Quipt Home Medical Corp. (QIPT) Earnings Call Transcript & Summary

Thank you for standing by. This is the conference operator. Welcome to the Fiscal Fourth Quarter and Unaudited Full Year 2023 Earnings Results Conference Call for Quipt Home Medical Corp. [Operator Instructions] And the conference is being recorded. [Operator Instructions] We remind you that the remarks today will include forward-looking statements that are subject to important risks and uncertainties. For more information on these risks and uncertainties, please see the reader advisory at the bottom of the company's results news release. The company's actual performance could differ materially from both these statements. At this point, I'd like to turn the call over to Chairman and Chief Executive Officer, Greg Crawford. Please go ahead.

Thank you, operator, and thank you all for joining us today on the call. My name is Greg Crawford, and I'm the Chairman and Chief Executive Officer of Quipt Home Medical. Joining me today is Hardik Mehta, our Chief Financial Officer. Quipt Home Medical is a diversified health care services company, providing a full spectrum of home medical equipment and services to patients in the comfort of their own homes across the United States. At Quipt, our model is centered around delivering clinical excellence and we drive this through our patient-centric ecosystem, leveraging technology-enabled equipment solutions in conjunction with our specialized clinical respiratory programs to effectively treat patients at home in a way that best suits their needs. Our core focus is on clinical respiratory care, serving patients with cardio and pulmonary conditions with over 80% of our product mix being considered respiratory in nature. The consistent financial and operating success of our business seen through fiscal 2023 is a result of our targeted go-to-market strategies and end-to-end respiratory solution we offer in the marketplace. Our team of over 1,200 carries out our vision every day, working tirelessly to fulfill our company's central objective of providing exceptional patient care. Our ability to successfully implement our differentiated service model is driving Quipt's record-setting growth and emergence as a growing force in the industry. On this call, we will update you on our record-breaking fourth quarter and full year fiscal 2023 performance, the strong demand trends we are continuing to see across all our product categories, the favorable regulatory landscape and our strategic insights on the continued success of our core business. At present, Quipt has expanded to 125 locations across 26 states with over 287,000 active patients, which has enabled us to strengthen our coast-to-coast reach, and this continued scaling of our infrastructure throughout fiscal 2023 has allowed us to monitor our rapidly growing patient base, effectively decrease organizational redundancy and grow our margins. Through fiscal Q4 and in real time, we are experiencing consistent demand for all of our key product categories, continued success in the ongoing penetration of our primary sales touch points and are thrilled with the integration and performance of our largest acquisition that began the calendar year, all of which has led us to a year of significant financial and operating milestones for Quipt. During fiscal 2023, we recorded record revenue of $221.7 million or 58.5% year-over-year growth, with strong margin acceleration to 22.8% equating to adjusted EBITDA of $50.6 million or growth of 73.5%. For fiscal Q4 2023, we saw adjusted EBITDA margins continue to accelerate, reaching 23.5%. This can be attributed to the operational scale we have achieved in our ability to leverage the platform we have built when adding revenue. Due to our focus on growing the continuum of care, cross-selling product categories, taking advantage of the benefits of normalized supply chain and operating in a favorable regulatory environment, we have the opportunity to increase our organic growth performance. We have been focusing our efforts on regions with a high COPD prevalence and expanding our key sales touch points into continual markets to meet our organic growth objectives. We expect steady and continuous organic growth in fiscal 2024 with the objective of 8% to 10% on an annualized basis. Furthermore, our strategy of providing a complete range of end-to-end respiratory solutions with our diverse product mix is crucial to sustaining our success and a major component in the expansion of our core markets as we continue to carry out our long-term strategic expansion strategy. By concentrating on our primary sales channels, which are medical facilities such as hospital systems, physician's offices, long-term care facilities, home health agencies and rehab centers, we can increase overall volume growth, which is the main driver of organic growth. Moreover, I would like to provide insights into the demand trends within our sleep business, given the recent market speculation and reaction related to the adoption of GLP-1 diabetes and weight loss medications. Our sleep segment has experienced business as usual with absolutely no impact. Demand continues to exhibit strength in real time. And our anticipation is that this robust demand will persist well into the foreseeable future. It is important to emphasize that CPAP and BiPAP therapy continued to be the established gold standard of care for individuals diagnosed with obstructive sleep apnea. Furthermore, leading manufacturers of sleep equipment are also reporting no findings of any decline related to GLP-1 drugs. In addition to that, we hold the firm belief that there are over 20 million Americans who haven't yet been diagnosed with OSA that have it, representing a substantial untapped opportunity for future market growth to this point, we believe it is possible that the total addressable market may grow as a result of more awareness and increased diagnosis of obstructive sleep apnea. Lastly, we continue to believe the key is to work with our sleep patients to ensure their compliance as it relates to the therapy, which is the heart of our patient-centric ecosystem. Moving to the regulatory environment. We see continued stability and there have been no indications of the return of the competitive bidding. Historically, CMS has begun any competitive bidding process roughly 18 months before contracts and price takes effect. The likelihood of this happening is decreasing because CMS hasn't indicated how returning to the program would result in savings. Additionally, CMS has recently announced a headline CPI increase of 3% to the Medicare fee schedule beginning on January 1, 2024. Prior to 2022, our product categories were not subject to CPI adjustments while included in the competitive bidding program. Over the past year, we have seen positive developments such as the easing of restrictions through the elimination of the long-standing requirement for providers to obtain certificates of medical necessities for home oxygen, which reduces the administrative burden on health care providers. Moreover, we have witnessed the opening of access for patients who visit the emergency care setting and are identified as having either acute or chronic respiratory diseases and these now can be ordered for home oxygen equipment. Throughout fiscal 2023, we executed on the fundamental pillars of our growth strategy, building out our operational footprint into 6 new states, providing us additional attractive markets to implement our innovative go-to-market strategy. Moreover, in fiscal 2023, we continued making technological advancements, such as an e-prescribing and expanded our commercial insurance capabilities with the addition of Aetna to our national contract roster. Quipt is in a strong position to withstand any potential economic downturns due to the nature of our business, providing necessary respiratory products and services to patients in the home setting throughout the United States. Our unwavering focus on building a robust operational foundation and infrastructure, combined with our proactive approach to both organic and inorganic growth, has uniquely positioned us to seize the multitude of opportunities for expansion that lie ahead. With that commentary, I'd like to hand the call over to Hardik to discuss our fiscal fourth quarter and full year 2023 financial results.

Thanks, Greg. On Monday evening, we announced our fiscal fourth quarter and full year 2023 financial results representing the 3 months and 12 months ended September 30, 2023. Please note that all financial values are in U.S. dollars. Here are some key highlights. Through the company's continued use of technology and centralized intake processes, respiratory resupply setups and/or deliveries increased to 395,618 for the year ended September 30, 2023 compared to 231,495 for the year ended September 30, 2022, an increase of 71%. The company's customer base increased 65% year-over-year to 285,819 unique patients served in fiscal year 2023 from 173,203 unique patients in fiscal year 2022. Compared to 516,328 unique setup deliveries in fiscal year 2022, the company completed [ 754,418 ] unique setups and deliveries in fiscal year 2023, an increase of 46.1%. Revenue for fiscal year 2023 was $221.7 million compared to $139.9 million for fiscal year 2022, representing a 59% increase in revenue year-over-year. Recurring revenue as of fiscal year 2023 continues to be strong and exceeds 83% of total revenue. Adjusted EBITDA for fiscal year 2023 was $50.6 million or 22.8% margin compared to adjusted EBITDA for fiscal year '22 of $29.2 million or 20.9% margin, representing a 73% increase year-over-year. Revenue for fiscal Q4 2023 was $62.5 million compared to $40.1 million for fiscal Q4 2022, representing a 56% increase in revenue year-over-year. Adjusted EBITDA for fiscal Q4 2023 was $14.7 million at 23.5% margin compared to adjusted EBITDA for fiscal Q4 2022 of $8.4 million at 21% margin, representing a 74% increase year-over-year. Cash flow from continuing operations was $40.5 million for the 12 months ended September 30, 2023 compared to $26.3 million for the 12 months ended September 30, 2022, a substantial increase of 54%. For fiscal year 2023, bad debt expense improved to 4.5% compared to 8.7% for fiscal year 2022. This exemplifies the company's ability to scale and add more revenue through add-on acquisitions without compromising billings and collection capabilities. Operating expenses remained flat as a result of the year ending September 30, 2023 was 46.6% compared to 46.6% in the corresponding period in 2022. The company reported $17.2 million of cash on hand and total credit capability of $41 million as of September 30, 2023, with $20 million available towards the revolving credit facility and $21 million available pursuant to the delayed draw term loan facility. The company maintains a conservative balance sheet with net debt to adjusted EBITDA leverage of 1.4x. We are very proud to have produced another record-breaking year in fiscal 2023. Real-time momentum has persisted in fiscal Q1, and we are witnessing continued organic growth and margin expansion that we have been aiming for. For fiscal 2023, our revenue reached $221.7 million, and adjusted EBITDA margin has reached 22.8%, driven by our diversified respiratory product mix and services as well as focusing on operational leverage in the business and effective cost management. Annualizing our fiscal fourth quarter, our run rate revenue now sits at $255 million. In Q4, our margin acceleration continued as a result of the scale we have generated with 23.5% adjusted EBITDA margin realized in the quarter. We expect strong organic growth in fiscal 2024 will persist as we continue to drive volume through our growing sales team and the cross-selling of products and continued expansion of the continuum of care in adjacent markets. In real time, setups across our product mix are very strong, including our sleep segment, which continues to drive our resupply business as a steep patient converts into our program and we continue to see strong organic growth. As we move into fiscal 2024, we continue to see improving net cash flow from operations. On our last conference call, we increased our guidance to 6% to 8% net cash from operations after CapEx and/or lease payments and before any debt service and purchase price payable related payments. We are very confident in our ability to continue to grow our net cash flow, inclusive of our CapEx needs, and continue to see this as our base case on a go-forward basis with a long-term goal to further improve on this as we continue growing our business. The continued consistency of our revenue base is driven by our highly recurring revenue model, which accounts for more than 83% of our total revenue mix. Our resupply program is a major component of this recurring revenue base as we have significantly scaled the program, which now consists of 169,000 patients as of September 30, 2023. The resupply program represents an amazing growth area for us, extending a patient's life cycle with us. Our healthy balance sheet with over $58 million of liquidity gives us ample flexibility to execute our organic and inorganic plan for strategic expansion in an environment with higher interest rates. Our present net leverage is very modest at 1.4x, giving us the ability to deploy a combination of debt and cash for the execution of our acquisition pipeline in accordance with our prudent acquisition approach. In fiscal Q4, we closed on a multistate acquisition target expanding our presence in Mississippi, Texas and Louisiana, adding $9 million in revenue and $2 million in adjusted EBITDA. We were able to acquire this asset for a very favorable multiple of adjusted EBITDA on a post-integration basis. In real time, the integration has gone very well, and we are working on organic expansion opportunities within those existing markets on the heel of this acquisition. The operating footprint aligns closely with regions that have a very high prevalence of COPD, a key target patient group. According to National Institutes of Health, about 1.5 million people across the 3 states have COPD. We will remain dedicated to the structured acquisition approach and tried and true integration process we have developed over many years. We have a strong plan for sustained strong organic growth as well as the acquisition pipeline. These are the things that have propelled our consistent growth, which is demonstrated annually and has strengthened the company's position in the marketplace. We have the tools needed to execute our expansion and acquisition strategy to drive value for our investors. Thank you. And with that update, I'll turn the call back to Greg.

Thanks, Hardik. Providing excellent patient care with an emphasis on treatment of conditions like sleep apnea, COPD and other chronic respiratory disease is our top goal in each of our markets. We are constantly thinking of methods to expand the number of patients we serve and get access to desirable geographic areas, and we do this by breaking into new markets and forming partnerships with payers, patients and referral sources. Our competitive advantage stems from our increased market share, reach and robust clinical services, which enable us to leverage economies of scale. We believe that because we have successfully implemented the essential components of our growth strategy, and we will maintain our strong momentum for the foreseeable future. These include completing accretive acquisitions, investing in our company's future organic growth and broadening our health care network across the country through the execution of national insurance contracts and the expansion of continual markets. Furthermore, we are certain that acquisitions that are effectively integrated contribute to the overall acceleration of our organic growth strategy. At this point, I would like to review with you the 3 components of our core growth strategy. The first is driving organic growth with the goal of the 8% to 10% annually. We see momentum in fiscal Q1 2024 and have continued growing our sales team, which is one of the core initiatives on this front. This is how we connect with key touch points like hospital networks, doctor's offices, long-term care facilities and rehab centers. Furthermore, the aging population and significant increase in the number of people with multiple chronic diseases across the United States are very positive demographic trends for Quipt when looking at the operating environment. Home medical equipment and services are becoming more necessary as the population ages, which provides a very sustainable long-term growth opportunity. Additionally, a lot is being done to make sure that patients receive care at home whenever it is feasible. Secondly, as we continue to expand our business, we remain committed to leveraging technology in every way we can to consistently improve our operational performance. We focus on enhancing our workflow processes, which creates real value and removes friction points. As an example, the significant improvement in our bad debt expense and increased net cash flow is a result of improved processes across our billing and collections functions of the business. Furthermore, we are focused on long-term growth of e-prescribing in our industry and have positioned ourselves well with our investment in this area in fiscal 2023. Electronic prescribing is essential to the industry as this technology can serve to boost productivity, cut down on errors, boost compliance and improve patient outcomes. As of now, less than 5% of our orders come from e-prescribe and we anticipate this will grow significantly over time, giving us an opportunity to improve the patient, prescriber and provider experience by eliminating inefficiencies and reducing paperwork. Another key example of the usage of technology is our automated resupply platform, which not only helps us drive organic growth and higher margin recurring revenue, but also provides us with considerable revenue synergies when we make strategic acquisitions. The third element of our growth strategy is expanding scale by making smart, accretive acquisitions in conjunction with our tried and true integration approach, which has effectively integrated 19 acquisitions since 2018, representing over $115 million of annualized revenues. Our attention is on heavily-weighted respiratory businesses, which can be successfully incorporated into our scalable infrastructure. Our strategy objective is to increase our payer base and geographic reach into advantageous geographies with a high a prevalence of COPD. Thanks to our healthy balance sheet, we will be able to take advantage of opportunities as they become available to grow our revenue, EBITDA, patient base and overall geographic reach. Given the continued strong performance of our business in real time, we are actively engaging with investors from the United States and Canada to share our ongoing financial and operating achievements and discuss our long-term growth objectives. In calendar 2023, we participated in 10 investor conferences and expect to be very active throughout 2024 meeting with investors. Moreover, we are thrilled to see our institutional shareholder base on both sides of the border continue to grow as we have moved through 2023. As we look to fiscal 2024, we will continue to drive organic growth, strive to grow our adjusted EBITDA margin further, which accelerated in the most recent fiscal quarter to 23.5% and continue building our health care network across the country. With our flexible capital structure, we continue to look at different ways to create shareholder value as appropriate and believe that our operational excellence and 1.4x leverage balance sheet provide us with all the resources necessary to execute our expansion strategy. And I would like to conclude that we have been seeing consistent demand across our product mix in real time during fiscal Q1 2024 and look forward to sharing our fiscal Q1 results in February. Finally, I would like to take this chance to thank the whole Quipt team for their tireless work and our stakeholders for their continued support.

[Operator Instructions] Our first question comes from Doug Cooper of Beacon Securities.

Congratulations on a great quarter. I just want to focus in, if I could, on the resupply program. You said in the press release, it's 169,000 patients now in the program. Can you give us an idea of what the average reorder rate is per patient for the year and what the average revenue per reorder is?

Yes, sure. This is Greg. Doug, so we continue to see those go up kind of quarter-over-quarter in that. Right now, we're seeing patients order in just about 3 times a year. And we're starting to see the average revenue in that to be just over $200 in that, which is -- that's up about 6%, 7% in that from where it was this time last year or at the beginning of fiscal '23 Q1.

So is that -- just to be clear, is that $200 for the 3x or it's $200 per reorder?

No, that's -- yes, that's just over $200 per reorder.

So the average person is...

That would be just over $600 per patient.

Okay. So $600 in -- just the math would be 600 times 169,000, that's $100 million. Is that where the run rate is on the resupply business?

Yes, that's it. That's about right, yes. The other thing that we're kind of seeing in that side of the business too is the average items per order that go in there. That's another metric that we kind of watch. We continue to see that go up too. So that slightly increased about 5% to 6% in that this year. Honestly, that's the new...

This is predominantly hoses and masks, I'm guessing, right?

Yes. Yes, the cushions and the filters and tubes, water chambers, anything that need replace, which there's a lot of parts and pieces that need replaced in that on those devices.

Okay. One of your peers said on their conference call that the reorder business gross margin was 42% in and around there. Is that similar for you guys?

Yes. Yes. Very similar in that for us.

Okay. So because this is electronic, I guess the reorder business, the infrastructure is in place. So I'm guessing that the EBITDA contribution from the reorder business is much greater than the rental business.

Yes. Than most rental items, yes, we do have some other higher margin in that rental items, but as far as -- and overall, if you kind of look at that side of the business, and that is pretty automated. So over 50% of the orders in that are what we refer to as no touch and that where the patient has kind of either ordered through the app, they ordered via e-mail and it just kind of flows through right to the warehouse and it doesn't need like a pre-authorization or a new updated prescription or anything. So as those are all kind of work proactively, so when the patient does request to get additional supplies, that's able to go through seamlessly.

So just to finish off and close the loop then. So if respiratory is 80% of your revenue, so you're running, say, whatever that is, $275 million, I think Hardik you said [indiscernible] Q4 annualized, so 80% of that...

Right now, we're about $255 million run rate.

Yes, $255 million, 80% of that is $200 million in the reorder business. Is that sort of 40% to 50% of your respiratory business is the resupply business now? Is that in the ballpark?

That sounds about right overall.

That's about right.

Yes.

Sorry, Hardik, you said it's the ballpark?

Yes, that's about right. 40% to 50% is a good ballpark range.

Okay. Just on the M&A strategy. You guys are obviously active and you've been successfully integrated a bunch of companies. Your stock now trades about 4x last quarter annualized EBITDA. So what are the prices you're seeing out there? And quite frankly, I'm assuming you guys are the fifth largest respiratory company in the U.S. There is bigger players than you who probably are looking at M&A as well. You must be on their radar, I'm assuming now.

Well, as far as -- we can only speak about who we acquire, that's within our control. So I guess it definitely has changed some dynamics. I think the overall multiples for the targets we would typically go after have also seen some downward movements, which, at this point, if you structured it right, I think there's still opportunities out there that we can acquire and make financial strength of -- sense of it, right? I mean at the end of the day, we still have to -- have 2 things that we have to keep in mind given the environment that we are in. One is, obviously, you have an interest rate component going on, which we carefully monitor and evaluate that against the cash flow of our businesses that we acquire. So we want to at least make sure we come out on top of that. And then -- and on the other side is what you just said, which is comparing our multiples to the target that we end up acquiring. That's a little bit of a lesser concern quite frankly, because for most of the companies that we have acquired, if you just go back and look at our average multiple on a post-close basis, I think that will still be less than kind of what our current trading multiples are. So that margin has compressed, given our share price and where we stand today. But I think for the right set of acquisitions, the numbers can still make sense.

Okay. Just my last question on the GLP-1 drug. It's in -- thank you for your commentary specifically around Q1. What are you hearing from ResMed or those guys? I listened to obviously ResMed's conference call in the last quarter, same as you. They said they're seeing no impact in the business. That was a few months ago. But these drugs have been out for a couple of years now. And when do you think the market will realize that it's not having an impact? I'm just wondering when that light bulb will go off.

Yes, that's actually a really good question, Doug. I can just tell you in real time and by looking at our results here in that we've just seen no slowdown in our business and don't anticipate anything. I think it does make rational sense, though, to think that more patients do get in the pipeline in that and the funnel of the health care system, and they have sleep issues or anything in that and maybe don't qualify for GLP-1s in that, it could drive volumes even further. It's estimated that there's over 20 million Americans that haven't been diagnosed or treated yet for sleep apnea. So it's a pretty big TAM there for us to still in that and have the availability in that to service.

Okay. That's it for me, guys. Congratulations on the quarter and happy holidays.

Our next question comes from Ty Collin of Eight Capital.

First one for me, just on the margin outlook for next year. Are you kind of still seeing room for meaningful improvement there on an organic basis like you were able to achieve this year? And if that is the case, what are sort of the low-hanging fruits there, where are those opportunities?

Thanks, Ty, for the question. I guess from a modeling perspective, that's kind of the driving force behind the question. I mean, we've always taken a conservative approach. And I would say, if I'm modeling internally, we certainly model for what we currently have. There has been some recent price increases that we have seen, which we have -- we were able to offset that using some other opportunities from a low-hanging fruit perspective. So I would say from -- for calendar 2024, what you see for -- sorry, for fiscal '24, what you see for fiscal '23, I think that is still within a good plus and minus 5% range in terms of margins. 5% range in terms of prospectus curve not from actual absolute curve swings.

Right, right, right. Okay. Got it. Got it. And then maybe sticking on that theme, some pretty strong sequential improvement here on the gross margin rate. It looks like about 150 bps quarter-on-quarter. Can you provide a little more context on how you were able to do that and maybe if there's any trends to take note of there?

I mean nothing certainly in particular. I would say, I mean, this is a little bit of a year-end audit situation. So there are sometimes adjustments that flow through in your Q4, which could be spread across a little bit further out. But I mean we always say let's not look at quarters, look at, at least 2, 3 quarters in a row or in this case, you could look at kind of the whole fiscal year kind of to look and do actions.

Okay. Great. And then last one for me, circling back to some of the earlier questions on the resupply patients. What's sort of the average duration of your relationship with a resupply patient? Is it -- whether you're measuring that in quarters or years, I think that would be helpful to round out that discussion.

Yes, sure. This is Greg. We estimate that to be about 4.5 years and in that 5 years that the average resupply patient is around.

Our next question comes from Richard Close of Canaccord Genuity.

Hardik, maybe if you could just go over the organic growth numbers for the fourth quarter and for fiscal '23 to begin with here.

Sure. Thanks for that question, Richard. I mean if we go back and look at our fiscal '23, our organic growth rate year-over-year came around 6.7% to 7% from an organic perspective. And it gets a little tricky because you have big companies that are part of the year in both periods. So there is a little bit of art to science, but that's something that -- 6.7% to 7% is what we believe our organic growth was for fiscal 2023. Now if we look at our organic growth and break that down a little bit further, the first half of fiscal 2023 had a lower organic growth rate. We were still a little recovering from some of the product issues and stuff like that. And then the second half of the fiscal '23 had a little bit -- had larger than the 7% growth rate. So if you break that down into 2 halves, then they both had a little bit different, but the average is around that. And then for the quarter, we are kind of strong at about 3%.

Okay. And then with respect to bad debt, it ticked up a little, I guess, sequentially. Was there anything -- I mean, obviously, strong improvement year-over-year, but maybe a little tick up from third quarter to fourth quarter. Was there anything specific driving that or like the year-end cleanup or anything along those lines?

I would say, I mean, it's a slow and steady process on our end. We continue to work on it, kind of chip at it along the way. There weren't certainly any dramatic or drastic changes. It's just when we acquired Great Elm, we also adopted some of the practices that came along with that. And I think what you're seeing is a kind of a weighted average number for bad debt and revenue of the combined entities. Having said that, we -- sorry, we have always said that is an area that we believe there is opportunities to continue to work upon.

Okay. That's helpful. You beat our revenue estimate in the quarter. I guess, consensus I had is $62.9 million. So maybe a little bit below that. Was there anything specific maybe to the fourth quarter that didn't come through in the quarter that you can call out or anything to note there? I mean, obviously, you're talking about the first quarter. It sounds like things are going extremely well for the first quarter, but just curious if anything slipped.