Viemed Healthcare - Q2 2024

Transcript

Operator (participant)

Good day, ladies and gentlemen, and welcome to the Viemed Second Quarter 2024 earnings call. Our host for today's call is Todd Zehnder, Chief Operating Officer. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. I would like to now turn the call over to your host. Mr. Zehnder, you may begin.

Todd Zehnder (COO)

Hi, thank you, and good morning, everyone. We appreciate you joining us today. I'm excited to share that... Yeah, I'm prepared for remarks coming. Please note that our remarks on 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 for 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 today, and the company undertakes no obligations to update or revise any forward-looking statements, except as required by law. The second quarter financial news release, including the related financial statements, are available on the SEC's website. I'll now turn it over to Casey to get things started.

Casey Hoyt (CEO)

Okay, thank you, Todd, and good morning, everyone. We appreciate you joining us today. I'm excited to share that the second quarter of 2024 has been nothing short of exceptional for Viemed. Our organic growth in the company's core product categories remains impressive, consistent with our strategic vision. Our net revenue for the quarter reached a new company record of $55 million, exceeding the top end of our guidance and representing a 27% increase over the previous year.

We are incredibly happy with our results and our opportunities for continued growth. This remarkable growth is a testament to our robust operational performance and the unwavering dedication of our team. Our Viemed family continues to expand, now numbering 1,121 employees as of June 30th, which includes our talented team at East Alabama HomeMed, following our acquisition on April 1st. Our HomeMed integration is on track, and we are close to the point where we are moving past process changes and can start to focus on growth for East Alabama Medical Center and Viemed. We expect to realize further growth throughout the back half of the year and are really more excited about the framework we have created for future JV opportunities through this transaction.

New ventilator setups are incredibly strong, with active vent patients growing by 4.4% during the quarter compared to the March patient count. A major component of our successful quarterly performance is the impressive results from our sales force restructuring initiatives. We have refined our approach, enhanced developmental conversations, identified and strategically invested in the right talent earlier in the training life cycle. New incentive plans and alignment of performance targets have also contributed to these results. The impact of our new sales structure is evident, with a 15% increase in average monthly vent setups per sales rep compared to the beginning of the year. Excuse me. New reps are hitting their sales target faster and at higher rates than ever before, giving us tremendous optimism about the next 18-24 months of ventilator growth.

We are now at the phase of the sales restructuring, where management is in place, existing sales reps are producing at higher levels, and we will be accelerating recruiting efforts throughout the back half of the year. Market penetration for non-invasive ventilation remains in the sub-10% range, and we are observing considerable demand widespread throughout the country. Our industry association, AAHomecare, recently engaged Dobson DaVanzo for a comprehensive non-invasive ventilation study to quantify the differences in outcomes and treatment costs for patients receiving an NIV therapy versus those who don't. This research will also analyze the experiences of Medicare Advantage patients. We believe this new study will further educate payers on the substantial advantages of non-invasive ventilation, reinforcing the significant benefits already highlighted by existing research.

As many of you know, Viemed was a pioneer in the non-invasive ventilation market, resulting in a fleet with a number of aging ventilators. The recent Philips recall of these older machines has presented a unique opportunity to replace these devices and alleviate the need for future servicing. We've entered into an agreement with Philips to buy back a large number of our affected vents. By leveraging substantial volume purchase discounts with manufacturers of new ventilators, we can use the proceeds from the buyback to significantly reduce the average age of our vent fleet without negative impacts on our overall cash flows in P&L. Our sleep business continues to experience strong organic growth, and it now represents 15% of our revenue mix. The GLP-1 craze may be contributing to this increase in sleep volume as more folks are addressing their health concerns at higher rates around the country.

Sleep has grown at a double-digit quarterly rate over March. CPAP and sleep lines continue to thrive, reflecting the enduring demand and effectiveness of positive airway pressure solutions. On the technology front, we have been beta testing machine learning tools that we view will further improve our processes and provide opportunities to enhance our patient care capabilities. These technological and software developments are helping us to accelerate fulfillment times and optimize claim processes. Furthermore, the proprietary Engage platform continues to aggregate valuable patient data and create workflow efficiencies for our RTs in the field. We expect to realize real efficiencies and opportunities in the coming quarters as a result of the technology investment. On the payer and regulatory front, we have swiftly and successfully migrated all of our payers away from Change Healthcare.

We can now confidently say that we expect no material impact in timely filing denials as a result of the Change Healthcare cyberattack. Affected claims are being processed on the alternative clearinghouses. AAHomecare is also continuing to push for the reinstatement of 75/25 blended rates, which, if successful, have the potential to further improve margins. We are also experiencing behavior shifts and payers adjusting to more favorable medical policies. As a result of regulatory enforcement and voluntary compliance, there are a number of payers modifying step therapy approaches to trying and failing Bi-level devices before authorizing ventilation. These changes stand to reduce the burden patients experience on being placed on inferior treatments for chronic respiratory failure. These positive medical policy trends also help our clinicians fast-track vent therapy and ultimately improve overall access to care in a timely manner.

Recently announced mergers and acquisitions in the home healthcare sector underscore the robust appeal for the industry. For instance, Owens & Minor's $1.4 billion pending transaction to acquire Rotech, a large national HME provider, highlights the sector's significant attractiveness. We view this development as a testament to the industry's potential rather than a threat to the Viemed's competitive stance. Our M&A pipeline remains active, reflecting our continued interest in acquisitions and promising growth opportunities. At Viemed, we are incredibly well-positioned within our market as a leading provider of complex respiratory care. Ventilation services continue to be at our foundation and present an amazing opportunity for profitable growth in the sector. With more financial and operational updates on the quarter, I'll now hand the call over to our Chief Operating Officer, Todd Zehnder. Todd?

Todd Zehnder (COO)

Hi. Thanks, Casey. In reviewing the financial results, all figures are in US dollars, and the full results have been made available on the SEC website. Our core business generated net revenue of $55 million during the second quarter of 2024, as compared to net revenues of $43.3 million in the second quarter of 2023, which equates to a 27% increase. Our revenue increased approximately 9% sequentially, all of which about $900,000 was organic, which is an extremely strong growth rate. Operationally, the first half of the year has been strong, and we have worked through the majority of the first quarter in Change Healthcare headwinds. We continue to remain committed and optimistic that we will be able to continue our high organic growth rates.

Our second quarter revenue from vents was approximately 56%, as compared to approximately 60% in the second quarter of 2023. Our gross and EBITDA margins are still strong, and we continue to be successful in managing our cost structure this year, and is showing in both gross and EBITDA contribution. Our gross and EBITDA margins during the quarter came in at 60% and 23%, respectively. Our second quarter gross and EBITDA amounts came in at $32.9 million and $12.8 million, respectively. Our SG&A for the quarter totaled approximately $26.5 million, as compared to $20.6 million in the second quarter of 2023. G&A, as a percentage of revenue, decreased sequentially from 49% during the first quarter of 2024 to 48% during the second quarter of 2024, and continues our theme of managing our G&A well.

We will continue to manage our G&A costs and also remain committed to invest in our patient and employee experiences, and once again, expect to grow revenues at a faster rate than expenses. For the quarter, we invested approximately $8.9 million on patient CapEx, primarily on various respiratory products. The gross CapEx is higher than normal this quarter because we have begun to sell back some of our fleet to Philips in conjunction with their recall, and hence, are buying new vents from other manufacturers. We sold back approximately $2.6 million of vents during the second quarter. That should be considered an offset to our CapEx number. To add context to this, during the second quarter, Philips began offering a vent buyback program in relation to the Trilogy vents that have been on recall.

We're utilizing the buyback program for a portion of our fleet and plan to remediate a portion after the process is fully developed by Philips and the related governmental agencies. We are waiting to hear when the remediation can begin, and will continue to monetize a portion of our fleet over the next year or so. We have recorded some gains as a result of this project during the quarter and expect to do so until it is completed. Offsetting some of that gain are two unique items that impacted net income, but not EBITDA for the quarter. We took reserves related to a former vendor filing bankruptcy in an amount that we were owed from them, as well as an impairment on one of our investments down to fair market value. The total amount before tax benefits of these two items was approximately $2.2 million.

We have once again funded our CapEx out of discretionary cash flow and continue to manage the business in order to drop free cash flow onto the balance sheet. Our percentage of net CapEx to EBITDA was healthy at 49%. We will continue to update our free cash flow disclosure on an annual basis, as we discussed last quarter. As an update to the cash collections being impacted by the Change Healthcare cybersecurity issue, we have fully restored connectivity to all of our payers through alternative clearinghouses, and we made up a significant amount of the deferred collections during the second quarter. We are still working through finalizing the cash collections on the remaining claims and estimate that we still have approximately $4 million of increased AR on June 30 as a result of this issue.

We are confident that this project will be completed during the third quarter, with a substantial portion of the impacted amounts already collected in July. Our capital allocation opportunities remain consistent, in that our organic growth is the highest priority. Our inorganic growth, debt paydown, and then equity buybacks continue to round out those priorities, as evidenced by our JV signed on April 1 and a $3 million paydown of our revolver on July 31. We ended the quarter in a net cash positive position once again and have total long-term debt of $8.7 million. Our working capital at the end of the quarter was $13.1 million. Moving on to the third quarter, we have provided net revenue guidance in the $56.5 million-$57.7 million range related to our core business.

The midpoint of our net revenue guidance is up 16% over the core revenue in the third quarter of 2023 and is once again showing impressive sequential growth. We remain active in our discussions with investors and analysts, and once again have seen our U.S. institutional ownership increase over the last couple of quarters. We remain excited about telling our story of growth and see the current market as an opportunity to attract new investors. At this time, I'll turn it over to Casey to wrap things up.

Casey Hoyt (CEO)

Thank you, Todd. As we look back on the second quarter of 2024, we are proud of the robust growth we've achieved and the solid foundation we've built for future success. The opportunities presented by the Philips recall and the ongoing success of our salesforce restructuring initiatives highlights our ability to adapt and thrive in a dynamic market environment. We're excited about the potential for future growth in our core product categories. Our advancements in technology and machine learning underscore our commitments to innovation and improved patient care. Our strong financial performance and the swift integration of East Alabama HomeMed are testaments to our team's strategic vision and operational excellence. Our proactive approach to regulatory and payer challenges demonstrates our dedication to staying ahead of industry trends and ensuring the best outcomes for our patients and partners.

We are deeply appreciative of the continued support and trust from our investors, analysts, employees, and partners. Your confidence in Viemed fuels our drive to excel and pushes the boundaries of what's possible in respiratory care. Thank you for joining us today. This concludes our prepared remarks. We will now open the floor up for further questions.

Operator (participant)

If you would like to ask a question at this time, please press star, then the number 1 on your telephone keypad now. You will be placed into the queue in the order received. Please be prepared to ask your question when prompted. Once again, if you would like to ask a question at this time, please press star, then the number 1 on your telephone keypad. Your first question comes from Brooks O'Neil with Lake Street Capital. Your line is open.

Brooks O'Neil (Senior Research Analyst)

Thank you very much. Good morning, guys. Terrific quarter. I have a few questions. I guess I'd like to start... It feels to me like you're in a super target-rich environment. I might make an analogy. It feels a little bit like you're looking at a flock of ducks coming over the duck blind. And I'm curious, do you think about that as taking your shotgun and hoping you hit something? Or would you say it's a little different than that, that you're really trying to prioritize the best opportunities and take careful shots at each one?

Todd Zehnder (COO)

Well, to stay on your duck analogy, we're trying to get three shots per man out of each flock. So, we're being really efficient with how we do things, and that kind of ties back to the sales restructuring, Brooks. Yes, I mean, we see vents as a target-rich, really complex respiratory for all of our products right now, including vests and vents and even sleep. They're target-rich environments, and all of our sales folks are trained to cross-sell across all those lines, where we're getting the production out of them, thanks to increased training and improved management. And now, we feel really confident about our management team out there, and so we're gonna crank up and pour a lot more fuel in the fire on recruiting for not just the back half of the year, but back half and beyond.

Casey Hoyt (CEO)

And I'll just add one thing to the duck analogy: We don't miss very often. And, we're gonna stay consistent with that theme, that we're very careful where we take our shots, and we're good at them, generally. So, we're patient, but we're prudent.

Brooks O'Neil (Senior Research Analyst)

Good for you. That all makes sense. Let me ask you about the most recent thing, the JV.... that you, you've completed, and you mentioned a framework. Do you see a lot of opportunities for, for replicating that structure and that opportunity in, in other markets or with other partners?

Todd Zehnder (COO)

Yeah, I mean, we've gotten close with some. I think really where we're at with it, Brooks, is I'm hoping to have some real-world data to present to our next few opportunities, you know, showing the success of HomeMed and how we've been able to improve their bottom line and their efficiencies and so on and so forth. So we expect to probably have more meat on the bone for our value prop pitch to others, you know, by year's end. And from there, we can, A, circle back with some of the ones that, you know, we've been close with, and then, B, you know, bring it to the masses. But right now, I think we're in the proving-the-model-out mode, if you will.

Brooks O'Neil (Senior Research Analyst)

Absolutely. Let me ask just one more. It sounds like the Philips recall and buyback is an absolute home run for you guys, in that you can sell them back some used equipment, probably in a favorable way, and redeploy the capital in new equipment that is gonna have a 10-year life. Am I thinking about that right, or is there any downside to you guys with what's going on there?

Todd Zehnder (COO)

No, you're thinking about it correct. It's a project that we've been working on. We're probably—we've probably sold about 15% of our fleet back already. We're not exactly sure if we're going to sell the whole thing back. We're just working through that, but exactly correct, in that we're able to replace the fleet at a cost advantage situation. And, you know, at this point, we've been able to record an accounting gain as a result of it. It's an operational project, but our team has folded in really well. Philips has been a good partner to work with on it, and thus far it has been extremely positive and nothing but good for the company and the patients at that point.

Brooks O'Neil (Senior Research Analyst)

For sure. Well, great. Thank you very much for taking the questions. Congratulations. Keep up all the good work.

Todd Zehnder (COO)

Thanks, Brooks.

Operator (participant)

Once again, to ask a question, press star, then the number one on your telephone keypad. Your next question comes from Ilya Zubkov with Freedom Broker. Your line is open.

Ilya Zubkov (Senior Equity Research Analyst)

Good morning, and thank you for taking my question, and congrats with the strong quarter. I have a question on the equipment and supply sales dynamics. One of the mentioned growth drivers of this segment is the sleep resupply program, and I'm wondering, how much does this program contribute to the segment's revenue? And, could you elaborate on the quarterly revenue dynamics in this segment as well? Because I see that the revenue is rebounding significantly in Q2 compared to the previous two quarters.

Todd Zehnder (COO)

The specific line item that you're asking about is equipment and supply sales. Is that correct?

Ilya Zubkov (Senior Equity Research Analyst)

Yes, correct.

Todd Zehnder (COO)

Okay. It's mainly due to us increasing our sleep business over the last, call it, 2 years, but then especially last year when we bought out or we bought HMP and then our own Viemed sleep growth being so strong the last, call it, 1-2 years. That, the primary amount of that is related to our sleep resupply program. And if you're familiar with the sleep business, that is really the driver of your long-term value creation in the sleep business. It's the patients who need new supplies every 3 or 6 months or whatever it is. So as we've stacked on thousands and thousands of new patients into the resupply program, that number is gonna continue to grow. It has 0 CapEx associated with it, which is another good piece of our business.

It's all, cash flow, and so we fully expect that line item to continue to grow over the coming quarters.

Ilya Zubkov (Senior Equity Research Analyst)

Okay, thank you. That is helpful. And, I have one more on service revenue. There is a significant ramp-up in service revenue this year due to the staffing offerings, and I'm curious, is there any seasonality in this segment that can cause quarter-to-quarter fluctuations of the revenue in the future?

Todd Zehnder (COO)

No, not really. Those could come and go if, in the future, but we don't see anything large falling off in the near term. That's really our healthcare staffing division, and as we've expanded that group over the last several years, I mean, we just stood that up organically about three years ago. So as they continue to go out there and explain our value proposition and what we can do, we've gotten some new contracts with some states around the country, and that's just it... While it's not seasonal, it could have terms, but at this point, once again, we see some good growth coming from that division over the next couple of quarters.

Ilya Zubkov (Senior Equity Research Analyst)

Okay, great. Thank you very much.

Todd Zehnder (COO)

Yep, have a good day.

Operator (participant)

Your next question comes from Doug Cooper with Beacon. Your line is open.

Doug Cooper (Managing Director of Research)

Hey, good morning, guys, and congratulations on a terrific quarter. It's amazing to me in one sense that the sector's been hit so hard from a stock price perspective, because people think the proposed ones presumably are gonna have an impact, but nobody seems to be highlighting the impact when they release the results. I think Rotech, by our math, sort of got sold for 6x EBITDA, EV down multiple. Based on where you guys were before your stock opened this morning, it was trading at 5x last quarter annualized, about, which seems pretty much an all-time low multiple. Like, what has caused the break here at the end of the day, from an investor perspective?

Todd Zehnder (COO)

You know, it could be a lot to do with the GLP craze, which we've only been able to, like, explain a couple different ways. We listen to the larger people out there who are doing studies, and it seems nothing has been pulled away from their sleep business or their profitability, which is good. You know, there's companies that are much more focused on it. Sleep makes up roughly 15% of our business right now, and as we did last quarter, probably the last few quarters, all we can tell you is, by no means is our sleep business feeling any pressure. We're not having patients fall off of service in any meaningful way, any higher attrition rates. The sleep business is doing great, and we continue to grow it, and we're happy to keep growing it.

Outside of that, Doug, you know, the stock market has its ebbs and flows, as we all know. We're very considerate of the stock price, but right now, we spend 99% of our time just continuing to try to grow the company, try to add to the bottom line, and we think as long as we keep doing that, the stock price is gonna come back around at some point.

Doug Cooper (Managing Director of Research)

Do you guys know what % of your patients are on GLP-1 drugs on the sleep side?

Todd Zehnder (COO)

No, we don't. We haven't dove into that. I know some of our peers have gone out and I think the number that they said was maybe 12% of their patients. Once again, we focus our research and our kind of digging in on complex respiratory, 'cause that's what drives us every day. But I'd have to think that if you hear from ResMed or some of our peers that that percentage is somewhere around it, then that's probably a pretty decent number for us as well.

Doug Cooper (Managing Director of Research)

Okay. And again, maybe just the last one, just based on that, on the private side, the M&A pipeline, what are you seeing expectations, for guys' prices that they want? Have those come down, over the past 12-18 months as well, coincident with the values for publicly traded companies?

Todd Zehnder (COO)

You know, we in our discussions, we're talking through that, that the public multiples can't be significantly depressed from private multiples, but we haven't, we haven't really gotten to the point where we were with, like, an HMP and talked that much of turkey out there. So I think that the market. You know, seeing the Rotech transaction was good because that means that things are starting to maybe open up again. And I would think a, you know, a public company multiple out there on that big of a transaction set some sort of marker, but that's somewhat theoretical, and we're gonna continue to look for the right opportunity. And, you know, get if we, if we get to the point where we're talking that level of detail, we're gonna be prudent about the multiple that we pay.

Doug Cooper (Managing Director of Research)

Okay. And maybe just a final one for me. Casey, you referred to the non-invasive vent market, still less than 10% of what could be the applicable market. It's sort of been like that now for a couple of years, despite a bunch of research showing the better outcomes. What do you think, is there... Is this sort of just a chug along here, or is there a big aha moment by the referring physicians that said, "Yeah, I'm gonna start referring all my guys to the NIV?

Todd Zehnder (COO)

Yeah, I mean, you know, and the way that we break it down, Doug, in our investor presentation, we focus on, you know, the 6% is really the Medicare population. So when we say sub-10, we're kind of just assuming that the commercial or the private sector is gonna make up the rest of that, but we're still in a drastically underserved population. Research is important in order to get the penetration number up a little bit higher. If we continue to see more positive and positive studies, not just the ones that we've accomplished over the years, but others and outside forces now proving out the benefits of non-invasive ventilation. It's exciting to take a look now at the Medicare Advantage population.

This is the first time that we've had access to those patients, so we'll see how good those, those guys have been doing on non-invasive vent care. And it's really exciting to see that AAHomeCare, our industry association, is the one that's leading the charge now. It's not, you know, for years, we've had to be the leader in the research market, but that's changing and physicians are jumping in from across borders and doing studies now. So it's all positive momentum, everything clinically that we're seeing.

Ultimately, we hope that that research really will drive penetration up to where more folks are considering NIV the gold standard of care, and really step therapy and other forms of treatment to try and fail will become less of an alternative for medical policies and payers to lean on down the road.

Doug Cooper (Managing Director of Research)

All right. Thanks very much, guys. That's it for me.

Todd Zehnder (COO)

Bye, Doug. Thanks.

Operator (participant)

At this time, there are no further questions in queue. I'd like to turn the call back over to our presenters for any further remarks.

Todd Zehnder (COO)

We wanna thank everybody for listening in today. Follow up if there's any other questions, and appreciate your support. Have a great day.

Operator (participant)

This concludes the Viemed second quarter 2024 earnings call. Thank you for attending, and have a wonderful rest of your day.