Jack Shevel - Chairman and Interim CEO Leslie Cho - CFO

Neil Maruoka - Canaccord Genuity

Thank you and thanks to everyone joining us. Welcome to our conference call to discuss our fourth quarter and year-end 2017 results and other key developments.

With me for today’s call is our Chief Financial Officer, Leslie Cho. For today’s call, I will provide an overview of our recent highlights.

Leslie will then review our financial results for the fourth quarter and then I’ll return with some comments on our outlook and growth strategy before opening up the call to questions. Last year was a completion of the journey we started about three years earlier to focus Centric on two core businesses and restructure the balance sheet.

The divestiture of these businesses helped us in two ways. Firstly, it helped us to pay down debt and also provided the financial flexibility to invest in the significant growth opportunities available to us in the ongoing businesses.

Since the beginning of 2016, we have effectively transformed the balance sheet, reducing debt by $233 million and annual finance cost from $26 million to $6 million in 2017. Secondly, to bolster the Specialty Pharmacy business, we made strategic acquisitions that brought Centric into a market leader.

The purchase of five specialty pharmacies in Alberta, Saskatchewan, British Columbia, and the latest been the acquisition of Salus pharmacy in Calgary transformed us into a true national provider. With earn-out now substantially completed and the appointment of Tim Matthews as the national COO of this division, we can finally start to rationalize the platform and take advantage of our scale and group practices.

In 2016, we signed a new contract with the national provider of retirement home and long-term care facilities which replaced a large contract that was expiring over the course of 2017. Unfortunately, due to technical issues with the new digital pin and in the interest of patient safety, the onboarding of the new contract has delayed by 6 months.

During the course of this month, the final bid under this new contract would transition and the company can now focus on maximizing returns for shareholders. Looking at 2017, revenue grew at only 1% while adjusted EBITDA grew at 12%.

Revenue growth was affected by the delay of bids transitioning, fixed starting costs and further reductions on ODB tariffs terms. The growth in adjusted EBITDA reflects the margin improvement from the strong performance in our surgical business for the period ended 2017.

The revenue split between the two businesses continues to be 75 to 25. Looking specifically at our pharmacy business.

With the national contract bids now onboard, our focus is on providing optimum care to over 28,000 residents. In November of last year, we acquired Salus Pharmacare Specialty Pharmacy in Calgary, presently servicing over 700 assisted living beds with the potential to service an additional 700 seniors in independent living facilities.

This acquisition increased our market share in Calgary and made us a leading pharmacy provider to assisted living and long-term care homes in Alberta. Since 2015, the surgical division has had a compound annual growth rate of 6% on the revenue line and 31% on EBITDA, a great turnaround by any measure under some difficult circumstances.

Utilization has increased from 20% in 2012 to 49% currently bolstered by strong performance from bariatric surgery. Interprovincial referrals also increased last year.

We see this as an opportunity for future growth that we will be focusing on in 2018. One of the most exciting developments in 2017 was the strategic investment we made in AceAge, the entity responsible for the development of Karie.

Karie is a home-based order made drive delivery appliance that makes it simple to follow complex medications regimes by automatically delivering prescription drugs in the correct dosage at the right time. This is the biggest concern for cheniors, the children of seniors.

The device uses the compliance medication packaging that is generated from our automated PacMed and PacVision systems and is placed in an easy to load cartridge. When it’s time for each dose, Karie provides visual and audio alert.

It can also be set automatically notify a family member or caregiver if a dose is ever missed. Face recognition ensures further safety and security.

As we announced last week, Karie is entering a manufacturing phase and we expect to be delivering devices by this summer. This device is designed and manufactured solely in Canada with international patent registration rights.

I will go into more detail on our marketing plan later in the presentation. The success we have had to-date is a result of a talented cohesive team that is committed to innovation with each other -- with each member focused on service excellence.

I would also like to pay tribute to our 918 [indiscernible] for their dedication and passion. Most recently, we added Tim Matthews as a Chief Operating Officer of our national Pharmacy division.

Tim has been part of Centric since 2013 in business development and joined us again from PwC. Ryan Stempfle, pharmacist MBA was appointed National Business lead; and Paul Rakowski joins us as VP of General Counsel with an MBA in Bachelor of Pharmacy.

We have made significant progress on our CEO search and expect to make an announcement during April. Now, Leslie will provide you with financial overview.

Thank you Jack and good morning everyone. In the interest of time, I’ll restrict my remarks to the fourth quarter.

Our complete results for the quarter and full-year are available in our financial statements and MD&A, which have been filed with SEDAR and are also available on our website. Consolidated revenue for the fourth quarter grew marginally to $42.3 million from $41.8 million for the same quarter of the prior year.

Adjusted EBITDA from continuing operations decline 6.8% to $4.1 million from $4.4 million in Q4 2016. Adjusted EBITDA margin for Q4 2017 was 9.6%, compared to 10.5% in Q4 2016.

Results for the fourth quarter continued to be impacted by the timing differences between the transition of contracts, resulting in the delay and the onboarding of new beds as we have previously discussed. In addition, there were labor inefficiencies identified along with additional costs related to the transition of beds that could not be eliminated in the short-term.

I’ll now walk through the quarterly results for each of our two business segments, separately. Beginning within Specialty Pharmacy segment, fourth quarter revenue remained relatively flat year-over-year at $31.1 million, compared to $31.4 million.

Adjusted EBITDA for Specialty Pharmacy decreased 26.5% to $3.6 million from $4.9 million in Q4 of the prior year. And adjusted EBITDA margin was 11.6% in the fourth quarter compared to 15.6% in Q4 2016.

The Specialty Pharmacy segment continues to be impacted by the temporary change in Ontario government’s regulations relating to pharmacy reimbursement for certain drugs provided under the Ontario Drug Benefit program. As described in Q3, the payments related to certain prescription fees and drug costs were temporarily reduced by 2.8% in order to recover savings that were not achieved in the government’s 2015 reduction.

The impact of this in the fourth quarter was approximately $130,000, and we are estimating the impact of the reduction to be between $650,000 to $750,000, annually. In addition, the timing of the contract transition, highlighted labor inefficiencies and excess costs that could not be eliminated in the short term.

During the fourth quarter, we initiated a business reengineering plan that we will discuss in more detail in a few moments. Moving to our Surgical and Medical Centers segment.

Revenue for the fourth quarter of 2017 increased 8.7% to $11.3 million from $10.4 million at the same period of the prior year. Higher surgical volumes and a more favorable case procedure mix contributed to this year-over-year growth.

Adjusted EBITDA for Surgical and Medical Centers grew by 33.3% to $1.6 million from $1.2 million and margin expanded to 14.3% from 11.3% from Q4 last year. Corporate costs for the fourth quarter of 2017 were $1.2 million, down from $1.7 million for Q4 of the prior year.

The decline in corporate costs is primarily due to the reversal of accrued performance bonuses that were not achieved. As a percentage of revenue, corporate expenses in Q4 2017 were 2.8% compared to 4.1% in Q4 2016.

As projected, at the end of 2016, we reported corporate office expenses of less than 4% of revenue in each quarter of 2017, which we expect to continue through 2018. In 2017, we generated $16.1 million in positive cash flow from operating activities.

Cash flow from operations in 2017 reflects additional amounts received from our drug supply agreement, while 2016 was negatively affected by the timing of payments related to the sale of our Physiotherapy and Rehabilitation segment. Going forward, we continue -- we expect to continue to see positive cash flow generated from operations.

Turning to our balance sheet. You can see the impact of our deleveraging and balance sheet simplification plan as we ended the year with the total debt to adjusted EBITDA ratio of 4.8 times.

Over 2018, we will continue to improve on our leverage as we aim to achieve a ratio of below 4 times in the short-to-medium term. In addition, the annualized run-rate cash interest payments as of Q4 2017 was approximately $6 million, substantially less than the $12 million paid in 2016 and $26 million paid in 2015, a big step towards the company generating positive free cash flow.

As we witnessed over the last three years, the pharmacy industry continues to face regulatory pressure. At the end of January, the Canadian Generic Pharmaceutical Association and the pan-Canadian Pharmaceutical Alliance announced the April implementation of a five-year initiative aimed at reducing the prices of many commonly used generic drugs.

We are currently estimating the impact of this to be approximately $2 million on an annualized basis. We are also looking at the new pharmacy funding framework being implemented in Alberta and are in the process of determining the impact that they may have on our pharmacy business as well as mitigation plans to minimize any potential impact.

With these continued pricing pressures from government payers as well as an overall critical look at our business, we initiated a business a reengineering plan to help offset and reduce the impact that these funding changes may have. The plan focuses on efficiency in our facilities by increasing our reliance on automation, redesigning our work flows to optimize labor models, consolidated smaller sites and utilizing high volume centers and lowering our overall cost structure.

With this plan, the Company has targeted annualized cost savings of $4 million to be achieved by the end of 2018. And as we continue to grow our bed count, we expect to see further operating leverage benefit.

In addition to the reengineering plan, we remain focused on expanding our service offering, target market and geographic outreach including the introduction of the Karie device, entering new geographies and developing a medical cannabis solution for seniors. I’d now like to turn the call back to Jackie for some remarks on some of these initiatives and on the growth outlook for the businesses.

Thank you, Leslie. The cost is now behind us, the demographics remain compelling and we have two underutilized platforms from which to launch.

We are focusing on operational excellence with top-line initiatives. The Specialty Pharmacy, we intend to leverage our national footprint of over 28,000 beds and the relationships we have built with the retirement home operators to expand and introduce new services.

The landscape remains right for consolidation and automation robotics and AI will be introduced over the coming years to further enhance efficiencies and safety. Most exciting is the Karie device, which will not only help us to increase our penetration in retirement homes, but also opens up a whole new market of more than 3 million seniors taking more than five meds per day through aging at home.

The device is also being attractive option for home operators who are embracing new technologies and will offer savings to traditional medication management. Medication management and adherence remains the biggest concern for cheniors.

It is estimated that 8% to 12% of all hospital admissions are due to non-adherence in this population, many of which could be avoided. Total costs are currently being tested and will be showcased at the Ontario Long Term Care and Retirement Home conference in April.

The first 2,000 devices will be available this summer through Centric with preferential pricing. The average drug consumption for senior aging at home is estimated to be $3,000 annually.

Karie will levy assisted monthly fee of approximately $60 to $80 to remind and monitor patients, their families or loved ones about the medication. Initially, Centric will be the only pharmacy offering the Karie device in Canada.

Centric currently owns 17.5% of AceAge with the opportunity to ultimately increase its stake to 32.5%. Quebec remains a national expansion opportunity for us, given our relationship with national customers and it has the second largest retirement home population in Canada.

We have been looking into the landscape over the past few months, meeting with potential partners, and intend to launch a pilot project in the second half of 2018. In 2015, we applied for to Health Canada for sales-only license to distribute medical cannabis and while there is no guarantee that the license will be granted, we are developing our listed cannabis solutions for the future plan.

This greater stability in our surgery division and government outsourcing represents 15% to 20% of revenues. Our bariatric centers of excellence showed good growth as [indiscernible] pace final surgery.

Margins are affected by the case mix and sensitive to volume increases. New doctors continue to apply for admission rights with an increase of interprovincial referrals.

We expect this to continue to grow with the launch of our new website in April and expanded social media marketing initiatives. Our dedicated surgery centers are set up to provide optimum patients outcomes for these elected procedures and alleviate the long wait times using the focused system.

As one of the largest providers of Specialty Pharmacy services and private surgery centers, Centric is uniquely positioned to address the challenges of the Canadian healthcare system. As the population continues age and costs and wait times increase, our solutions and facilities will increasingly become a clear option for many Canadians.

With new leadership and young entrepreneurial team focused on operations and some new innovative growth strategies, Century is well-positioned to leverage its existing infrastructure. We’d now like to open the call to questions.

Thank you. Sharon?

First question to Leslie. I missed your comment earlier, Leslie where you had talked about the impact of $650,000 to $750,000 annually.

I just want to wrap my head around some of the changes in the funding. So, my understanding, well, first of all, if you could just talk about what exactly that related to that what changes?

Sure. That would be the change that we had announced last quarter in the Ontario pharmacy business.

They had reduced the certain dispensing fees and drug reimbursements by 2.8%. And so, that temporary reduction to recover some of the amounts that they we had intended to recover back in 2015 where they made previous cut.

And so, that’s the estimated impact that that will have on an annualized basis.

Great. But that’s transient till 2019?

Correct, yes.

Yes. The saving, anticipated savings I think that we’re looking for was $35 million.

So, as soon as they reach that, then this 2.8% will come back.

Right. And so, then you were talking about the changes in the generic pricing the pan-Canadian pricing.

That impact is $2 million offset by the $4 million in cost savings that you expect to achieve?

Correct, yes.

And then for the changes in the Alberta funding framework, you have not provided any guidance as to what that impact would be. Do you have any early assessment?

Not at the moment. No.

We’re still looking at the impact that that will have as well as any potential changes we can make to our workflow to offset that.

Okay. And then second question just on the ramp of the Quebec beds.

Jackie, you had -- talked about a pilot project to be launched in the second half of 2018. Can you give us some idea of the size of that project?

And are you kind of slowing down the approach to the ramp in Quebec?

Yes. I think, we absolutely -- we are slowing it down to an extent.

Obviously, the whole transition is being delayed longer than we anticipated. And we want to focus on the existing operations.

Plus, I think the launch of Karie is taking precedence. And then the cannabis strategy as well as is an exciting advantage.

The Quebec market is different and the many of the homes are lot, lot large and have resident pharmacies in it. So, the consolidation is not as easy.

There is difficult legal framework. It is a big market and national customers that we have, have initiated 12,000 beds in the province.

So, we’re looking to pilot program on 1,000 beds in 2 or 3 homes, just to get a good understanding. And Quebec was one of the first that really embraced this pan-Canadian in terms of drugs.

They have also kept on the drug pricing et cetera. And I think just wanted to take a little bit longer to absorb the effect of that legislation and whether there would be any additional sort of impact.

So, I think that once we’re comfortable and that model is there, we will be able to move ahead more. But, we see it more as a 2019 expansion phase really having any meaningful impact.

And finally, just on your Canada strategy. Have you -- are you in talks with any of the LPs out there?

And is there particular focus that you’re going to have in terms of dosage forms, because I assume that you won’t be distributing -- drive that into old age home?

Correct. So, we believe we’re uniquely position within the homes, knowing the seniors what drugs there on, what drugs hopefully they will transition off in terms of introducing medical cannabis.

And the homes are also looking for assistance and policies to help manage it. So, we’ve spoken with many.

I think, our view is we want to be able to offer a larger range of products, base that’s out there on the market for these patients. And you correctly said, this is going to take more in terms of oils [ph] and we expect it to be more pharmaceutical, the preparations coming out and then also creams.

So, we have a compound in -- we have compounding capabilities, which I think have positioned us well. And we will probably look to come to some arrangement with between 2 and 4 LPs in terms of the supply.

Thank you very much. And thank you to all the participants and those who are listening via the webcast.

We look forward to speaking to you on our next call.