All right. Good afternoon, everybody. Welcome to the 2023 Stifel Healthcare Conference. My name is Matthew Blackman, a member of the Stifel Healthcare Research Team. Thank you for joining us at our conference, and of course, at this session with Viemed. We're joined by CEO Casey Hoyt; COO, Todd Zehnder. Thank you, guys, for joining us. I think this is at least the second year you've been here, maybe the third?
Thanks for having us.
Yeah. Thanks for coming back. I must not have embarrassed myself too much the last several times. So that's a good sign. I'll give you a little bit of a background on the story, and then we're gonna just walk right into Q&A, try to frame the opportunity. It's actually a nice sort of segue from what we just heard as well, some similar elements, but also some different ones.
And so just for background, Viemed provides an array of home medical equipment, services, and supplies, specializing in post-acute respiratory care services, for patients suffering from things like COPD, chronic respiratory failure, other chronic disease states. And again, if you have questions, please don't hesitate staring at my two associates, who haven't asked a question in the last two days. It's your last chance, folks.
So if we could start the Q&A, maybe, maybe the best way to frame it is to sort of give sense to folks of what's been a really outsized, robust, organic, growth profile over the last several years. And maybe sort of break it down into the key contributors to that growth, and maybe if we can talk about it, maybe by key segment or key disease state, maybe that's the easiest way to do it. I don't know if you want to start. Maybe we'll talk about sort of the, the respiratory model, and that sort of franchise. I think it's about just under 60% of the business, somewhere in that neighborhood.
Yeah, 58%.
58%. So maybe again, help people understand what you do there, what the market opportunity is, and I think more importantly, how you continue to gain share or drive growth.
Yeah. So what we do a little bit differently than your traditional DME is, we put respiratory therapists in the homes of very sick patients. So the 58% complex respiratory model, as we call it, which is non-invasive ventilation, it, you know, it's an RT dealing with a patient who's got 17 months to live, and they're going in and out of the hospital, I mean, in and out of the home at a very critical moment in time whenever that patient is subject to going in and out of the hospital and burdening the payer. The other mix of our product mix is sleep apnea, which is making up 18% of the mix, and then we have, oxygen, 11%, and then other would be staffing, administrative support, I mean, behavioral health and percussion.
Behavioral vest.
So that makes up our product mix right there. What I would say is all of them are growing, Matt. We've traditionally been heavy vent, you know, a heavy vent company, and we've rolled out these other products nationally, and so they've had probably even a higher growth rate over the last few years because we had such a low base.
The good news is, we're not necessarily trying to focus on one product versus the other. We want to grow all of them, and they're complementary to one another. We feel comfortable that the organic growth model will still be in place, and we're gonna be able to continue to do it.
And what is sort of the key driver of that growth? What's the key input here in terms of where you're investing to continue to accelerate, you know, patient onboarding or where, I mean, you know, maybe just frame what you're doing to help sort of sustain this outsized growth.
It's our ability to find good people, you know? I mean, that's always been the governor to our growth in years past. We. That was the reason we started the staffing division back in 2021. We were doing some successful staffing solutions for VAs throughout the country during the pandemic, and so we saw that opportunity to bring staffing in-house, not only to be a solution to our referral partners, which would be the hospitals, but also so that we could start getting ready and building our own internal recruiting platform.
And so, you know, these guys have found over 75% of our sales force here this year, which is important. We're not having any trouble finding people right now, thanks to that division. Right now, what we're up to is just building out infrastructure, sales trainers, management, and everything we need to onboard the folks that we're finding. So that's a good thing.
What about your geographic expansion, and how sort of concentrated are you today in specific regions? How much is just expanding the footprint, a key potential future driver of that, of that business?
Yes. We've naturally kind of fallen into the rural pockets of the country just because that's where the COPD is. That's where COPD prevalence is. Our coverage area, we have patients in all 50 states, but we're really probably strong in about 38 of them, and it's, you know, from New Mexico, Texas, Louisiana, down the Deep South, on up to the hills of West Virginia, is the best way to kinda explain our sweet spot. But we have aspirations of getting into all 50 with our coverage area, as, you know, we're already treating the patients in all these states.
Okay.
What I'd also add is that while we don't have heavy coverage in the West, there's a lot of infill growing that we can do in our existing states. Our number one state now is Texas. It overtook Louisiana probably two years ago. We could more than double or triple our rep count in Texas just because of the patient base there. So we don't have to go to another state. If we're not at 42 states next year, but we added 40 good sales reps, that's a very successful year for us.
Okay. So you really are toggling most of the growth there in terms of, you know, at one point it was your ability to find people, and now it's just you know, finding the opportunities where you want to invest.
That's right. I mean, you know, even sleep is an underpenetrated market. I mean, you look at O2, it's 11% market penetration. Complex respiratory, we call it 6% with the Medicare population. It's really, w e could go anywhere we want and find those patients. For us, it's about finding the person, and so it's that chemistry of a clinician that we're training how to walk and talk to be a salesperson, which can kind of be a little bit unique and difficult, but it's part of what we're good at. Oh, Colin, just.
How do you guys think about prioritizing pulling that toggle and actually hiring additional reps versus maybe what you planned, increasing that growth versus what you guys wanna see drop down to the bottom line?
We have historically just said, "We're gonna invest in the growth, no matter what." And scale will come, and that's when we'll increase—like, our goal this year, and we're on track, is to grow, grow EBITDA margins 150 basis points. We'll probably grow net income margins 50 basis points. As we continue to scale, the growth might not have to be at, or the investment into that may not be as important, because we'll have this sales force around the country, but at this point, we're most concerned about top line.
What, what is the profitability profile of that particular business today?
Of which business? The ventilation business?
Yes, sorry. Yeah.
Ventilation probably runs about 72% gross margin, and while we don't allocate every cost center down to EBITDA, I would tell you it's probably running around 28%-30% EBITDA margins. It's our highest capital investment, and that's one of our strongest suits, is our sales force, our clinician force, and then we own a pretty wide array of ventilation. So, we have the ability to redeploy those at low CapEx.
No issue getting vents from suppliers, that sort of supply chain in general?
No.
Obviously, you're.
Yeah. Following up on, you know, Adapt before, as they, they said the same thing: We have no product issues across our fleet. I mean, CPAP, oxygen, vest, ventilation, we have multiple suppliers. I think one of the things that came out of the pandemic and then out of the recall situation is, there's been new competition. As they've built up their manufacturing capabilities, I would say our ability to work with good manufacturing providers and build long-term relationships is as strong as I've ever seen it. So then it's just, you know, trying to grow that sales force to where we're having to buy more from them every month.
Okay. And then just in terms of working through to the extent that there's, you know. Well, never mind. We'll, we'll move on to the, to the next, part of the, the conversation. Maybe can you talk a little bit about, you know, maybe what you're seeing. We just had Adapt in here, maybe talk a little bit about CPAP in general and, sleep, and how you think about that market and what you as a company bring that may distinguish you, differentiate you from your competitors.
Yeah, I mean, historically, all of the growth that you, we've witnessed, if you do a look back, has been organic, so we haven't made an acquisition. We just recently purchased a company called HMP out of Tennessee, which has had a coverage gap, a Viemed coverage gap for us that they've filled. They're in North Alabama, North Mississippi, but they were about 80% sleep, call it 15%-20% vent, right? And in acquiring them, we captured and grew our sleep patients, but we started in this business doing sleep.
We see an opportunity because the way that we grew, when we decided to scale sleep at Viemed around the country, we did so through home sleep testing, meaning that, you know, we can remotely send out a home sleep test, have the patient sleep in their normal environment, and then get the test results back, and then mail out a PAP and put them in touch with a respiratory therapist. So that's been our model. The exciting thing about it is when we bought HMP, we were buying them thinking: "Hey, let's teach these guys how to sell ventilation in a grander way." We have a goal to get them to north of 50% of their product mix with ventilation, which is the higher margin business.
But the things that we learned through the integration, or learning right now, is that we have different ways of even expanding their sleep business and by teaching them the remote model, whereas most durable medical equipment businesses around the country are set up with brick-and-mortar facilities. They service the patients that are coming out of the facility, out of the lab, and then, you know, go to the shop, set them up, off they go.
We can now get those guys out into some different areas where they treat internal medicine patients and p rimary care, so on and so forth, in the rural pockets of the country where we're strong. So lots of revenue synergies popping up, and then our integration's going really well, too. We just bought them on June 1st, and it's going a little bit faster than we expected. Got them centralized on HR and some billing and intake and now even sales as well.
So, do you feel emboldened now after this deal to push harder and do more M&A? It's something we've been talking about over the last several years and slowly becoming more a part of the story, not that you need it. The organic engine is strong here. Just maybe just a good way to sort of segue to think about the M&A landscape and how you think about-
Right.
Supplementing growth.
So on our last call, I was really harping on how we don't have to go out and do a deal in order to grow 20%-30%. So that's important to focus on. And the guys that we're looking for are a certain type. HMP is a great example, just because they had a solid management team at the top. One of the owners was looking to get out, a perfect scenario for us. But they were. The rest of the ownership team and the management team was looking to expand the business, and it made sense for them to pair up with Viemed to do so.
We're looking for a more sophisticated type of management team with all of our acquisitions. Whenever you're in that profile. You know, they know about multiples, and they know about valuations being down right now, and this not being the most perfect time to sell. And so while our pipeline is built, it's okay for us to be patient with when we do the next one. We certainly wanna get this next one right, the one that we're up against with HMP. And then, you know, when the time comes, we'll do the next one. But we're not looking at going out and buying 10 fixer-uppers, if you will-
Right.
And slowing down our organic growth. We want a management team that can actually springboard our organic growth in a unique way. With HMP, we got 12 sales reps, right? Our job is now to teach those 12 new areas how to sell ventilation, the higher margin business, in a little bit different way.
Okay.
I think I would tell you, we are emboldened to do more because this one's going very well. We did—I mean, we're very clear with the Street. We did not buy this to be, cut the middle part of the P&L and make it cost synergies to make it accretive. We want revenue synergies. There have been cost synergies that have naturally come, and what we're happy with is in the first quarter, it was accretive. And so we think.
Accretive to.
Earnings.
Earnings.
Earnings and EBITDA. Yeah. And look, we're very confident the best is yet to come with this company too. So we think the fourth quarter is gonna be better than the third, and then next year, as we train their sales reps how to do more, kind of the Viemed way, we call it, then we think the acquisition is only gonna get better.
Are there any other sort of product lines you're thinking about, or indications, or however you wanna frame the market, adding another leg to the stool, or just how you're thinking about strategically where to go next, if there is a place to go beyond where you are today?
Yeah, we're always looking at other product lines that make sense for us to leverage our clinicians in the home and leverage our contacts. So we're paying close attention to the value-based world as well. You saw us make an investment into a technology platform called Modo Health. Modo Health is going in and talking to the payers, and they stand to be the aggregator, if you will, of quality providers. So you could view Viemed as a quality respiratory DME right now. There's other folks that are better than us, obviously, in diabetes, and maybe someone else has got the behavioral health component.
And, you know, so what Modo stands to be is the aggregator of these guys that goes in and pitches up to the payer and says, "Let me get the entire population of your patients, and we'll go out and treat them for every single disease state." And so I bring that up because that's the type of strategy that we have for value-based that would drive our decision-making into entertaining another disease state. But right now, we've got too much work to do in this underserved population with our respiratory patients to get distracted with another disease state-
Something new and shiny, yeah.
Until it becomes necessary.
Okay.
I do think that the acquisition we just did, while it's probably only about 10% of what HMP did, was the ancillary things called bent metal, whatever. We are gonna take a look and see, of those subsectors, is there something that we wanna get behind? Because, you know, whatever it might be, it could be a negative pressure wound therapy , it could be back braces, whatever. If there's something that having this 350-400 person RT fleet in the country can go and leverage, that could be something we wanna get into. It's not where we're pushing anything right now. We're pushing them really to do more respiratory, but it's something that we can kinda take a look at, really the detailed numbers and how the business works without trying to stand up a whole new division.
It makes sense. We've spent a lot of time talking about revenue growth. I appreciate that's the priority. Maybe just help us understand the profitability model here and the profile. I keep using the phrase over and over in these meetings, but you know, at scale, where you are, you know, maybe not growing 20%-30%, but sort of more normalized towards the market plus a little bit, how should we think about the profitability profile of Viemed?
Yeah. So, proud to say that our gross margins, even though we've diversified the business away from 92% ventilation to 58, we're still hanging in that 61%-62% gross margin. And I would think that with scale, if we kept our revenue mix where it is right now, we could keep it at that number or possibly grow it some, right? So just depending on what grows faster, it'll be somewhere in that range. We're on track to do somewhere between 23%-24% EBITDA margins this year. As I mentioned, the ventilation side pulls those numbers up.
As we've grown the sleep business and as we've folded HMP, we're maturing that sleep patient to where probably about 50% of the revenue stream is coming from resupply, and everybody knows the resupply is the you gotta get them to resupply because that's where the real money is for us. And then the oxygen business, it doesn't carry as high of EBITDA margins, but it's really the precursor to the ventilation side. So I give all that detail to say that if we could steady state into maybe the 25% EBITDA range and grow our net income margins back up to that higher single digits again, and we've run there before, but sometimes we're just investing so hard into the growth.
If we could run at a high single digits, you know, I would say a kind of stretch goal would be maybe one day to be around 10% net income margin. That's a healthy company. The one thing I will say as well, right now, as our business model has changed to not just being ventilation and the growth of vents, a higher percentage every year of our revenue mix is becoming transactional, meaning it's not a rental patient. So it's resupply, it's staffing, it's things that are just one-time sales, right?
So we're probably gonna be dropping roughly 50% of our EBITDA into free cash flow this year, and we know we're gonna grow EBITDA next year, and we're pretty confident we're gonna grow that free cash flow component, which will tell us, you know, it's gonna give us a war chest to either go buy another company, or we're gonna have ample capital to go and continue to grow this company with.
Okay, so things are going well, I think is sort of the takeaway here. Not to turn dour, but what have been some of the challenges? Obviously, we as a market are, everyone's talking about GLPs, and you can certainly comment that if you like. Reimbursement's always been a sort of boogeyman in this space in general, but it's been fairly calm recently. But so what are the things that, for lack of better words, are keeping you guys up at night? And what are the things, as investors, we should be cognizant of as, you know, potential risks or headwinds that may emerge, that may already be here?
Yeah, I mean, just to, before I get going, just on the GLP-1 stuff, we haven't seen any material impact on our sleep business or our ability to adhere, get patients to adhere to sleep therapy. So our, y ou know, we've grown sequentially in the sleep space, 11% from 2Q to 3Q. So that really wasn't keeping our management team up at night. But we, you know, we had investors making theories and speculating, so we had to kinda hit that head-on in our last call. So that's where we are on that. The biggest challenge really is our greatest opportunity.
While Medicare Advantage for Viemed specifically only makes up 11% of our payer mix, we are seeing the maneuvers that they take in terms of an ALS patient might get diagnosed for a vent, and they'll deny a vent because it's an expensive piece of equipment. And so, you know, that is unfortunate. However, Medicare is signaling that they are on to them. They've submitted a final rule that will be implemented here on January 1st, where they're going to force the payers to be more transparent with their authorizations and denials, and that is gonna be a really good thing for our entire industry.
Because, you know, if you play by the rules that we're supposed to, the clinical rules and guidelines, that's where the patient gets the access to care, and that's where we're allowed to do our treatment. So we see that being a positive in 2024 and beyond, but it's been somewhat of a challenge for us to just, you know, fight through these denials and kinda the administrative burden of putting peer-to-peers together and explaining that to the payer. But eventually, what's gonna happen is that there is a right way to save money if you partner up with a quality DME provider.
We have three published studies that are on our website anybody can access, and the last one that we did was on 500,000 patients, Medicare patients, and showed that through early utilization of non-invasive ventilation therapy, you could save up to $5,400 per patient per year. So we know that the more you utilize this product at the right time, the more you will save. So there is a way to save money other than just denying care because the ticket price is a little high for the payer. So we're excited about that. I think that, you know, once that playing field is equalized, that challenge of ours becomes our greatest opportunity, and that's green space for us.
Got it.
Yeah, and I would, I would say the other that you kinda touched on, while we don't see it as a concern and it's not keeping us up at night, we always have to address reimbursement, right? And people ask about Competitive Bidding and all the different facets, 'cause we are, you know, at stroke of pen risk with the government, if you will. I would say that the value that we're providing in the ventilation world, just what Casey said, with these studies and so forth, the fact that Competitive Bidding really was proven that it wasn't gonna save money, we feel like it's as stable as it's ever been right now.
It doesn't mean that three years from now, they don't reintroduce some program, which we'd be fine with, 'cause now we're all over the country. We're ready to go. We bid in almost every one of them before they pulled the program. We're always sleeping with one eye open when it comes to Medicare rates, but we really feel pretty good about where we are for the next couple of years.
So as we sort of wind down here, as, you know, we're in the latter part of 2023, everybody in here is already thinking ahead to 2024. I'm not gonna ask you for explicit guidance or anything like that. But as we think about each of the pieces of the businesses, each piece of the business, and how they roll up next year and the next several years, just any sort of things that we should be thinking about in each of the segments, you know, relative to the growth that each may have been showing the last several quarters? Are there tough comps in a particular? Anything that we should be cognizant of that may not be completely obvious as we sort of think about, you know, building our models for the next year?
Not really. You know, we have seasonality like most of your other companies that you follow, but it's nothing that, that is, completely crushing to us. Q1's always a tough sequential to Q4, but, there's nothing that we did over the last couple of years that we're not gonna be able to replicate, in our opinion. The law of larger numbers means it's harder to grow 20% and 30% when we're call it a $200 million run rate company now. But it doesn't mean that that's not what we're trying to do. We're trying to go find those people, build the training infrastructure. We've got capital to do it, we just gotta keep finding people. So I would say that generally, all of our four major product lines should continue to grow. Will one have a better quarter than the other sometimes?
Maybe, but there's nothing that's like a boogeyman that, oh, we'll never be able to do what we were able to do over the last few years. So we feel good about the future. Our goal is to keep hitting those high growth rate numbers. We may look at doing another acquisition at some point, and we'll be ready to do that, so-
Sounds like the playbook's working. You just gotta continue to execute against it, right?
Yep.
So.
Yeah, and look.
Sounds easy.
The patients are there, right? We know the patients are there, and our value proposition has always been, treat a patient with a lower cost condition, lower piece of equipment, you're not in a hospital bed. That's a growing demand, and the country will go bankrupt if we don't figure out a way to treat patients at a lower cost.
We're working on it.
Yeah, we're doing a pretty good job of going down that.
All right, why don't we. Unless there are any questions from the audience? Once, twice. Sold. Thank you, guys. Really appreciate it.
Thank you, Matt.
Thank you, Matt.
Appreciate you guys.
Appreciate you guys.
Thank you all.