my career. I am so proud of the company, the brand, and the team we have created. Working alongside Puneet, Andrew, and the rest of the team, we have consolidated our sector, grown the business, strengthened our balance sheet, and laid the foundation for what I believe will be an industry leader in Canadian healthcare for many years to come. As I prepare to leave the company, I feel immense optimism about the team, its leadership, and its future growth prospects.
I would now like to turn the call over to Andrew to discuss our first 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 first quarter have been filed with SEDAR and are also available on our website. Revenue for the first quarter of 2023 declined CAD 1.8 million or 2% to CAD 91.4 million from CAD 93.2 million for the first quarter of 2022. The revenue decline was driven by the previously announced off-boarding of a large customer contract, which was substantially completed by the end of 2022, as well as the result of a change in the mix of branded and generic drugs dispensed during the first quarter of 2023. This change in drug mix is expected to have a recurring impact on revenue in future quarters. It did not negatively impact the company's profitability in the quarter.
The impact of the contract loss was partially offset by the contribution of new beds onboarded throughout 2022 and in the first quarter of 2023. Adjusted EBITDA for the first quarter declined CAD 1.8 million or 21% to CAD 6.8 million from CAD 8.6 million for the first quarter of last year. As was the case for revenue, the decrease in Adjusted EBITDA was driven partially by the off-boarding of a large customer contract from the second half of 2022. Additionally, incremental costs associated with continued challenges in the healthcare labor market totaling approximately CAD 1.7 million impacted Adjusted EBITDA in the quarter. I will speak to this in more detail in the next slide. The decline in Adjusted EBITDA was partially offset by the contribution from new beds onboarded throughout 2022 and the first quarter of 2023.
Near-term profitability continues to be affected by challenges in the healthcare labor market. Scarcity and increased competition for pharmacists, registered pharmacy technicians, and pharmacy support staff has resulted in a higher number of open positions and a longer time to fill these vacancies. CareRx provides an essential service to a vulnerable population with complex medication needs, and in order to ensure that the company is able to continue to provide these services to our customers without disruption, we've had to incur these incremental labor costs. In the first quarter, these incremental costs totaled approximately CAD 1.7 million. This consisted of half a million dollars related to wage adjustments and the creation of certain new positions, and CAD 1.2 million related to overtime, contract labor, and recruitment costs. We currently expect these incremental costs to persist to varying degrees into the second half of 2023.
Our net loss in the quarter decreased to CAD 2.1 million from CAD 2.8 million in Q1 of last year, primarily due to lower transaction and restructuring costs, share-based compensation expense, and finance costs in the current year. These were partially offset by the impact of the previously announced customer off-boarding, incremental costs incurred as a result of the current labor market, and a lower gain on the change in the fair value of derivative financial instruments. Turning to our balance sheet, on January 11, 2023, we launched a bought deal for common equity for gross proceeds of approximately CAD 8 million at a price of CAD 2.70 per share.
Concurrent with this offering, we entered into an agreement to issue common shares on a private placement basis for additional gross proceeds of approximately CAD 8 million to Yorkville Asset Management under the same terms and conditions as the bought deal, with the private placement to close in two equal tranches. The bought deal offering and the first tranche of the private placement closed on January 18th of this year, and on February 24th, we closed the remaining second tranche of the private placement. Total gross proceeds of the public offering and private placement were approximately CAD 16.1 million, including from the partial exercise of the over-allotment option. These proceeds are expected to be used for debt reduction, working capital, and general corporate purposes.
Cash at March 31st was CAD 40.4 million, up CAD 12 million from CAD 28.4 million at the end of the fourth quarter of 2022. The increase in cash in the quarter was driven primarily by cash provided by operating activities and the net proceeds of the equity financing. Net debt at March 31st was CAD 54.2 million, a decrease of CAD 12 million compared to the prior quarter. This was driven primarily by the increase in our cash balance. Net debt to annualized run rate Adjusted EBITDA improved to 2 x at the end of the quarter. I would also highlight that our debt is and has always been fixed rate, so we've had no increase in our cost of debt as interest rates have risen.
With that, I will now turn the call to Puneet Khanna, our Chief Operating Officer and incoming President and Chief Executive Officer. Puneet.
Thank you, Andrew. As a pharmacist, I'm honored to lead a pharmacy organization committed to improving the health of Canada's most vulnerable populations through industry-leading clinical programs and innovative technologies. I've spent over 20 years in pharmacy and seniors care. I'm passionate about the work that we do and the customers we serve. In my previous roles at CareRx as Chief Commercial Officer and then Chief Operating Officer, I have been the driver of the strategy that we have been executing. My plan is to continue to maintain our current course. The next chapter of the CareRx growth story will continue to be focused on operational excellence and top-line growth. As a result, you should expect the transition from David to me to be seamless.
I've been fortunate to have worked with so many of our leaders during my tenure at CareRx, as well in previous roles within the industry. Through our acquisitions, we have built the strongest team in our sector, comprised of passionate and accomplished healthcare and business professionals, all committed to improving the health of seniors across Canada. It is with this incredible team that we will deliver on our business and strategic priorities. I'm also excited to announce that Jeff Watson, the former CEO of Apotex, has been nominated to our board and will be standing for election at our upcoming annual general meeting. We are looking forward to the addition of Jeff's expertise to further strengthen our team. As I will touch on in the next few slides, the market dynamics for our industry are extremely favorable.
While we optimize the contribution from our acquisitions and create a best-in-class operating model, we are setting the stage to further expand our leadership position and capitalize on this growth opportunity in the years to come. CareRx provides essential medication and clinical pharmacy services to seniors and other congregate care settings. The work we do is highly specialized, and our customers need a pharmacy partner that can provide incredible responsiveness while maintaining the highest quality service. As such, our focus is always providing the best care for the seniors that we serve. For greater clarity, we are not a community pharmacy nor a retailer. Our pharmacies are not open to the public. Our pharmacies are focused on the same-day delivery of medication and clinical pharmacy services to over 1,600 home partners across Canada.
We differentiate ourselves from our competitors through our proprietary clinical services and applications, as well as technologies that support our home operators with the safest medication delivery systems. Our strategic priorities reflect our commitment to quality and service, while also positioning us to create value for all of our stakeholders by increasing efficiencies, improving margins and cash generation, and further leveraging our leadership position to drive profitable growth in the expanding senior living sector. That said, we have not yet achieved full operational synergies from the acquisitions and site consolidations and believe there are still significant opportunities for further efficiencies. For example, we still have multiple systems and processes within our pharmacies that we are currently harmonizing and optimizing to create a best-in-class standardized operating model.
The standardization of our operations through the implementation of innovative technologies and workflows, more effective and centralized procurement practices, and the expanded use of lean principles will create a more efficient, high volume operating environment which we expect to help drive margins. On the technology front, as we announced during our last earnings call during the first quarter of 2023, we commenced the packaging of medications using the BD Rowa packaging system, which has packaging speeds and accuracy rates that exceed the capabilities of conventional solutions. We expect innovative technologies and software solutions like this will continue to drive further efficiencies and cost savings in the years to come. We've also committed to strengthening our balance sheet, simplifying our capital structure, reducing our cost of capital, and driving a meaningful increase in our EBITDA to cash conversion.
As I will outline shortly, we remain extremely well-positioned to continue growing revenue through an increased breadth of the essential services that we provide to our existing customers, as well as increased volume by leveraging our value proposition to win new customer contracts. Finally, we will take advantage of our position in the market to expand our industry advocacy efforts by promoting the value of the long-term care pharmacy sector with key stakeholders and strengthening our government relations capabilities in order to ensure sustainable funding levels for our sector. Today, CareRx services just under 20% of the market, so there is tremendous opportunity for organic growth. At the same time, there are significant investments being made within the sector. In long-term care, emerging from COVID, federal, provincial, and municipal governments are making investments into long-term care.
As a result, the size of our market is expected to double in the next 15 years, with significant growth expected within the next few years. Our customers, who are the largest and fastest-growing home operators with whom we have long-term contracts, will be adding capacity to existing homes, building new homes, and making acquisitions, and we stand to benefit as we grow with them. Our pharmacies are strategically located, and we have a compelling value proposition for home operators and residents. This places us at an increasingly attractive position to grow organically through winning new contracts with long-term care providers. Our sector remains highly fragmented, and we have an attractive M&A pipeline that will allow us to make accretive acquisitions and further leverage our national footprint, increase our scale, and benefit from additional operational synergies.
Finally, similar to our upcoming expansion to Atlantic Canada, we will consider expanding geographic footprint in new markets where the economics are attractive and there is demand for our service offering. I look forward to continuing to work with the CareRx leadership team to both enhance our service offering for customers while driving value over the near, medium, and long term for all of our stakeholders. Before closing, on behalf of our customers, our employees, and the board, I would like to thank David for his transformative leadership over the past five years and strengthening all facets of the organization. On a personal note, I want to thank you for bringing me along on this journey and wish you continued success. With that, I would now like to open the call to questions. Operator?
Thank you. Ladies and gentlemen, we will now conduct a question and answer session. If you have a question, please press star followed by one on your touch tone phone. You will hear a one-tone prompt acknowledging your request. If you would like to cancel your request, please press star two. One moment please for your first question. Your first question comes from the line of Gary Ho from Desjardins. Your line is now open.
Thanks, and good morning. My first question, just on the margin side. It appears, you know, hit a trough in Q1. Maybe just help us kinda think through how the recovery looks like, and, you know, better labor market will definitely help. You know, what are other things that's within your control that can improve the margin profile looking at?
Hi. Good morning, Gary. Thanks for your question. Yeah. I think that's right. I think trough's probably a good word. Now, you know, with those two big impacts baked into run rate, we're very focused on margin expansion. You know, I don't think we're gonna provide guidance on that, nor I think are we gonna be too aggressive about how fast the ramp will happen. It really is the two things that I think both Andrew and Puneet addressed, which is, you know, continued top line growth. I think we've added, you know, 2,500 beds the last couple quarters.
I think continuing to add beds and then letting those, operational efficiency initiatives, technology, the BD Rowa Dose, you know, do their work, I think should allow for pretty steady margin expansion from the sort of low point of Q1.
Okay. Thanks for that. Second question. Did, you know, see the language in terms of the pause in the Ontario fee schedule. You know, thinking about this, you know, probably kinda need fees to increase from the current levels, let alone, you know, the decrease or the pause. Maybe you can talk about the conversations you've had with your provincial counterparts, and where they stand today.
Yeah. I mean, nothing specific to report, Gary. You know, as we've said in the past, I do think, you know, the combination of the experience of the pandemic and, you know, CareRx's size and scale now has really changed government perception and understanding of what we do and how important we are to the long-term care sector. We continue to have very constructive discussions. I know Puneet already in the transition, has already set up a number of direct conversations himself with provincial governments. I think there's a broad recognition, whether it be because of the importance of what we do or because of the inflationary cost pressures on our business, which have affected all healthcare related businesses in Canada in the last year, that there needs to be changes and improvements in funding.
I think we're confident that will happen. You know, I think the Ontario pause was yet another example of that. Yeah, I don't think anything more to say on that front, except I know it's a big focus for Puneet.
Okay. Last question for Puneet. Great chatting with you. You know, I know you've been involved in the current strategy and its early days. You did mention in your prepared remarks, you know, things like standardization model, more effective workflow, expanding use of Lean Principles, et cetera. I'm not sure if you've, you know, tried to quantify the potential margin improvement that could have had over time. Not saying near term, but, you know, over a period of time when you think those are implemented.
Yeah. A good question, Gary. I think it's still early days on that plan. You know, we're going to launch lean methodology in the next 60 days. It's hard to say. We're doing it and approaching it in some cases as pilots to see what's the size of the prize for the organization.
Gary, it's Andrew. I would just add. You know, I think the objective for us, and we still believe it's going to be attainable, has always been to get to double-digit margins. You know, the exact kind of pace in which we're gonna get that quarter-over-quarter improvement or ultimately when we get there is still yet to be determined just based on both the current labor market and just, the outcome of some of these initiatives.
Okay. Makes sense. Those are my questions. Thanks very much.
Thanks, Gary.
Your next question comes from the line of Tania Armstrong-Whitworth from Canaccord Genuity. Your line is now open.
Good morning, gentlemen. I'll start with the dispensing mix shift that we saw, the branded versus generic. Could you maybe highlight what the cause of that was and if we should see that mix rebound to normalized levels in Q2 or if this is the new run rate?
Morning, Tania. Yeah, it's Andrew. I would say that this is reflective of the new run rate. The reason for that is, you know, in Q4 of last year, our top-selling or highest volume branded drug converted over to generic. We saw the full quarter impact of that in Q1. You know, the impact of that being a reduction in the selling price on that treatment by about 75%. That's a permanent change in the dispensing mix for us going forward. You know, in terms of, I guess, future changes, you know, obviously branded drugs are always coming off patent all the time. How that will impact us depends on, you know, obviously what those molecules are and how frequently they're dispensed by us.
This one had an outsized impact just given the fact that it was our top moving branded drug.
Amazing. That's good color. Thank you. Then the labor issues that you have highlighted over the last few calls, thank you for providing color on the actual dollar impact. Are you able to say, will this dollar impact kind of remain the same over the next three quarters of this year, or should we see it gradually decline? I know you said that we will still see an impact in H2 of this year, but I'm wondering if we can start to see it subside.
Good morning, Tanya. This is Puneet. We don't expect things will get worse. I think as we continue to drive the operational efficiencies, we do expect gradual improvement. It's still hard to say the exact pace and timeline on that.
Okay. That's fair. Good news on the BD Rowa packaging system. I'm glad that you guys have started to dispense medication from those systems. Could you provide maybe a little bit more in terms of timeline on how that'll progress through the course of the year and when we might see actual site consolidations from it?
Yeah. You know what? I think David's characterized it in the past that it is really a proof of concept. We've onboarded the first tranche of beds. We've received initial feedback from the local pharmacy team as well as customers, and it's been positive. I'm gonna be cautiously optimistic. We'll, you know, we'll continue to ramp up beds on the BD Rowa over the course of this year, and then we'll do our assessment on the benefits and determine what that looks like for us.
Excellent. Thank you so much. That's all for me.
Thanks, Tania.
Your next question comes from the line of Justin Keywood from Stifel. Your line is now open.
Hi. Good morning. Thanks for taking my call. Just on the cash balance highlighted, it's a pretty healthy number. What's the expected use of proceeds for that cash?
Morning, Justin. It's Andrew. Yeah. I think as we discussed when we did that financing in January, you know, the uses of that, at least the proceeds for that, were primarily both debt reduction and kind of general working capital or corporate purposes. You know, ultimately for us, the objective is to continue to both strengthen and simplify our balance sheet. As part of doing that, we anticipate that some of this cash will be used to delever and to simplify the balance sheet. We'll look to provide an update there later this year.
Thanks. Any reason for not adjusting the balance sheet more near term?
I think we're continuing to assess options, you know, as we go through that. As I said, I think we'll have more to talk about later this year as it relates to that, we're definitely working on kind of assessing some options right now.
I think Justin, it's David. I mean, the key thing to point out here is I don't think, you know, debt reduction in and of itself was ever the goal. I think our, you know, based on the journey to get here, you know, the capital structure's a little more complicated than we'd like. Our cost of capital, even in this rate environment, we still believe could be better. Rather than just doing a sort of knee-jerk pay down of debt, we wanna find a more comprehensive long-term solution. I think that may take a few months longer, but we're very, very focused on, I know Puneet and Andrew are very focused on doing that this year.
Would a share buyback be on the table?
I think, you know, I'll speak. Obviously, it'll be for Puneet and others to talk going forward. At this point, our strategy has always been to get that balance sheet strengthening process and then ultimately a refinancing completed. Down the road, you know, we do believe after that there would be a pretty healthy cash generation that would permit various options, whether it be growth or buybacks or dividends. I think the balance sheet is the more important milestone right now.
Understood. Thank you.
As a reminder, if you have a question, please press star followed by the number one. Your next question comes from the line of Stefan Quenneville from Echelon Capital Markets. Your line is now open.
Hi. Thanks for taking my question. This is a question for Puneet. You know, you're gonna be in the seat shortly. Could you just rattle off your key priorities once you take charge? The second part is, you know, obviously you're quite integrated in the operations, but I'm wondering if the change in leadership in any way is delaying any potential, you know, M&A opportunities, you know, just 'cause of your managing the transition, that sort of thing. Thanks.
Good morning, Stefan. Good to meet you. Yeah. You know what? I think similar to my prepared remarks, really the focus is going to be operational excellence to drive that top-line growth. Like, there's still opportunity within the business.
You know, we are running multiple processes and systems within the pharmacy, to remove that complexity, helps offset a lot of things on the labor overages and other pieces as well. That's gonna be the focus. Then, you know, I think with respect to M&A, we'll continue to look at what options are, and exercise those as those come along.
Great. That's it. That's it for me. Thanks.
Thank you.
There are no further questions at this time. I will now hand over to Puneet Khanna. Please continue.
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.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.