And for our final presentation of the day, we have speakers from PharmaCorp.
Okay, thank you very much. Hi everyone. Thanks for being with us at the very end of the day. Some of you I recognize from our meetings earlier today or over the last couple of months, so thanks for spending some time with us. Before I get started, I will introduce a few people on our team. Grady Brown, he is the CEO of our company, PharmaCorp. We got Thomas Veneruz.
Thomas Veneruz would be our Swiss Army knife. He does everything from looking at our acquisitions, detailing out finance. So he is our Director of Acquisitions. So that is the team that you will meet a little bit later on as we get into the conversation today. I am going to give you a high-level overview of what we are and what we do. I am not going to go through that unless anybody is interested in disclaimer. No, everybody is good?
Okay, I will get right past that. We will talk a little bit about what we do as far as buying, integrating, and operating our stores. So I will give you a bit of our origin story, if you will. So we have a strategic alliance with PharmaChoice Canada. PharmaChoice Canada owns 1,100 stores, constantly growing across the country, all independent pharmacies.
As a company, they are a co-op, so really all the monies they generate go back to the owners of the stores. And they ran into a bit of a problem over the last number of years that as pharmacists are aging, they do not have a compelling exit strategy succession plan for their stores. So they were losing some stores to other banner groups or to other large operators like Shoppers Drug Mart, Rexall, competitors like that, and from that losing membership within their group.
So the opportunity was to look for a partner that can help with the succession planning and be capitalized to be able to buy these stores. That is where PharmaCorp comes in. So PharmaCorp and PharmaChoice did a strategic alliance, which essentially gives us the right of first refusal on all of those stores as they come up for sale.
So that is really our pipeline of acquisitions and acquisition opportunities. I am sure you see a lot of roll-ups. So when you look at a roll-up, part of the thing we have to ask ourselves, what is different? So what is different for us is we have the strategic alliance and the ability to buy these stores as they come up for sale, and that is exactly what we have been doing. I am going to get through some of these fairly quickly and just get to some of the key slides.
This one we think is very key. We have exclusive ROFRs on 1,150 stores across the country. By the way, that number is constantly growing as new members come into the PharmaChoice banner program. We have a growing pipeline of stores, 40 to 50 stores transact each year. Essentially that is the knowable pipeline for the stores that we could buy.
We recently did a retail collaboration agreement with McKesson Canada as well. For those of you who may not know, McKesson is a massive wholesaler in the country, but they also control a number of retail banners, IDA, Guardian stores, and we have the rights on those stores now as well. If they don't activate on acquiring a store, we have an opportunity to buy that.
Really endless pipeline for us, endless opportunity of what we can buy in the marketplace, and we really think that's kind of our secret ingredient. Quickly, this is more or less what we're trying to buy. We're not trying to buy all those stores.
We're trying to be very selective on which stores fit our model. Typically, we're looking at stores that have at least CAD 2 million in revenues, at least CAD 350,000 in normalized EBITDA. That's the type of stores that we are trying to buy in the Canadian landscape. So far this year, we've bought 17. Right now, we have 17 locations. We bought 11 stores this year, which included one very significant acquisition.
We bought a block of eight stores in the East Coast, CAD 24 million in July this year, and we're going through our integration process with that group of stores right now. Very active pipeline, lots of opportunities for us, and we have a number of signed LOIs that we're working through right now. Here's a map of our business.
What's pretty exciting for us, we're almost coast to coast already. With 17 stores, we have a store in Courtenay, BC and in Bonavista in Newfoundland, so we're really end to end. The nice thing about that, we've worked through all the economics by province. When we buy stores, we've worked through the different college requirements to really start setting our foundation. Finally, before I introduce the rest of the team and they come up and we'll do some Q&A.
For us, the roll-up is really key to our strategy. We obviously have the ability to buy the stores through the pipeline. We're very firm on what our founding principles of what we're trying to do. We're trying to buy stores at a 6x multiple.
That's our weighted average right now in the stores that we have bought is 6x. We're looking at stores that do greater than CAD 350,000 in normalized EBITDA, really to set the base in the future of our stores. By the time we finish our due diligence, we've determined what the knowable upside in those stores, and we're projecting growth in these stores on normalized EBITDA between 7.5% and 15% in the first three years of owning the store.
That's a little bit of our background on what we're doing. We are pretty excited to be here over the next couple of days and present to a lot of different people. That is our strategy, and we have some very bright days in front of us.
Well, thanks, Paul, for a great intro. I would like to welcome everybody to the PharmaCorp Fireside Chat, hosted by Acumen Capital. My name is Jason Sawatzky. I am an institutional equity salesperson at Acumen. We are based in Calgary, Alberta.
If people do not know Acumen, we cover 60 Canadian small caps. For full disclosure, we do cover PCRX. We have a buy rating and a CAD 0.70 target price. With that, I think we will get started with the discussion. Feel free anybody to jump in. First question is to the guys. Given that PCRX is a roll-up story in the pharmacy space, can you speak about your management team and board's experience with roll-ups?
Absolutely. If we can just go to the slide with our board. I can start with Paul Dale. History around Paul Dale, ex-Rexall guy. He is one of the reasons why we started PharmaCorp to begin with, as he was consolidating independents into the Rexall program. He has a wealth of experience there. Myself, within PharmaChoice, we are growing by 40 to 60 stores a year.
We are considered a consolidator within the independent space on the buying group side. We have Sophia Sigler, ex-VetStrategy as well. Multiple years on the vet side, rolling up vet clinics. We have Al Simpson. You want to flip to the They already have. Al Simpson is our Executive Chair, so StorageVault, traded on the TSX. He currently still chairs the acquisition committee on StorageVault. Very active within our business.
Ken is a micro aggregator out in Atlantic Canada. Chris Gardner, those of you may or may not know, ex-Neighbourly, a roll-up of independent pharmacies as well. Tons of experience on the M&A side, and we are set up for growth long term.
Okay, great. You guys are unique for a small company, given the built-in pipeline that you do have. On the ROFR, you do have access to 3,000 plus stores in the PCC and the McKesson networks. How many of these stores turn over every year? Do you have a preference for one network over the other?
Yeah, no, it's a great question. In the PharmaChoice network, around 30 to 50 stores sort of turn over every year. Within the McKesson group, it's almost double that on that side. So, call it 50 to 80 stores changing hands every year. So pipeline is definitely large. As far as benefits or We'll look at every deal, and we're not partial to any banner. We're brand agnostic from that point of view.
I think the one thing to keep in mind when we consider the different groups and the different banners, if you worked in a roll-up business before, some of the ways you can stub your toe is trying to make too many changes and really change what that store is all about. As we buy a store, whether it's a This guy's laughing.
A PharmaChoice store, a Guardian, IDA, or Remedy'sRx. Our objective is to keep it within the banner group it is in already. We want to limit the changes to both the customers and the staff members in the store, so stay very consistent on what the store is and what it's all about. As we acquire, we will keep them within that banner group, which we think really protects the business going forward.
Oh, sorry.
Yeah. You can go ahead if you want to.
Do the banner groups. Is there a reason that IDA as a banner group might not want an owner of a bunch of PharmaChoice banners to be involved with them?
Yeah, so the question, is there any reason why an IDA banner store would feel uncomfortable if we were owning other brands as well? Is I think essentially-
My understanding is that IDA may be able to say, "Hey, we don't want this owner for our banner," quote unquote. Would they prevent you from buying into their banner?
The way it works with the McKesson stores, IDA, Guardian, Remedy'sRx, they are all independent owners of those locations. When they choose to sell the store, if they are selling outside of their banner program, that is when the ROFR would kick in.
They may go ahead and do a deal with another person to buy the store, but we would still have an opportunity to review that opportunity and see whether we would want to step into their place. In most cases, when an independent is selling their store, obviously they are interested about the price they are going to get for the store. After that, they are interested of what happens to my store, what happens to my community, what happens to my staff? We feel we do a very good job with that.
To answer your question, if they find a buyer that is outside of the program, we would have an opportunity to activate the ROFR, and they would have limited options if we choose to activate the ROFR.
Just have a piece to add to that. When we are looking at different banners, whether it is PharmaChoice or a McKesson store, these are mature stores that we are buying. The economics of whatever banner they are currently running are already embedded in the business. It really comes down to your traditional core due diligence items.
Are the financials strong? Is the script count growing? Staffing is really one of the key pieces in our industry. Everybody knows it. You cannot run and take over one of these stores without a solid managing pharmacist in the store. We will look at any opportunity. If the numbers and the economics are palatable, we will move forward with an opportunity. If they are not, we will not.
Okay. Thanks, guys. With the roll-up story, always pace of acquisitions and size of acquisitions is always of interest to investors. You have done, as you mentioned, transactions ranging in size from file buys, to one pharmacy acquisitions, to a large eight store acquisition in Eastern Canada. Do you have a preference of which type of transaction that you do?
Yeah. When we are looking at an opportunity, we really try to look at them each individually on their individual merits. If we have an opportunity to buy a group of stores, we will still go back to the same deal economics. Is the script count right? Is the performance right? Is it staffed properly? Interestingly enough, if you are buying a block of stores, some of those challenges are a lot easier, because typically, if an owner owns six or seven stores, he is not working in them all. So you tend to have a very solid core staff.
So, we really look at each opportunity and see what the merits of that opportunity are and see if it makes sense for us. You mentioned roll in, I just want to touch on that because some of you may not be familiar with that.
We have had two examples in the past year where we have acquired a much smaller pharmacy and rolled it into one of our existing stores. There is really, really good economics when we do that. We had one market where we had a store that does about 70,000 prescriptions. There was another small independent in town that did about 10,000 prescriptions. They were interested in selling. We bought that store, rolled it into our store, and the leverage and the economics of that is great. So each one of these opportunities is an individual view based on our economics and staffing capabilities.
Thank you. Paul, I know you had mentioned the co-ownership loan program, that does, I believe, give you an edge. I am not sure if Neighbourly had a similar program. I do not think they did. How many pharmacists have used the loan program? Maybe you can talk a little bit about it.
Well, should I take it?
Yes.
Just to give a bit of context, our co-ownership loan program, I'll just paint you an example. You're buying a store. The former owner-operator is 65 years old. They're looking to step away from the business. One piece that they're really trying to figure out and they care about is legacy and what's going to happen to my store after.
On our end, we want to have somebody that's there to drive the business forward, especially through a transition. We created a co-ownership loan program that lets, let's say that 65-year-old owner has a 30-year-old pharmacist that's on staff, wants to become a co-owner. The former seller doesn't want to give them a VTB, nor does the young person have the funding to actually buy, let's say, a CAD 5 million pharmacy.
Our co-owner loan allows that young pharmacist to buy in alongside us via the loan. The loan is structured where it's self-funding for them. On day one, we have somebody in the store with a 20% ownership to drive that business forward, and the legacy piece stays in place, and typically, they're already part of the community. Let's say there isn't someone we've flagged in the store to become that co-owner. It makes recruiting tremendously easier.
We'll have a, let's say, a six-month transition period for that vendor. We go out and we recruit, and what we've been seeing is that there's ample inbound co-owners wanting to sort of step into that role. The other piece of your question was how many co-owners do we have in our stores? Currently today, we have two stores where sellers retained a piece of equity.
In one scenario, they retained 10%. In another scenario, they retained 25%, so they became a co-owner via that mechanism. In the remaining stores, we will have a co-owner put in place in all of them vis-a-vis the co-owner loan. In summary, 16 of our 17 stores will have a co-owner in it in either one of those two lanes.
We have a question there.
How confident are you that the unit economics will stay the same when the old owner/pharmacy hires?
Okay. The question was, how confident are you that the store economics will stay the same when the old vendor transitions away?
I will take that. Thanks. Great question. I think one of the things we want to really emphasize is when we do our due diligence, there is certainly the whole financial equation on whether the deal makes sense. We weigh the staffing and the go-forward situation just as importantly. When we are looking at buying a store and the owner is in the store, or any acquisition, we are trying to get very comfortable saying yes, no, and too hard.
We have come across some situations in very remote areas where the husband and wife may be the pharmacy team. Very good store from an economic standpoint, but the reality is we will not be able to staff, and we are happy to step away from those opportunities. We are very thoughtful of the type of store we are buying. We want to be very positive that we will be able to maintain the store.
As far as what happens to the store when we buy it, our results to date show that we have been able to consistently grow top-line sales, consistently grow script count well beyond the industry average right now. We are outperforming the store as it was before.
To paint a bit of a picture, often in these cases, you may have a pharmacist who wants to step out that is in their 60s, early 70s. They are often running the store and maintaining the store at a certain level and a certain profitability and not driving to that next level. As we are buying these stores, we are seeing opportunities on how we can drive to the next level on profitability, and I will give you one example.
In Canada, there's huge growth in minor ailment prescribing on what a pharmacist can do today versus what they could do 15 years ago, whether that's a flu shot, whether that's writing a prescription for a UTI infection. As we convert and bring a pharmacist in or bring a younger pharmacist, we're really finding a lot of growth in those other opportunities in the expanded scope in pharmacy right now.
We've been very consistent on all the stores we bought. We are performing at or better than what we purchased to date.
Unit economics, what is economics?
When you say unit economics, as far as what are we buying?
What you buy, what kind of are you looking at?
First of all, on what are we buying? We are looking for stores that are doing a minimum of CAD two million in annual revenues, doing a minimum of CAD 350,000 in normalized EBITDA. Those are our key numbers. That usually translate to 35,000 or 40,000 prescriptions. That would be our base level. When we talk about that pipeline, there's a huge number at the top, but a lot of stores fall out because they're not going to meet that base level economics for the store.
Generally, when we buy, by the time we've finished our due diligence, we've really broken down that store opportunity into opportunities to make the store better today, so that could just being a buying efficiency opportunity, to what we can do in 90 days, and then what we can do in a year.
To answer your question, we are projecting that we'll get between 7.5% and 15% gain on normalized EBITDA in the first three years we run the store. So a nice opportunity to grow the profitability of the business. It'll come in different avenues depending on the store and the situation. I'll give you one example. We bought a store about a year ago.
Their purchasing through the PharmaChoice program was running at about 73%, 74% of buying through the main provider. The owner felt that they were cutting better deals with other providers. We turned that tap off. We got them right on program right away, and we took that efficiency from mid-70s to low 90s.
That one change translated into about CAD 80,000 in profitability in that store in one year, and all we did was change the mechanics of how they buy. Every store will have a different story of where the opportunity is, and that's what we got to be very aware of as we buy. Yes, sir.
I might have missed this, but how are you financing acquisitions? If it's some guy that's 65 and doesn't want to have, surely they want to take cash, which is still how-
Sure
yeah.
Yeah, the question is how are we financing the acquisitions, and the assumption is most vendors would want to take all cash. I'll turn it over to Thomas.
Yeah. To date, we've deployed most of our cash that we've raised. We do have an acquisition term loan with CIBC, so it's sized at CAD 17.5 million. We actually upsized it to CAD 27.5 vis-à-vis the accordion with them. We have two LOIs out right now representing four stores. We have ample dry powder to close on those deals.
Then as a capital-consumptive company, if the market is attractive, we will look to the market. If it's not, we will review other options and see where we sit. We've communicated to the market and will continue to communicate this, is really where we want to run the business is about 2 to 2.5 times leverage as a high water mark. We understand in Canada, shareholders, investors, institutional investors, retail, they don't like when companies go above 3 times.
We do not want that to be our story. We don't want it to be a de-levering story. We also are doing a lot of single store opportunities in conjunction with our multi stores, so we have the ability to sort of scale up our debt as we go versus using a blunt instrument of a large debt outtake to fund a deal. I hope that answers your question, but that's sort of where we sit in that front.
Just furthermore on your question around how are we making it better. We've got several programs within the network that our store owner that's 65 years old is kind of just happy making his CAD 400,000 or CAD 500,000 in EBITDA and not really dialing into all of the programs. We go ahead and layer in the programs that are available to them and add EBITDA overnight.
Okay, great. Thanks, guys. I guess we kind of answered a couple of the questions on post-acquisition value creation that Paul talked about on the balance sheet. A lot of our clients care about free cash flow. Maybe you can answer, what is your free cash flow conversion economics on a store basis?
Yeah, so I like this one because our industry is very unique. When you look at sort of EBITDA up here, I mean, your change in net working capital is, I don't mean to placate it, but it's kind of a wash because the inventory in pharmacy is quite low. Your turns in your inventory is quite quick, and your payers are government and insurers, so that is really not impacting the economics at all.
Then you have CapEx sitting below that. Outside of growth CapEx, which is what I believe you should be using for this illustration, maintenance CapEx is about 20 to 40 basis points of sales. When you get a store, if you're doing sort of a refresh, budgeting in about CAD 25,000 is actually a pretty good proxy if you're just getting new technology in there.
That would be computer screens, POS scanners for your merchandising, maybe a new server for the store, which runs you about CAD 10,000. But in terms of maintenance CapEx, there's not a lot in pharmacy. Then from there, you're really looking at taxes. So your EBITDA to free cash flow conversion is north of 70%.
I really like this number in terms of our maintenance CapEx. You look to a dentalcorp, I mean, when they were still publicly traded, their CapEx as percent of sales was about 200 basis points. If you walk into any dentist office nowadays, it's very different than maybe 20 years ago. It's like walking into a high luxury hotel. It's very nice. You need all the latest technology to compete with other dental clinics in the space. Pharmacy is not
Not really there. You do not need to spend the number that you do. When you are looking at growth CapEx, the return on automation is really good. We bought a robot that costed about CAD 300,000, and the payback on it was roughly about 2 and a half years. When you are looking at growth CapEx, there is pretty easy business cases to implement it.
Thank you. Well, we are bumping up against time here, but maybe I will give Grady the last one. Just in terms of your vision over the next 3-5 years, we know that Neighbourly, I think, got taken out for 13 times, a pretty big multiple. Where do you see this company going over 3-5 years? Is this a billion-dollar company? Just your thoughts.
I can tell you, we started this organization as a succession planning tool for our members, for the 1,200 members that we have. We partnered with McKesson for another 2,000 stores on the ROFR, so 3,000 stores. Average age of an owner in Canada is around 57. The opportunities are, it is a lot of white space in front of us. I am excited about the opportunity.
Everyone is fully aligned. When we did the initial raise of CAD 28 million, 65% of that raise was from our owners. We do feel strongly that when they are ready to sell, they will come and talk to us first. I feel impressed with the team and what we have done so far, and the sky is the limit for the organization.
Great. Okay, well, that is all of our questions. If we have any more questions from the audience, feel free. Yeah.
Hi. I think you might have covered this in the beginning. I just didn't hear it clearly. When you are trying to buy stores, are you buying it off of a multiple of EBITDA or free cash flow? What is that?
Normalized EBITDA. We normalize the EBITDA, and right now we are around 6.
Yeah. Okay, Justin.
The three-year EBITDA lift of 7%-15%, is that a CAGR or is that a cumulative three years?
Cumulative.
But that's like there's some universe in which that's 3% organic growth and a little bit of incremental margin. Is that good, or is that just like the baseline of what we're hoping for ultimately?
Yeah, I can tell you that we have access to IQVIA on how stores are performing in the Canadian marketplace, and these 17 stores are outpacing the Canadian marketplace right now.
Good.
We're early days. We haven't had a store for three years. We're looking to give the market some sort of guide so they can model out as we mature and grow up as a company. Those numbers will obviously move, and I'm not going to speculate where they're going to move, but I hope you can appreciate that those numbers were set with the context and the life cycle of our company right now.
I just want
Yeah, sure. Okay, one more.
When you are buying these stores and you are retaining the brands, there has to be, presumably, some limitation on what you can do with the store. Because presumably the brand wants to maintain a certain identity or certain protocols that you need to stick to. How are those limiting then? Do you see yourself creating a PharmaCorp brand that has its own-
Yeah, no, it is a great question. Some of the stores that we have purchased, they have been in existence in some of these towns for 20, 30 years. We are not really in a position where we want to come in and brand them PharmaCorp. We are going to continue with the brand that is available within that community because that is what resonates with the patients. Yeah.
But is that a limitation or?
Not at all. The PharmaChoice side, we're a co-op member-owned organization. We're not a franchise model. Within reason, you can basically run the store as you see fit. But Paul's got
I think when I look at a lot of the PharmaChoice stores as an example, it's an independent operator running in an agreement with PharmaChoice. There are some things that they have to comply to. What's impressed me about PharmaChoice is they provide an owner with a massive toolbox of what they can do with their store to improve their store and lift their store.
It's really up to them on what they choose to do and not to do within that toolbox, if you will. What we want to do is be able to be the experts on what's in that toolbox and make sure it's all getting used. So whether that's buying efficiency, as an example, whether that's rebranding the store to make it look fresher or brighter, whether that's putting automation in.
We really have quite a bit of latitude on how we run and operate a store. To give you an example, I use the example of the gross profit lift in a store. We've owned that store for a year. We already have plans early next year to expand and double the size of that store because we are attaching to a medical clinic. So opportunities can come in different ways, but there's a way that we're still within the brand, but double the size of our store and get a lot of growth.
Yeah, we really think there's a ton of runway within these banners on how we can grow the store. If you travel around and go from store to store, you'll see a huge amount of disparity on how it's presented or how it's run. Thanks for the question.
Perfect. Okay. Well, thanks, Paul, Thomas, and Grady, and thanks everybody. That's all we have.
Thank you. Sorry.
That's okay.