QIPT Q3 2019 Earnings Call
Operator: Welcome to the Protech Home Medical Third Quarter Fiscal 2019 Earnings and Corporate Update Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Mr. Greg Crawford, Chairman and CEO. Please go ahead, sir.
Greg Crawford: Thank you, operator, and thank you all for joining us today on the call. My name is Greg Crawford and I'm the Chairman and Chief Executive Officer of Protech Home Medical. Joining me today is Hardik Mehta, our Chief Financial Officer. On this call, I would like to outline our core business, review our progress over the past year with a focus on the last quarter, and provide you with our updated outlook for the rest of calendar 2019. I hope we will leave you with a resounding impression that Protech is in a strong position in respect of its financial performance, its operations, the balance sheet, and organic and inorganic revenue opportunities. We remind you that our remarks today will include forward-looking statements that are subject to important risk and uncertainties. For more information on these risks and uncertainties, please see the Reader Advisory at the bottom of our News Release as well as our in MD&A. You can find these on our website, and on SEDAR. The company's actual performance could differ materially from the statements. On August 19, 2019, we announced our Q3 fiscal 2019 financial results for the period ended June 30, 2019. For more on those results in a moment, but first a brief background on our story. Protech Home Medical provides a diverse offering of home medical equipment and services for treating patients with chronic disease in the United States. The company provides a range of products including respiratory, oxygen, various medical supplies, and custom power mobility devices. We operate in 13 states across the Midwest and East Coast regions, completing hundreds of thousands of deliveries each year to more than 80,000 active patient customers. Our growth strategy is focused on utilizing technology to make life easier for the patient, the physician and to improve our overall healthcare experiences and outcomes. Today, for example, if a patient needs respiratory equipment, he or she would typically have to drive to a location to pick up the equipment and see some level of in person training. If the patient has any difficulty with the device, either someone must drive to them, or they are forced to come back to the location where the device was purchased. In contrast to that, Protech uses technology to reduce or eliminate these points of friction, resulting in more successful treatment and managing of chronic conditions and not unimportantly at a higher margin yield per patient. With that background, I'd like to hand the call over to Hardik, to discuss our Q3 fiscal 2019 financial results.
Hardik Mehta: Thanks, Greg. In reviewing the financial results for the third fiscal quarter ending June 30, 2019, please note that all financial values are in Canadian dollars. And the full results are available on SEDAR. In the third fiscal quarter of 2019 Protech completed 11,034 signups for deliveries compared to 10,245 in the corresponding period last year, an increase of 7.7%. The company generated revenue of CAD 21.1 million up 7.1% from Q3 of 2018. Our efforts to streamline operations and standardize reasonable processes continue to bear fruits. Most of the 7.1% year-over-year growth is organic with a small contribution from two smaller recent acquisitions. Though we were up 7.1%. Year-over-year, the reported net revenue was down 5% quarter-over-quarter. I want to take a moment to explain why. It is important to clarify that our baseline gross revenue actually increased marginally by 0.6% quarter-over-quarter. Despite of this increase our recorded net revenue was down 5% for primarily two reasons. One change in accrual, the change in accrual quarter-over-quarter was close to negative CAD 600,000. It was primarily because we witnessed some temporary slowdown in a processing of CPAP intake and [indiscernible] orders, because we were in middle of establishing a new process with a new global partner with the aim to reduce our SG&A in the long run. At this time, all the tipping issues have been resolved and we are back on track. The second reason is because this quarter we took additional results for previously recorded revenue against our gross revenue for the quarter, which resulted in current period reduction in net revenue. One of our businesses, which is also our non-core assets and represents less than 5% of revenue had product recall earlier in the fiscal year, which was followed by a 20% reimbursement cut by Medicare. This quarter, we took additional reserve against previously recorded revenue for this entity to accommodate for these changes. Moving on, adjusted EBITDA for Q3 fiscal year 2019 was CAD 3.9 million, up 7.8% from the corresponding period last year. Adjusted EBITDA margin was 18.4%, up slightly from 18.3% in Q3 2018. At the end of third quarter we had CAD 4.2 million in cash. Our net loss for the quarter was CAD 12.5 million compared to a net loss of CAD 1.4 million in Q3 2018. This decline was almost entirely a result of the cyber-attack that the company suffered. As Greg will discuss in a moment, we have reasons to be optimistic that this charge of CAD 9.2 million will be reversed. Current assets totaled more than CAD 27.2 million at June 30, 2019, compared CAD 19.1 million in net short-term liabilities. To summarize, our balance sheet remains solid, our operational base continues to grow and we continue to post industry leading margins. Thank you. And with that update, I’ll turn the call back to Greg.
Greg Crawford: Thanks Hardik. We have been satisfied with our operating performance over the last year and are pleased to report that solid organic growth continues through 2019. I want to take a moment to explain a little more in depth what we are doing differently and why we have been able to achieve the results we have and why we continue to be so excited about the future. Protech uses unique efficient delivery cost models and technology to change the way in which home medical equipment is delivered to a growing aging U.S. population. This segment of the market known as durable medical equipment or DME providers is estimated to approximately CAD 60 billion. This is underlined by the fact that over 10,000 people in the U.S. will turn 65 everyday for the next 15 years. This is our core market. In the last 12 months, we have set up or delivered over a quarter of a million pieces of equipment to over 80,000 patients. We operate out of 33 locations in 12 states and now have over 13,000 referring physicians. Our core product offering is for chronic illnesses that are treatable at home, using streamline logistics and distribution. Protech can offer home delivery and maintenance on the equipment, which is a first for many of these patients. The respiratory market, one of our key target markets is interesting and that the demand for services continues to rise, but the supply side is fragmented and shrinking as significant reimbursement cuts have reduced the number of providers in this segment. There are very few companies like Protech that have the scale and competitive advantages, including those from technology and logistics to benefit from such structural changes and the balance sheet to seize upon these opportunities. I would now like to review with you the three components of our growth strategy that we implemented upon taking the reins of the company in late 2017. First, we are laser focused on capturing market share economically and profitably. Our industry growth rate is about 3% to 5% per year. However, we believe we can achieve more than double the growth rate of our industry, as we continue to focus on significantly increasing our market share in key target regions within the markets we serve. We continue to seek opportunistic ways to grow our business, through more strategic methods and or additional product lines within our existing locations. It is important to remember that this is an industry of scale and Protech is still at the early stages of reaping the full benefits of being one of the only companies that can benefit that given our relative size. These benefits will further magnify as we continue to grow both organically and through acquisitions. Secondly, we continue to lead the industry in technology deployment and in our use of data mining tools to drive efficiencies and profitability, a patient's ability to order a piece of equipment, a service call, or other ancillary option via the touch of a button is where the industry is headed. We have made significant investments in developing these tools and we'll continue to invest in them to continue to maintain our technological advantages over our competitors. The third component of our growth strategy is acquisitions. Our key focus for our acquisition program is to focus on geographies, where we are -- where we already operate, so that we are best able to integrate acquisition targets onto our platform by consolidating distribution channels, driving efficiencies, and substantially improving the overall profitability. We are actively working to bolster our M&A program with new hires that will focus on driving more deal flow and enhancing our process. By building up our M&A team, we believe we can improve our acquisition pace and find the most accretive pricing for deals. We will keep our shareholders up to date on our progress. Overall, I sincerely believe that our three pronged strategy will continue to propel our company towards sustained financial growth and profitability. Finally, I want to address the cyber-attack of which most of you are aware and in which we press released on May 6, 2019. To recap, Protech was the subject of a sophisticated breach of our email system that ultimately led to the theft of approximately CAD 9.2 million. On August 16, 2019, we announced that we have completed the final legal hurdle in Hong Kong to recover the majority of the stolen funds with accrued interest. As such, we expect the funds to be back in our bank account within the next several weeks. In addition, we have filed a claim under our cyber insurance policy for costs associated with the recovery of the funds. The process of recovery has been both time consuming and distracting for management this quarter. In addition to the recovery itself, we have spent significant time strengthening our internal systems and processes to reduce any risk of reoccurrence. I am pleased to note that, despite the distraction, Protech posted solid growth this quarter, demonstrating the quality and fortitude of our core business. With the cash recovery now in its final phase, we are pleased to report that certain M&A related discussions that were ongoing at the time of the theft have now been reenergized and new targets are constantly being identified. Of course, although there is no guarantee that any of these discussions will lead to a transaction. I believe our track record speaks for itself, mainly that we are highly adept at identifying, closing and integrating attractive acquisition opportunities in a highly accretive manner. In conclusion, I want to leave you with three clear messages. First, our core market is growing and we continue to expand our market share there in. Secondly, our strong balance sheet, expanding margins and cash flows allows us to speedily respond to strategic opportunities, creating a dynamic and we believe highly attractive investment opportunity. Finally, engaging with capital markets is a top priority for us. We truly believe that of our current share price Protech is highly undervalued compared to its peers. We will continue to tirelessly share and promote our story to the markets to rid ourselves of that discount. We look forward to continue to demonstrate strong financial results and we'll continue to communicate with our retail and institutional shareholders the progress we're making towards our goals. This concludes our prepared remarks and we will now open for questions.
Operator: Certainly, sir. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Doug Cooper of Beacon Securities. Please go ahead, sir.
Doug Cooper: Hi, good morning, guys. And congratulations on a solid quarter. Couple of things for you, I just wanted to confirm what you said, I guess with the respiratory resupply setup business, did you say the changes that you undertook in the quarter caused a temporary slowdown. And I think you said sort of the opportunity cost CAD 600,000. Is that what you said in the quarter?
Hardik Mehta: Yes, what I said was, as part of IFRS accounting there is accruals. And the change in accrual was a big portion for the drop in revenue. And the reason for these changes in accrual is because towards the end of the quarter, we had a slowdown in our intake process in our confirmation process, which because we were establishing a global partner to reduce our overall SG&A associated with the process. So there were some tipping issues that resulted in slowdown of recording the revenue. I mean it did not result in the drop of revenue, it just resulted in a slowness around when the revenue was booked on our side, because the order went out into Q4 basically instead of going into Q3.
Doug Cooper: Right. So, yes…
Hardik Mehta: For the quarter fell in a drop.
Doug Cooper: Okay. So in other words, if this process was already done, just as an example, you think you could have generated an incremental CAD 500,000 in revenue. Is that how we should think about it?
Hardik Mehta: Yes, I mean, we could have recovered -- I mean, there are two reasons for the changes in accrual. One was the CPAP and then the other as I said, we had another company, small non-core asset that had seen some drops. So you would see a little bit of drop from that and from the CPAP. So I wouldn't entirely contribute CAD 500,000 but a big portion of the CAD 600,000 did get contributed through the CPAP program.
Doug Cooper: Okay. So that was sort of the sort of the impact between those two issues that you itemized.
Hardik Mehta: Right.
Doug Cooper: Okay. And just on the second point, you talked about that other company or other segment of your business being a non-core asset. Does that mean that we should think about you potentially looking to sell that asset or when we see a non-core? I'm assuming that you might look to sell that asset. Is that how should we be thinking about the definition of non-core?
Hardik Mehta: We are obviously always looking to bring efficiencies and take steps towards increasing our EBITDA margin for the overall company. And if that evaluation leads to a potential divestiture than we are absolutely going to consider that as an option. So hopefully that answers your question.
Doug Cooper: Okay. And can you give us the size of what that sort of non-core asset does revenue wise on an annual basis?
Hardik Mehta: I mean, it's less than 5% fiscal year 2018. It was close to CAD 4 million.
Doug Cooper: Okay. And second of all, Greg, you referred to in your speech 13,000 referring physicians. Can you give us an idea how that has grown over the past year. And the ability of those 13,000 positions to drive more business to you? Like, what is the sort of underutilized referring power, if I can call it that of those 13,000 physicians?
Greg Crawford: Yes, good question. It allows us to be able to add more physicians obviously, into the network and that -- and they learn about our services and things. And we're able to sell our different programs that we have. So some of those particular physicians, and that may have been referring one type of device to us. And then we were able to tell them about another service that we provide. So that's really kind of been key to some of our growth of the high margin respiratory products that we've been expanding on for the past couple of years within the company.
Doug Cooper: So when you talk about your goal, one of your strategic growth strategies is to drive sort of double industry growth rates. I'm assuming as part of that is the leverage that you can get from those 13,000 referring physicians?
Greg Crawford: Yes, absolutely. And it's leveraging multiple products and that particularly on the side of the respiratory category.
Doug Cooper: And, I guess, my final question, well, sort of the twofold questions. Assuming that you get the -- all goes smoothly from here on out to get the cash back from the cyber theft, and we'll just leave it there on the pro forma basis maybe Hardik can you talk to us about what your cash position would be pro forma? Should we just assume the CAD 4 million plus the CAD 8.6 million and -- when you talk about reenergizing the M&A program, what kind of -- can you give us a bit more color on what kind of size companies you are looking at? What do you think you pay in terms of whether cash and stock and in what kind of size company?
Hardik Mehta: Right, so I'm just doing the math of CAD 8.6 million plus CAD 4.2, that we currently have at least about CAD 12.8 million as we all know, there was a loan that was provided by Greg, to us to honor the debentures that were due for December. And so after, after that, I think the money that will be left with it, we should be able to at least by close to CAD 10 million of revenue, if not more. And then we have some other things in works that it's premature for us to disclose at this point. But I think there are some other stuff that we are working on that will allow us to bring more acquisitions.
Doug Cooper: Okay, great. That's it for me. Thank you very much.
Greg Crawford: Thanks, Doug.
Operator: Our next question comes from Andrew Hood of M Partners. Please go ahead.
Andrew Hood: Good morning, guys. So my first question it was kind of the same as Doug’s, and I guess maybe you kind of answered it there. I was wondering if you were comfortable with your cash balance to pursue your acquisition strategy. And really, are you expecting to be cash flow positive next year?
Hardik Mehta: I think we are operationally definitely cash flow positive as of today. It -- so, yes, I mean, I think we are cash flow positive operationally today, and we will continue to do that in the next year, too.
Andrew Hood: And I guess even considering, let's say, payment of interest, debt that type of thing, would you still expect to be cash flow positive at the bottom line of your cash flow statement?
Hardik Mehta: Yes, I think, we are very -- I think, yes. So simple answer to that question would be, yes.
Andrew Hood: Okay. So what's your total pipeline of acquisition, let’s say, over the next year or two, as of now dollar value wise?
Hardik Mehta: I mean, we have -- we got actively engaged with about CAD 20 plus million in revenue, with some of them are actually more closer, some of them a little bit farfetched, I mean, some of them are on an introduction phase. But a big portion of that 20 plus million dollars is where we are actively talking to the management. And there has been an indication of interest if not signed at least negotiated.
Andrew Hood: Okay. Would it be fair to say that LOI signed in April would likely be the first one to close?
Hardik Mehta: I mean, we are still actively talking to the seller, I don't know if that would be the first to go or there would be something else that can go first. There are a couple other opportunities that are a little bit better and probably more time pressing from a closing perspective. So, I think, there could be other opportunities that can go first, just depending on where the sellers are in their own processes.
Andrew Hood: Okay. But you're still definitely considering that April, LOI target then?
Hardik Mehta: That is absolutely correct. We are in active conservations with those guys.
Andrew Hood: Okay. As you mentioned that CAD 3.4 million loan from Greg. So once you get that cash back, let's say, in September, are you intending on paying back that loan immediately or is that going to remain on the balance sheet?
Greg Crawford: Ultimately, I believe that's what the board would like to do. Yes.
Hardik Mehta: Paying it off?
Greg Crawford: Yes.
Andrew Hood: Okay. A quick question, what proportion is recurring revenues now. Still 65% roughly?
Hardik Mehta: Yes. Andy, you may or may not be part of some of the other conversations in the past, but a lot of our resupply program, even though that is characterized as sales as per IFRS the nature of that business is recurring in nature. So, a person who's on a CPAP program -- a CPAP resupply program would buy products on a recurring basis, it's like a, for lack of a better comparison. But if you -- somebody is on a diabetic resupply program, that person needs scripts to test for their blood sugar, on a daily, monthly, whatever the schedule is. Now those kind of transaction on an IFRS accounting business are considered as a sale item and not a revenue item. So, I think categorization wise, it’s much more percentage of our revenue is recurring in nature.
Andrew Hood: Okay.
Hardik Mehta: May not be rental, but it is recurring in nature.
Andrew Hood: Yes. I know, it's a noncore business, but could you just talk about that, you mentioned a supplier recall?
Hardik Mehta: Yes.
Andrew Hood: Would the business still be affected by that going forward or is that -- has that been resolved?
Hardik Mehta: So the business would not be affected by that going forward. But it did affect us for a significant amount of time, almost more than two to three months. And we were the only providers that supply the whole industry got affected by it, because this was like a single supplier industry. And, what I meant by about the reserves associated with those was, we had book revenue based on our estimation on what our collection efforts would be and then the week away from those recall. And I think that particular segment performed a little bit lesser than our expectations were. And so in anticipation of that, we thought it would be prudent for us to take some reserves against those previously booked revenue. So -- but at this point, no, that recall doesn't affect us going forward.
Andrew Hood: Right. So it affected the whole industry as well. So you don't think you lost -- I mean, obviously, it's a recurring business likely, but you don't think you've lost market share at all?
Hardik Mehta: No, definitely not. It didn't affect our market share. What it did affect was that, during the few months that there was no product supply, we were not able to onboard new patients. So that does affect our revenue stream from that business. And we had a pipeline of patients who were waiting to be set up or waiting for the products, or we were able to supply them non-recall products to get through the phase. But that did impact our overall performance. And we were not the only one, everybody went through the exact same cycle.
Andrew Hood: Okay. My last question…
Hardik Mehta: There was no other opportunity for a patient to go. It's not like they were gone from us to -- on a different provider.
Andrew Hood: Okay. Okay. My last question, I'm just wondering -- I know, it's a longer term strategy, but is there any update on the warehouse consolidation strategy at all?
Greg Crawford: No real update, I mean, we continuously evaluate the operation and look at consolidating distribution channels and warehouses and things on a regular basis. But we're -- at the same time, we're also expanding into areas. So the number may not necessarily change, but different locations and that could be added and some could be retired.
Hardik Mehta: Yes. Just to add more is what's happening is, as some of these leases are coming due, we are exiting those, or we might have already exited and the leases are just being paid the deal post. But at the same time, since we are expanding into some new geographies, on the financials you may or may not see a net impact. But it is definitely a more efficient way of using our capital.
Andrew Hood: Alright, that's it for me. Thanks, guys.
Greg Crawford: Thank you.
Operator: The next question comes from Ed Sollbach of Spartan. Please go ahead.
Ed Sollbach: Good morning. I noticed the SG&A went up year-over-year. Can you talk about what happen there?
Hardik Mehta: Sure. A big portion of that SG&A is associated with our investment in personnel. As we had discussed in our Q2 and Q1 that we have hired a significant amount of sales rep and some senior management to support the growth that we want to plan for, especially back in Q2 before the cyber-attack took place. We were positioning ourselves to capitalize on the capital raised and following more acquisition strategy. And so we kind of bolster our personnel to support that. And since we were very positive on our ability to recover most of the funds, we have made the decision to kind of continue to sit on that investment and right size us right soon after the attack took place.
Ed Sollbach: Okay. So I guess we look forward to that paying off in the future. Where are you at in terms of personnel now versus last year?
Hardik Mehta: I think we are about 10%, more than last year. And again, it is some investment in high dollar of management people along the -- boots on the ground. So we don't believe that acquisitions going back on track. Our marginal contribution would be much better on a dollar business. We don't expect our SG&A to grow proportional to the revenue.
Ed Sollbach: Okay. So you expect margins or economies of scale at some point?
Hardik Mehta: Yes, we do, exactly, we do the expect economies are scale to that. And so -- and as some of them were just -- as we bootstrapped this into -- in fiscal year 2018, it was time for us to kind of bring some senior people in the team to support where we were heading to go.
Ed Sollbach: Okay, so that makes sense. One thing that was worrisome was the bad debt. I mean, it's already sizable and I noticed it went up this quarter again versus last year. What happened there and what are you doing to…
Hardik Mehta: Right. Again, because partly the reason for that was this non-core asset that we had booked revenue against, and we thought looking back and looking at some of the performances associated with the previously booked revenues, we thought it was prudent for us to right size revenue from those assets. And that's exactly what we did in this quarter. I think overall, it is still aligned to last year. On a year-to-date basis, it's just probably slightly up.
Ed Sollbach: So the bad debt came from the non-core assets?
Hardik Mehta: Yes. Additional portion of that did come from that non-core asset.
Ed Sollbach: Okay. What -- how much of the bad debt was associated with the non-core assets?
Hardik Mehta: I would say about 80% of the delta of a normalized bad debt versus this year was probably associated with the non-core.
Ed Sollbach: Okay. Could you put a number on it?
Hardik Mehta: I don't know, I don't have that in front of me right now. So, sorry.
Ed Sollbach: Okay. So -- sorry, I was trying to understand what you said 80% of the…
Hardik Mehta: The additional bad debt than what our normalized bad debt ratios were.
Ed Sollbach: All right. So 80% of the increase came from the non-core assets?
Hardik Mehta: Yes, yes.
Ed Sollbach: Okay, that's it for me. So I'll be -- good luck. And I'll be watching those two line items in the future. Take care.
Hardik Mehta: Thank you.
Greg Crawford: Thank you.
Operator: This concludes the question-and-answer session. I would now like to turn the conference back over to Mr. Greg Crawford for any closing remarks.
Greg Crawford: Thank you, operator and thank you all for your participation today. As always, you can find us on the web at protechhomemedical.com, where we will be posting a transcript of this call and also our updated investor deck. On the site, you can also view some of the exciting products and developments discussed on this call. Thank you and good bye.
Operator: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.