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

Thank you for standing by. This is the conference operator. Welcome to the First Quarter 2025 Earnings Results Conference Call for Quipt Home Medical Corp. [Operator Instructions] 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 these statements. At this point, I'd like to turn the call over to Chairman and Chief Executive Officer, Greg Crawford.

Thank you, operator, and thank you to everyone joining us today. I'm Greg Crawford, Chairman and CEO of Quipt Home Medical. I'm pleased to have Hardik Mehta, our Chief Financial Officer; and Tom Roehrig, our Chief Accounting Officer, joining me today. Quipt Home Medical is a diversified health care services company, delivering a comprehensive range of home medical equipment and services to patients across the United States. Our commitment: to clinical excellence powered by a patient-centric model and advanced technology-enabled solutions. These, combined with our specialized respiratory programs, allow us to effectively meet patient needs in the comfort of their own homes. At present, Quipt has expanded to 135 locations across 26 states with over 314,000 active patients, which has enabled us to strengthen our coast-to-coast reach. Our go-to-market strategy is rooted in providing an integrated end-to-end respiratory care solution complemented by a diverse portfolio of durable medical equipment. As a trusted partner for patients and health care providers alike, we have developed a scalable model that addresses the complexities and evolving demands of the durable medical equipment ecosystem. Respiratory care comprises approximately 77% of our product mix, demonstrating our unwavering commitment to patients with pulmonary and cardiovascular conditions. This strategic focus aligns with critical macro trends such as the aging population, the rising prevalence of chronic respiratory disease like COPD and the significant untapped opportunities in the sleep apnea market. These drivers, combined with our operational expertise and expanding scale, position Quipt to meet the growing demand for high-quality in-home respiratory care solution. On today's call, we will review our fiscal first quarter 2025 performance as well as provide insights into emerging demand trends, operational highlights and strategic initiatives shaping our growth trajectory for the remainder of fiscal '25. For the first quarter of fiscal '25, we experienced consistent demand across all major product categories and steady referral patterns. We achieved stable revenue generation of $61.4 million alongside a strong sequential improvement in adjusted EBITDA margin, which reached 22.8%, leading to adjusted EBITDA of $14 million. We are particularly encouraged by the meaningful improvement in our adjusted EBITDA margin sequentially during fiscal Q1 2025. This progress reflects the proactive steps we've taken to streamline our operations and optimize our organizational structure. These enhancements are enabling us to operate more efficiently while maintaining our commitment to high-quality patient care. As we continue to execute on our growth initiatives, we expect this operational discipline to support steady margin expansion throughout the year. Shifting the focus to our sleep business, we are pleased to report that GLP-1 medications continue to have no impact on demand. Referral activity for new device setups remain solid, while replacement supply volumes continue to demonstrate strong and consistent performance. Recent real-world data shared by the leading sleep device manufacturer involving nearly 1.2 million patients underscores the positive effects of GLP-1s' on-treatment adherence. The study found that individuals with an obstructive sleep apnea, OSA, diagnosis who were prescribed the GLP-1 were 10.7% more likely to start positive airway pressure therapy compared to those not on GLP-1s. Additionally, these patients exhibited higher resupply order rates over both 12- and 24-month periods. These data points have now been steady with the same trend, plus or minus a couple of tens of a basis points as the leading manufacturer has grown their analysis from a year ago with approximately 300,000 patients to now tracking nearly 1.2 million patients. On January 17, 2025, the American Academy of Sleep Medicine released a quick reference guide for providers discussing the use of novel pharmotherapies (sic) [ pharmacotherapies ] in the treatment of OSA. The AASM continues to emphasize positive airway pressure therapy as the frontline treatment for OSA. Additionally, the guide suggests that weight loss medications may serve as useful adjunctive or combination therapies. We believe GLP-1 medications will serve as a long-term tailwind for our sleep business, introducing more motivated patients into the health care system as they focus on improving their overall health. Additionally, the regulatory environment remains stable, and we are not seeing any significant headwinds over the near term. This stability allows us to operate with greater efficiency and confidence, supporting both margin performance and continued strategic execution. With this regulatory clarity, we are well positioned to sustain long-term growth as we expand our footprint and deepen partnerships across the health care ecosystem. We continue to manage our balance sheet prudently with net leverage at 1.5x, which gives us the flexibility to invest in strategic initiatives. As we move forward, we are confident in our ability to deliver exceptional patient care, strengthening relationships with payers and execute on a disciplined, scalable growth strategy. Through these efforts, we are well positioned to drive consistent long-term value for our shareholders. With that commentary, I'd like to hand the call over to Hardik to discuss our fiscal first quarter 2025 financial results.

Thanks, Greg. On Monday evening, we announced our fiscal first quarter 2025 financial results for the 3 months ended December 31, 2024. Please note that all financial values are in U.S. dollars and are now reported under GAAP accounting principles with comparison periods also reported under GAAP for consistency. Here are some key highlights from the quarter. We completed 221,000 unique setups and deliveries in the fiscal first quarter 2025, an increase of 3% from 215,000 unique setups and deliveries in fiscal Q1 2024. Respiratory resupply setups and deliveries increased to 124,000 for the quarter, reflecting growth of 1% year-over-year, driven by our centralized intake processes and technological innovations. The customer base grew by 1%, serving 157,000 unique patients as of December 31, 2024, compared to 155,000 unique patients as of December 31, 2023. Revenue for fiscal Q1 2025 was $61.4 million compared to $62.6 million in fiscal Q1 2024. This represents a 2% decrease year-over-year. Revenue for Q1 2025 was flat compared to Q4 2024. The Medicare 75/25 blended rate, which had been providing rate relief for certain geographies, was discontinued as of January 1, 2024. Although this change is still under legislative review and could return, its immediate cessation had a negative impact on our revenue and operating results. Moreover, in certain regions, we also experienced the withdrawal of Medicare Advantage members due to a capitated agreement engaged with other providers in the industry. In November 2024, a disposable supply contract was not renewed. The cumulative annual impact of these 3 events is estimated to be approximately $8 million with a reduction of approximately $1.5 million for the 3 months ended December 31, 2024, as compared to the 3 months ended December 31, 2023. Recurring revenue for Q1 2025 was very strong and was approximately 77% of total revenue. Adjusted EBITDA for Q1 2025 was $14 million at 22.8% margin compared to $15.3 million at 24.5% margin for Q1 2024, representing an 8.7% decrease. Adjusted EBITDA sequentially increased by 4.5% from Q4 2024, in which the company reported adjusted EBITDA of $13.4 million at 21.8% margin. Net loss improved from Q1 2025 to $1.1 million or $0.03 per diluted share compared to net loss of $1.5 million or $0.04 per diluted share for Q1 2024. Operating expenses as a percentage of revenue came in at 49.5% in fiscal Q1 2025 compared to 47.6% in the corresponding period in 2024. CapEx, also known as rental equipment transferred from inventory, for fiscal Q1 2025 was $9.4 million compared to $7.3 million in fiscal Q1 2024. Cash flow from continuing operations was $9.3 million for the 3 months ended December 31, 2024, compared to $10.6 million in the prior period. The company reported $15.5 million in cash on hand as of December 31, 2024, compared to $16.2 million in cash on hand as of September 30, 2024. The company has total credit availability of $32.4 million, including $11.4 million available on revolving credit facility, and $21 million on delayed-draw term loan facility. We maintain a conservative balance sheet with a net debt to adjusted EBITDA leverage of 1.5x. Our financial performance in fiscal Q1 2025 demonstrates the stability of our business model. We delivered an improvement in adjusted EBITDA margin compared to previous quarter, reflecting the initial benefits of the structural optimization efforts we began implementing at the start of the fiscal year. These initiatives are focused on enhancing operational efficiency across the organization, reducing inefficiencies and unlocking margin expansion opportunities. We are pleased with the results so far, and we plan to deliver steady margins throughout the year as we continue to refine our processes and optimize our cost structure. We continue to see steady referral activity, demonstrating the durability of our operating model and our ability to meet evolving market needs. This consistent demand trends reinforce the strength of our business, which continues to benefit from macro tailwinds such as the aging population and the rising relevance of chronic respiratory conditions. While some headwinds persisted, we are pleased with our ability to build upon the foundation established in prior quarters and position ourselves for growth in the calendar year ahead. The strength and consistency of our revenue base was underpinned by our recurring model, which accounted for over 77% of total revenue in fiscal Q1 2025. A cornerstone of this model is our resupply program, which has grown to support more than 174,000 patients as of December 31, 2024. This program not only extends the duration of each patient's relationship, but also reinforces the value of our high-touch patient-centered care model. Our financial position remains a critical driver of growth. With $47.9 million in liquidity and a net leverage ratio of 1.5, we are well equipped to advance our growth initiatives. As capital market dynamics evolve, we remain confident in our ability to seize strategic opportunities that align with our long-term goals, all while safeguarding our strong financial foundation. As we progress through calendar 2025, we are energized by the opportunities before us. Our commitment to the operational excellence, disciplined growth and patient-focused care remains the cornerstone of our approach, positioning us for continued success. With that, I will now turn the call back to Greg.

Thank you, Hardik, for that comprehensive overview of our financial performance and operational highlights. Our top priorities for fiscal 2025 and beyond are driving organic revenue growth, achieving operational net profit, generating positive cash flow and expanding both adjusted EBITDA and adjusted EBITDA margin. We are focused on expanding our presence in both existing and new markets, leveraging our scalable business platform to broaden our product offering and service reach. To support these objectives, we continue to optimize our organizational structure, enhancing operational efficiencies by reducing redundancies and centralizing back-office processes. These measures are streamlining operations, improving scalability and positioning the business for sustainable long-term growth. At the heart of our strategy is our commitment to addressing chronic respiratory conditions, including sleep apnea, COPD and other pulmonary diseases, while ensuring patients can access high-quality care in the comfort of their homes. As demand for home-based health care solution grows, we are exploring new ways to expand our reach, including entering into untapped markets and fostering strategic partnerships with payers, referral sources and health care providers. Our competitive strengths lie in the unique combination of our expanding national footprint, growing market share and deep clinical expertise. These advantages enable us to operate at scale, creating efficiencies while delivering a seamless patient-centric experience that meets the rising demand for home-based care solutions. As it relates to the execution of our growth strategy, we are committed to leveraging technology in every way we can to consistently improve our operational performance. We are also focused on enhancing our workflow processes, which creates efficiencies and removes friction points. We believe the keys to success are strong organizational efficiency and building economical scale to create long-term value. Looking ahead, we are continuing to maintaining active engagement with our investors across both U.S. and Canada as we focus on delivering value through an expected return to consistent organic growth in calendar 2025. Importantly, despite trading well below the valuation levels at which recent acquisitions have occurred within our space, our business fundamentals remain solid. We are pleased that the margins have been steady and improved nicely on a sequential basis this quarter, reflecting the positive impact of our operational initiatives. Having effectively navigated recent challenges, we are well positioned to capitalize on growth opportunities. With steady demand across our product portfolio, we are optimistic about the balance of calendar 2025 and excited to share continued progress with you. We look forward to reporting our fiscal Q2 results in May. In closing, we remain committed to exploring and pursuing all avenues to drive increased shareholder value, and I would like to take this chance to thank the entire Quipt team for their tireless work and our stakeholders for their continued support.

The first question comes from Richard Close with Canaccord.

I apologize if there's any background. I'm traveling. I appreciate providing the calendar 2024 revenue headwind impact of $8 million on those moving parts. I was wondering if you could provide us some background on the contract termination, the disposable supply and how much of a headwind do you think that's going to be in the remainder of this fiscal '25. That's my first question.

Yes, sure. So that was an incontinence supply contract that we have had with a state that we operate in through a home health agency, and it ended up getting terminated there on November 1. So we expect that to be about a $2.5 million headwind, kind of look at it, say, in calendar '25.

Okay. And that includes the first quarter impact, that $2.5 million?

Well, that's the total for the entire calendar year. So if you -- it's probably a little more heavily weighted in the first quarter than it would be going out into, say, our fiscal Q1 '26.

Okay. That's helpful. And then also on the capitated contract that shifted, I guess, at the end of 2023, that was MA mostly, but you also, I think, have PPO patients as well with them. And how should we be thinking about like that headwind, maybe some of those PPO patients rolling off in the remainder of fiscal '25? I'm really just trying to get a feel of how much of the headwinds are behind you because you'll be lapping essentially January 1 75/25 and how much of the headwinds are sort of continuing this year, and obviously, the $2.5 million that you just mentioned is part of that.

Richard, this is Hardik. Yes, great question. So you're right. As we kind of go into fiscal 2025 -- sorry, calendar 2025, so fiscal Q2, 3 and 4, you would see the larger impact year-over-year in the first couple of quarters versus the later half because Humana's impact to us was really, it kind of scaled up. And so Q2, Q3 of last year, we saw the most impact of Humana. So quarter-over-quarter, year-over-year, you would probably see about somewhere in the neighborhood of $1 million in Q2; maybe $750,000 to $800,000 in Q3; Q4, similar; and then Q1 '25 might be much lesser. So again, if you take that $2.6 million, it's probably weighted towards the front couple of quarters and the second on the quarter -- second half, the 2 quarters in calendar 2025.

I think I'll just add to that, Richard, that it's important to note that the PPO has stabilized, and that as far as what we've seen fall off, and we're starting to make some progress in the referral community with the sales team of some initiatives to let them know that, hey, we still can take the PPO plans.

Okay. So it sounds like not much from Humana PPO rolling off in calendar '25, you just have this very small disposable contract termination. So most of the headwinds are behind you.

That's what we believe, yes.

Yes, that would be a good characterization. A little bit of Humana would be in the first half, that's all.

It has certainly stabilized.

Okay. Perfect. And then final question is, good job on the margins, and interested in some of the cost efficiencies or optimization that you're talking about and how much of that's still to come. Just curious, Hardik, in terms of how you're thinking about the progression of margins as we go through the year? Is it -- should we think about steady stair step as we progress through the year? And then how do you guys think about 25% adjusted EBITDA margins? Is that attainable this year? Or a time line to get in there.

I would say -- so definitely stabilized from where we are. I think we made some adjustments. If needed, we could make some more. We have always tried and staffed this company to kind of allow for more revenue growth, and that has certainly been our strategy. And so with that said, for 2025, of course, our goal this year, to get more organic growth. That's our primary focus here. But in the event that's not going to happen, then we would have to certainly readjust our cost structure. But for now, we are certainly planning for revenue growth, and stabilization of EBITDA is kind of where we see things are. Of course, with growth, we would be probably -- we certainly will be seeing that step increases in EBITDA margins as well, certainly stabilized from a dollar perspective with some opportunity should we have to take some.

And is 25% still a long-term target?

Yes. Certainly, a long-term and achievable target, maybe not in the near, for next 3 quarters. But again, certainly, it's a target we believe can be achieved with a little bit more of scale that we hope to bring in 2025. But yes, it's a certainly achievable target, but just not in the next near future.

The next question comes from Doug Cooper with Beacon Securities.

I just want to look at the -- so the EBITDA minus patient CapEx, Hardik, you said patient CapEx was $9.4 million in the quarter or total CapEx. So that gets me in a margin -- adjusted margin of 7.5% versus 12.8% last year. I just -- I don't have a number for Q4 for patient CapEx. Do you have that number?

Yes. Yes, I do. So patient CapEx in Q4 of 2024 fiscal year Q4 -- I mean Q1 of 2024 fiscal year was certainly on the lower end, and that was kind of an anomaly for that particular quarter, which shows year-over-year to be at a much larger percentage points. So last year, this quarter, our medical equipment CapEx was around $7.3 million versus $9.3 million -- $9.2 million, $9.3 million that we reported this year. But if you look at our Q2, 3 and 4 of 2024, those respective quarters were at $7.1 million, $10 million and $9.1 million. So what we have is kind of more along the lines. We are also in the middle of swapping out some recall for Philips on ventilators. So we do expect that will impact us for another couple of quarters as we kind of turn over the Philips Respironic ventilators.

I see. So it would seem to me a target of 10% plus should be a target there to generate some real free cash flow. Is that fair?

Sorry, can you ask that one more time, please?

Yes. The adjusted EBITDA margin or EBITDA minus patient CapEx margin, to generate some material free cash flow, that's got to be over 10%, correct?

Yes.

Okay. And when would we expect to have that over 10%? I mean, obviously, it helps if you get EBITDA margin towards the 25%.

Sure. I mean if you look at fiscal 2024, we were at 10%, right, for the whole year. Again, we might have to replace some ventilators here for the next couple of quarters, as I just mentioned earlier, but we should be kind of heading back to that margin rate sooner than later. We are not saying that we are deviating from what historically we have performed at least. Like, if you look at the whole fiscal 2024, I think that is a good measurement of what to expect overall in 2025. Of course, quarters might move here and there, but to keep that as a goal for 2025 is certainly what we would look -- we would consider steady state.

Okay. Moving on. The resupply business hasn't gained a lot of traction, I would say, over the past 5 or 6 quarters. It ended fiscal '23 at 169,000 patients, ended fiscal '24 at 172,000 and now we're 174,000. What can you do to drive that business? Because in my opinion, I guess that's a real generator of free cash flow.