President's Letter

Fellow Shareholders:

A little more than 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 segments. With our multiple and meaningful actions towards debt reduction over the first nine months of 2016, I am very pleased to report that we have effectively achieved our goal.

Delivering on Our Debt Reduction Commitment

In aggregate, our actions since the beginning of 2016 have reduced our outstanding debt by approximately $220 million, which will generate annual interest savings more than $19 million next year. The result is that we have significantly improved our debt to equity and interest coverage ratios, while simplifying our balance sheet considerably.

We are evaluating options with respect to further debt repayment and extension of debt maturities, with the objective to further simplify our balance sheet. Importantly, we have additional near-term funds flows alongside our growing adjusted EBITDA to support our next steps – more than $7 million still to come from the $17 million investment from Guardian and IDA Pharmacies (which I discuss below) and $8 million1 still to come from the sale of our Physiotherapy, Rehabilitation and Medical Assessments operations in December of last year. In short, we now have the balance sheet strength and financial flexibility to invest in our growth opportunities, both organically and through strategic, tuck-in acquisitions.

Continued Momentum in Our Financial Results

The third quarter of 2016 marked our tenth consecutive quarter of year-over-year growth in revenue and adjusted EBITDA from continuing operations, as we expanded our overall adjusted EBITDA margin to nearly 10%. As discussed below, the continued momentum in our financial results was 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. We also benefitted from a lower corporate cost structure as we continue to focus on expense management and efficiencies.

Growing Our Specialty Pharmacy Business

Our Specialty Pharmacy business is performing well and we are making steady progress on our growth strategy. Last year, we completed a transformative acquisition, expanding into Western Canada through the addition of Pharmacare. In addition to providing a platform for growth in the West, it is allowing us to pursue opportunities with regional and national long-term care and retirement home customers who require services across multiple provinces.

This year, we have extended our geographic reach in the West through two transactions. During the second quarter, we entered the Saskatchewan market with the acquisition of Pharmacy West in Regina. During the third quarter, we entered the British Columbia market with the signing of definitive agreement to acquire CareRx, with three fulfilment centres in the high growth centres of Vancouver, Victoria and Nanaimo (the transaction was subsequently closed in the fourth quarter). We further strengthened our presence in BC with the opening of a fulfilment centre in Kelowna and now have access to the vast majority of the province's seniors population.

Our entry into BC, 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.

To support our growth and long-term success, during the quarter 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. We have already received nearly $10 million of the funds.

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. During 2015 we made meaningful investments in facility improvements and accreditations that, while dampening segment profitability in the short term, enhance 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 40% in the third quarter of this year – up from 38% twelve months prior, and 20% in 2012.

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.

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

We are emerging from a truly transformational period for our Company. Our deleveraging marks 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 growing our business.

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


1. $3 million of the $8 million currently recorded on balance sheet as restricted cash.