PHM's (PHMZF) CEO Casey Hoyt on Q3 2016 Results - Earnings Call Transcript

| About: Patient Home (PHMZF)

Patient Home Monitoring (OTCPK:PHMZF) Q3 2016 Earnings Conference Call August 24, 2016 4:30 PM ET

Executives

Casey Hoyt - CEO

Todd Zehnder - Chief Strategy Officer

Analysts

Doug Cooper - Beacon Securities

Russell Stanley - Mackie Research Capital

Operator

Ladies and gentlemen, thank you for standing-by. Welcome to the PHM Conference Call. I would now like to turn the conference over to Casey Hoyt. Please go ahead.

Casey Hoyt

Thank you, Sheryl. Thank you for joining us on the call. My name is Casey Hoyt and I am the Chief Executive Officer of Patient Home Monitoring. And joining me on the call will be Todd Zehnder, Chief Strategy Officer, reviewing the financials from the quarter ending June 30, 2016.

Let me begin with an overview of PHM and what our efforts have been focused on for the last year. At Patient Home Monitoring we've been specializing in home-based healthcare programs for our growing U.S. baby boomer population. Our patients come to us with a wide variety of chronic diseases ranging from chronic pulmonary disorder, congestive heart failure, neuromuscular disease to sleep apnea. The products we use are on the cutting edge of technology designed to keep the patient comfortable in their own environment. Our patients are treated with equipment such as ventilators, oxygen concentrators, home sleep studies, CPAPs, custom wheelchairs and much more.

We hire the best-in-class certified clinicians, inspire them to increase the quality of life for our customers. Our management team is made up of healthcare veterans, some industry veterans and other pharma business owners. A team that ranks second to none as it compares to the competition. The competitors in our industry are two pronged, we have very large national competitors and smaller mom-and-pop competition both of which find it very hard to be efficient and effective. PHM finds itself servicing a sweet spot of non-compliant patients that require a high level of attention and care and consume a significant amount of healthcare services as they age.

Our business is perfectly positioned to provide solutions to a growing market and the time is now to start aggressively catching as much of this opportunity as we can. Since I've taken over as CEO our primary goal has been to integrate the companies that have been rolled up and to make sure that we're growing in the profitable business line. The last year has been a challenge, from the business perspective as we've endeavored the multiple Medicare rate cuts, but the opportunities in our company remain numerous. We remain in a position where we can grow in our profitable product lines and divisions.

However our job is to identify those lines and business that take away from the bottom line and redirect those efforts. In doing this for the last year we've come up with a plan for the go-forward PHM. We've recently divided the company into two operational divisions so as to have a daily focus on all items. I'll continue to oversee the high level decisions of each division, but I’ve asked Mike Moore and Greg Crawford to be the divisional leaders. Mike will oversee our disease management division while Greg will oversee our DME division. The Board and management team see this as the best way for all of us to stay on top of the day-to-day changes that we face in our business and each division will have the tools and teams needed to be independently profitable.

While our divisions will naturally have some products and geographical crossover, for the most part we’ll operate individually. However we're still able to support one another with patient service and obviously have shared services that we'll continue to utilize. At a high level the disease management division will have a focus on patients that range from chronic obstructive pulmonary disorder, congestive heart failure and among other neuromuscular diseases. Our DME division will focus on respiratory programs including CPAPs and oxygen concentrators, home medical equipment, complex rehab among other general DME product lines.

The last quarter has once again been one that we focused much of our efforts on optimization, integration, consolidation and as mentioned a new structure. We continue to work on implementation of best practices and are beginning to see that most of the work is paying dividend. Much of the reset has been done and with the exception of few more internal reviews we feel that the majority of our time can that be spend looking forward. PHM continues to have a two pronged growth strategies, being organic in acquisition growth. As we had previously mentioned, the organic growth is clearly taken president as we have been integrating the pervious acquisition. But there will likely be a day were strategic acquisitions to once again make sense.

On the organic growth front, we’re focusing on geographic growth with a strategy we had [indiscernible], if I may. We are recently expanded and emphasize new areas, that we had no presence to several of these areas have already began to pay nice dividend. This is the strategy that the Bio-Med [ph] team had always used to grow and there is one that it’s very capital efficient. Its organic growth is what we as a management team forecasted; drive our revenue growth and margin expansion during the back half of the year.

One additional item is important with our balance sheet. Our cash burn has finally stopped, as we’ve seen in our daily cash balance that we’re diligently monitoring. The majority of our reduction in cash was due to the closer of a now shuttered business. One time tax payments and reduction of our outstanding current liabilities. Looking at our liabilities, you can see that in the last quarter, we reduced our current liabilities by 41% and our total liabilities by 32%.

Our management team focuses on cash every day and it many millions to make sure moves to make sure that our liquidity is improved. With the business and personal cuts we’ve recently made, we’ve positioned PHM to begin growing cash at a high rate. As I said the current PHM platform and team are strong. It’s better understood by our team and has a focus with our new division to drive our future growth. To provide an overview on the quarter ending June 30, 2016, I will turn over to Todd Zehnder.

Todd Zehnder

Alright thanks Casey. In reviewing the financial result all of our figured will we reported in Canadian dollars. The quarter ended June 30, 2016 was PHM’s third fiscal quarter. We generated revenue of approximately $32 million for the quarter. When factoring in the currency translation from U.S. dollars our forecast for revenues was accurate. In terms of year on year growth, PHM generated an increase of 70% in revenue for the quarter. Adjusted EBITDA which excludes depreciation, amortization, stock based comp and changes in financial derivatives totaled $1.2 million for the fiscal third quarter. As we’ve indicated in prior calls, there is a large push to integrate the various businesses that has been rolled up over the last couple of years and much of that work has begun this year.

During our consolidation phase, we have increased the amount of bad debt taken for various reasons. Some of the expenses are due to billing software changes, some are due to personal and some of due to just having to spend times on items that have heart [ph] collections. With all that said, we feel that after this quarter that we’re currently in, we would be complete with our step-by-step AR analysis and would have a more normalized bad-debt percentage.

With our ongoing consolidation integration and optimization of business lines, we have closed down some business lines altogether, scaled back unprofitable locations and had personal and salary reductions throughout the businesses. We did not see the benefits of those reductions in the current quarter but expect to see the ongoing impact to SG&A beginning with our fourth quarter. With all the after mentioned business decisions, we continuously monitor our margins to assure that we’re active in the correct products. We’re pleased that our gross margins have continues to improve.

The current quarter had a gross margin percentage of 72% as compared to 69% and 65% in the second and first quarters respectively. Now that we’re selling the right products, we must focus our efforts on billings and collections along with overhead. With the changes made over the last six months, our number at the bottom line should reflect our enhancements and we should see positive results.

PHM has a solid balance sheet with approximately $8 million in cash at quarter end, over $52 million of current assets and $21 million in short-term liabilities. As taking note that we have significantly reduced our liabilities over the last six months, and now we just continue to focus on building liquidity. While we’ve had some higher than normal debt expense over the last six months, we’ve also converted our AR to cash at a higher pace and we continue to do so that in the fourth quarter. That along with the cuts in cost management have gotten us to a point of cash mutual operations and we expect to continue to do that in coming quarters.

We have the cash we need to continue to execute our business and there is no bigger initiative in our organization than to build cash flow from operations and our net cash balance. Our debt and lease payable balances remain manageable at $15.4 million. The majority of that balance is product that has continues cash flow strings related to them. As we pay down these leases each month the net cash flow can be used to rebuild our liquidity, buy more equipment or be used in opportunistic acquisitions down the world.

When analyzing cash flow our management team focuses on cash flow generated directly from operations, which excludes adjustments made for IFRS requirement like stock base comp and other changes in working capital accounts. Year-to-date our cash flow generated from operations or working capital was $16.8 million and increase of 58% compared to the previous year. The full results of all of our operations for the third quarter are available on CEDAR.

With that I'll turn the call back to Casey.

Casey Hoyt

Thank you, Todd. Again our company remains committed to servicing the 75 million Americans with multiple chronic illnesses. With 11,000 baby boomers turning 65 every day for the next 20 years, our country simply does not have enough hospital beds and positions to keep up with the growing market. The U.S. is forced to reevaluate and embrace home programs that offer more cost efficient solutions. Such as the one that PHM offers.

Looking forward, we’re already beginning to see the system move away from fee-per-service payments and into bundled payment systems. This payment format shift will increase the value that PHM is able to provide to payers and hospitals by offering a more clinically sound and cost effective service. As we continue to ride [ph] this ship we remain focus on adding shareholder value to building out an organic engine that repeatedly contributes to the bottom line.

Now that we are almost out of the integration storm that we have been in for the last few quarters, you should see a positive trend in our financial results going forward. I am extremely proud of what we have accomplished this past year to our organization and look forward to reaping the rewards of our efforts in the years to come.

Thank you. We will now open up the call through registered callers for questions.

Question-and-Answer Session

Operator

[Operator Instructions], the first question comes from the line of Doug Cooper.

Doug Cooper

I was nice to see the gross margin tick up in the quarter clearly. I just want to focus on the G&A as it was broken down on your notes. The payroll number you are having here, 12.3 million is essentially flat versus quarter two, what can we expect that run rate to be by Q4 or maybe by Q1?

Casey Hoyt

Well, we are forecasting just on payroll and benefits probably more than the 10% that we cited as an overall, because some of the costs just don’t have the flat [ph] like G&A. So I would say that that’s probably going to be in the $10 million to $10.5 million range on our Q4 basis.

Doug Cooper

Okay, and I guess the other one, there is two others that stick out, obviously here, the bad-debts 6.4 million, it was north of 6 in Q2, 2015 -- 19% of revenue. So is this still having a do with Hollywood Healthcare and what exactly is this bad debt expense?

Casey Hoyt

No, it's really not related to that, we took all of the AR off last quarter as it relates to Logimedix this is really a result of probably two major things, one, we’ve had billing conversions during the last year while we integrate and when you do that you just have pressure put on your AR along with having personal move and it disrupts operations, that along with rolling these companies up there, it’s just not as much of a daily focus as much as probably [indiscernible] attention. So we rolled in going back and looking at some of the over AR along with some of the items that happened during the conversions and it's just caused a higher bad debt percentage.

As I mentioned, I don’t see this as a long term trend although we still have had some cleanup that we’re continuing to do, I mean we’re sitting here at the end of August and we’ve made a lot of progress in the last couple of months. I feel as this quarter that we’re sitting in right now will be the last quarter of the cleanup. But we still have some more to write off.

Doug Cooper

So, what was percentage of the revenue here is Medicare?

Casey Hoyt

As a total company?

Doug Cooper

Yes, in the quarter.

Casey Hoyt

We are probably still at 75% to 80% Medicare. I guess maybe a little less than that.

Todd Zehnder

Less than that.

Casey Hoyt

Yes, maybe 50% when you think about all the -- it’s probably about 50% Medicare. Correct.

Doug Cooper

So the bad debt, is this Medicare related or is this private insurance related?

Casey Hoyt

Not always, a lot of times it’s patient pay. So there is not a secondary policy and it goes straight to the patient that will be difficult to collect some times, although we do reverse for that. Some of this is private insurance, some of it is denial that may not have been worked timely from Medicare or from a private insurance. It's across the board, there is not any one single payer that’s causing all of it.

Doug Cooper

Okay. So what you think a normalized level here is at the end of the day?

Casey Hoyt

Well, to the extent that you have secondary policies than and you have good documentation and all your denials are worked properly, it should be able to sub 10% because you are going to collect some of your patient AR and some of this is going to have secondary that are going to pay for it. So I think on a go forward basis sub 10% should be what we’re focused on and that would probably be in the -- somewhere in the 8% to 10% range, I think would be in line with what we see.

Doug Cooper

Do you think you can get there Q1?

Casey Hoyt

Yes, I do, yes, because I think that -- I think we’re there on several of our subs already.

Doug Cooper

So, if you drop --.

Casey Hoyt

The way I can follow that up, Doug is, in several of our business unit we’re collecting more money than we’re booking right now which means that we're harvesting some of our over AR and we’ve reserved enough for it. So, that means that we've turned the ship around on this.

Doug Cooper

So, nothing to worry in your monthlies [ph], but if revenue is relative -- let’s just assume that revenue is relatively flat and you drop, $1.5 million to $2 million of pay loan benefits and $3 million of bad debts, we’re talking about EBITDA could be 6 million, a normalized EBITDA of 6 million on that revenue rate?

Todd Zehnder

Which would be about a 20% EBITDA margin and we would like to think that we can get it a little higher than that, but that's a good number for right now.

Doug Cooper

And I guess the last one, [indiscernible], the $2.1 million in other costs in G&A, what exactly is that?

Todd Zehnder

I don't have a breakout of that right now, I'll have to get back to you on that later.

Doug Cooper

But is that something -- okay, I guess you can't answer then that's -- I expect others to be running at a similar level or is that a one-time thing or?

Todd Zehnder

B&E [ph] through nine months was 6 million, it looks like that's probably a pretty normal trend, I just don't exactly know what's rolling up into that, but I'll get back to you.

Doug Cooper

And I guess you're talking to the cash flow, obviously people are going to look at it and I appreciate that you take down much of payables in the quarter and so forth, but if you're going to look at the cash position the company and wonder if this is, the company needs to raise capital, is going to be an obvious question. So you said the cash burn has stopped and you didn’t expect to maybe be cash neutral in Q4 and then start to generate cash like real cash on the balance sheet by Q1?

Casey Hoyt

Yes, I mean we can tell you that we are cash neutral right now, and possibly being up slightly from where we ended the quarter. We just had a lot of things happen in the last quarter especially that we had a lot of liabilities hanging out there that we had the payoff, that were one-time in nature if you want to call them that, the Logimedix payment to the pharmacy was a big chunk, that the [indiscernible] elections was a big chunk of money and then just paying down payables was about a $1.5 million in itself. So, we see what happened in the last quarter and a lot of -- or all of that is not happening in the current quarter and just looking at in on a daily cash basis we can see that we provided the shift [ph].

Doug Cooper

So, this includes changes in non-cash working capital, we were actually going to be putting cash in the balance sheet by Q1 or by the end of the year?

Casey Hoyt

Correct.

Doug Cooper

Okay, and I guess and my final question being just on the with the way the integration and the close of Logimedix and you are obviously sitting here with $123 million in goodwill and intangibles, is this something you think when the auditors come in for the Q4 results, that that’s going to be materially looked at and we could expect a write down in those numbers?

Casey Hoyt

So we obviously will look at all of our intangible balances and we do on a quarter-by-quarter basis, we wrote off the goodwill related to Logimedix last quarter. I don't see much in the way of intangible issued, we [indiscernible] all the goodwill and to look significant at year end and a part of maybe one small balance that I'm thinking off of top of my head that we've scaled back that lets them help business pretty significantly over the last couple of months, I don't see much else.

We'll obviously be looking at it, and the auditors along with us we'll do so, but I won’t definitely forecast anything at this point.

Doug Cooper

Right, and I guess it’s pharma question, Medicare reimbursement comes to you, envision that you’ve seen the worth of it and I’m assuming this is an ongoing thing, but if I continue to look at pricing, but do you feel that with your product portfolio you’ve gave [ph] us today, you’ve taken the branch of the Medicare imbursement concerns or do you see you more coming?

Casey Hoyt

No we feel like, we have taken the brunt of it Doug. If anything, we’re working on a little bit of relief here in the back half for the year for debt rates that’s up and that’s a big initiative of ours with the builder [ph], we’ve been working on capital here. Competitive bidding for all other products has been posted and it’s stabilized, so we been knowing about that three months before it hit. So to answer to your question, we think we’re at pretty much throughout the bottom right now.

Doug Cooper

Okay, and just finally I will pass baton here, but the Q4 is also -- we anticipate before the end of the calendar year or would that be a January?

Casey Hoyt

We have the orders coming out over the next couple of weeks to do some interim work, so we have to see how much work is done before the end of the year and how much we get strung out after year end. So it’s probably a little early, I would like to hope that we can get it out in December, but we’ll expect to put some announcement out on that later on.

Operator

The next question comes from the line of Russell Stanley.

Russell Stanley

Just a follow up on your comments regarding the product mix and your outlook for gross margins given the sequential improvement there, where do you see margins, wandering margins finally landing and I guess this is a follow up to that. When you work with our focused are you, just to clarify do you think your done calling and now the focus is strictly on driving more sales of higher margin products or is there more culling to be done?

Casey Hoyt

I think that we still have some movements in margins, especially since a lot of what we’ve done has not fully being realized in one quarter, I mean we’ve been cutting our products. Obviously this quarter was done -- a couple of things, we did have the lower margin Logimedix revenue in there and we’ve gotten out of some of the business products and scale back line that were selling low margin items. That didn’t happen in the current quarter at some of the places until later in May or early June. So I would like to think that going forward we can keep growing the margins. I don’t know if we can grow 3 points quarter-over-quarter, every quarter like we did this in our last time. But I think as long as we keep focusing on pushing hard on our highest margin products which we’re doing at every business unit and especially down here in Lafayette, we’re doing that. I do think that we can continue to have some expansion.

As far as the culling most of it has been done, but that doesn’t mean that with changes, you don’t continuously look at it. What we’d love to say is that we may bring in a new product, we don’t want to just keep cutting products, we want to find new products that have good margins. And we’re working on that and that’s what our sales force and operation folks are doing every day. But we don’t have anything else significant on the table right now, as far as another cut.

Russell Stanley

Great thanks for the highlight and just as a follow up, I guess on that topic is do you still see competitors earlier in the call and just one on the especially on the higher merchant products, how is the competitive environment changes and how are you addressing that?

Casey Hoyt

The competitive environment is still out there, we see a lot of our competitions still a little bit scared. We are very proactive with all the rules making with the big [ph] business and the kind of ahead of the game on the formulary rule changes that go on with it. So we are able to respond a little bit more aggressively around our different market places to capture opportunity. But for the most part the January cuts have somewhat locked up our competition in a way. Tremendous amount of opportunity, we mentioned in the call that we expanded into five new areas and we’ve also grown our active patients in the ventilation sector by 10% just in last two months. So that’s a really positive trends that we expect to continue that momentum on through the back half of the year.

Russell Stanley

Great and just one last question for me, and looking at receivable, where do you think today's sales level kind of normalize just from here, has there more improvement in the offer [ph].

Casey Hoyt

I am sorry Ross, on that receivables how it relates to sales you are saying?

Russell Stanley

Yes the day sales, I think in the quarter kind of around 94 days.

Casey Hoyt

I got you. I'd like to tighten that up and I think with tighter controls on our billing and more -- I would call it, better process is too work denials and to convert that cash on a timely basis. I would like to get that down to 60 days to 75 days. And hopefully most of that is going to come through cash collections and as I mentioned earlier some of it -- we probably have a little bit more clean up to do and we’re doing that. But I think as we put more controls and best practice employee, we ought to be able to convert those ARs to cash on a more efficient basis.

Russell Stanley

That’s excellent. Thank you for the color guys.

Operator

Ladies and gentlemen, this concludes the list of pre-registered callers. If you have any question please send them to investorinfo@myphm.com. This concludes today's conference you may now disconnect.

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