Earnings Call Transcript - VMD Q3 2024

Operator, Operator

Greetings, and welcome to Viemed's Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Todd Zehnder, COO. Thank you. You may begin.

Todd Zehnder, COO

All right. Thank you, Rob. Good morning, everyone. We appreciate you joining us today. 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 the 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 security 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 today, and the Company undertakes no obligations to update or revise any forward-looking statements, except as required by law. The third quarter financial news release, including the related financial statements, are available on the SEC's website. I'll now turn it over to Viemed's CEO, Casey Hoyt, to get things started.

Casey Hoyt, CEO

Okay. Thank you, Todd, and good morning, everyone. We appreciate you joining us today. The third quarter results exceeded both our projections and expectations, driven by continued organic growth in our core businesses as well as continued growth from recent M&A activity, leading to strong year-over-year and sequential growth in net revenue. Our third quarter net revenue established yet another company record of $58 million, exceeding the top end of our guidance and establishing a pathway to a strong finish in 2024. I want to acknowledge and thank our incredible Viemed family, which now numbers more than 1,150 employees. Their dedication to our Live Your Life mission and their relentless focus on patient satisfaction and operational performance will enable a strong finish to 2024. You've heard us talk about earning the trusted place in the home for some time. I want to drill down on that a bit more this morning and why it matters. Viemed is substantially differentiated from HME providers to the point that we believe that even the description home medical equipment doesn't fully capture exactly what we're doing in the home and the value we're proving out every day to patients, providers and payers. It's clear that there is a trend of providing clinical care in the home. Patients want to be treated in the comfort and safety of their home, hospitals and health systems want to avoid readmissions and payers know that the costs are lower in the home versus an institutional setting. Improving outcomes, patient satisfaction and operational efficiency are the pillars for delivering care in the home. Viemed has been a leader since day one with our high-touch, high-technology care model. What's become clear to us is that in today's environment, patient satisfaction is more critical than ever. A focus on patient outcomes and personalized care, not to mention offering support to address patient concerns becomes increasingly important, particularly when it comes to patient compliance. Utilizing advanced tools such as our proprietary Engage platform can boost provider communication and care coordination. These solutions need to be scalable to streamline operations and provide the accurate data ultimately needed for value-based care. This isn't a future state we're talking about at Viemed. This is the model that we have been deploying with our RTs at the center of everything we do in the home. It's the reason why we've allocated capital investments in technology, recruiting, training and the provision of social services we offer to our patients. We're ready for where the industry should be going, and we expect to continue to lead it. On the regulatory front, we're seeing some positive signs of support for the industry. Viemed has been a leading advocate for the reconsideration of NCD 280.1, emphasizing objective and comprehensive coverage policies for NIV therapy. We believe that the request for the NCD is another signal we've seen from CMS that they are serious about holding MA plans accountable for appropriate guidelines to deliver clinical care. The majority of comments submitted on the NCD have been positive, and we think this is a real opportunity for the industry to serve those in need and facilitate continued expansion. The reason we've been proactive on the NCD is that establishing clear and consistent guidelines will create a stable business environment for providers and reduce uncertainty for patients. The research supports the efficacy of the NIV, resulting in significant reductions in costs, hospitalizations and improved patient outcomes. And the data exhibits there is medical necessity for putting patients on the device immediately and improving their quality of life. We've submitted our comments on the NCD and have sponsored or supported much of the research cited in other comments. We'll continue to provide a leadership role through Viemed and through the industry trade associations. I'd also like to highlight that there has been some recent movement on the 75-25 reimbursement relief. Recall that this rate adjustment for certain products in certain areas would increase Medicare reimbursements for providers serving those areas. This isn't dead by any means. It adds positive momentum with some recent legislative support, and it should be backed up for consideration at the end of the year. As we've noted before, restoration of this relief would be positive for the financial performance in 2025. Let me now turn to some brief updates on the business. The continued strength of our vent business was on display again this quarter with a 4.3% sequential increase in active vent patients. That sequential growth is usually a leading indicator for future quarters and reinforces the positive outlook we have on the business. The 400-plus increase in vent patients we've experienced in both Q2 and Q3 is as good as we produced in a number of years. One of the reasons our vent growth has been so strong is the operational overhaul we completed earlier in the year. Those efforts resulted in internal processes driving higher vent utilization and vent patient billings. The new sales structure we put in place and discussed last quarter is having an impact as well. With an 18% increase in average monthly setups per sales rep compared with what they were producing prior to the implementation, we've been accelerating the recruitment of sales reps to maintain our industry-leading organic growth. We expect to have more to report on this effort in Q4. In our sleep business, all I can say is what a difference a quarter makes in terms of the overall narrative around GLP-1 drugs. Based on what we've seen from ResMed and others so far, we believe it's pretty conclusive that GLP-1s are not impeding the growth of the sleep business. As we noted before, in fact, it appears to be bringing more patients into treatment for sleep apnea and other disorders as they lose weight. Despite the increasing use of GLP-1 therapies for weight loss, both obesity and sleep apnea rates continue to climb. For patients with moderate to severe obesity-related sleep apnea, research consistently shows that combining PAP therapy with weight loss provides greater benefits than either treatment alone. Real-world data reveals that OSA patients prescribed GLP-1 medications are 10.8% more likely to start PAP therapy with significantly higher adherence rates, evidenced by increased PAP resupply orders at one- and two-years post setup. The improvement in sentiment and the increasing amount of published research lines up with what we're seeing in our business. We're seeing sequential growth in CPAP units, patients, resupply orders and home sleep tests. Even though sleep is currently contributing 17% of our total revenue as of Q3, we believe we've only scratched the surface of what this business can contribute to our overall growth. We're still on track with our East Alabama joint venture integration plans. We've made incremental progress each of the last two quarters. And as this is our test case for future JVs like this, we are easing our way into our growth plans. We outlined a plan for annualized revenue of approximately $4 million when we made this acquisition, and that's the path we're on. We expect to have more to report out on the JV at the year-end. Our M&A pipeline remains robust with a focus on adding complementary services that could expand our core businesses. These new opportunities could also build on the strong relationships we've already earned with patients and could enhance our value to providers and payers through greater scale and efficiencies. Overall, I'm pleased with how we've executed throughout this quarter. We've regularly challenged our team to hit our strategic goals, and they've delivered. With record-breaking quarters in 2024 on top of our highest EBITDA quarter ever in Q3, we have built up a lot of positive momentum for the fourth quarter that will feed into 2025. The increasing vent patient and sleep patient growth, together with our sleep resupply business provide a strong base of organic growth. We have no intention of letting up. We are laser-focused internally on finishing on a strong note, which will provide the exit velocity for a stronger year in 2025.

Todd Zehnder, COO

For more on our operational and financial results for the quarter, I'll turn the call back over to Todd. Thank you, Casey. As we review the financial results, all figures are in U.S. dollars and the complete results are available on the SEC website. I will provide some insights into our strong performance. You may have noticed new disclosures this quarter regarding our sleep therapy patient count and sleep resupply orders. We have been exploring additional disclosures, based on feedback from the investment community, to help measure our performance. Our aim is to enhance these disclosures in the coming quarters. This quarter, we set a new record for revenue with a 17% increase, primarily driven by organic growth, with organic and acquired revenue contributing $1.1 million to the year-over-year increase. Sequentially, our revenue rose 6%, with inorganic or acquired revenue making up $327,000. The organic growth at Viemed is strong, providing a high level of predictable growth in a capital-efficient way. Our core business in vents constituted 55% of revenue this quarter, while sleep grew to 17%. Our oxygen and staffing businesses also expanded, each contributing roughly 10% of this quarter's revenue. We are also seeing improvements with the East Alabama Medical Center joint venture. Gross margin remained steady at 59.3%, slightly down year-over-year due to a shift in product and service mix as sleep, oxygen, and staffing grow faster. The EBITDA margin for the quarter was 24.1%, up from 23.3% in the second quarter and favorably compared to 24.5% a year ago. We have made substantial improvements each quarter and aim for another strong performance in the fourth quarter. We effectively managed SG&A expenses, reducing them to 46% of revenue this quarter compared to 48% in the second quarter and a year ago. We are investing in new sales talent and enhancing patient experiences at home. The reduction in SG&A as a percentage of revenue reflects good cost control and the leverage from improved productivity and efficiencies through operational enhancements. Our gross CapEx for the quarter was elevated due to our strategic vent exchange initiative, with approximately $11 million invested in respiratory equipment for our patients. Offsetting these purchases were about $6 million from related sales and exchange proceeds, leading to a net cash CapEx of around $5 million for the quarter. We expect to sell more vents in the coming quarters, with the timing and volume dictated by the remediation process from Philips and relevant governmental agencies. Our CapEx has been funded through discretionary cash flow, and we continue to manage the business to increase free cash flow on the balance sheet. The percentage of net CapEx to EBITDA was 36% for this quarter compared to 64% in the second quarter and 58% a year ago. We will continue to update our free cash flow information annually. Like last quarter, we recorded a small gain of $0.5 million from the Trilogy return program, which we expect to continue reporting until the project concludes, likely next year. Our balance sheet is strong as we paid down our line of credit by $2 million this quarter, leaving us with $55 million available on our credit facilities and a $30 million accordion if needed. We increased our cash by $2.5 million to $11.3 million at the end of the quarter, improving working capital to $11.3 million. The opportunity to upgrade our vent fleet through the Philips buyback allows us to prioritize investing in organic growth and gives us the flexibility to consider additional M&A in the future. The positive momentum in the business is reflected in our outlook for the fourth quarter. We anticipate net revenue between $59.7 million and $60.9 million. The midpoint suggests sequential growth of 4.0% and a year-over-year increase of 18.9%. This outlook is based on sequential growth in vent patients, ongoing contributions from our sleep business, and expected growth in other products. As we head into the fourth quarter, we do not foresee many variables affecting our performance. Assuming no material changes to our margin profile or the typical liquidity increase we see in the fourth quarter, we expect a solid adjusted EBITDA finish for the year. The improvements we have made each quarter through operational efficiencies, driving organic growth, self-funding CapEx through cash flow, and enhancing the balance sheet are crucial for maintaining momentum and operational excellence in the fourth quarter. We are confident in our ability to achieve this, which should set us up nicely for a successful year in 2025. Thank you for joining us today. This concludes our prepared remarks.

Operator, Operator

Our first question comes from Brooks O'Neil with Lake Street Capital Markets.

Brooks O’Neil, Analyst

Congratulations on the terrific progress you're making. To be honest, you guys provided such a great overview. I only have one significant question, and I probably should know the answer to this before I even ask it. But Casey provided a nice overview of the positive shift in the regulatory environment. I'm curious if what they're talking about involves any increased reimbursement or maybe I should say, any change in reimbursement? Or is it just clarifying some of the usage guidelines and whatnot?

Casey Hoyt, CEO

No problem. There are two regulatory aspects I wanted to mention. The first is related to the 75-25 rate relief reimbursement fluctuation. During COVID, we received rate relief, but at the beginning of last year, that relief was recalled. The 75-25 movement pertains to a rural demographic mix that they are reassessing to see if we can get that relief reinstated. This effort is still active, and there is significant movement in that direction. It would amount to about $140 million for CMS to restore it, which is relatively small since we account for less than 2% of CMS Medicare spending as an industry. We have some legislative support and are hopeful for a potential recovery by the end of the year, which would be beneficial for us. The second point concerns the NCD comment, which is unrelated to any reimbursement changes but emphasizes the importance of developing clear clinical guidelines. CMS recognizes that their current guidelines are somewhat vague, allowing Medicare Advantage plans to create their own rules. They are addressing this and will enter a comment period to gather feedback. This is an ideal time for us to present the research we have conducted over the past five to seven years, which will be based on data rather than just our opinions as a provider. Many of our industry peers and associations have aligned with our comments as well. This unity signifies that CMS will have substantial data to establish clear guidelines in the future, which would represent a significant achievement for our entire industry.

Brooks O’Neil, Analyst

Great. Fantastic. Congratulations again on the terrific progress.

Operator, Operator

Our next question comes from Doug Cooper with Beacon Securities.

Doug Cooper, Analyst

Nice quarter. Todd, I wanted to discuss the increased disclosure regarding the sleep business. I want to ensure that I understand it correctly. The fourth bullet point in your press release notes that the company increased its sleep therapy patient count by 11% sequentially to 19,478. Additionally, the company raised its resupply orders by 9.7% sequentially to 22,143. So, to simplify, there are about 20,000 patients in your sleep program right now. However, it seems there are nearly 22,000 people in the resupply program, which appears to be more than your actual patient count. How should I interpret this?

Todd Zehnder, COO

Those are mutually exclusive, Doug. So the sleep therapy patients are the ones that are on PAP therapy, like we're actually renting them the machine right now. The resupply process developed over the last, call it, 5 to 10 years. And so they're no longer in their generally, what, 13-month cap period. And so they're just on resupply. So you should add those together effectively to get to what the patients that we serve during the quarter, which was roughly 42,000.

Doug Cooper, Analyst

42,000. Okay. And then so the resupply order, that's 22,000, is that 3x a year?

Todd Zehnder, COO

It varies. On average, we're closer to 2 to 2.5 times per year. This fluctuates based on the insurance companies and patient preferences regarding how often they reorder. Overall, our rate is between 2 and 2.5 times as a total company.

Doug Cooper, Analyst

Okay. When I look at your financials, I see that other durable medical equipment rentals amount to $12.5 million, which is directly related to the 42,000 patients.

Todd Zehnder, COO

That would have 20,000 patients renting the machine. The resupply would generate service revenue. Additionally, with the other rentals, you would have your oxygen patients and everything else including nebulizers, covering the entire range of products.

Doug Cooper, Analyst

Okay. And then finally, just the other equipment sales, that would be the resupply program, the $8.4 million?

Todd Zehnder, COO

Yes.

Doug Cooper, Analyst

Is there anything else in that number other than the resupply program? Or is that predominant?

Todd Zehnder, COO

It's primarily resupply, but there is other things in there.

Doug Cooper, Analyst

Okay. And to your point, Casey, the 469 patients you added to the vent program might be the largest increase I've seen in absolute terms over the last five years. There might have been one quarter with a higher number, which was 455 in the prior second quarter. What do you think has contributed to this? Is it simply increased sales, or are the referring doctors becoming more at ease with the program?

Casey Hoyt, CEO

I really credit our training program and the restructuring of the sales force for this success. We're achieving more with fewer resources, and our team is incredibly productive, polished, and well-educated. We have the appropriate personnel in the right locations across the country. This transition was challenging as we promoted 12 individuals to upper and middle management while completely restructuring the sales force. Although we discussed it at the start of the year, we have yet to fully gain from the benefits of localized recruiting since we have been intensely focused on training our team. The next phase of our sales restructuring will focus on recruiting individuals from their local areas. We now have a solid training program and a method for identifying the right candidates. Looking ahead to 2024, particularly in Q4 and 2025, our focus will shift to recruiting and gradually expanding our team. We're really excited about our current position.

Doug Cooper, Analyst

Okay. Lastly, regarding mergers and acquisitions, you mentioned that the pipeline is looking quite strong. Can you provide more details on whether it's related to the sleep sector? I'm assuming it wouldn't involve ventilation, but is it focused on sleep or potentially outside the respiratory market? Additionally, could you share more about the size of the companies you might be considering?

Todd Zehnder, COO

We're not always going to be leaning towards respiratory, Doug. We're not exclusive to that. I mean we will look at other businesses. We've looked at other businesses. We generally have said that the size of the HMP acquisition was just a really good size, which was that $25 million to $30 million range. But we'll do smaller deals as necessary or we'll look at larger deals. So we've got a little bit of everything in there right now, but it just feels like we're getting more inbound calls over the last, call it, three months than we had the prior couple of years.

Operator, Operator

Our next question is from Ilya Zubkov with Freedom Broker.

Ilya Zubkov, Analyst

So my first question is on the EBITDA margin expansion. I see that adjusted EBITDA margin is expanding from quarter-to-quarter this year. And I was wondering if the primary driver for that is permanent like economy of scale? And if yes, could it be in effect next year as well?

Todd Zehnder, COO

Yes, typically our EBITDA margins improve as the year progresses. Looking at the quarter-over-quarter data, we generally observe higher margins. We do identify some efficiencies that arise from scale. The year-over-year decline is mainly due to the mix of our revenue. As events account for a smaller share of our revenue, maintaining flat margins becomes challenging, but we managed to stay close to that. This indicates that our overall operations are becoming more efficient as we grow, benefiting from the advantages of being a larger company. There are many factors at play, but we are very optimistic about the key metrics. That's why in my prepared remarks, I emphasized SG&A as a percentage of revenue, since gross margin is heavily influenced by the product, while G&A is an area we can manage more effectively, highlighting the scalability you mentioned.

Ilya Zubkov, Analyst

Great. And another one on the current progress in replacement of recalled ventilators. So I see that CapEx is growing, and I wanted to ask if you expect further increase in CapEx in nearest quarters? And what is the expected timing for full replacement of recalled ventilators?

Todd Zehnder, COO

Yes. I mean, like I said in the earlier part, we definitely saw an increase this quarter, but we're starting to measure it on a net CapEx because the third quarter was where we really got into a groove of selling or distributing our vents back to Philips. And obviously, our vent patient count is growing, so we have to replace those vents with CapEx. It's why you saw us very deliberately disclose net CapEx, and we're very proud that I think the net CapEx as a percentage of EBITDA is probably the lowest it's ever been in our corporate history. I would expect that number to continue to be very large this quarter. And very likely, it will stay like that through at least the middle of next year. We're kind of waiting on Philips and the FDA and anybody else that is going to be needed to make a decision of when they can actually remediate some of their vents versus us just selling them back to them. But we'll be working in conjunction with them to see how that all shakes out to determine whether we keep selling at the rate that we are right now or maybe we send some back to be able to stay on patients and so forth. So it's a little early for us to say how long it will take us to finish, but it will definitely go into next year because we still have a pretty significant fleet out there.

Operator, Operator

We have reached the end of the question-and-answer session. I'd now like to turn the call back over to management for closing comments.

Todd Zehnder, COO

We want to thank everybody for listening in. And if you have follow-up questions, please reach out to us, and we look forward to talking to everyone. Have a great day.

Operator, Operator

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.