Quipt Home Medical Corp. (NASDAQ:QIPT) Q4 2023 Earnings Call Transcript

Quipt Home Medical Corp. (NASDAQ:QIPT) Q4 2023 Earnings Call Transcript December 19, 2023

Quipt Home Medical Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: 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. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation there will be an opportunity for analysts to ask questions. [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 conference over to Chairman and Chief Executive Officer, Greg Crawford. Please go ahead.

Greg Crawford: 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 healthcare 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 respiratory solution we offer in the marketplace. Our team of over 1200 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. 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 physical 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 even 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 and 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, physicians’ offices, long-term care facilities, home health agencies, 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 continue 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 will result in savings. Additionally, CMS has recently announced a headline CPI increase of 3% to the Medicare fee schedule beginning on January 1st, 2024. Prior to 2022, our product categories were not subject to CPI adjustments while included in the competitive bid program.

Over the past year, we have seen positive developments such as the easy no restrictions through the elimination of the longstanding requirement for providers to obtain certificates of medical necessities for home oxygen, which reduces the administrative burden on healthcare 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 six 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 in 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.

Hardik Mehta: Thanks, Greg. On Monday evening, we announced our fiscal fourth quarter and full year 2023 financial results representing the three months and 12 months and the September 30, 2023. Please note that all financial values are in US 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 an 74% increase year over year.

Cashflow 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 net 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 to add-on acquisitions without compromising billing and collection capabilities. Operating expenses remain flat as a result of the year ending September 30, 2023 was 46.6% compared to 46.6% the corresponding period in 2022. The company reported 17.2 million of cash on hand and total credit availability 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 continues 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 to 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 sleep 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 lifecycle 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 multi-state 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 relevance of COPD, a key target patient group. According to National Institutes of Health, about 1.5 million people across the three states have COPD. We’ll even 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 deep 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.

Greg Crawford : 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, and these include completing accretive acquisitions, investing in our company’s future organic growth, and broadening our healthcare 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 three components of our core growth strategy. First is driving organic growth with the goal of the 8% to 10% annually. We see momentum in physical Q1, 2024, and have continued growing our sales teams, which is one of the core initiatives on this front. This is how we connect with key touch points like hospital, networks, doctors’ 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 collections functions of the business. Furthermore, we are focused on long-term growth of e-prescribing 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 serve, the boost productivity cut down on errors, boost compliance, and improve patient outcomes. As of now, less than 5% of our orders come from e-prescribed, 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 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 healthcare 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 1.4 times leverage balance sheet provide us with all the resources necessary to execute our expansion strategy. 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: [Operator Instructions] Our first question comes from Doug Cooper of Beacon Securities.

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Q&A Session

Doug Cooper: Hi, good morning, guys, and 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?

Greg Crawford: 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 that just about three times a year. 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.

Doug Cooper: So is that, just to be clear, is that $200 for the three times or $200 per reorder?

Greg Crawford: Yes, that’s 200, that’s just over $200 per reorder.

Doug Cooper: So if the average person is three times a year.

Greg Crawford: So it would be just over $600 per patient.

Doug Cooper: Okay. So $600 and just the math would be 600 times 169,000. That’s a hundred million dollars. Is that where the run rate is on the resupply business?

Greg Crawford: Yes, that’s it. That’s about right. Yes.

Doug Cooper: Okay.

Greg Crawford: 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 to. So that’s slightly increased about 5% to 6% in that this year.

Doug Cooper: This is predominantly hoses and masks, I’m guessing, right?

Greg Crawford: Yes. The cushions and the filters and tubes, water chambers, anything that needs replaced, which there’s a lot of parts and pieces that need replaced in that on those devices.

Doug Cooper: Okay. One of your peers set in their conference called it the reorder business. Gross margin was 42% in and around there. Is that similar for you guys?

Greg Crawford : Yes. Very similar in that for us.

Doug Cooper: 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?

Greg Crawford : Yes. And so, 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 have ordered via email and it just kind of flows through right to the warehouse if it doesn’t need like a pre-authorization or a new updated prescription or anything. So as those are all kind of worked proactively, so when the patient does request to get additional supplies that is able to go through seamlessly.

Doug Cooper: So just to finish off and close the loop then, so if respiratory is 80% of your revenue, so you’re running, say 2 — whatever that is 275 I think Hardik, you said, or 36, the Q4 annualized 80% of that.

Hardik Mehta : Right now, we’re about 255 runway with —

Doug Cooper: 255, 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?

Hardik Mehta : That sounds about right overall.

Doug Cooper: Sorry. Hardik, you say that’s in the ballpark.

Hardik Mehta: That’s about 40% to 50% is a good ballpark range.

Doug Cooper: 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.

Hardik Mehta: Well, as far as we, 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 structure it right, I think there’s still opportunities out there that we can acquire and make financial strength of it — sense of it. I mean, at the end of the day, we still have two things that we have to keep in mind given the environments 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 on the other side is, what you just said, which is comparing our multi post 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 go back and look at our average multiple on a post-close basis. That would still be less than kind of what our current trading multiples are. So, that margin has compressed, given our share price and where they stand today. But for the right set of acquisitions the numbers can still make sense.

Doug Cooper: Just my last question on the GLP 1 drugs, and thank you for your commentary specifically around Q1. What are you hearing from ResMed or those guys? I listed 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 years now. And when do you think the market will realize that it is not having an impact? I’m just wondering when that light bulb will go off.