President's Letter

Fellow Shareholders:

Just a little over three years ago, your senior management team committed to right-sizing the Company’s debt levels so that we could return our focus to growing our business by capitalizing on the tremendous long-term opportunities in each of our strongly performing segments. With our multiple and meaningful actions towards debt reduction over 2016, and continuing into the first quarter of this year, I am very pleased to report that we have effectively met our objective.

Living Up to Our Commitment to Debt Reduction

Since the start of 2016, we have reduced the Company’s debt by over $233 million, with resultant annual interest expense savings of more than $20 million. The result is that we have significantly improved our debt/EBITDA and interest coverage ratios, while simplifying our balance sheet considerably. We now have the financial flexibility to seize upon the significant opportunities inherent in each of our businesses in the evolving Canadian health care market.

We have also taken steps to refinance our remaining debt, and have signed an indicative term sheet with a Tier 1 Canadian bank. This will both extend the overall maturity of our remaining obligations, as well as significantly reducing our overall interest rate. Importantly, these interest rate savings, combined with our continued focus on corporate cost reductions and new contracts, bode well for future free cash flow generation and shareholder value creation, all underpinned by our unwavering commitment to the highest levels of clinical excellence and customer satisfaction.

Accelerated Growth in Our Specialty Pharmacy Business

We are the most advanced seniors pharmacy provider in Canada, offering industry-leading clinical intervention and pharmacovigilance capabilities, which are crucial to the customer’s decision-making process around health outcomes and aligned with governments’ Patients First health care strategies, which have been adopted by each of the provinces.

2016 saw a continuation of the transformation of this business which began with the 2015 acquisition of Pharmacare. The Pharmacare acquisition provided us a platform for growth in the West, and enabled us to pursue opportunities with regional and national long-term care and retirement home customers who require services across multiple provinces.

Last year we saw significant growth in the Western provinces through sizable multiple province contract wins and the strategic expansion of our network through accretive tuck-in acquisitions. In October, we built upon our entry into the B.C. market with the acquisition of CareRx, with three fulfilment centres in the high growth centres of Vancouver, Victoria and Nanaimo. We further strengthened our presence in B.C. with the opening of a fulfilment centre in Kelowna in the first quarter of this year, and are now positioned to serve the vast majority of the 25,000+ long-term care beds in that province.

Our expansion in B.C., along with the opening of a fulfilment centre in Lethbridge, Alberta, enabled us to secure a new, multi-province contract with the Good Samaritan Society at all of their 26 care homes with an aggregate of 2,400 beds.

During the second quarter, we entered the Saskatchewan market with the acquisition of Pharmacy West in Regina, and in December we rounded out our expansion plans for the year with the acquisition of two facilities in Grand Prairie and one in Medicine Hat, Alberta.

To support our growth and long-term success, we entered into long-term business development, technology and supply agreements with Guardian and IDA Pharmacies. The agreements call for, collectively, investments from our partner of up to $17 million for technology enhancements and growth initiatives, including both organic growth initiatives and acquisition opportunities.

Increasing Utilization at Our Surgical and Medical Centres

Our Surgical and Medical Centres business is well positioned as the largest and best regarded independent surgical network in Canada. Our meaningful investments in facility improvements and accreditations in 2015, while dampening segment profitability in the short term, enhanced our long-term growth opportunities. A primary objective of the growth strategy for this segment is expanding the utilization of our network based on the strategic positioning of our centres, which partners with physicians, hospitals, and health authorities. That number improved to 42% this year, up from 38% in 2015, and just 20% in 2012. Over the mid-term, we are targeting utilization rates of 50% across our network.

We are going to continue to drive improved utilization numbers by growing third-party payer services, capitalizing on the trend toward more government outsourcing, coordination of interprovincial and foreign procedures, growing our volume of uninsured services, introducing new technologies, and developing Centres of Excellence, such as we have done with bariatric surgery.

Continued Momentum in Our Financial Results

2016 was a strong year financially for our business, with meaningful revenue and adjusted EBITDA growth, as well as adjusted EBITDA margin expansion. These were driven by strong growth in beds serviced in the Western Canada operations of our Specialty Pharmacy division and solid performance from our Surgical and Medical Centres division, and we also benefitted from a lower corporate cost structure as we continue to focus on expense management and efficiencies.

Revenue from our continuing operations increased 4% to $167.4 million from $160.8 million, and adjusted EBITDA grew to $15.6 million from $8.5 million in 2015, with adjusted EBITDA margin growing to 9% from 5%. When normalized for out-sized corporate costs in 2015, reflecting since discontinued operations, adjusted EBITDA growth from continuing operations was 13% year-over-year.

Notably, the last two quarters of 2016 marked a return to meaningful cash flow from operations after several atypical quarters that were impacted by the timing of accrued transaction costs. Historically, we have reported strong cash flows from operations, and moving forward we expect to generate more consistent and growing positive cash flow from operations supported by growth in EBITDA, normalized working capital, and more stable payment schedules on one of our largest expense outflows from moving to a single new drug supplier.

A New Era for Centric Health: Focused on Our Significant Growth Opportunities

We have emerged from a truly transformational period for our Company, with our deleveraging marking the beginning of a new era for Centric Health. We are a significantly more focused organization and, with our balance sheet substantially addressed, we can devote our full attention to the opportunities in front of us. We have two highly-specialized businesses, and moving forward it is our intention to grow in these areas of expertise.

Our core value proposition remains compelling. As healthcare systems continue to face the challenges of spiraling costs and long wait times amidst an aging population that requires significantly more spending on healthcare than its younger counterparts, independent, collaborative support and innovation are required to identify and deliver cost effective solutions that are in the best interest of patients, healthcare providers and payers.

Centric Health is at the forefront of such collaboration and solutions. Our potential continues to be based on high growth businesses with national networks that have significant operating leverage and leading market positions, and that generate strong margins and cash flows, with low working capital and ongoing capital expenditure requirements.

All of this firmly positions Centric Health for strong growth, both organically and through strategic, tuck-in acquisitions, sustainable cash flow generation and the creation of long-term shareholder value.


Yours truly,

David Signature
David Cutler
President and Chief Executive Officer