Quipt Home Medical Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 16, 2024

There are 8 speakers on the call.

Operator

Thank you for standing by. This is the conference operator. Welcome to the Fiscal Second Quarter 2024 Earnings Results Conference Call for Quip Thome 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

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 would like to turn the call over to Chairman and Chief Executive Officer, Greg Crawford. Please go ahead.

Speaker 1

Thank you, operator, and thank you all for joining us on the call. My name is Greg Crawford, and I'm the Chairman and Chief Executive Officer of Quiptoe 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 home setting across the United States. At Quipt, our model is centered around delivering clinical excellence and we drive this through our patient centric ecosystem.

Speaker 1

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. Currently, respiratory care accounts for approximately 80% of our product mix, demonstrating our commitment to serving the needs of people with pulmonary and cardiovascular diseases. Our core strength is our incredible team, which consists of over 1200 individuals. With the ongoing dedication to patient care and scale we are achieving, we are poised to capitalize on the expanding need for respiratory care delivered in the home setting. This need for respiratory care is driven by an aging population, significant COPD target patient group of over 16,000,000 Americans and a significantly underpenetrated sleep apnea market with OFA impacting 80,000,000 adults across the United States.

Speaker 1

On this call, we will provide updates on our fiscal Q2 2024 performance and provide strategic insights into our core business and our new capital flexible allocation strategy. As it relates to our flexible capital allocation strategy, we look at all ways to allocate our capital to promote growth and create value. To this effect, we are pleased to have initiated a share repurchase program through a normal course issuer bid or NCIB after quarter end for up to 10% of our public float. The NCIB program reflects our continued confidence in our business model, operating cash flow generation and ongoing commitment to create shareholder value and shows our belief that our valuation in the marketplace does not reflect the ongoing strong fundamentals of the business. In fiscal Q2 twenty twenty four, we saw revenue of $64,000,000 marking a 10% year over year increase, while maintaining a robust margin of 23.3%.

Speaker 1

This resulted in an adjusted EBITDA of $14,900,000 representing growth of 14%. Our strategy focusing on generating economies of scale and effective cost management enabled the strength in our margin profile. While we are pleased with the overall margin profile and strength of our underlying operation, fiscal Q2 presented us with a range of challenges that we absorbed in the quarter, which negatively impacted certain geographies was discontinued. Although this change is still under legislative review and could return, its immediate cessation was a negative impact on the quarter. Also, in certain regions, we experienced withdrawal of Medicare Advantage members due to a capitated agreement engaged on with other providers in the industry.

Speaker 1

Additionally, the recent cyber attack on Change Healthcare, which significantly impacted the healthcare industry, hindered the ability to process and build claims in the back half of the quarter, creating a short term drag in our cash flow. In real time, we continue to work diligently through this with thousands of claims being recently submitted, and we expect cash collections to normalize in the coming months as the backlogs of claims are adjudicated and future claims are adjudicated in a timely manner. Despite these setbacks, we have observed several positive trends indicating a recovery path for the remainder of the year. We continue to see strong equipment setups in real time and there has been no change in the favorable referral patterns and our relationships with healthcare providers and payers remain solid. Moreover, we are working diligently to make up for the lost revenue with ongoing organic growth initiatives, which we hope will provide benefit in the quarters to come.

Speaker 1

Our primary objective remains to be at an 8% to 10% annualized organic growth rate, which we believe can be attained with the incorporation of our updated and enhanced capital allocation strategy. Our organic growth strategy remains focused on growing into continuum markets, enhancing cross selling of our product offerings and expanding our insurance portfolio, which provides a barrier of entry in the marketplace. This strategy has been crucial in our positioning towards achieving our target of 8% to 10% annualized organic growth, reflecting our confidence in our internal capabilities, resources and strength of our core business model. Our emphasis on utilizing our current infrastructure and economies of scale to generate margin consistency have been bearing fruit as we continue demonstrating our ability to drive a strong margin profile in any operating environment, all thanks to a careful and flexible approach to capital management. Our strategy of providing a comprehensive range of with our diverse product mix is critical to sustaining our success and playing a major role in the expansion of our core markets as we carry out our long term strategic expansion plan.

Speaker 1

By concentrating on our main sales channels such as hospital systems and physicians offices, we can increase overall volume growth, which is the main driver of our organic growth. Now I would like to provide you another real time update on our sleep business with reference to GLP-1s. Referral patterns for new device set and replacement supplies remain strong and recent positive data shared from the leading sleep device manufacturer involving 660,000 patients shows those on GLP-1s are 10.5% more likely to start sleep therapy path compared to those not on GLP-1s, highlighting their impact on treatment adherence. Additionally, data showed more frequent resupply orders for these patients over 12 24 months. Furthermore, we believe a significant new consumer driven trend that will promote more diagnosis of sleep apnea are tracking wearables.

Speaker 1

We are very excited to see one of the largest phone manufacturers in the world receive de novo FDA clearance to screen for sleep apnea on their watch. Our hope is that similar capabilities become available from other major tech companies. We think that the availability of these medications for treatment of obstructive sleep apnea may lead to a rise in the number of cases diagnosed with the illness and a rise in the market demand for PAP therapy. It is significant to remember that 80,000,000 adults in the U. S.

Speaker 1

Have OSA, of whom over 20,000,000 have moderate to severe OSA. Furthermore, it's estimated that 85% of cases of OSA remain undiagnosed and untreated. The total addressable market is extremely large for this segment of patient and allows for multiple treatment modalities. We believe based on early data and positive developments of more motivated patients entering the healthcare system as they work towards their health goals, the introduction of GLP-1s can be a tailwind for our sleep business over time. As it relates to the ongoing CID known as Civil Investigative Demand, I want to note that while we have not received a CID before, companies in our industry are subject to CIDs from time to time and a CID is a request for information, which is designed to gather facts that are necessary for regulatory authorities to make an informed decision about whether a violation has occurred.

Speaker 1

In real time, we continue working in a timely and transparent manner to provide information requested. And at this time, the government has not reached a conclusion that any wrongdoing has occurred. We believe we have effective internal controls around billing and compliance procedures in place and are confident in our practices. Our priority is to resolve this matter as quickly as possible and we are working diligently to do so. Turning back to the business, our approach to managing debt and leveraging our strong balance sheet enables us to pursue strategic initiatives that drive long term value for our shareholders.

Speaker 1

As we continue to implement our strategic growth strategy, we are confident in our ability to deliver exceptional patient care, establish strong payer alliances and achieve consistent and sustained growth. With that commentary, I'd like to hand the call over to Hardik to discuss our fiscal Q2 2024 financial results.

Speaker 2

Thanks, Greg. On Wednesday evening, we announced our fiscal Q2 2024 financial results representing the 3 months ended March 31, 2024. Please note that all financial values are in U. S. Dollars.

Speaker 2

Here are some key highlights. The company's customer base increased 8.1% year over year to 148,000 874 unique patients served in Q2 2024, up from 137,748 unique patients in Q2 2023. Compared to 198,101 unique setup deliveries in Q2 2023, the company completed 210,279 unique setups and deliveries in Q2 2024, an increase of 6.1%. This includes 116,000 and 23 respiratory resupply setups and deliveries for the 3 months ended March 31, 2024 compared to 106,486 for the 3 months ended March 31, 2023, an increase of 9%, which the company credits to its continued use of technology and centralized intake processes. Revenue for fiscal Q2 2024 was $64,000,000 compared to $58,100,000 for fiscal Q2 2023, representing a 10% increase in revenue year over year.

Speaker 2

Organic growth contributed approximately $6,400,000 or 6.5 percent year over year. Revenues for the 6 months ended March 31, 2024 increased to $129,300,000 representing an increase of 31% for the 6 months ended March 31, 2023. Recurring revenue as of fiscal Q2, 2024 continues to be strong and is approximately 80% of total revenue. Adjusted EBITDA for fiscal Q2, 2024 was $14,900,000 or 23.3 percent margin compared to adjusted EBITDA for fiscal Q2 2023 of $13,100,000 or a 22.5% margin, representing a 14% increase year over year. Adjusted EBITDA for 6 months ended March 31, 2024 increased to $30,200,000 representing an increase of 37% from the 6 months ended March 31, 2023 and represents 23.4% of the revenues.

Speaker 2

Cash flow from continuing operations was $17,100,000 for the 6 months ended March 31 compared to $14,800,000 for the 6 months ended March 31, 2023, an increase of 15.6%. For fiscal Q2 twenty twenty four, bad debt expense improved to 4.2% compared to 4.3% for fiscal Q2 2023. This exemplifies the company's ability to scale without compromising billing and collection capabilities. CapEx defined as transfers of rental equipment from serialized inventory to fixed assets when we deploy the equipment on patients was 11.2% for the 6 months ended March 31, 2024. We expect CapEx to stay consistent the remainder of the year.

Speaker 2

Operating expenses for the 3 months ending March 31, 2024 was 48%, which was flat compared to the corresponding period in 2023. The company reported $14,600,000 of cash on hand on March 31, 2024 compared to 18 point $3,000,000 as of December 31, 2023. The decline in cash was due to seasonality in collections and the recent cyber attack on Change Healthcare, which impacted the ability to process and bill claims in the back half of the quarter, creating a short term drag in cash flow. In real time, the company continues to work through this with thousands of claims being submitted and the company expects cash collection to normalize in the coming months as the backlog of claims are adjudicated and future claims are adjudicated in a timely manner like they have been historically. The company had total credit availability of $39,300,000 as of March 31, 2024, with $18,300,000 available towards the revolving credit facility and $21,000,000 available pursuant to the delayed draw loan facility.

Speaker 2

The company maintains a conservative balance sheet with net debt to adjusted EBITDA leverage of 1.4x. Our commitment is to ensure long term value creation for our shareholders. We dive this through our prudent capital management approach that aims to economically scale our business. Our long term strategy emphasizes maximizing our existing resources, including our strong balance sheet, operating strengths, sales capabilities and infrastructure we have built out today. This strategy is particularly centered around long term stability and resilience as it focuses on building already rock solid foundation from which we grow.

Speaker 2

Subsequent to quarter end, we initiated a share repurchase program with the initiation of an NCIB. We consider the NCIB as a welcome addition to our capital allocation plan given our ongoing confidence in our business model, future growth prospects, our solid balance sheet and our belief that our current valuation does not accurately reflect the company's fundamentals. As Greg mentioned earlier, in the Q2, we observed the impact of the end of the Medicare 7,525 relief as of January 1 in certain geographies and experienced the withdrawal of Medicare Advantage members in certain regions due to the capitated agreements engaged on with other providers in the industry. Despite this, we are proud of the efforts of our team in mitigating the overall revenue impact and leveraging our strong operating platform to post a consistent adjusted EBITDA margin profile of 23.3%. We have full confidence in our margin profile throughout the remainder of the fiscal year.

Speaker 2

Moreover, our priority remains on driving long term organic growth, which continues to be achieving a target of 8% to 10% on an annualized basis. The company also utilizes free cash flow, a non IFRS measure, as a method of measuring its cash available to pay interest and repay the company's senior credit facility or to make acquisitions. In looking at free cash flow, we define free cash flow as adjusted EBITDA less capital expenditures both in cash and those financed through equipment loans and repayments of leases. In fiscal Q2, we had $5,900,000 of free cash flow or 9% of revenue prior to interest expense and working capital adjustments outperforming expectations. On a go forward basis, we continue to anticipate 6% to 8% free cash flow following CapEx and or lease payments, but prior to any payments relating to debt service and acquisition price payable.

Speaker 2

We see this as our baseline scenario going ahead with the long term objective of improving on this as we continue to expand our business. We are confident in our ability to grow our net cash flow inclusive of our CapEx needs. Our robust balance sheet with $32,900,000 in cash and revolver availability puts us in an exceptionally well positioned to navigate through an environment of high interest rates and to strategically pursue both organic and strategic inorganic growth avenues. With a prudent leverage ratio of 1.4 times, we are strategically positioned to utilize a balanced mix of debt and cash, reflecting our commitment to a disciplined approach to grow. Maintaining our capital allocation discipline is crucial to our continued financial success, and we will continue to adhere to our strict approach.

Speaker 2

Lastly, I would like to highlight an upcoming change related to financial reporting to our investors. The company has determined that it no longer qualifies as a foreign private issuer and as a result effective October 1, 2024, the company will transition from International Financial Reporting Standards, AKA IFRS, to U. S. Generally Accepted Accounting Principles, AKA GAAP. This means starting with our Q4 of fiscal 2024 and our audited financials for the year ending September 30, 2024, the financial statements will be prepared under U.

Speaker 2

S. GAAP. It also means that effective October 1, 2024, the company will be subject to the same reporting and disclosure requirements applicable to domestic U. S. Companies and the company will be required to file periodic reports and financial statements with the SEC on Form 10 ks and Form 10Q as applicable, as well as filing current reports on Form 8 ks.

Speaker 2

We are looking forward to this transition as we believe it is important to align our accounting standards with the geography of our operations being all within the United States as well as improving comparability to our peers in the industry. Thank you. With that update, I'll turn the call back to Greg.

Speaker 1

Thanks, Hardik. Our investment in creating operational efficiencies is central to our overall strategy. By automating key processes and enhancing our operational infrastructure, we aim to boost productivity, reduce costs and improve patient outcomes. This focus on generating efficiencies not only supports our long term organic growth objectives, but also ensures we remain competitive and agile in our markets coast to coast. By optimizing our workflow procedures to generate tangible benefits and eliminate friction points such as throughout our billing and collections department, we have seen a notable decrease in our bad debt expense and an increase in our net cash flow.

Speaker 1

Our expanded market share and overall reach allows us to take advantage of economies of scale within the business to drive margin growth and free cash flow generation. In looking at our core growth strategy, we are focused on driving long term organic growth, enhancing our cash flow generation and margin profile, as well as retaining our financial flexibility that allows us to seize opportunities as they rise. 1st, we are driving long term organic growth by leveraging our unique market positioning in clinical respiratory care. Our objective of 8% to 10% annualized organic growth will be supported by an expanding need for home delivered respiratory services driven by an aging population, significant COPD prevalence and an underpenetrated sleep apnea market. The core path is through market expansion and sales initiatives as we are continuously exploring opportunities to broaden our product portfolio, cross selling of our end to end product solution and penetrating new markets.

Speaker 1

Our targeted initiatives aim to drive volume based growth through enhanced sales efforts, deepen relationships with healthcare providers and payers and gain access to desired geographic areas. As it relates to cross selling opportunities, we are strategically expanding our product offering by entering the diabetes market segment, including CGMs and related supplies. This represents a significant opportunity to enhance our value to our existing patient base. This initiative allows us to address an unmet need within our patient base without necessitating any increase in SG and A expenses. This addition to our portfolio presents a promising avenue for our sales team to cross sell new products, leveraging their established relationships and familiarity with the needs of our patients.

Speaker 1

This move not only bolsters our product offering, but also strengthens our position as a comprehensive care provider in the home medical equipment ecosystem. The diabetes patient population very complementary to our existing patient population. And looking at sleep apnea patients, clinical research shows that as many as 48% of people diagnosed with type 2 diabetes have also been diagnosed with sleep apnea. 2nd, we are focused on generating economies of scale and continued margin improvement by streamlining operations as we reach critical scale and optimizing our cost structure, we aim to enhance our margins and overall cash flow. This will allow for reinvestment into growth initiatives and help achieve positive cash flow generation.

Speaker 1

Furthermore, we are focused on promoting long term ePrescribe in our industry and have positioned ourselves well with our investment in this area in fiscal 2023. Electronic prescribing is essential to the industry and as the 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 ePrescribe 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. Our automated resupply platform is another excellent illustration of how we use technology. It not only helps us achieve higher margin recurring revenue and organic growth, but it also offers us significant revenue synergies when we make strategic acquisitions.

Speaker 1

The resupply program also plays a crucial role in extending the patient lifecycle with us as well as driving compliance rates and long term adherence to the therapy, which all benefits the patient. 3rd, our focus is on financial prudence and flexibility that allows us to allocate capital towards synergistic acquisition candidates as they meet our stringent criteria. Since 2018, we have successfully integrated 19 acquisitions totaling more than $150,000,000 in revenue. Our disciplined approach to debt management, strategic investments in our operating platform and market expansion will support our long term objective of positive net cash generation and modest leverage, enhancing our ability to invest in synergistic acquisition opportunities as they arise, focused on enhancing our go to market strategy centered around our end to end respiratory offering. Despite quadrupling the size of the business since 2019 and in terms of revenue and adjusted EBITDA as well as the continuous growth of our key operating metrics, our current public valuation represents one of the lowest multiples we have traded at in the last 5 years.

Speaker 1

Given the overall strong fundamentals of our business in real time and that disconnect, we announced the CIB as an additional avenue to consider deploying capital that will allow us to enhance shareholder value opportunistically. Moreover, we are actively engaging with investors from the United States and Canada to discuss our long term growth objectives and expect to be very active meeting with to synergistic acquisitions positions us well for sustained success. Our ability to leverage internal resources and operational efficiencies underscores our commitment to building a resilient and scalable business model. As we continue to navigate the operating environment, our focus is on our flexible capital allocation strategy will remain central to our efforts to deliver value to our shareholders. In summary, while fiscal Q2 posed several challenges, the underlying strength of our market positioning, scaled operational platform and the resilience of our business model are clear.

Speaker 1

Quipt Home Medical is well positioned to overcome these temporary setbacks and achieve the sustained growth path we have laid out. We appreciate the continued support of our investors as we navigate these challenges and are extremely well positioned to seize the opportunities for further expansions. Finally, I want to take this chance to thank the entire Quip team once again for their tireless work and our stakeholders for their continued support.

Operator

We will now begin the analyst question and answer session. The first question comes from Richard Close with Canaccord Genuity. Please go ahead.

Speaker 3

Yes. Thanks for the questions and good job on the margins given some of the headwinds. With respect to 75, 25 and that going away, I guess I was a little surprised in terms of based on some of the past commentary. I believed it was going to be minimal to the business. So since it was called out, is there anything you can quantify the impact $75,000,000 had in the second quarter?

Speaker 3

And how we should be thinking about that factoring into, I guess, the remaining months of calendar 'twenty four, until that's lapped? That would be helpful.

Speaker 2

Yes, sure. Thanks, Richard. This is Hardik. Based on our estimates back in the early 2024 when we were expecting this to occur and the Congress was not going to approve it, We estimated that the impact of 70 by 25 was going to be around 1.5 percent of our total revenue. As far as what was the actual so that was our estimate, that was our internal working that we were working off.

Speaker 4

As far as the actual

Speaker 2

impact in Q2 as it relates to that, that's a little Change Healthcare and everything because the claims are not going through and the ERNs are not coming in, which would allow us to quantify better. So that is something we are also kind of eagerly waiting as some of those things resolve and we get good data coming out of from the claims that we have submitted. So but that was our estimate back in January, February timeframe when we kind of thought that Congress is not going to act on it.

Speaker 3

Okay. And was that 1.5%, you provided an 8% to 10% organic growth target, I guess. Was the 1.5% headwind on 75 percent, 25% contemplated in that 8% to 10% number?

Speaker 2

Not fully, no. We were anticipating some of the Medicare Advantage going away in that 8% to 10% number. The 70 by 25%, we were hopeful that at the time from what our networking with the Congress was at the time was that it would most likely be included in one of those things. Now I do want to say like since we are talking about revenue, I mean, we do believe that this seems to be a good baseline or at least a good bottom at this point for the rest of the year. I don't think we see further decrement from here.

Speaker 2

I think you've taken whatever the maximum hit it was.

Speaker 3

So the 6% organic growth is a good baseline?

Speaker 1

Is that what you're saying? Well, I think what we're saying, this is Greg, and that is that this revenue and that that we reported this quarter here is a good baseline in that to start factoring what the additional organic growth's been, which historically in that has been around that 8% or so. Okay.

Speaker 3

And then on the supply chain, just really quick, ResMed talked about some Red Sea headwinds. Adapt took a pretty conservative stance with respect to their 2nd quarter, I guess, sleep resupplies based on some supply chain. Can you just talk about your thoughts on the current supply chain environment, whether you're seeing any impacts or anything to be aware of?

Speaker 1

As it relates to devices in that, we haven't seen any supply chain issues or any back orders or anything on the disposable supplies and that we have seen a slowdown in shipment in that, just maybe things going from 3 to 4 day delivery time in that up to a week, 10 days or so. But nothing that's really kind of delayed. So we've just had to kind of pre plan out a little better than we have historically. And that kind of going back to when we had the pandemic, we were really kind of pre planning rather than historically in that in this industry and that we've brought things in kind of just in time.

Speaker 3

Okay. And my final question, with respect to obviously some balance sheet impact, cash flow impact from change and that's going to take a while to work out. Any more details in terms of how you think about the timing of as you see that normalize or coming back to normalized levels?

Speaker 2

Yes. So we have been actively working on an alternative exchange and stuff like that. So and we've made some decent progress here in the month of May, pretty much starting second half of April. And we expect to at least resolve the claim, the dropping the claim issues here in the over the next 15 to 35 days. Hopefully, from that point onwards, it would be kind of business as usual.

Speaker 2

There would be a backlog that we would have to kind of process and stuff like that. But we are hoping that at least by June, the process is starting to work like it has and then there would be some kind of backlog to recover from in terms of collections and getting those post data and claim secondary and patient invoices going out.

Operator

The next question comes from Doug Cooper with Beacon Securities. Please go ahead.

Speaker 5

Hey, good morning, gentlemen. A couple

Speaker 6

of things. First of all,

Speaker 5

I just want to clarify something, Hardik, that you said for patient CapEx. You said 11.2%. Is that 11.2 percent of revenue? So $7,200,000 roughly?

Speaker 2

Yes. I mean, if you look at yes, the patient CapEx is actually one of our items on balance sheet, right? But yes, that's right. That's about right. Okay.

Speaker 5

So the resupply program $7,114,000,000

Speaker 2

just to be precise, dollars 7,114,000,000 as part of our footnotes.

Speaker 5

$7,114,000 Okay. And that's versus I think that's versus last year, if my numbers are correct. Where did I put it here? 7.96.

Speaker 2

7.9. That's right. That's right. That's right.

Speaker 5

Okay. Okay. The resupply program, can you talk a little bit about how that contributed in the quarter in terms of how many resupply patients you have and what the resupply revenue was in the quarter?

Speaker 2

I mean, we don't really break down our revenue by segment, but I think resupply trended very similar to the rest of our revenue. We were coming off a really, really strong quarter in December. We were anticipating that this quarter was going to be just looking at quarter over quarter, Shay, for just two reasons. One, there was seasonality that these are the months of deductible. Typically, this month or the Q1 the Q1 calendar quarter, we tend to see resupply dip a little bit.

Speaker 2

So that did occur. And just looking at quarter over quarter, December is usually a very strong quarter and this last December was extremely strong quarter for us. And so we did see some quarter over quarter decline when it comes down to resupply for those two reasons. And then the third reason we saw some decline was just whatever you're talking about the change health overall, I think there was some decline related to that. We didn't see a lot more we didn't see a ton of decline as it relates to Humana or the Medicare Advantage, but just these three factors.

Speaker 1

Yes, year over year in that we actually had seen an increase. Yes, year over year, but our fiscal Q1 was so strong and that the fiscal Q2 just did not wasn't going to beat that.

Speaker 5

Okay. Okay. Greg, just on the you talked about the diabetes opportunity or your initiative in the diabetes. Can you maybe just expand on that a little bit about this is an organic strategy, you're moving into the diabetes. What exactly are you going to be selling strips or what exactly you're

Speaker 2

going to

Speaker 5

be doing?

Speaker 1

Yes, we're going to start providing in that the CGM and supplies in that to patients. We've already started in some territories and have had some positive results. And we're in the process this quarter here of kind of rolling it out to the sales team across the entire organization.

Speaker 5

Okay. What do you think the impact would be this year from that initiative? And what kind of margin profile

Speaker 2

it is? Diabetes, I'm assuming, is

Speaker 5

a little bit lower margin profile than fleet?

Speaker 1

Yes, absolutely. And it's hard to put a number on it right now because we just don't know how successful we're going to be on the sales side. I think that's something we'll be able to speak to probably in the coming quarters and we'll talk about. As far as the margin in that, it's probably in the 15%, 16% range or so. But just remember, there's no CapEx or anything with that.

Speaker 1

And then it's a lot of dropship.

Speaker 5

So the 15% to 16% gross margin that would basically fall unencumbered to EBITDA is what I'm hearing kind of in that?

Speaker 1

Correct. Yes.

Speaker 5

Okay. And so you have relationships with suppliers now and so forth. So there's no real CapEx involved to get into this business, right? And is there any acquisition opportunities

Speaker 2

in this?

Speaker 1

Yes, there could be. Those are things historically that we've passed on in the past in that. But just based off the early results that we're kind of seeing for the demand just went within our own patient ecosystem and that looks pretty positive trend in that going into the back half of the calendar year.

Speaker 5

Okay. Obviously, pretty competitive market, I would think. It's a well established market. The GLP-one, which is obviously designed specifically for diabetes in the first place, what impact is that having on the diabetes market?

Speaker 1

Yes. I mean, right now, we're just focused on our internal patients and then kind of selling into our current networks. We don't have any information as it relates in that or any experience, I should say, as it relates to GLP-1s and what it's doing to the CGM market. We just know that we get a lot of request in that for the CGM supplies within our current system and then we also had started receiving a lot of referrals. I think for us that kind of prompted us in that to kind of enter that market.

Speaker 2

I think Doug, for us, it's really ground 0, right? So we don't really get it's not like we have an existing base and then GLP-one is taking away from it. I think for us, it's really growing into an untapped cross selling opportunity with our existing patient company.

Speaker 5

Right. But just to be clear, I'm assuming these patients are getting their supplies somewhere else right now, but maybe it's just an ease of use to get them from a one stop provider?

Speaker 1

That's part of it, yes. Yes. But we're also receiving new referrals, yes.

Speaker 5

From fresh diagnosis, for example?

Speaker 2

Yes.

Speaker 5

Yes. Got it. Got it.

Speaker 1

Brand new patient.

Speaker 5

Okay.

Speaker 2

Yes.

Speaker 5

Okay. Okay, great. Thanks very much, Jay.

Speaker 1

Thank you.

Operator

The next question comes from Bill Sutherland with The Benchmark Company. Please go ahead.

Speaker 7

Thank you. Hey, Greg and Hardik. I was kind of interested in your initiatives, Greg, to

Speaker 6

pick up the

Speaker 7

organic growth a bit. Have you pointed out cross sell with diabetes in expanding markets, I wonder if you could provide color there and maybe plans with the sales force?

Speaker 1

Yes, sure. And that's on the diabetes side in that. We started kind of testing in that in fiscal 'twenty three, certain markets in that to see how well we could do with the CGM because that's where the demand was coming. So the early signs in that have looked pretty good for us. So now we're in the process of expanding that around the rest of the company.

Speaker 1

As far as the rest of the sales team in that, I mean, we continue to add to our sales team and expect that to continue throughout the year. And that's what's kind of driving a lot of the growth in that that we are seeing on the organic side has been into either new continuum areas or also supplementing in that in certain regions and that where they potentially don't have clinical coverage in that. So we might have somebody selling just basic home medical equipment, but not selling the clinical respiratory such as our vents and our percussion vest and other related items.

Speaker 6

Okay.

Speaker 7

Is there I'm sure you have ongoing negotiations or discussions with national payers all the time. Is there anything kind of you think reaching some sort of conclusion for you?

Speaker 1

Nothing imminent at this point.

Speaker 7

Okay. And then last for me, I guess, with the buyback in place, is it fair to say that capital deployment is going to be leaning towards that and not so much in the M and A?

Speaker 2

We wouldn't say leaning towards that. I think we I mean, at the end of the day, goal is to create shareholder value, whichever way the shareholder value gets created, right? And we believe at the levels that we were trading that having that opportunity and option to do so make the most sense. So we still believe in the M and A strategy. We still believe in the inorganic growth part of the strategy and that has that opinion hasn't changed, that focus hasn't changed.

Speaker 2

We just wanted to have more optionality given where the shares were trading. Okay.

Operator

Drained. The next question comes from Rahul Sergeser with Raymond James. Please go ahead.

Speaker 4

Good morning, Greg and Hardik. Thanks so much for taking our questions. So unless we missed before, we noticed that there's a new exhibit in your financial statements talking about free cash flow, the shift from adjusted EBITDA to free cash flow. We see given that adjusted EBITDA is generally a proxy for cash flow, Could you maybe give us a little more color as to the spread there between the $15,000,000 that we see in adjusted EBITDA and around $6,000,000 we see in free cash flow? And also maybe you can give us a little color relative to your peer set, if possible.

Speaker 4

Thanks.

Speaker 2

I didn't get the last part. What was the last sentence, please?

Speaker 4

And also how your peers likely treat this treatment?

Speaker 2

Yes, sure. So I guess it was a kind of a recurring question over the years in terms of where is CapEx and how does that relate to EBITDA. Looks like our peers have modeled it this way. So we were quite frankly trying to give a peers to peer comparison here by presenting the information that we presented at this time. This information has always been in our financial statement under our PP and E where every quarter we kind of publish what our PP and E editions have been.

Speaker 2

And over the years, over every single pretty much on every single conference call, this topic comes up and we do say one of the best and most conservative way to look at our business would be to take EBITDA less patient CapEx. I mean, that is the most conservative way of looking at this business if somebody was trying to get to a cash flow number. And that's kind of what we attempted to do since that was a recurring question. And I think as far as how do our peers trend, I would say they trend very similar. We I mean, there's always nuances around how others are doing their accounting and reporting.

Speaker 2

So we kind of tend to not comment on that. But it seems to us that it would be competitive.

Operator

The next question comes from Justin Keywood with Stifel. Please go ahead.

Speaker 6

Good morning. Thanks for taking my call. I just want to circle back on the commentary around revenue and growth. If I interpret it correctly, should we expect this year to be more or less steady on the revenue given the offsetting headwinds and tailwinds?

Speaker 1

Well, we would expect the revenue in that this to kind of be the baseline in that to go forward for the rest of fiscal 'twenty four that we would get back to our historic 2% sequential quarter over quarter growth?

Speaker 2

Yes. So I guess what we were I think put differently, this is a I think this seems like from a dollar number perspective, this seems like a baseline dollar for the quarter. I think from Europe on where we should hopefully see organic growth quarter over quarter, like how we have done in the past.

Speaker 6

Okay. And then I assume some of these headwinds are impacting the smaller operators in the DME space in a more profound way. Is that an opportunity to win market share or potentially acquire some of these operators at very favorable multiples?

Speaker 2

We are seeing some increased inquiries, sell side inquiries, inbound sell side inquiries over the last month or so. Does that necessarily translate into better valuation? I couldn't speak to that right now. Is it because of the headwinds? Couldn't speak to that, but we are seeing some more inbound sell side inquiries.

Speaker 6

And finally, any initiatives as far as cutting costs to improve margins? Or do you feel like you have a good baseline here to leverage growth going on going forward?

Speaker 1

Yes, we think we're built in that to continue to grow. I think that's why you even despite the decline in revenue, you're still seeing very strong margin in that. I mean, if we would have had the additional revenue, you probably would have seen margin maybe 24% plus or so. I think one thing historically and that's that we've got a history of is delivering strong margin. So we would expect that to continue in that throughout the rest of fiscal 2024.

Speaker 1

Yes.

Speaker 2

And I think I'll just add to what Greg said. Put differently, I think we are still staffed to grow. And as far as the growth keeps coming in, I think we would be staffed that way and our margins will reflect the way it is right now. But if you're asking the blunt question, do you have if it does not, do you have the opportunity to maintain it and cut costs? And yes, we would react to whatever is required and we would try to maintain the margins.

Speaker 6

Thank you for taking my questions.

Speaker 2

Thank you.

Operator

We have a follow-up question from Richard Close with Canaccord Genuity. Please go ahead.

Speaker 3

Yes, thanks for the follow-up. I have a couple here. With respect to diabetes, Adapt was in that business a little bit earlier and they've been encountering some headwinds as like reimbursement on CGM shifted over to the pharmacy channel from the medical DME channel. And I guess I'm curious how you're thinking about that. And then are you adding sales force with diabetes?

Speaker 1

Yes. To answer the second part of that, we are not adding any sales in that. This is just going to sell right into our current referral sources and that with the current sales team. For us, we just kind of look at this as an opportunity in that to serve the patients that we currently have along with the referral sources. The customers are coming to us and so are the referrals in that asking us to provide this to the patient and that's what's kind of prompted us in that to bring this into the product line.

Speaker 5

And I guess, I

Speaker 2

don't have to comment on our competitors, but they have a I mean, this was a big part of what they did. Obviously, there was a lot of M and A equity around that part and it might have got complex, right? And I think our approach is to keep it very simple here. It's one more product that we would process. We're not putting an enormous amount of inertia or capital behind this.

Speaker 2

I think it's just one more thing that you do when you are in this industry and it's just more like cross selling, for lack of a better word.

Speaker 3

Yes. Okay. I appreciate that. And then with respect to Humana and the capitated arrangements, are all those members you won't see any additional impact here in upcoming quarters. Is that pretty much all done at this point?

Speaker 1

I wouldn't say the conversion is done, but from a revenue perspective in that, everything is relatively rolled off in that. We still got a a handful of patients to roll off in a couple of states, but it's nothing material. And they've stopped paying us anyway.

Speaker 3

Okay. Thank

Operator

you. This concludes the question and answer session. I would like to turn the conference back over to Mr. Crawford for any closing remarks. Please go ahead.

Speaker 1

Thank you, operator, and thanks everyone for joining us today. As always, you can find us on the web at quipthomemedical.com, where we will be posting a transcript of this call and also our updated investor deck. Thank you, and have a great day.

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Earnings Conference Call
Quipt Home Medical Q2 2024
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