Viemed Healthcare, Inc. Q1 FY2020 Earnings Call

Good day, and welcome to the Viemed First Quarter 2020 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Todd Zehnder, Chief Operating Officer. Please go ahead, sir.

Thanks, and good morning, everyone. Please note that our remarks in this conference call may include forward-looking statements under the U.S. Federal Securities Laws or forward-looking information under applicable Canadian securities legislation, which we collectively refer to as forward-looking statements. Such statements reflect the company's current views and intentions with respect to future results or events and are subject to certain risks and uncertainties, which could cause actual results or events to vary from those indicated in forward-looking statements. Examples of such risks and uncertainties are discussed in our disclosure documents filed with the SEC or the securities regulatory authorities in certain provinces of Canada. Because of these risks and uncertainties, investors should not place undue reliance on forward-looking statements. The forward-looking statements made in this conference call are made as of the date hereof, and the company undertakes no obligation to update or revise any forward-looking statements except as required by law. The first quarter financial results news release, including the related financial statements are available on the SEC's website. Now I'll turn it over to Casey to get things started.

Okay. Thanks, Todd. Good morning, everyone, and thank you for joining our call today. Once again, I'm pleased to have the opportunity to report on another record-breaking quarter for Viemed. While we have plenty of updates on the first quarter to get to, let me first address the question that seems to be on everyone's mind: How has Viemed been part of the solution to the COVID-19 pandemic? With our company being the largest independent supplier of ventilation in the country, you can imagine our product quickly became in high demand as clinical guidance was showing ventilation to be the primary form of treatment for coronavirus patients. Before the virus hit the states, our management team was paying close attention to other countries struggling to treat the virus and made swift and key decisions that helped lock in our supply of ventilators. We were able to secure orders in many manufacturer queues, which led to us supplying many patients within states such as Louisiana, New York, Illinois, Wisconsin and many others. We supplied over 4,000 machines inclusive of both invasive and non-invasive vents and complex PAP machines, such as BiPAPs. We were also able to support many of our hospitals and states with oxygen concentrators, masks, PPE, and many other respiratory supplies. Secondly, and equally as important, we were able to assist our hospital partners with getting non-COVID-19 patients out of harm's way and treated in the home. Our hospital partners were never more relieved to lean on us to help free up those valuable hospital beds for the people in need. Our clinicians also sprung into quick action. They created an educational resource video library, which is currently hosted on our website at www.viemed.com. With many different brand names of equipment traveling across the country, our library allowed pulmonologists, respiratory therapists, and ICU nurses to have a central place for them to brush up on their clinical ventilation skills. Lastly, we were able to provide RT and nurse staffing to hospital systems trying to deal with the large quantities of patients headed their way. I couldn't be more proud to lead this batch of talented clinicians who make these daily decisions to work long hours, oftentimes away from their families, all in the name of helping others. I'm also pleased with the way that CMS quickly responded to the needs of the healthcare industry. We saw many rule changes announced by CMS, all appearing to be adjustments to help seamlessly support treating more patients in the home. Telehealth reimbursements were increased to be equal with face-to-face visits. Professional clinicians who can conduct the telehealth visit were expanded to include nurse practitioners, nutritional specialists, dieticians, etc. We also received a 2% sequestration relief on all Medicare home medical equipment from May 1 to December 31, 2020. CMS sent a memo to Medicare Advantage plans explaining that they must abide by all the Medicare rules for prior authorizing equipment. Perhaps the most pertinent announcement was the decision to not include non-invasive vents in the next competitive bidding round from 2021 to 2024. This announcement should protect our vent reimbursement for the future for many years to come. With coronavirus being a respiratory illness treated with a ventilator, there was truly no brighter light shined on the need for our equipment and our expertise. While we always have to keep patients who struggled and others who lost their loved ones in mind, we still have a responsibility to communicate to our investors about the tailwinds that presented themselves to our company. We had many other opportunities to tell our story to a much broader audience, and we did so. We were recently interviewed and written up by HME News, AAHomecare, and many local publications. We've also made it onto many TV shows. I was personally interviewed on multiple national news networks such as FOX Business, Newsmax, and a CBS New Orleans local syndicate. If anyone is interested in viewing those videos and content, please visit www.viemed.com to catch up. Before the crisis began, we were having a great first quarter. Beginning with our core business, we hired a total of 17 new sales reps in Q1, which was one of our best quarters. We expanded our business into New York and Connecticut, which brought our total coverage area up to 36 states. We've been working on revising our training program and stand ready to push our models to new areas around the country when the stay-at-home freeze is relaxed. Unfortunately, our technology department was in pilot mode with our patient engagement portal, which we call PEP, to be able to ramp up our launch efforts. PEP provided our patients with a continuum of care to connect with our RTs through its telehealth platform. Our tech team created another telehealth app called VieMed Connect in under two weeks to help those patients who were without a PEP tablet. The adoption from patients on both PEP and VieMed Connect has been amazing and has definitely fast-tracked our technology initiatives. The VA has also been moving faster than normal, as they helped us sign two large national contracts with their remaining third-party payers. The VA has also pushed through payments for our services, which has been the confirmation we have been waiting for to expand. During the pandemic phase, we also provided multiple staffing contracts through our SBB OSB partner to help the underserved VA facilities. While we did have to cancel our bell-ringing ceremonies with NASDAQ and a few other physical roadshows, we have been very active in virtually communicating with our institutional investors. For more on the capital markets and to overview the financials for the quarter, I'll turn the call back over to Chief Operating Officer, Todd Zehnder.

All right. Thank you, Casey. In reviewing the financial results, all figures are in U.S. dollars and the full results have been made available on the SEC website as well as SEDAR. We generated net revenue of $23.8 million during the first quarter of 2020 compared to net revenues of $18.1 million in the first quarter of 2019, which equates to a 31% increase. This is above our initial revenue guidance and at the midpoint of our recently revised guidance. Included in the current quarter is approximately $1 million of equipment sales in response to the ongoing COVID-19 pandemic. In addition to the sales of new equipment cited above, we assisted in certain areas by deploying equipment that had previously been in our active rental fleet. Those proceeds were recognized in the gain or loss on disposal of property and equipment, with the gain during the quarter related to those sales being approximately $1.6 million. Our vent patient growth was once again strong, as we grew approximately 3% during the sequential quarter and 25% over the prior year first quarter amount. The new patient referrals were slightly lower in March due to slower hospital admissions amid the ongoing pandemic, but we continue to admit new patients to our program, albeit at a slower pace than we were in January and February. Additionally, we were active in retrieving vents from patients who had not shown compliant utilization in order to assist in the need for vents around the country. Historically, we would allow a longer period for RTs to get patients compliant, but during this pandemic, we have been more aggressively placing units with the most needy patients. While our vent patient growth is solid, we are continuing to focus on our other product growth. Our vest business continues to be strong, and although it doesn't comprise a huge part of our revenue stream, the oxygen business has continued to ramp up nicely since our national rollout last year. Our current year gross margins are slightly lower than last year, partially attributable to the sales of equipment during the pandemic that had lower gross margins than our traditional rental business model. Adjusted EBITDA hit an all-time high, totaling $7.9 million for the quarter, which represents a 33% margin. The aforementioned COVID sales were accretive to historical EBITDA margins in the rental business. Our SG&A for the quarter totaled $10.6 million compared to $9.5 million in the prior year. The rate of hiring slowed at the end of the quarter due to travel restrictions, and we anticipate ramping back up when new employees can come in for training. We have continued to hire essential personnel such as clinicians in growing areas, and we are building out our inside sales team that will operate remotely. Our investments into the future growth of the company continue. We have launched our PEP pilot, and we pivoted during the pandemic to launch our VieMed Connect app. This app was able to be fast-tracked as a result of our prior technology investments. We have begun having patients interact with therapists via the smartphone app, making our lower in-person visits more effective than just visiting on the phone. To our knowledge, there's no other vent provider conducting business like this, and we once again pride ourselves on being the most patient-centric provider in the country. As in prior quarters, we once again have a very solid balance sheet with approximately $8.4 million in cash at quarter end, $15.4 million of accounts receivable, and an overall working capital balance of roughly $4 million. Our accounts receivable during the first quarter grew primarily due to the sales of equipment later in the quarter for COVID-19, so those amounts were collected in April. Our traditional accounts receivable were up slightly, as cash collections were stronger in the first quarter, and our first quarter business continues to grow. Our long-term debt is approximately $9.5 million and is being serviced with operating cash flow. The majority of our long-term debt is for our building and our term loan, and having the liquidity to help during this current pandemic has been powerful. We plan to continue to minimize the amount of leverage on our balance sheet in order to remain opportunistic to changes in the business landscape. Along the lines of changes in the regulatory landscape, as Casey previously mentioned, CMS has recently announced that non-invasive ventilators have been removed from the 2021 round of competitive bidding. We fully support this action, as NIV is a life-saving device that we feel should be frequently and substantially serviced. Our understanding of the latest guidance is that vents are out of the program for three years. With the latest focus on vent suppliers and the need for expertise, we hope that they will not be included in the future. There have been many other programs through the government to help companies during this time. Our company has received approximately $3.5 million related to the CARES Act, and we have attested to our use of these funds. We will clearly be redeploying these dollars in the COVID-19 costs to help with our patients, our employees, and the new areas. Our company evaluated the Payroll Protection Program extensively. After much evaluation, we decided that we were not the right type of company to request these funds. Therefore, we did not submit an application. We feel the right decision was made, as that program was intended for smaller, less capitalized companies around the country. Moving on to the first quarter, we have provided net revenue guidance in the $42 million to $44 million range, which includes approximately $20 million of sales of equipment related to the COVID-19 pandemic. Our margins will be difficult to estimate currently due to the changes in our revenue composition stemming from our efforts during the pandemic. Our organic business model should maintain relatively consistent margins as it historically has had. However, with such major changes to our model, we can't currently guide margins. In conclusion of my prepared remarks, I would like to express how incredibly proud I am of our entire staff for stepping up during this ongoing crisis. From our clinicians to our inventory, purchasing, and maintenance teams, to our technology team and back-office squad, everyone is teaming up to provide the best solutions to our existing patients as well as the hotspots around the country. As we have always said, we put our patients' needs first, and the rest will take care of itself. At this time, I'll turn it over to Casey to wrap things up.

Okay. Thank you, Todd. So we were a growth story before the COVID crisis. We helped a ton of people during the crisis, resulting in incremental business and now we have our sights set on nurturing our new relationships to grow while we establish the new normal in health care. This pandemic proves what we've said all along: We just don't have enough hospital beds in this country, and we must take advantage of treating more patients inside the home. The government is easing up on the programs and regulations that do not support home-based health care to prevent future outbreaks and help the masses of elderly patients headed our way. The new normal will include a more simplified approach for our physicians to seamlessly transition patients from facilities to home. Rapid adoption of telehealth and remote patient monitoring is underway, all in an effort to keep patients and clinicians safe from spreading another outbreak. Payers will need more home medical equipment providers, especially one equipped with clinicians administering care. Our company is already strategically positioned to be the premier provider in this new healthcare environment. Our clinicians, sales team, tech team, and executive staff are extremely excited to perform in this new world. With that being said, we must not forget about the many folks who lost their loved ones during this time. We also have a country of grieving families and many who have lost livelihoods as a result of the economic slowdown. Viemed will continue to do our part as a company to develop solutions, create jobs, and stimulate the economy as best we can while helping a lot of people live their best lives. This concludes our prepared remarks. We'll now open it up for Q&A.

[Operator Instructions]. We'll take the first question from the line of Brooks O'Neil with Lake Street Capital Markets.

Congratulations on all you're accomplishing. Can you hear me okay?

We can.

We can, Brook.

Great. So the question I'd gotten most this morning, I have to say, is, when we look at your Q2 guide, obviously, the $20 million of product sales are incremental. Is there any implied or actual softness in your core business in Q2 that might cause a shortfall relative to our previous expectations on the core side?

Yes. I mean, just like in the month of March, April has been slower than our initial expectations just because hospital systems are extremely slow. I mean, as you can imagine, people with chronic diseases are doing everything they can not to go to hospitals, and many clinics have been shut down in the month of April. So we're starting to see some of that loosen up around the country, but we've taken a more conservative stance with our guidance. And then also, we've done an excellent job of not having patient attrition catch us from COVID-19. But as we've been quite upfront about, this is a very vulnerable patient group. So we're not seeing any higher attrition than we have in the past, but we're just taking a more measured approach for guidance due to the current situation in the system.

Okay. That's very helpful. Secondly, I'm glad to hear about progress with the VA. Can you just talk a little bit about what steps you need to take to begin to ramp the patient population that's covered in that VA national contract?

Yes. It's in - and it's no - there was really two other payers, Brooks, that we were trying to get on with nationally beyond the VCA contract, which we announced in the last call. We ended up inking those deals - we inked those deals in Q1. So from a payer standpoint, we're good to go. The next piece, as you probably remember, we were waiting on getting paid. That has been solved as well. We started collecting on payments. And then as the pandemic hit us, a lot of the work that we were going to be doing for the VA was on the front end, getting RTs into the home and assessing the home environment and recommending equipment and services that they would need. Well, as you can imagine, that stuff put on halt. However, just because they saw the need for the vent, they were quickly wanting us to get in network with the other two large payers. So we were able to accomplish that. We have orders that are being uploaded into a VA queue right now. So we're seeing the shift and folks getting ready to release us to go out into the home again. And that's exciting for us because now we know not only do they want it - we knew they wanted it, we just didn't know that we were going to get paid for it. We've solved that problem as we started collecting on payments. So we're very - we're geared up and ready to ramp up here in Q2 for both doing business with the VA.

Fantastic. Let me just ask one more. I appreciate the color. So I think Todd may have mentioned that a little bit. But how do you view the investment you made to prepare for competitive bidding? Obviously, you looked into many other states beyond the ones that - the 36 that you're in now. Do you see that as kind of a wasted effort? Or do you see opportunities to leverage some of that investment and time that you made to grow the core business going forward?

It's absolutely not a wasted investment. We continue to leave our bids out there. The true cost of being in competitive bidding was getting our licensure ready around the country, which we would have to do over time anyway because we always had a goal of getting to the lower 48. So we just kind of compressed that into last year. We have bonds out there that will remain with our oxygen and PAP bids. If we win, then we'll execute on those. If we don't, we don't. The amount of money we spent, I wouldn't say was significant, and I definitely would not say it was a wasted effort because we are going to continue to grow into metropolitan areas. We just don't have to split to be there on January 1 in the event that we would have won those bids.

Yes. And I might just add that during the crisis, we did business in states that we currently were not in, New York being probably one of the largest. It was just nice being licensed in that state, being ready to go and easily able to transition into their system so we could service them. So that was helpful.

Great. I guess maybe I'll just ask one more sort of set of questions. Can you just talk a little bit more about the equipment sales? I assume, in general, those are one-time transactions, but you could clarify just so I understand. And then could you just talk a little bit more about the profitability or margin on those sales and how you see that maybe now and going forward.

Yes. I mean, clearly, there are sales that we want to consider one-time, but they're going to be over a period of time, right? And margins are all over the board, and that's why I've been - in my prepared remarks, I was upfront that we're not guiding a gross margin or an EBITDA margin because we're not finished selling. We've sold everything from vents to BiPAPs to consumables to PPE. We have a website for bulk PPE orders now. So I just don't feel comfortable throwing guidance numbers out. All I can tell you is that we're continuing to sell things that are 'one-time in nature,' all the while keeping our core business rolling. Anything we do in conjunction with helping these hotspots around the country is just accretive to sales.

We'll take the next question from the line of Nick Corcoran with Acumen Capital.

I think Brook asked most of my questions, but do you have any visibility on whether the new vent sales and all the equipment sales you've been doing will continue into Q3 and Q4?

You're talking about the sales to systems, Nick?

Yes, exactly.

It's hard for us to say. I mean, here's the thing. If you had asked us a month ago how long this thing would last, we would have told you a lot longer than we feel today, since things feel like they're stabilizing. I think everybody is seeing the same things around the country. However, we all know that people are preparing for this thing to potentially raise its head again in the fall. So we don't have any better, I guess, crystal ball than you on that, but we're continuing to make investments to be ready to sell to other people.

And I'll just say that different states have been having different peaks in demands at different times. So we've seen a little bit of a second run from some of these less-hit states, just getting ready. You've also seen hospitals, which have been inundated with all sorts of different types of equipment. They are now trying to backtrack and get the right equipment that they need for their care plans. So we're seeing a lot of different demands coming out of the hospitals, which is changing on a day-by-day basis. So it's just really hard to guide at this point in time, given the phase that we're in.

Great. And then just looking at the revenue per patient per month. Can you give any insight into maybe the sequential growth or the year-over-year growth? And the ancillary revenue, how that's been happening?

Yes. I think just in general, as the vent revenue is not as large, I mean, it's still making up, I guess, lower 80s in percentage of our total revenue. But when you look at the ancillary services, primarily the sleep business and the vest business, as those take up a larger share, then the incremental revenue per patient should go up. We don't implicitly guide by product. So as long as vents continue to grow or stay stable and these other products continue to grow, you should see a little bit of growth in that number.

Great. And then the last question for me is, are you able to get regular financing for the vents? I'm just wondering how you finance them in the short term.

Yes. We continue to use some of our cash to buy equipment and some of our short-term leasing through our strategic partners in order to lease those. And we have plenty of credit line available for that as well.

Your next question will come from the line of Doug Cooper with Beacon Securities.

A couple of things. First of all, the $20 million that you've guided for COVID sales in Q2, we're only 5 weeks into the quarter. Is that orders in hand? Or are you making some assumption that you're going to sell more throughout the quarter? In other words, could that number grow over the quarter?

Those are orders in hand, Doug.

Okay. Now moving on, Casey, qualitatively, given your expanding relationships with states and hospitals and people becoming more familiar with non-invasive vents versus intubation, what do you think this means for your business and the referrals, given that educating the doctor community is one of the prime - priming the pump for future growth? I mean, you're establishing relationships across the country, now have deeper relationships, and they're getting more comfortable with the efficacy of the non-invasive vents, in particular, I imagine during this process. Can you just talk about how this could translate to maybe accelerated patient growth as we move forward once this crisis has abated?

Yes. I'm glad you asked that, Doug, because that's the most important piece. Now let's just say, it's been one that I'm most excited about. We, as you know, have always been the leader in developing these clinical studies. We had KPMG a few years back, and our PRECISION Harvard study here is going to be published within the next month or so, we hope. That was all in an effort to educate folks on the benefits of non-invasive ventilation and the hospital rate prevention and so on and so forth. That indication process has been fast-tracked, and there's not many clinicians, not many pulmonology groups or RT staffing - respiratory therapy floors, if you will, that don't understand the benefits of working with a non-invasive vent right now because they've just had to use it. They had to use it in so many different settings. And that was the value we really brought to the table. Being a distributor who knows how to work with all the different types of equipment, we were being leaned on whenever they would try to get their hands on any kind of ventilator they could find. So they were overloaded with these various pieces of equipment that they weren't familiar with. That's why we created that video library. But that's also how we help build relationships as a thought leader with hospital groups all across the country. They were calling on us and leaning on us for our clinical expertise and guidance, and we were able to respond and be there for them, not only by supplying equipment but really through education, which was probably some of the most needed assistance to help save lives at that moment in time. So that's the kind of thing that people don't really forget, and we'll circle back around and hopefully build some more strategic partnerships in these areas that we helped serve. The Viemed name is - we've built a brand now of just being one that's very helpful and recognized as the leader in respiratory care. And so we'll continue to build off of that momentum and see how many more people we can help around the country.

Todd, just looking at - even excluding the COVID response sales of $1 million in the quarter, that's - excuse me, ventilator rentals are now down to 82% of total sales versus almost 90% in Q1 last year, I guess, as you start selling the - whether the percussion vests or oxygen and so forth. What do you - do you think that continues to trend, I guess, lower over time? You think by the end of the year, we're below 80%?

I think we could definitely get there. Our goal is to be able to offer more products to our patients. We don't want to be selling every product out there. We're very focused on these chronic patients, but we have found a few products that our referral sources really need and like. Many of our patients will ultimately have multiple devices, maybe they'll have O2 and a vest or O2 and a vent or a vent and a vest. So that's the goal. We don't have a set number we're shooting for, but obviously, the vest and O2 and sleep businesses have a much smaller base, so they have the ability to grow at very high percentages. It's just that keeping up with vent growth is sometimes pretty tough. Even in this environment where things may be a little slower in the clinics, we're still growing, and I think all products will grow.

Okay. And my last question, just on the PEP business. Is that a - if the RTs are doing remote monitoring and low checking-in with the patients, is that a separate billing revenue stream potentially? Or is that then captured under the monthly billing for the vent under CMS?

Right now, it's all captured under the existing billing code. However, we have visions and aspirations, and we're working on models to find other ways to monetize our technology investments. Right now, everything we've been doing from a technology perspective is aimed at keeping patients out of the hospital to save the system money and to keep patients alive longer. That's why we made these investments. We just went into pilot with PEP, and then as we mentioned, pivoting to VieMed Connect during the pandemic was caught by our technology team just to give people the ability to communicate with a smartphone. They don't need the tablet in the home, which is really a much more dynamic platform. The investment was made for - as we always say, invest in the patient, and the rest will take care of itself. So we're investing in the patient and the payers and so forth. Down the road, we have many different ideas that we're considering, but we just have to have the concept proven out that we're working on right now.

Ladies and gentlemen, this will conclude the Q&A session, and this also concludes today's call. Thank you for your participation, and you may now disconnect your lines.