Viemed Healthcare, Inc. Q4 FY2021 Earnings Call

Greetings and welcome to the VieMed Fourth Quarter and year-end 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require Operator systems during the conference, please note that this conference is being recorded. I will now turn the conference over to our host, Todd Zehnder, Chief Operating Officer. Thank you. You may begin.

Thank you, Diego. 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 annual financial results news release, including the related financial statements are available on the SEC's website. Now, I will turn it over to Casey to get things started.

Thank you, Todd. Good morning, everyone. And thank you for joining our call today. We're extremely excited to share the fourth quarter results, and discuss the drivers and trends that contributed to the record-breaking quarter. Underlying the success is the dedicated team of respiratory therapists, behavioral health specialists, staffing professionals, and administrative support staff who work tirelessly to deliver the best-in-class care for our patients. By year-end, our VieMed family of employees grew by nearly 23% over the prior year. Our people are our greatest asset and our success is always based on this foundation. We thank our team for their continued commitment and contributions to another exceptional year. Moving onto some of the themes from the fourth quarter, we witnessed positive traction from our investments in our industry-leading service model during periods of COVID decline. Increased access to referral sources allowed us to demonstrate the evidence-based benefits of our high-touch, high-tech delivery model of home respiratory care. As a result, our growth trends during these periods indicate an incredible opportunity for closed COVID expansion. We are also seeing stabilization of several COVID-related risks and uncertainties that have faced our industry during the course of this pandemic. In response to supply chain constraints and shortages, alternative manufacturers have introduced a number of new products during the second half of 2021, which we believe in many cases are improvements over some of our previously available offerings. Our strong relationships with these supply chain partners not only allowed us to secure orders when many others in the industry were facing or experiencing shortfalls, but also created a foundation for securing resources to support our future expansion. At this time, we are not expecting supply chain constraints to be limitations on model growth. As it relates to our specialized labor force, COVID-related obstacles appear to have diminished during the fourth quarter. We're now observing reduced pressures from the high-paying short-term opportunities that competed for our clinical staff during the year. As a result, clinical staffing levels remain healthy at year-end, and we're optimistically looking forward. While we fell short of our hiring goal of 60 new sales reps at year-end, finishing at 49, it is important to note that we incrementally added five new areas in 2021 which contributed to our growth. Our goal for 2022 will be to focus on netting 20 new areas as opposed to setting a hiring goal. With our improved training programs developed last year, evolved middle management, and a new recruiting platform inside of VieMed Healthcare Staffing, we're confident that we can achieve this 400% growth rate into new areas. We've proven that by aggressively growing our sales force, we can continue to diversify the product mix in our portfolio of healthcare offerings. In 2021, oxygen and sleep lines grew faster than any other line within the business, and we expect these trends to continue. In September, a national coverage determination was finalized by Medicare for oxygen, which will expand home oxygen coverage and is now expected to reduce some of the administrative burden in the delivery of care. Overall, many of the regulatory changes announced during the fourth quarter provide a strong outlook for the industry. In addition to the margin stability created by the cancellation of the 2021 competitive bidding program by CMS. In December, CMS finalized the CPI adjustments to the DMB reimbursement rates resulting in an approximate 5% increase for 2022. Also in December, legislation was signed into law, which further extends the 2% Medicare sequestration. We believe that these positive trends in reimbursements are a result of the critical role that we play in the delivery of healthcare inside the home. We actively support and commend our industry associations, which have been extremely active and a major driver of the positive regulatory changes for the industry. The result of our growth, we have generated significant cash flows which enabled us to be strategic and deliberate with our capital planning and management. Volatility in the public and private markets has created both opportunities and risks. We continue to perform careful and systematic evaluations of the prospects within our M&A pipeline. Ultimately, we aim for the deployment of our excess capital to be focused on long-term value and not for short-term or shortsighted opportunities. In recent periods, our most significant opportunities to create strategic long-term value came from internally generated investments. We previously announced the formation of VieMed Healthcare Staffing, which is now fully operational and generating staffing resources for our own internal needs, as well as revenue-producing external projects. Additionally, our joint venture with Solvet Services is producing impressive returns. As a reminder, Solvet provides healthcare support for state and federal governments, including the VA, and in 2021, resulted in 1.2 million of incremental income for VieMed. We also believe that investments in our care delivery model are creating revenue synergies with our traditional revenue streams. For example, VieMed Clinical Services, our behavioral health division, with the help of Engage, our remote patient monitoring and Telehealth platform, is contributing to a measured increase in NIV patient compliance, resulting in longer lengths of service and measurable improvements in clinical outcomes. We also expect our standalone behavioral health revenues to grow over time, as the demand for these services continues to rise. As we begin to see a trend towards returning to our historical growth rate in traditional product lines, we are incredibly excited to continue to innovate and expand our services to meet the evolving needs of patients. With more on our operations, financials, and the regulatory landscape, I will now 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. Our core business generated net revenue of $29 million during the fourth quarter of 2021 as compared to net revenues of $26.1 million in the fourth quarter of 2020, which equates to an 11% increase. Our sequential growth for our core business was 4%. We've once again seen solid growth in our major product lines being vents, PAPS, and oxygen. During the fourth quarter, we generated approximately $3 million of revenue from our other sources, primarily the vaccine and contact tracing revenue generated during the quarter with our established call center. We continue to serve as a resource for vaccine tracing and will do so as long as our resources are needed. We have an established unit in place at this time, and we can scale up or down in a very short period. Therefore, we will continue to pursue opportunities in the future. For 2021, our core business ended up at a record high of $108.5 million, a 12 percent increase over the prior year. And our total revenue came in at $117 million. Our margin percentages, both gross and EBITDA are once again very healthy and are primarily influenced by our core business. As our product lines continued to diversify, there might be some influence on these margin percentages. But the notional growth is the main priority for the business. Our gross and EBITDA margins during the quarter came in at 62% and 30% respectively. Our fourth quarter gross and EBITDA amounts came in at $19.7 million and $9.5 million respectively. For the year, we generated $29.3 million in EBITDA, which funded our CapEx and bolstered our liquidity. The oxygen and PAP businesses continue to benefit from our national rollout and the ongoing PAP recall. And we are encouraged to see all of our major product lines continue to show organic growth. Our fourth quarter revenue from vents was approximately 76% of our core, as compared to 81% in the fourth quarter of 2020. Our SG&A for the quarter totaled approximately $14.2 million, as compared to $12.3 million in the fourth quarter of 2020. Annual SG&A costs for 2021 and 2020 came in at $54.9 million and $52.8 million respectively. This is the last comparison to 2020, which had significant costs and volatility related to the COVID-19 pandemic. We expect to continue hiring people to serve more patients around the country and expand our organic growth model to new areas. The labor market has continued to be challenging, but it appears that the need for traveling clinical personnel has somewhat abated, as the recent variants have not had the same draw to epicenters as prior variants. We continue to seek out superior clinicians and professionals to help support our business. For the year we invested approximately $20 million on capital expenditures. The CapEx was spread across our stationary concentrators and PSC as well as our significant purchases of PAPS to support our sleep growth. The PSC market is the only one of our major product lines that has seen some recent disruption. But we continue to work through that with our major suppliers. We also purchased two other buildings that serve as our primary shipping hub and main location for our call center operations. As previously mentioned, we funded all of our CapEx with discretionary cash flow and also strengthened the balance sheet during the year. As we sit at year-end, we had a cash balance of $28.4 million and an overall working capital of $29.5 million. Our total long-term debt is down to $4.3 million, which leaves us with an approximate $0.15 debt to EBITDA ratio. We have once again been growing the company and stayed very under-leveraged, which gives us the tools needed to significantly grow the company through our organic efforts and inorganic efforts. Moving on to the ongoing OIG and CMS issue related to our NIV claims, we are continuing to work with CMS and its contractors through the appeal process to assess the medical necessity of the patients audited by OIG. We filed with the qualified independent contractor known as Quick, in the fourth quarter and are awaiting their review of these claims. We are hopeful that this round will have more of an individual clinical review rather than adopting the OIG position. As a reminder, due to the four-year look-back window, the total exposure of this issue is approximately $9 million; however, we do not believe this money is owed. Of the 39 patients with that issue, 15 of them have been detail-reviewed by CMS in prior audits and all of them passed complex medical review. The Company has not accrued any liability related to this ongoing matter as it continues to believe these patients qualified for the CMS rules and it eventually will be overturned through the appeals process, which includes reconsideration and ALJ, and will take some time to ultimately work through a final resolution. During our ongoing discussions regarding this issue, we decided to attempt for the first time ever, to establish clear rules related to NIV. Based on the most recent science that has been reviewed, we believe the proposed rules that we have given to CMS will be seriously considered, and if adopted, could help increase patient access to NIV. We have just recently submitted our NCD reconsideration and look forward to working with CMS during this process. Moving on to the first quarter. We have provided net revenue guidance in the $29.2 million to $30.2 million range related to our core business, and have also guided approximately $1.4 million to $1.8 million of revenue related to the COVID-19 pandemic. Our organic revenue is guided up 15% to 18% over the first quarter of 2021. The first quarter of each year always has a high number of billing holes due to insurance reauthorizations and many patients changing insurance, but we are working through those in due course. The COVID revenue is related to the vaccine tracing work that we have continued to fulfill. Also, this morning, we announced that the Board has approved a stock buyback up to 5% of our outstanding shares, which totals approximately 1.984 million shares. As we have discussed in the past, we look at capital deployment across several different vehicles, and with the pullback of our stock, the buyback has risen in the ranks of our opportunities. We still have the capital and the plans to grow aggressively with our organic plans and are still looking at inorganic opportunities. However, our current valuation is at a level where we see significant shareholder value in the buyback. We will update the market as to our purchases in our quarterly filings, and we once again have been visiting with current and prospective investors through industry conferences and non-deal road shows with our existing analyst and banking relationships. As always, we appreciate the ongoing support from both the buy and sell side during the year. At this time, I'm going to turn it back over to Casey to wrap things up.

Thank you, Todd. There are a few points I'd like to reinforce in my closing remarks. First, the significance of our investments into behavioral health and staffing stand to play a major role in our offerings for 2022. Aside from the current demand and track record of success with both of these service lines, our team views these divisions as clinical needle movers for our patients. The improved access to clinicians that our staffing division has provided to our company and our referral sources puts us into a position of strength as we look to partner with larger health systems. On the behavioral health front, we are seeing how our patients are returning to their doctors as changed individuals with a more positive outlook on life. One filled with less anxiety, as they learned to live and cope with their disease in a healthy environment, resulting in less stress for their closest family members. These two services will help us broaden our scope of care for patients at home. Secondly, the challenge of disputing the OIG report may seem like our largest headwind on its face, but we consider it to be our greatest opportunity once we reach resolution. Our published data shows that for every six patients we prevent an ER visit, for every 8.8, we prevent a hospitalization, and for every 5.5, we save a life. We know that a patient is three times more likely to die in the first 90 days if they do not receive our care immediately after diagnosis. Unfortunately, for the patients, we also know that we have a less than 5% market penetration number for the folks who qualify for our care in this country. Unclear guidelines are confusing government agencies on how to properly treat these patients and ultimately are limiting access to care for the 95% of patients who need home ventilation. We need to get this right from a policy standpoint, and I'm confident we will through the development of formulary rules, through the national coverage determination. Lastly, I'd like to reiterate that we remain driven and committed to always doing what is right for the patient. We will continue to be laser-focused on solutions that will drive positive outcomes and savings, which will put us into a position to be a premier provider in an ever-evolving value-based world. While today we are enabled by fee-for-service reimbursement offerings, we'll be in a very strong position and realize further value for VieMed in a value-based world. For now, we will continue to evolve as leaders in disease management, clinical retention recruiting, and patient satisfaction as these are the main contributors to our organic growth engine. Thank you to all of our shareholders for your continued trust and investment in our mission. This will conclude our prepared remarks. We'll now open up for further questions.

Thank you. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please provide the Operator instruction. A confirmation tone will indicate that your line is in the question queue. For participants using speaker equipment, please follow the operator instructions. Thank you. Our first question comes from Brooks O'Neil with Lake Street Capital Markets, LLC. Please state your question.

Thank you. Good morning, guys. Congratulations on the finish for a great year in a tough environment.

Thanks, Brooks.

So I have a couple of quick questions. First, you gave us quite a lot of detail, but would you say that you're facing shortages of respiratory therapists out there and was the shortfall in the sales hiring related to that? Do you think you can overcome it as we get into 2022?

Yes, I believe that by the end of December, we were in a strong position to finish the year well, aided by the holidays. Unfortunately, it became a busy month for hiring. In the first quarter, we are returning to our usual growth patterns regarding our hiring objectives. I want to shift the focus to discussing the new areas we've introduced in 2022 rather than concentrating on our sales hires. As we’ve refined our approach to hiring sales personnel, we now have various types, including hunters, farmers, home sleep representatives, and behavioral health representatives, which may become difficult for you to keep track of. Therefore, we'll concentrate on the new areas we've added incrementally moving forward, as this will be easier for you to understand rather than keeping track of all the new hires.

Great. And I assume there's plenty of new areas that you could target as you go forward to continue the strong organic growth you've demonstrated historically?

Yes, there are. If you think about what we added last year, five new areas don’t sound like a lot, but we added a lot of former type of sales reps into areas that we were already in. We're projecting that we're going to be in 20 new areas in 2022. That's, as I mentioned, a 400% growth rate, and we feel like we can achieve that just with the trends that we're seeing in Q1 which we'll report on later.

Great, fantastic. So I was talking to a friend of mine over the weekend who is involved with a ventilator company and he told me that ventilator sales are pretty soft right now. Is that what you're seeing? And do you view that as an opportunity or is that just sort of the ebb and flow of the business out there?

It's not what we're seeing. We're seeing a return back to our previous historical growth rates as COVID has released access or freed up access to our referral sources. I do consider that an opportunity if we have others out there that think that the ventilator market is soft right now. The only hiccup is we're still waiting on Philips to make a decision on the recall of the back of the Trilogy 100. That hasn't affected us as we've taken other measures to have inventory in place. But once that does occur, that will free up a lot of our inventory that's on the shelf.

Great. And the last question I had, historically, I used to think of you as 25%, 30%, maybe even 35% organic growth. Do you think, as we move past Omicron and COVID, and start to see normalization in labor markets and supply chains, that is a range you think you can get back to?

We always have wanted to be that number and we've faced a lot of headwinds, most of what you just mentioned. So assuming all those things go away, our intention would be to get back to that. We're a lot bigger company than we were before the pandemic. So just a lot of bigger numbers become more difficult, but before the pandemic, we never really had an inorganic arm either. So from organic only, that would be a great goal. It's not our guidance, but I think between inorganic and organic efforts, we should definitely be able to get back to that as things continue to normalize.

Great. Congratulations. Keep up all the great work, guys.

Thanks, Brooks.

Thanks, Brooks.

Thank you. And another reminder, we will take the next question. Our next question comes from Prasath Pandurangan with Bloom Burton & Co. Please state your question.

Hi, good morning. Thank you for taking my question and congratulations on the quarter. As the business evolves, what other operational metrics, besides the number of new patients, would indicate sustained revenue growth, and do you plan to disclose these metrics on a quarterly basis?

We will likely disclose how many new areas we are in, Prasath. It's maybe not an audited number, so it might just be conversational. The other things that are starting to become, none of them have gotten to a point of material nature to disclose. But when we talk about our other revenue sources just the net number of oxygen patients. So the net number of CPAT patients on rental or CPAP patients that are in the resupply program, those are all important to us, but none of them have risen to a level of disclosure at this point. I think the other thing that you will see that has the potential to become significant quickly is the ramp-up of VieMed Healthcare Staffing. And that will be as that continues to evolve and grow. Hopefully that will be a disclosure that we're making. We're just not at the point where the other revenue sources have become material enough to put those operational items in.

Got it, that's useful. And then second, looking at the cash portion of the SG&A number, is this a good one to zoom in on a normalized basis for 2022?

I think so. There is some volatility in there, as far as our quarterly numbers, but I think it has begun to normalize some. I mean, obviously, we're going to continue to grow our headcount as we continue to grow our patient count. And you've seen that happen throughout the year. It's been a pretty consistent growth number. So just looking at it in total, I would expect it to go up some, but I would also expect that our revenue growth will once again outpace our G&A growth, as we were used to prior to the pandemic.

Got it. Thank you.

All right. Thanks, Prasath.

Our next question comes from Doug Cooper with Beacon Securities Ltd. Please state your question.

Hi, good morning, guys. Congratulations on a nice quarter. Just question Todd, on the EBITDA. If you strip out the COVID revenue, what was the EBITDA from your core business? From a margin or dollar perspective?

This quarter had two main factors. Excluding the COVID aspect, we also need to consider the provider relief funds we received, similar to many operating in rural regions, which affected our other income and totaled just under 1.5 million. If we remove that and the COVID revenue, our core business would be around the low 20s percent. I don't have the exact figure handy, Doug, but our core operations have consistently been in that range.

Okay. Regarding the OIG issue, you mentioned during the call and in the filing that the maximum penalty would be $9 million. If this is resolved and there is a financial settlement, does that mean all patients are now compliant and there shouldn't be any issues moving forward? Once you say it's settled, will everything be finalized?

Well, I guess the answer to that is we would say yes because we don't think any of our patients currently that are on service are improper, but we also didn't think that any of the 39 at issue were improper either. So I say the answer somewhat bullishly, but also that I think their position is very incorrect, which is why we've been so vocal on our opposition to it. But with that said, I think the most important thing is we have now been engaged with CMS. We continue to do more research on the effects of NIV and we are hopeful to publish another study here within the next couple of months that will show some new benefits and some cost information that's pretty intriguing. If we're able to come out of this with whatever we resolved with the OIG issue, we come out with an NCD, that will be the single biggest win for not only VieMed, but the patients who benefit and the entire industry for that matter.

It's remarkable. I look at this sector that used to trade at around 8 to 12 times EBITDA, and as of yesterday's close, you're trading at 3.5 times. One of the smaller players sold for about 7 or 7.5, which I thought would be the lowest point. What do you attribute to the fact that you aren't the only ones trading at 3.5 times; clearly, others are facing issues as well? What do you think caused the complete collapse in the valuation of the sector?

There are more knowledgeable individuals in the market regarding valuations than us. Our focus has been on treating patients and profitably growing our business, which we are successfully doing. We disagree with the current valuation multiples; we are unsure why the sector has declined, but we authorized a buyback because we believe the current multiple is unrealistic. Our business is experiencing significant organic growth, and we are doing this profitably while building liquidity. Therefore, the best use of our available funds right now is to start repurchasing shares. I think the healthcare landscape has changed post-COVID and everything looks different now. However, I can't provide a clear reason why our sector has a lower multiple compared to pre-pandemic levels.

What would be the impact if inflation continues to be prolonged and elevated? What kind of impact would that have on us?

It's twofold. First, our service and product costs will increase due to supply chain issues. We've observed some impact, although not significant; labor costs, as everyone is experiencing, have risen as well. However, it's encouraging that the Medicare rules include a CPI adjustment. We monitor inflation on a trailing basis, and the inflation we're experiencing this year is likely to lead to a favorable rate increase for at least the Medicare segment of our business in 2023. Casey mentioned this in our earlier comments, with the specific figure being around 5.1 or 5.4 for this year. While we have noticed inflation beginning to occur, it hasn't reached the levels we are currently seeing. Therefore, this situation will elevate both revenues and expenses, but I believe the overall net effect will be manageable.

Okay. I have one last question. Regarding valuations, what are your expectations for the valuations of private companies when considering inorganic growth opportunities? Are you still aiming for five or six?

While there is an expectation for our stock to trade higher, it has been challenging to make moves given its current price. This is why we initiated the buyback. Recently, we've noticed values exceeding our trading price from 60 days ago, which were significantly higher than what people anticipated. There was a substantial transaction last year that provided scale and came in at seven. We are uncertain about the peak, but we will not pursue those multiples given our current equity price.

Okay. Thanks very much, guys. Congratulations. Nice work.

Thanks, Doug.

Thank you. There are no further questions at this time. I'll turn it back to management for closing remarks.

All right. And we want to thank everybody for listening in as always. We're available to follow up, and we look forward to talking to you guys in the future.

Thank you. This concludes today's conference. All parties may disconnect. Have a good day.