Q3 2024 Summary
Published Feb 7, 2025, 7:58 PM UTC- Quipt Home Medical is starting to see their volumes grow in the back half of the calendar year, and they are diligently working to overcome previous challenges such as the decline in the 75-25 rate and the withdrawal of the Medicare Advantage plan, which positions them for sequential growth going forward.
- The company expects to benefit from market dislocation due to industry M&A activity, specifically from the potential sale of a larger industry peer, which they believe will allow them to pick up market share and drive organic growth.
- Quipt Home Medical believes their stock is undervalued, trading at less than 3.5x EBITDA, compared to a recent industry deal at 6.3x EBITDA, indicating significant upside potential for shareholders. The company has a strong acquisition pipeline and is able to acquire companies at 4x to 5x EBITDA prior to synergies, creating long-term value through strategic M&A.
- Pricing pressures from Medicare rate cuts and the withdrawal of a Medicare Advantage plan are impacting revenue growth, resulting in flat sequential revenue despite increases in patient volumes. This suggests that higher patient numbers are not translating into higher revenues due to lower reimbursement rates.
- Increased bad debt expenses, rising from 4% to 5%, are affecting cash flow and may persist in the near term. The bad debt increase is attributed to the Change Healthcare cybersecurity incident, leading to elevated working capital needs and potentially impacting profitability.
- Ongoing legal challenges, including the Civil Investigative Demand (CID), are creating additional expenses and uncertainty, which could hinder the company's ability to achieve its free cash flow conversion target of 6% to 8% in the near term. Combined with pricing pressures and competitive dynamics, this may make it difficult to reach the organic growth target of 8% to 10%.
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Organic Growth | Q4 2024 | 8% to 10% | 8% to 10% | no change |
Free Cash Flow | Q4 2024 | 6% to 8% | 6% to 8% | no change |
Adjusted EBITDA Margin | Q4 2024 | 23.3% | 22% | lowered |
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EBITDA Margin Outlook
Q: Is this a good EBITDA margin level to assume going forward?
A: Yes, we have maintained a 22-plus EBITDA margin despite revenue drops. This level is expected to continue, especially if we can increase revenue without raising fixed costs. -
Organic Growth Prospects
Q: Can we return to 8–10% organic growth after lapping 75-25 and Humana shift?
A: Absolutely. The growth slowdown was mainly due to 75-25 rate cuts and Humana withdrawal. We expect to rebound as the sales team pivots to new referrals and expands coverage. -
M&A Activity and Valuations
Q: What are your thoughts on acquisition multiples and pipeline timing?
A: Recent industry deal valued at 6.3x EBITDA. We aim to acquire companies at 4x–5x EBITDA pre-synergies , creating long-term value even as our stock trades at less than 3.5x. We are actively working on deals and expect to close them as quickly as possible. -
Leverage and Financial Flexibility
Q: What is your comfort range for leverage given interest rates?
A: We are comfortable increasing leverage up to 2x ; although our credit agreement allows up to 3x, we don't plan to go that high. -
Impact of 75-25 and Humana Withdrawal
Q: How are you addressing challenges from 75-25 rate cuts and Humana exit?
A: We are diligently working to overcome these challenges , and starting to see volume growth in the back half of the calendar year. -
Bad Debt Trends
Q: How should we think about bad debt levels going forward?
A: We may see elevated levels around 5% for a quarter due to issues with Change Healthcare. Our long-term goal is to reduce it back to previous levels. -
Free Cash Flow Conversion
Q: Is the 6–8% free cash flow conversion target achievable in Q4?
A: Yes; while there are moving parts like legal expenses and Change Healthcare impacts, we expect to stabilize at 6–8% over the next two quarters. Year-to-date free cash flow is around 7%. -
GLP-1 Impact on Business
Q: Are GLP-1 drugs affecting your CPAP business?
A: We haven't seen a trend yet , but a recent study indicates a 10% increase in CPAP prescriptions for patients on GLP-1s , suggesting GLP-1s may drive more patients into the healthcare system. -
Market Share Gain from Industry Consolidation
Q: Can you gain market share from the Owens & Minor and Rotech deal?
A: Yes, historically M&A causes dislocation. We believe we can benefit from this when it occurs. -
Revenue Flat Despite Increased Patient Metrics
Q: Why is revenue flat when patient metrics increased?
A: The 75-25 rate cut means we're delivering the same products at lower rates. Loss of capitated insurance also impacts revenue despite higher patient metrics.