Please standby. We are about to begin. Good day everyone. Welcome to the Viemed third quarter 2019 earnings call. Today's conference is being recorded. At this time, I would like to turn the call over to Mr. Todd Zehnder, Chief Operating Officer. Please go ahead, sir.

Thank you. Good morning everyone. Please note that our remarks in this conference call may include forward-looking statements under the U.S. federal security 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 our forward-looking statements. Examples of such risks and uncertainties are discussed in our disclosure documents filed with the SEC or 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 the date of hereof and the company undertakes no obligation to update or revise any forward-looking statements, except as required by law. The third quarter financial results news release, including the related financial statements, is available on the SEC's website. Now I will turn it over to Casey to get things started.

Good morning everyone and thank you for joining our call today. Before I get going, I would like to take some time to directly thank our 407 Viemed employees across the country for their continued commitment to our mission. Our team's constant passion for care allows us to make a difference in so many of our patients' lives. We take treating our people right seriously over here at Viemed, for without them, we would not be able to drive quality of life for our patients within the communities that we serve. The Viemed family and culture is second to none and remains at the cornerstone for our continued success. Moving on to the progress made in the third quarter, I will begin with our ongoing geographical expansion. The compliance department finished the quarter having us license new business in 47 states, Medicare approved in 46 and with the addition of Utah and Illinois, now conducting business in 31 states. Our efforts to get positioned in the Lower 48 to ready ourselves for competitive bidding coverage are on track. We are actively positioning ourselves with clinicians and salespeople in more major metropolitan areas throughout our coverage area. There's nothing new to report on the competitive bidding front other than we have officially submitted our bids in the third quarter. Now we will wait and see as CMS decides to include noninvasive ventilation in the 2021 competitive bidding program. Operationally, we are growing in the same way that we always have and we will be ready to support our targeted areas that we have submitted bids. Our sales managers and recruiters brought on seven new reps to cover seven new areas in the third quarter. This brings our year-to-date total to 31 new reps hired in 2019. Our new inside sales force,…

All right. Thank you Casey. In reviewing the financial results, all figures are in U.S. dollars and the full results are available on the SEC website as well as SEDAR. We generated revenue of $23.5 million during the third quarter of 2019 as compared to revenues of $17.1 million in the third quarter of 2018, which equates to a 37% increase. Our revenues came in just below previously guided range for third quarter revenues. While our vent patient growth was still solid and we exited with 7,419 patients, the summer season proved to be more challenging for the respiratory industry than we have previously seen. Our gross margin percentage was 73% as compared to 76% in the prior year's third quarter. Adjusted EBITDA totaled $5 million for the quarter, which is a 21% margin. Our continued efforts into growing new regions, new products, new payor sources and new departmental strength such as technology and marketing, has suppressed our margins as compared to prior years. But the investments are sound and setting up for more robust growth in the future. We have funded our growth by redeploying our adjusted EBITDA during the current quarter as our medical CapEx totaled $4.2 million for the third quarter of 2019, primarily driven by new vent purchases to support our growing patient base as well as growth from our newer products like vest and oxygen that we have begun to sell in higher quantities. We are now showing all of our medical equipment as property, plant and equipment versus having some in our inventory line item. Therefore, the implied quarterly CapEx is higher as a result of this accounting reclass. Our SG&A totaled approximately $13.3 million as compared to $9.5 million in the prior year. As in prior quarters, we have continued to make investments…

Thanks Todd. We have regularly stated that the major opportunity inside of our business is with the patients that qualify but cannot access our care. The new Medicare utilization numbers were presented in the third quarter and they reflected that we still only had 60,000 beneficiaries on noninvasive ventilation service. With an estimated 25 million COPD patients in the country and only 16 million diagnosed, we have always said that there are roughly 1.25 million at Stage 4 who qualify for our care. Our company still believes we are at less than 5% market penetration number for an industry. We must have more data, more studies and more people to help the 95% of folks that are returning to the hospital without a home solution in hand. Our country has to embrace home-based providers to care for the masses of patients that are headed our way. Payors, physicians, providers and patients all know this and are seeking out these solutions. At Viemed, we have the solution and the recipe for success and we arrived in the tailwinds that will ultimately lead us to being the largest home respiratory company in the country. This concludes our prepared remarks. We will now open up the floor for questions.

[Operator Instructions]. Your first question comes from the line of Sarah James with Piper Jaffray.

Thanks. [Indiscernible].

Sarah, we lost you there. I don't know, we had some feedback.

Yes. We will move on to another question in the meantime. And Miss James, if you would try reconnecting, that might help. We will now go to Brooks O'Neil with Lake Street Capital Markets.

Good morning guys and congratulations on your results. I was hoping you could talk just a little bit more about the growth initiatives and the results you are seeing. Obviously, you are picking up new market growth, in some cases going to some larger metropolitan areas. I am curious, if you are seeing sort of the traditional Viemed growth trajectory in those new markets? Or if you are seeing anything different than normal?

Yes. We have learned a lot to fast track into these metropolitan areas, Brooks. I mean your payor relationships are so much more important in the bigger cities than they are in the rural markets. You find a lot more heavy Medicare business out in the rural markets, a lot more COPD. So the growth rate is a little bit slower as you learn the landscape in the metro areas. That still doesn't mean that we are not going to be in those areas. We are actually just kind of beefing up our network development efforts, which is why you see so much growth in that division. As far as all the other initiatives, we are looking at all sorts of different strategies to expand our sales force, expand our recruiting efforts, beef up the recruiting efforts, beef up the trading programs, have a group of cold-blooded sales people type of Fortune 500 training folks that are coming out of different industries. So we are opening that up a little bit to kind of broaden our scope of who we can get in here for recruiting. And we expect that to pick up here in Q4.

Todd, you said no real update on competitive bidding. But can you just refresh our memory on what sort of the time line you expect is in terms of the sequence of response from CMS, et cetera?

Yes. So like Casey's prepared remarks said, we submitted all of our bids in September and there's a process that you just have to go through to qualify your bids. And we are ongoing with doing that. While there's no exact dates given by CMS, we are expecting to hear maybe late spring or in the summertime as to the winning bids for the regions. We have not been fully educated as to, are they going to announce the rate for each region that wins first or they are actually going to announce the providers. We are hearing a little bit of differences on that. So it's still a little early to give some concrete information. And I am sure as people are seeing out there, there are different groups out there and there's some legislative efforts in place right now to try to get competitive bidding or to get NIB out of competitive bidding for the 2021 round. We, as the third largest provider of this service in the country, are ready for it. But there are quite a few patient advocacy groups who see the problems of this going into competitive bidding. And so we are following that as well. But as of now, think of that as sometime late spring, early summer, we start figuring something out.

Talk a little bit, Todd, about the summer seasonality and a little bit slower discharge activity related to warm weather. Is that something you have seen before? Or something you think might become an annual thing? Or how do you react to that?

It's been a long time since we have seen a seasonality effect, Brooks. I mean, for me, being the industry for six, it's been since, I don't know, four, five years ago, we used to experience slowdowns in summer months. But we have kind of always outgrown that. This quarter was where we felt it and it wasn't just us. It was the competitors that we have spoken to, the manufacturers of all our different product lines, all just kind of chalked it up to just warmer months, less respiratory issues, less patients coming out of the hospital. So be that as it may, we still don't accept that. We look into ways that we can look in the mirror and see if there's anything else that we could be doing. So that's what we are doing right now. But all things are pointing that, we just had a bad seasonality quarter right there in those warmer months.

Yes. I think you mentioned that bad debt expense popped up a little bit during this quarter as well. Is there anything that you think drove that? Or is it something you think is going to remain sort of at this level? Or do you think it's more likely to kind of go back into historical ranges?

Yes. I mean short answer is, I expect it to go back down into a lower range within the historical average that I always quote of 9% to 13%. But we have generally hung out at the lower to middle end of that. And if you look at the full year, we should be somewhere, it looks like, between 10.5% and 11%. What happened this year, which was unique and I have talked about it on a couple of the calls, is that we completely revamped our workflow system in the field and that translates into a new billing and intake system as well. And truthfully, when you are servicing 20,000 patients almost and having an infinite amount of insurances between primary, secondary and patients, there are just glitches that happen. And our staff was very dedicated to making sure that bills were sent out and making sure that glitches were worked on. And they did a fantastic job in the first six months. But while we were spending time on that, we weren't working individual patient balances as fast as we normally do. So that kind of got back in play in the third quarter. And it's why our third quarter collections were so much greater than the first two. And October has been a record collection month on a cash basis. So we are converting those receivables at a faster pace like we used to do. So when I look at it, the third quarter is somewhat of an anomaly for a variety of different reasons, mainly the integration. But all is fine. We are still going to be living within that range. And once again, I will reiterate that we expect to be on the lower end of the range that the DME industry is used to, which is that 12% to 13%. And I want to get this back down to high single digits or right at the low double digits.

Obviously, you are investing heavily in sales and marketing. How do you feel about the rest of your infrastructure? Do you think you are set for continued growth and eventual operating leverage in the business model?

Absolutely. We are making some investments now and we have been very open that there are great investments between the marketing and technology groups. And Casey talked about it, the fact that our patient engagement platform has been in testing mode and then we are going to try to go into a pilot this quarter. And the feedback that we are getting from patients is outstanding. So we are starting to see that. And then our e-commerce solution that our marketing team is developing. And just the fact that we have been investing in items to really continue to be able to deliver these double digit quarterly growth that we all expect. I mean, it's a law of numbers. Every quarter that we get bigger, it gets harder to grow, but it doesn't mean that our expectation means we are going to slow down our growth rate. We had a slower quarter. We are still on track roughly to have a 40% annualized growth rate. It was more stacked up in the front-end of the year. We recognize that. But what we are working on is setting ourselves up for these 40% growth years for years to come. And that's why these investments are so critical to it.

Good results.

Thanks Brooks.

All right, next we will move to Nick Corcoran with Acumen Capital.

Good morning and congratulations on a great quarter.

Hi Nick. Thanks.

So just a couple of questions for me. The first is on the competitive bidding. You say that there is some patient advocacy groups that are against the idea of competitive bidding. What do you think the chances of the NIV being excluded are?

It's hard to say. In general, CMS's position, from what we can see, is that this is going to continue forward and that's what we are planning for. We have always said that this has springboarded our initiatives to go into these larger metropolitan areas. We had historically just grown 60 miles down the road and have not been springing to get into all these areas. So we see it as an ability for our company to expand faster and to get into some areas that we probably wouldn't have had in the next 18 months. With all that said, I would hate to throw a percentage out there because I really don't know. We are planning for NIV to be there. We are hopeful that we win every bid we submitted. We are ready to go. And if it's in, it's in. If it's not, then we will adjust accordingly.

Great. And then you mentioned that there's a new multifunction vent. Are those at a significantly higher rate than your traditional vent?

Yes. They are a little bit more expensive and there's a separate code that reimbursement is a little bit higher than the noninvasive vent. But you have to be billing for at least two of the functions, two of the five functions on the vent. It's a really great product for our ALS and pediatric patients. If you can think about a patient that is vent dependent and they have to take their tube out and plug-in a cough assist to another device and produce a cough, those seconds and moment in time for when you transfer it from one machine to the next, are very critical and presents a lot of anxiety in the home with caretakers and patients. So now we could do this with the push of a button on the machine. So our clinicians in this company are just super pumped about this offering. We have got a really great relationship with the manufacturer and they identify that Viemed is a company that's very patient-centric driven and their clinical mission is sound. And so they are helping us expand into newer markets, newer ALS markets that we haven't been in as a result of having this product offering now. So we are very excited about it.

And can you give any indication what percent of your overall patients are ALS or children that might be able to use this product?

ALS is less than 5% of our patient base and pediatrics we can count on two hands or maybe four hands, maybe facing on both of our hands. So it's a pretty small patient base currently. But like Casey said, this gives us the avenue to become much more of a solution when it comes to some of these ALS clinics around the country. And then there's also the quadriplegic community that could benefit from this. So we are starting to look into calling on some of those centers as well. So while that wouldn't make up a huge part of our business right now, we see it as a really good solution for the patient and one that could help us with our growth rate.

And the pediatric program, Nick, has assisted us with getting in with more payors around the country. We have probably got 40 different payor contracts as a result of just having a pediatric offering. So we had a clinical mission in hand. We wanted to take care of this, the toughest batch of patients, which were the kids, but we also had a business mission at hand too and that was to get in, build more deeper relationships with other payors around the country.

Great. And then the last question for me is just looking at your Q4 guidance, it looks that your implied bad debt expense was 10% to 13.5%. Am I thinking about that the right way?

Yes. That is correct. That's sort of the midpoint of our range. We would expect to come in somewhere in there.

Okay. That's great. Thanks again for your time.

Thanks Nick

All right. Thanks.

[Operator Instructions]. We will next go to Doug Cooper with Beacon Securities.

Hi. Good morning guys. Casey, let me just start. I think I might have missed something at the very beginning. You said you are in 46 states for Medicare approval, 31 states you are currently doing business. I mean and you started out the same in about 47 states. Did I miss that?

We are licensed to do business with 47 states. We are Medicare approved in 46 states. So the first step is always just getting in with the Secretary of State and fulfilling the state requirement. The second phase is fulfilling Medicare's requirements to where you are accredited. And if they require a facility, then you have that facility. If not, we can usually move a little bit faster. But once we get Medicare approval, then we are ready to really start recruiting in that state. So basically what that means, Doug, is that we are recruiting in 46 states right now. And we are actually conducting business with patients and therapists and sales people in 31 states. We added Utah and Illinois this past quarter.

So there's no impediment from a regulatory perspective now for moving from about the 31 you are currently doing business to the 46 now. And now it's just recruiting employees and so forth. Is that correct?

That's correct. And we needed to be in those states to submit our competitive bids as well.

Okay. And just on the competitive bidding, can you share with us how many areas you submitted a bid for?

It would have been for the 46 states, yes.

Yes. There's like 124, I believe, out of the 130 roughly, it was somewhere, it was over 120, but we were never planning on going to Honolulu and there were a couple of states that we weren't able to get licensed and bid in, in time.

So should we think of that, that's 124 cities or regions? Or how should we think about that?

Yes. You should think about it as generally cities. Competitive bid areas are a cluster of zip codes, to be technical. So there are some areas that have multiple CBAs within a same, which you would consider a city. But generally, think about the 130 largest concentrations of people around the country.

Okay. So can you maybe help us put this in perspective. So you finished the quarter with 7,421, I think, vent patients. How many vent patients would be in those 124 competitive bid areas?

When we first ran the numbers, it was about 25% of our patient base were in the CBAs, which were Medicare patients within that. So we don't say if you are a commercial patient and a CBA, we are not going to throw that in that number. So about 25% of our patient bases were Medicare patients in a CBA.

Okay. I guess, what I am trying to understand is, what's the opportunity if you were to win, I will just say, 100 of 124 areas? How many potential patients, new patients would you be actively recruiting for?

Well, generally, it just puts you in that area as marketing for that. It's not as though the people servicing those patients couldn't continue to service them until they expire. So if we lose an area that we have patients, we continue to service those patients. We just can't take on new Medicare patients within that zip code range. So what it does is, it's really springboarded, like I said, when I was answering one of Brooks' questions. It just pushed us to get into some of these larger areas faster and it's just really compressing the time line that we had that we wanted to be in metropolitan areas. So it's won't be January 1, we all of a sudden end up with 1,000 new patients.

And Doug, we don't have the numbers on Medicare patients in specific zip codes. So we go off of the top line of 1.25 million patients that are out there and only 16,000 of those guys are on Medicare. So you can back into how significant the metropolitan areas are in the 95% of patients that need us right now. It's going to be a significant amount of patients that are available to us.

Right. Well, I guess, that sort of gets us to my next question on the pulmonary conference and the CHEST conference. This really is, I guess, the key to driving those 1.25 million patients that could be applicable for NIV therapy to the therapy. So how long would it take, do you think? I am assuming the data is starting to convince some physicians. How long is the selling process, do you think, for these new doctors to get comfortable with the therapy?

It takes quite some time. I mean just seeing how long it took with KPMG. We have positive momentum with our existing referral sources. That's actually the lowest hanging fruit. So I mean, first thing we do is we go, we bring the data to our existing referral sources. But the next phase is really getting out to the educational communities, the educational health systems that are doing all the research and having a publishable study being presented to them through the American Thoracic Society, COPD Foundation. CHEST was the first step in that direction. But it takes doc getting out there and presenting that data in those communities and circles in order to really get to the 95% of folks faster. I mean we are naturally going to have the momentum with our own sales force in the way that we are presenting to our guys. But the real market opportunity is to get to the folks that aren't doing business with us today. And that's just getting through the industry. I mean the industry trade shows and conference panels.

And Todd, my final question is just on EBITDA margin. You were up a couple of hundred basis points, I guess, versus Q2 despite the increase in bad debt provision. What do you foresee for Q4 EBITDA margin or into 2020?

We have historically said we are going to try to get back up to those historical margins. And I think that we are growing into that. There's a lot of variability from quarter-to-quarter and expenses that are either going to push things up or down, listing costs, investments into new groups, the variable compensation plan. I think, over time, we will push the margins up again. But right now, we have been so aggressive in investing into the future of the company that we have been not concerned as much about the margin as we are getting the growth rate to continue. So I think fourth quarter, I mean, just roughly, I said that we would expect it to be materially consistent with the first three quarters of the year, hopefully, a little bit higher. And then I think in 2020, generally, as we continue to grow this company, a lot of the costs that we have made are not going to have to be scaled along with that revenue growth. So a long-winded answer for me to say that I do expect them to go up over time.

Okay. Great. Thanks very much guys.

Thanks Doug.

All right. Moving on, we will next go to Sarah James with Piper Jaffray.

Thank you and apologies for the technical issues earlier.

All good.

So I just wanted to follow-up on that last question. So I understand why the investments now to support growth and future margin expansion. I guess I am just looking for a little bit more clarification on the level of growth investments that you may make in 2020 versus 2019? And if there's any difference there, if you are thinking that it's going to be sort of a flat margin year? Or if you are already at the point where you would be getting some return on investments for the 2019 spend so it would be a little bit better than flat in 2020?

Yes. So in general, I would say that the technology and marketing departments are hitting more of a steady state right now. Obviously, if we get into a pretty major deployment of our patient engagement platform, that may take some additional costs. Although, nowhere near the materiality of the ramp that we have had this year. And I would say the same thing for marketing. We are looking for marketing to deliver on the e-commerce solutions along with some of the other branding and inside sales that we are doing. So I think that the ramp on 2019 versus 2018 is going to be much more material even with successful solutions in both of those departments. They won't scale like they did this year. So that comes back to, if we continue to deliver the growth that we have done in the past and we haven't started talking about 2020 yet, but we continually discuss how we are going to keep growing then I think operating leverage will come with that. So just generally, I will restate kind of what I did to Doug, we should have higher margins in the future, all things being equal, as we continue to grow into some of these investments.

Okay. That's great. And on the new patient platform monitoring pilot, I know it's really early. They have just done a few test, I guess. But are you able to even anecdotally give us any insight on outcomes that you are generating? And then with the 3Q rollout, are you thinking about that as payor agnostic? Or is it focused around collaboration and discussions that you have with any particular payor?

Well, we are having discussions with all of our payors about the patient engagement platform right now. The preliminary data that we are seeing is that eight out of 10 of our patients in the pilot are adhering to the tablet and are actually interacting with it. They prefer to use it, which is an astounding number to me. I was thrilled to see that because you are dealing with an elderly patient, but you are finding that they are just a little bit bored at home and the tablet gives them something to do and they are inputting their data on a daily basis. So those things are just encouraging from just a usability standpoint. But we are very open to building out customizations with each payor. We are finding that payors are requesting of us to, can we do this, can we do that? Well, sure, we will do whatever you want. I mean we are building this thing first to increase our length of stay to make our RTs more efficient in the home and we are totally set up to bolt-on another piece of equipment that has Bluetooth connectivity or another feature for a payor, a data point that they would like to start capturing. That way, we can just be more useful and build more of a partnership with each one of these guys through our technology solutions. So yes, we are seeing some of those customization requests. Because we are in pilot, we are just kind of saying, yes, but let's go ahead and get past the pilot program before we can take it to the next level. But the encouraging thing is that these guys are very, very excited that we will building out this program. And I see it being us adding major value for their organization down the road.

Yes. That sounds like a fantastic growth opportunity ahead for you guys. Last question here is on the oxygen sales. So you talked about last quarter doing a rollout nationally during 3Q and perhaps that's driving towards a 20% bump in sales. Just wondering how that ended up and how the rollout is going?

Yes. Once we rolled out O2 into the entire country, it looks like, quarter-over-quarter, sales were about double. Although a very small base and it won't impact all of our overall revenue metric, it's working. And while we don't have exact percentages, we are seeing a lot of our oxygen patients are getting vents as well. So we are starting to track that. So the program is working. We are offering a great solution. Our service is second to none around the country with our RTs in the home. So it's all about improving the customer experience, using the best technology and trying to be a full service provider.

Great. Thank you.

Thanks Sarah

[Operator Instructions]. We will next go to John Rakoto with Claret Asset Management.

Hi guys.

Hi John.

Hi John.

Hi. Thanks for taking my question. Can you just give us a little bit of color on puts and takes for the lower gross margin for this quarter?

Yes. It's a couple of things, primarily two. As the other products are starting to become more material, that will, over time, maybe put some pressure, just although oxygen isn't material and our sleep business isn't individually material just yet. They have lower gross margins. So as we continue to grow those at a higher pace than vents, that will put a little bit of pressure. And then the other thing is that as we have geographically expanded, we do have RTs in cities that don't have the traditional patient base of, call it, the 50 to 60 patients that we like each to RT have. So we have got some labor cost waiting for the ramp in some of these cities as we have grown around the country. So those are probably the two most material items to change. And look, we are going to bounce around 100 basis points from quarter-to-quarter. We had a 73% gross margin quarter sometime in 2018. I don't see this trend going down. I think as we get more patients in some of these areas where we have the labor force, they will continue to pop back up.

Okay. Well, that was quite helpful. That's it for me. Thanks guys.

Okay John. Thanks again.

And it looks like we have no further questions at this time. So I would like to turn it back over to our speakers for any additional or closing remarks.

All right. We would like to thank everybody for your time this morning and please follow-up if you have any additional questions.

That does conclude today's conference. We thank everyone again for their participation.