QIPT Q1 2020 Earnings Call

Operator: Thank you for standing by. This is the conference operator. Welcome to the Protech Home Medical first quarter, fiscal 2020 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 to join the question queue. [Operator Instructions] I would now like to turn the conference over to Greg Crawford, Chairman and CEO. Please go ahead.

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 with a focus on the last quarter and provide you with our updated outlook for 2020. I hope we will leave you with a resounding impression that Protech is in a strong position in respect of our financial performance, our operations, our balance sheet, and the organic and acquisition revenue opportunities we have in front of us. We remind you that our remarks today will include forward looking statements that are subject to important risks and uncertainties. For more information on these risks and uncertainties, please see the reader advisory at the bottom of our results news release as well as our MD&A. You can find these on our website and on SEDAR. The company's actual performance could differ materially from these statements. This morning we announced our first quarter financial results for fiscal 2020 the three months ended December 31st, 2019, more on these results in a moment, but first, let me provide a brief background on our story. Protech Home Medical provides a diverse offering of home respiratory services and medical equipment for treating in-home patients with chronic conditions in the United States. The company provides a range of products including oxygen therapy, sleep apnea treatment, certain medical equipment and custom power mobility products. We operate in 10 states with more than 40 locations across the Midwest and East coast region, completing hundreds of thousands of deliveries each year to more than 85,000 active patients. With that background, I'd like to hand the call over to Hardik to discuss our first quarter fiscal 2020 financial results.

Hardik Mehta: Thanks, Greg. In reviewing the first quarter of fiscal 2020 numbers, please note that all financial values are in Canadian dollars and the full results are available on SEDAR. As discussed on our yearend fiscal 2019 conference call a few weeks ago and the associated filings, the company sold Patient Home Monitoring Inc, also called PHM an asset we determined to be non-core. As for IFRS operating results of PHM were reported under discontinued operations. As a result please note that all numbers for the first quarter of fiscal 2019 have been adjusted for this divestiture and are reported for continuing operations only. In the first quarter of fiscal 2020 Protech completed 63,000 setups or deliveries compared to 50,943 in the corresponding period last year, an increase of 24%. The company generated revenue of 22.8 million in first quarter fiscal 2020 up 11% from first quarter fiscal 2019. Gross margin increased to 73.5% from 69.6% in the first quarter fiscal 2020. Adjusted EBITDA for the first quarter of fiscal 2020 was 4.4 million compared to adjusted EBITDA for the first quarter of fiscal 2019 of 3.7 million representing a 18% increase year over year. Adjusted EBITDA margins for the first quarter of fiscal 2020 increased to 19.4% compared to 18.2% for the first quarter of fiscal 2019. Current assets totaled more than 27.3 million at fiscal yearend 2019 compared to 23.5 million in net short term liabilities demonstrating continuing strength in our liquidity. While we did not release detailed forecast, we continue to stand by our previously stated objective of attaining an annualized revenue run rate of 100 million at some point during 2020. When achieved it would equate to an increase of at least 20% compared to fiscal yearend 2019. We have had a number of recent investor inquiries regarding the coronavirus. I want to say that we have not seen any impact of this one up operations. At this stage we see zero impact of coronavirus on our financial performance going forward. As always, we will keep investors posted on any material developments on this front. To summarize our balance sheet is in excellent condition and our operating performance continues to improve. In this quarter we again posted industry leading margins. We are confident in our ability to continue with this trajectory. Our focus remains on accelerating revenue goals, process improvement and cost rationalization. Thank you and with that update I will turn the call back to Greg.

Greg Crawford: Thanks Hardik. We have been very pleased with our operating performance over the last year and are delighted to report today that solid organic growth continues into fiscal 2020. I want to take a moment to explain in a little more 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 US population. This segment of the market known as the durable medical equipment or DME providers is estimated to approximate $60 billion. This is underlined by the fact that over 10,000 people in the US will turn 65 every day for the next 15 years. This is our core market. In the last 12 months we have set up or delivered approximately a quarter of a million pieces of equipment to over 85,000 patients. We operate out of over 40 locations in 10 states and now have over 15,000 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 this equipment, which is a first for many of these patients. The respiratory market, one of our key target markets is interesting in 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. First, we are laser focused on capturing market share economically and profitably. Our industry growth rate is about three to 5% per year. However, we believe we can continue to achieve well more than double the growth rate of our industry by focusing on significantly increasing our market share in key target regions within the markets we serve. To execute on this, we are continuously hiring and training new sales representatives and we'll continue to expand our product base. 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 from 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. The key focus for our acquisition program is to focus on geographies 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 overall profitability. We have made two acquisitions this quarter which are well on their way to be successfully integrated. I am very confident in our abilities to continue to integrate acquisitions as we find and execute on them. Although we have a very robust pipeline of acquisition targets, we remained hyper focused on closing more material acquisitions on favorable deal terms. Overall, I sincerely believe that our three pronged strategy has and will continue to propel our company towards sustained financial growth and continued profitability. I want to say how proud we were to be awarded a ranking in the 2020 TSX Venture 50. The TSX Venture 50 represents the top 50 performing companies on the TSX Venture exchange based on three key criteria, share price appreciation, market capitalization growth and trading volume. I believe the ranking further substantiates that our strategy is on the right track to maximize shareholder value. In conclusion, I want to leave you with three clear messages. First, our core target market is growing and we continue to expand our market share therein to exceed the industry growth rate. Secondly, our strong balance sheet, expanding margins and cash flows allows us to speedily respond to strategic acquisition opportunities, which creates a dynamic and we believe highly attractive investment opportunity. Finally, engaging with capital markets on both sides of the border is a top priority for us. We draw your attention to our February 4th 2020 press release discussing our proposed listing on the OTC QX in the United States. We have fielded many calls from interested investors in the US and believe that this move makes sense for a company headquartered in the US and deriving 100% of its revenue from US customers. I believe this is the first step towards fulfilling our ambitions of graduating to a US stock exchange such as the NASDAQ or NYSE. I want to make it clear that to unlock shareholder value, we are committed to tirelessly share and promote our story to the capital markets in Canada and expect to continue to do so going forward. In fact, over the preceding 12 months, we have added two prominent investment analysts to the roster covering our company and expect more over the coming months. I would like to take a moment here to thank the entire Protech team for its tireless efforts and stakeholders for all their continued support. We look forward to continuing 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: We will now begin the question and answer session. [Operator Instructions] The first question comes from Doug Cooper with Beacon Securities. Please go ahead.

Doug Cooper: Hi. Good morning Greg and Hardik. Just want to talk about organic growth first of all, if we take Q1 last year at 20.5 million, you had I guess, some contribution from Cooley and Acadia. And I guess maybe an FX impact. Can you just walk me through what do you think the organic growth rate was in the quarter?

Hardik Mehta: Yeah, we had a pretty flat organic revenue growth for the quarter and partly of that reason is we through our analysis I think our deliveries and set ups were high for our organic piece, but we took a little bit of a higher revenue reserve as compared to what was taken in Q1 of fiscal 2019. And we did that just to be inconsistent with the results of fiscal 2019 and we took the same revenue reserves that the auditors came up with for the year and applied that to Q1, which resulted into a lower net revenue, but on the gross revenue basis we are definitely higher year over year.

Doug Cooper: So what, what, sorry, give me, just explain the revenue reserve. What does that mean exactly?

Hardik Mehta: So, our ERP comes up, you know, we have a gross revenue number from our ERP and then there is a revenue reserve internally that we reallocate. So it's a left pocket, right pocket between bad debt and revenue reserve. So within audited numbers of fiscal 2019 the percentage that was recommended by the auditors was a little bit higher than about three points higher than what was used in first quarter of fiscal 2019. And since we applied a little bit higher percentage on our gross revenue our net revenue kind of came up with that. But if I look at on a gross basis it was about 3% to 4% organic growth.

Doug Cooper: Okay. The bad debt provision, that's a line item within your G&A and that looked like it ticked up to 8.7% of revenue a little higher than it's been in the last several quarters. Any comment on that?

Hardik Mehta: No. I think we are just again nothing underlying. I think we are heading, starting the year with a slightly I wouldn't say conservative, but we feel that it might recover over the rest of the year.

Doug Cooper: You mentioned the MD&A and the implementation of IFRS 16, I think which increased I think what you said increased depreciation amortization by 390,000, maybe decreased G&A by 300 and I guess the off-setted amount. So that that would've had a positive impact on EBITDA margin, reported EBITDA margin, by maybe a 100 basis points or so. Does that compare to, is that fair?

Hardik Mehta: Yes.

Doug Cooper: So what I'm looking at Q1 versus Q1 last year in terms of margin am I looking at an apples to apples comparison or was that IFRS adjustment not made in last year's Q1?

Hardik Mehta: It was not made retrospectively. We are just adopting the guidance going forward basis. I do want to take a moment here to point out that Q1 and also Q2 continue to see some downward on a pool on the margins related to acquisitions of Cooley and Acadia. So the numbers we have presented is obviously a job in that downward pool. So again, organically we would have.

Doug Cooper: Right. So on a year and a year basis, on a comparable basis, even though margin was down slightly because of the acquisition of Cooley the integration work necessary for Cooley and Acadia and you would expect that to recover or over the balance of the year or second half. Is that fair?

Hardik Mehta: Second half, yes, but I think we expect to fully recover in the second half. The first half we will definitely, that will be a continuing factor for the first two quarters because our integration efforts are expected to last six months.

Doug Cooper: Okay. And I guess my final question, just a free cash flow, what do you think your estimate for free cash flow generation was prior to any acquisition of new I guess monitoring equipment and repayment of capital leases.

Hardik Mehta: I think by the end of fiscal 2020, I think we should be on our way to be positive after deduction of all this, what you just mentioned, from you came in off some of the overhangs we have had from 2019 and some acquisition related lease payments for Cooley and Acadia.

Doug Cooper: And just one final one for me. Sorry. You have broken down the segments as you normally do, I guess between sales of medical equipment and rentals of medical equipment. I guess the sales of medical equipment, 9.9 million in revenue. I'm assuming, you know, the I guess the gross cost of sales $6 million is fully reflective of the sale of the stuff. So can you maybe just give us a comment on what do you think the profitability. There's 1 and then 2 have a better profitability or the, you know, at the end of the day they when you subtract out the amortization against the rental are they sort of about the same?

Hardik Mehta: I think some of the costs of revenue also includes cost for rental and medical equipment. I wouldn't say that everything on the cost of revenue line item belongs to the sale. There are disposables and ancillary products that go with the rental equipment and the services related to a rental equipment so. I just wanted to point that out. I guess I missed the second question.

Doug Cooper: I guess the profitability attached to each segment? Does one contribute greater to the profitability than the other or are they similar?

Hardik Mehta: No, I think in the longer run they, I think they have a very similar unit metrics, so I wouldn't say that way. I mean even if they are off, they're probably off five to 10% compared to other. I wouldn't say they are materially different.

Doug Cooper: Okay. And sorry, one final-final question. Adapt Health reported their earnings the other day. And just certainly on the surface of their stock looks like it trades about nine and a half times EBITDA. Looks like they're bullish on the sleep side of their business, which I guess is a big part of your business, you know, why do you think the market continues to have you guys trade in and around four, four and a half times EBITDA in the market value and they're at nine and a half. Maybe just some color from your perspective and I'll leave it there. Thanks.

Hardik Mehta: Sure. Honestly, we don't know that we are surprised and perplexed ourselves that we have very identical profiles, identical business models. I mean I would say they're probably a couple of points more than on the EBITDA margins than us, but nothing substantially better. And the market has continued to have this kind of response, which again we hope to be trading close to where they are trading but we don't have a particular reason why we are traded where we are. We do believe that we should be trading differently.

Operator: Our next question comes from Andrew Hood with M Partners. Please go ahead.

Andrew Hood: Hi guys. Good quarter. I'll start with the set ups and deliveries and the unique patients growth year over year. How much of that was just from Acadia and Cooley?

Hardik Mehta: A decent portion was I think on the setup side, I think our organic growth if that's where this is heading, I think it was close to about a 4% to 5%.

Andrew Hood: And then how about for patients? Is that mostly Acadia and Cooley?

Hardik Mehta: Yeah.

Andrew Mehta: In your, MD&A you mentioned on the gross margin improvement to 74%, roughly, you said that improvement was mostly from consolidation of vendor accounts and better ordering models. I didn't see any mention of product mix. So does that mean that this is a sustainably higher level in your view?

Hardik Mehta: We are definitely hoping for that and we continue to work to make that an ongoing permanent or not permanent, but at least sustainable efforts.

Andrew Hood: And then your SG&A, I think 1.5 million of the increase in SG&A, was from Cooley and Acadia. And obviously those are both partial quarters. So how much could you see SG&A going up for those two? Or is there room for improvement on cost cutting measures there?

Hardik Mehta: Sure. So Cooley was for a full quarter, the acquisition being done on October 4th and Acadia was only a third, the acquisition being done on December 4th. I think about 200 to 300 is probably it will go up by another $200,000 to $300,000, to accommodate those two acquisitions into the next quarter.

Andrew Hood: And is that including any sort of cost measures? Cause my understanding, obviously when you make these acquisitions you make some improvements. Is that more so just on the gross margin aspect or is there some SG&A savings measures you could apply as well?

Hardik Mehta: I think I just pointed in a more of a factual way of what we see happening in Q2, not accounting into any cost rationalization that has already occurred or will take place. I think our first goal right now for the first, you know, first couple of quarters post an acquisition is to really integrate the business. I think cost rationalizations take place as a side effect of that. But I think the real effects come after that. The first step is to integrate and then the cost rationalization comes after that.

Andrew Hood: Now I'd like to talk a bit about the finance lease spending. Obviously this quarter was a bit of an uptick. I think it was about $5 million which I think, I guess I'm wondering is that abnormally high because of Cooley and Acadia, they're refreshing their equipment there. And then also what are your expectations on the remainder of the year for how much you anticipate spending on the finance leases?

Hardik Mehta: You are 100% correct. The biggest impact was to Cooley and Acadia part of the purchase price was paid through assumption of their liabilities. And, we see that for a Q2, it will continue to be, they're into Q2 and then go down in Q3 and 4. It also just, that's how you know the impact in increasing or increased on our balance sheet related to lease liabilities also included the new IFRS 16 guidelines for, related to how property leases are being treated. We just answered that prior to this call, prior to your questions we just answered that.

Andrew Hood: So I guess in a more quantitative way then, on your capital statement it was 5 million on finance leases this quarter, what do you kind of see there for the remainder of the year on that line item?

Hardik Mehta: I think it should trend downwards in Q3 and 4. We won't be able to give a quantitative answer to that but it definitely should trend down in Q3 and 4.

Andrew Hood: Right. And then sort of even longer term maybe just in our understanding of this. Is it correct to say longer term, since you get more life out of the equipment, then you pay on leases. Like let's say you get seven years of life out of a piece of equipment, but you pay on leases for three years, for example. Does that kind of mean in general as the business grows, you can kind of see it downward tick on the spending there since you're simply, you know, you maybe refreshed a bunch of your equipment recently.

Hardik Mehta: Right. Theoretically, definitely in a zero growth model that would be the case. But, in a growth model that we currently have I think we expect that to either stay constant which is I guess a good thing given that it's a growth model, because you've got to buy new equipment to support the growth.

Andrew Hood: Okay. And then just a couple more questions and then I'll pass the line. Obviously, the share price performance hasn't been as strong as you guys would like. And to Doug's question the valuation is quite a bit cheaper than peers. I was just wondering if it ever crossed your guys' mind to consider a share buyback. Maybe even, you know, after last quarter you mentioned taking on some debt, even using debt and taking those proceeds and buying back shares if that's something that you guys have considered at all.

Hardik Mehta: We have considered it's a, obviously a constant topic amongst the team and the board. But at this point, I would say we have no further comments on that.

Andrew Hood: And then just one more question here. I won't ask for political opinions, but I'm just curious, in a sort of Democratic presidency or a Bernie Sanders presidency how do you view any sort of potential impact there on your business?

Greg Crawford: Hi, Andrew. This is Greg. You know, we think most of the things that are going impact our particular industry in that are already in play and you know the political side in that will probably drive future potential changes in things. So I, I don't see that one side or the other and that would you know, be a benefit or you know a deterrent on our business.

Hardik Mehta: And I think it's also too early to understand what that actual plans are, I think, I think at this point.

Andrew Hood: Okay. All right. Thanks guys.

Operator: This concludes the question and answer session. I would like to turn the conference back over to 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 goodbye.

Operator: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.