Centric Health Reports Q3'18 Financial Results, Continues to Execute on New Strategic Direction

TORONTO, Nov. 14, 2018 /CNW/ - Centric Health Corporation ("Centric Health" or "the Company") (TSX: CHH), one of Canada's leading healthcare services companies, today reported its financial results for the three and nine month periods ended September 30, 2018.

"In the third quarter, we announced a new strategic direction and took a number of significant steps towards repositioning the Company for profitable growth," said David Murphy, President and Chief Executive Officer of Centric Health.  "Third quarter results were in line with our expectations, as we absorbed the first full quarter impact of previously disclosed regulatory changes on our Specialty Pharmacy business.  Our business re-engineering plan remains on track for completion by the end of 2018, which will allow us to offset the bulk of this impact and return to normalized results in Q1 2019."

Highlights for the Third Quarter of 2018
(All comparative figures are for the third quarter of 2017)

• Revenue from continuing operations increased to $40.5 million from $40.1 million
• Despite the regulatory changes in Specialty Pharmacy, Revenue continued to grow as a result of a higher number of average beds serviced during the quarter.
  
  
• Adjusted EBITDA¹ from continuing operations declined to $1.7 million from $4.1 million
• Recorded another strong quarter for the Surgical and Medical Centres segment, with 3.4% growth in Adjusted EBITDA year-over-year and an Adjusted EBITDA margin of 14.2% in the third quarter.  Year-to-date Adjusted EBITDA growth is 15.6% compared to 2017; and
• Adjusted EBITDA declined as expected in Specialty Pharmacy, primarily driven by a full quarter's impact of regulatory changes and other gross margin compression in Specialty Pharmacy, partially offset by initiatives under the Business Re-Engineering Plan. The net impact of the regulatory changes in the quarter was $1.8 million.
  
  
• Continued execution of Business Re-Engineering Plan, expected to be completed by the end of 2018
• Completed a number of initiatives within the third quarter of 2018 that improved operational efficiencies and partially offset the impact of the regulatory changes in the Specialty Pharmacy business, with the remaining initiatives expected to be completed by the end of 2018; and
• Business Re-Engineering Plan targeting a return to double-digit Adjusted EBITDA margins.
  
  
• Initiated new strategic direction to establish the Company as the leading provider of pharmacy and other healthcare services to Canadian seniors
• Announced review of existing businesses and assets that may not fit with new strategic direction, and that the Company may consider divestitures in order to reduce debt and pursue growth opportunities in its core business;
• Retained Scotia Capital Inc. to act as the Company's financial advisor in this review process; and
• Completed the divestiture of the Company's retail pharmacy operation located in Richmond, BC.
  
  
• Secured new customer contracts in Specialty Pharmacy
• Signed new long-term contracts with multi-site regional home operators located in Ontario and British Columbia;
• New contracts are expected to increase overall number of beds under contract in Specialty Pharmacy by approximately 2,300 beds to approximately 31,000 beds nationally by the fourth quarter of 2018; and
• Newly serviced beds will leverage existing operational infrastructure and capacities within each respective province.
  
  
• Established strategic partnership with Canopy Growth Corporation ("Canopy") as part of seniors medical cannabis strategy
• Entered into multi-year supply and service agreements with Canopy for the provision of medical cannabis;
• Canopy is the preferred education partner and supplier of choice of medical cannabis to the Company and the seniors that it serves in long-term care and retirement residences and seniors living in the community; and
• Entered into a separate business development agreement wherein Canopy advanced funds to the Company to help with improved education and assistance programs.
  
  
• Additional investment of $0.2 million in AceAge Inc. ("AceAge") to fund the production of its home-based automated drug delivery appliance ("Karie")
• AceAge launched the first pilot Karie units;
• Due to manufacturing delays, the majority of the first 2,000 units are now targeted to be manufactured in the first quarter of 2019; and
• The Company currently has an ownership interest in AceAge of 19.5% with the ability to increase its investment in AceAge up to 32.5%.

Highlights subsequent to quarter-end

• Changes to executive team
• Nina Freier joined the Company as Chief Human Resources Officer from her previous role as Vice President, Human Resources at Sienna Senior Living;
• Mitchell Sinclair joined the Company as Vice President of Business Development for Specialty Pharmacy from his previous role as Vice President of Sales at Cardinal Health;
• Ryan Stempfle was promoted to the position of Vice President and General Manager, Western Canada, for Specialty Pharmacy; and
• Leslie Cho, Chief Financial Officer and Tim Matthews, Chief Operating Officer for Specialty Pharmacy will be leaving the Company during the fourth quarter of 2018.
  
  
• Reached an arrangement with senior and subordinated lenders to facilitate covenant compliance through a transition period as the Company executes on its strategic direction
• Received a waiver for all financial covenants for the third quarter of 2018;
• Established a framework for receiving waivers of future financial covenants based on financial targets to be derived from the results of a review by an independent third-party and approved by the lenders; and
• Interest payments on subordinated debt facilities and any additional costs and fees will be accrued for a period of up to six months to assist with short-term liquidity and will be settled through the proceeds of any divestitures or refinancing activities.

2018 & 2019 OUTLOOK

As the Company continues to execute on its Business Re-Engineering Plan to improve the operational efficiency of its Specialty Pharmacy business, the Company anticipates that there will be timing differences in offsetting the impact of the regulatory changes as these initiatives are implemented throughout the remainder of 2018. The Company is optimistic that the execution of the Business Re-Engineering Plan, on-boarding of new customer contracts and implementation of other strategic initiatives will position the Company to re-establish a growth trajectory for the business. However, during the transitional period the Company may be required to continue to receive covenant relief from its lenders or find additional sources of liquidity in the event that the short-term financial performance is not sufficient to cover obligations as they come due. The Company will continue to focus on effective management of its existing businesses and executing on its new strategic direction, including potential divestitures of non-core assets, to position the Company as the leading provider of pharmacy and other healthcare services to Canadian seniors.

FINANCIAL RESULTS

Selected Financial Information

(All amounts in the chart below are in thousands except per share, shares outstanding, and percentage data)

	For the three month periods ended September 30,			For the nine month periods ended September 30,
	2018	2017	2016	2018	2017	2016
(in $000)	$	$	$	$	$	$
Revenue	40,470	40,141	41,820	128,150	126,296	125,236
Income (loss) from continuing operations	(2,488)	482	(156)	(2,341)	1,701	(3,858)
Income (loss) from continuing operations before interest expense and income taxes	(2,078)	1,145	(1,079)	(21,772)	4,162	(9,225)
EBITDA^1 from continuing operations	354	3,388	1,927	(14,374)	11,113	(354)
Adjusted EBITDA^1 from continuing operations	1,672	4,089	4,290	8,942	13,480	11,277
Per share - Basic^2 and Diluted^2	$0.01	$0.02	$0.03	$0.04	$0.07	$0.07
Adjusted EBITDA^1 Margin from continuing operations	4.1%	10.2%	10.3%	7.0%	10.7%	9.0%
Adjusted EBITDA^1	1,552	4,084	4,198	8,782	13,457	11,102
Per share - Basic^2 and Diluted^2	$0.01	$0.02	$0.03	$0.04	$0.07	$0.07
Adjusted EBITDA^1 Margin	3.8%	10.1%	9.9%	6.8%	10.6%	8.8%
Net income (loss)	(871)	248	3,409	(23,415)	(1,022)	(18,060)
Per share - Basic^2and Diluted^2	$0.00	$0.00	$0.02	($0.12)	($0.01)	$(0.11)
Cash flow provided by (used in) operations	2,453	787	10,832	8,166	10,633	(1,282)
Weighted Average Shares Outstanding (Basic and Diluted)^3	203,882	199,595	163,806	203,135	192,808	162,860
Shares Outstanding, September 30^3	203,778	199,484	166,813	203,778	199,484	166,813

^1	See "Non-IFRS Measures" below.
^2	Basic and diluted earnings per share is based on the profit or loss attributable to shareholders of Centric Health Corporation.
^3	Excludes contingent escrowed shares and restricted shares.

Segment Results

(All amounts in the charts below are in thousands except per share, shares outstanding, and percentage data)

For the three month periods ended September 30,		Revenue			Adjusted EBITDA^1
		2018		2017	2018					2017
(in $000)		$		$	$				%	$	%
Specialty Pharmacy		29,715		29,248	1,510				5.1	4,116	14.1
Surgical and Medical Centres		10,755		10,893	1,532				14.2	1,482	13.6
Corporate		—		—	(1,370)				—	(1,509)	—
Total		40,470		40,141	1,672				4.1	4,089	10.2
For the nine month periods ended September 30,		Revenue			Adjusted EBITDA^1
		2018		2017	2018					2017
(in $000)		$		$	$				%	$	%
Specialty Pharmacy		94,313		93,040	7,713				8.2	13,429	14.4
Surgical and Medical Centres		33,837		33,256	5,286				15.6	4,571	13.7
Corporate		—		—	(4,057)				—	(4,520)	—
Total		128,150		126,296	8,942				7.0	13,480	10.7

Specialty Pharmacy

Revenue growth for the three and nine month periods ended September 30, 2018 was driven primarily from an increase in the number of beds serviced.  This growth in revenue was offset by gross margin pressures compared to the same periods in the prior year, resulting in the decline in Adjusted EBITDA^1..  Margin pressures were derived from:

• Provincial regulatory changes that resulted in, amongst other things, dispensing fee reductions in Ontario and dispensing fee and dispensing frequency reductions in Alberta;
• The new April 1, 2018 agreement between the Pan-Canadian Pharmaceutical Alliance and Canadian Generic Pharmaceutical Association which reduced the prices of nearly 70 of the most commonly prescribed drugs in Canada by 25% to 45%; and
• Changes in the composition of beds serviced across the country, as funding models vary by geography and between types of beds such as long-term care and retirement.  While overall beds serviced increased, a larger proportion of lower margin generating beds were serviced in the three and nine month periods ended September 30, 2018 compared to the same periods in the prior year.

Surgical and Medical Centres

Revenues for the three and nine month periods ended September 30, 2018 were relatively flat compared to the same periods in the prior year.  The increases in Adjusted EBITDA¹ were due to a net increase in higher margin services performed as well as labour and operating cost savings achieved through operational efficiencies.

Corporate

Corporate office expenses were reduced for the three and nine month periods ended September 30, 2018 as a result of a reduction in labour costs.  The run rate for corporate office expenses as a proportion of revenue from continuing operations remains below the target of 4%.

SHARES OUTSTANDING

As at September 30, 2018, the Company had total shares outstanding of 208,831,740. The outstanding shares at September 30, 2018 include 5,054,232 shares which are restricted or held in escrow and will be released to certain vendors of previously acquired businesses based on the achievement of certain stated performance targets and certain customers. Accordingly, for financial reporting purposes, the Company reported 203,777,508 common shares outstanding as at September 30, 2018 and 201,468,731 shares outstanding at December 31, 2017. The number of options outstanding is 1,863,750 at September 30, 2018. The number of restricted share units outstanding is 6,125,076 at September 30, 2018. The number of warrants outstanding is 2,822,000 at September 30, 2018. Should all outstanding options and warrants that were exercisable at September 30, 2018 be exercised, the Company would receive proceeds of $2.3 million.

As at the date of this press release, November 14, 2018, the Company had total shares outstanding of 209,160,299 which include 4,554,232 shares which are restricted or held in escrow. The number of options outstanding is 1,863,750, the number of restricted share units outstanding is 6,569,241 and the number of warrants outstanding is 2,822,000.

¹NON-IFRS MEASURES

This press release includes certain measures which have not been prepared in accordance with IFRS such as EBITDA, Adjusted EBITDA, Adjusted EBITDA margin and Adjusted EBITDA per share.  These non-IFRS measures are not recognized under IFRS and, accordingly, shareholders are cautioned that these measures should not be construed as alternatives to net income determined in accordance with IFRS.  The non-IFRS measures presented are unlikely to be comparable to similar measures presented by other issuers.

The Company defines EBITDA as earnings before depreciation and amortization, interest expense, amortization of lease incentives, and income tax expense (recovery).  Adjusted EBITDA is defined as EBITDA before transaction and restructuring costs, changes in the fair value of the contingent consideration liability, impairments, stock based compensation expense, change in fair value of derivative financial instruments and gain on disposal of property and equipment recognized in the statement of income. Adjusted EBITDA margin is defined as Adjusted EBITDA divided by revenue. Adjusted EBITDA per share is defined as Adjusted EBITDA divided by the weighted outstanding shares on both a basic and diluted basis. The Company believes that Adjusted EBITDA is a meaningful financial metric as it measures cash generated from operations which the Company can use to fund working capital requirements, service interest and principal debt repayments and fund future growth initiatives.  The Company's agreements with senior lenders are structured with certain financial performance covenants which includes Adjusted EBITDA as a key component of the covenant calculations. EBITDA and Adjusted EBITDA are not recognized measures under IFRS.

Reconciliation of Non-IFRS Measures

	For the three month periods ended September 30,		For the nine month periods ended September 30,
	2018	2017	2018	2017
(in $000)	$	$	$	$
Income (Loss) from operations	(777)	261	(23,274)	(4,177)
Depreciation and amortization	2,362	2,301	7,135	7,089
Interest expense	1,821	1,467	5,316	8,417
Amortization of lease incentives	70	(58)	263	(138)
Income tax recovery	(3,122)	(583)	(3,814)	(78)
EBITDA from operations	354	3,388	(14,374)	11,113
Transaction and restructuring costs	1,313	1,028	2,736	4,123
Change in fair value of contingent consideration liability	(360)	(151)	581	(1,695)
Goodwill impairment	—	(322)	19,000	(322)
Stock-based compensation expense	415	324	1,147	656
Change in fair value of derivative financial  instruments	(50)	(190)	(150)	(444)
Loss on disposal of property and equipment	—	12	2	49
Adjusted EBITDA from continuing operations	1,672	4,089	8,942	13,480
Adjusted EBITDA from discontinued operations	(120)	(5)	(160)	(23)
Adjusted EBITDA	1,552	4,084	8,782	13,457
Basic and diluted weighted average number of shares	203,882	199,595	203,135	192,808
Adjusted EBITDA per share from continuing operations (basic and diluted)	$0.01	$0.02	$0.04	$0.07
Adjusted EBITDA per share (basic and diluted)	$0.01	$0.02	$0.04	$0.07

PRESENTATION OF FINANCIAL RESULTS

The Company presents two reportable operating segments as follows: Specialty Pharmacy and Surgical and Medical Centres. The financial results of the Company's Performance Medical Group, are included as part of the Surgical and Medical Centres segment.

CONFERENCE CALL

Centric Health will host a conference call, including a slide presentation, to discuss its third quarter financial results on Thursday, November 15, 2018 at 8:30 a.m. (ET).

Telephone Dial-In Access Information

To access the conference call by telephone, dial 647-427-7450 or 1-888-231-8191.  Please connect approximately 10 minutes prior to the beginning of the call to ensure participation.  Those participating in the conference call by telephone can view the slide presentation by accessing the online webcast (see instructions below) and choosing the Non-Streaming Audio option.

Webcast Access Information

A live webcast of the conference call, including the slide presentation, will be available on the Events and Presentations page of the Investors section of the Company's web site (http://www.centrichealth.ca/investors/events-and-presentations.html).  Please connect at least 15 minutes prior to the conference call to ensure adequate time for any software download that may be required to join the webcast. To view the webcast presentation with slides, please choose either the Real Streaming Audio or Windows Streaming Audio option.

Archive Access Information

The conference call will be archived for replay by telephone until Thursday, November 22, 2018 at midnight.  To access the archived conference call, dial 1-855-859-2056 or 416-849-0833 and enter the reservation number   6158469.

The webcast with slide presentation will be archived for 90 days on the Events and Presentations page of the Investors section of the Company's web site (http://www.centrichealth.ca/investors/events-and-presentations.html).

For further information please refer to the Company's complete filings at www.sedar.com.

About Centric Health

Centric Health's vision is to be Canada's most respected and recognized provider in the independent healthcare sectors in which it operates, world renowned for delivering the highest levels of quality care and outcomes, innovative solutions and value to patients, clients and stakeholders. To this end, Centric Health primarily focuses on two core healthcare businesses:

• The Specialty Pharmacy division is a "Seniors First" model composed of a growing national network of fulfilment centres that deliver high-volume solutions for the cost effective supply of chronic medication and other specialty clinical care services, serving more than 29,000 residents in over 490 seniors communities (long term care facilities, retirement homes and assisted living facilities) nationally. The Specialty Pharmacy division also provides pharmaceutical dispensing services for employees insured by corporate health plans.
  
  
• The Surgical and Medical Centres division is Canada's largest independent surgical provider operating five facilities across four provinces. It serves a diversified customer base with private paid non-insured surgeries and diagnostics, government outsourcing of insured surgeries and diagnostics and other procedures funded by third-party payors (including Workers Compensation) and is the proud owner of Canada's first Centre of Excellence in Metabolic and Bariatric Surgery.

With national networks of facilities in each of its businesses, deep knowledge and experience of healthcare delivery and extensive, trusted relationships with payers, physicians, and government agencies, the Company is uniquely positioned to address current and future healthcare needs in growing markets as the Canadian healthcare industry goes through a major transformation over the medium to long term.

This press release contains statements that may constitute "forward-looking statements" within the meaning of applicable Canadian securities legislation.  These forward-looking statements include, among others, statements regarding business strategy, plans and other expectations, beliefs, goals, objectives, information and statements about possible future events. Readers are cautioned not to place undue reliance on such forward-looking statements. Forward-looking statements are based on current expectations, estimates and assumptions that involve a number of risks, which could cause actual results to vary and in some instances to differ materially from those anticipated by Centric Health and described in the forward-looking statements contained in this press release. No assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur or, if any of them do so, what benefits Centric Health will derive there-from.

SOURCE Centric Health Corporation

David Murphy, President and Chief Executive Officer, Centric Health Corporation, 416-927-8400 Leslie Cho, Chief Financial Officer, Centric Health Corporation, 416-927-8400