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Edited Transcript of PTQ.V earnings conference call or presentation 26-Feb-20 3:00pm GMT

Q1 2020 Protech Home Medical Corp Earnings Call

Mar 12, 2020 (Thomson StreetEvents) -- Edited Transcript of Protech Home Medical Corp earnings conference call or presentation Wednesday, February 26, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gregory J. Crawford

Protech Home Medical Corp. - Chairman, President & CEO

* Hardik Mehta

Protech Home Medical Corp. - CFO

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Conference Call Participants

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* Andrew Hood

M Partners Inc., Research Division - Research Analyst

* Doug Cooper

Beacon Securities Limited, Research Division - MD and Head of Research

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Presentation

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Operator [1]

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Thank you for standing by. This is the conference operator. Welcome to the Protech Home Medical First Quarter Fiscal 2020 Earnings and Corporate Update Conference Call. (Operator Instructions) And the conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to Greg Crawford, Chairman and CEO. Please go ahead.

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Gregory J. Crawford, Protech Home Medical Corp. - Chairman, President & CEO [2]

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Thank you, operator, and thank you all for joining us today on the call. My name is Greg Crawford, and I'm the Chairman and Chief Executive Officer of Protech Home Medical. Joining me today is Hardik Mehta, our Chief Financial Officer.

On this call, I would like to outline our core business, review our progress with a focus on the last quarter and provide you with our updated outlook for 2020. I hope we will leave you with the resounding impression that Protech is in a strong position in respect of our financial performance, our operations, our balance sheet and the organic and acquisition revenue opportunities we have in front of us.

We remind you that our remarks today will include forward-looking statements that are subject to important risks and uncertainties. For more information on these risks and uncertainties, please see the reader advisory at the bottom of our results news release as well as our MD&A. You can find these on our website and on SEDAR. The company's actual performance could differ materially from these statements.

This morning, we announced our first quarter financial results for fiscal 2020, the 3 months ended December 31, 2019. More on these results in a moment, but first, let me provide a brief background on our story. Protech Home Medical provides a diverse offering of home respiratory services and medical equipment for treating in-home patients with chronic conditions in the United States. The company provides a range of products, including oxygen therapy, sleep apnea treatment, certain medical equipment and custom power mobility products. We operate in 10 states with more than 40 locations across the Midwest and East Coast region, completing hundreds of thousands of deliveries each year to more than 85,000 active patients.

With that background, I'd like to hand the call over to Hardik to discuss our first quarter fiscal 2020 financial results.

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Hardik Mehta, Protech Home Medical Corp. - CFO [3]

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Thanks, Greg. In reviewing the first quarter of fiscal 2020 numbers, please note that all financial values are in Canadian dollars and the full results are available on SEDAR. As discussed on our year-end fiscal 2019 conference call a few weeks ago and the associated filings, the company sold Patient Home Monitoring, Inc., also called PHM, an asset we determined to be noncore. As per IFRS, operating results of PHM were reported under discontinued operations. As a result, please note that all numbers for the first quarter of fiscal 2019 have been adjusted for this divestiture and are reported for continuing operations only.

In the first quarter of fiscal 2020, Protech completed 63,000 setups or deliveries compared to 50,943 in the corresponding period last year, an increase of 24%. The company generated revenue of $22.8 million in first quarter fiscal 2020, up 11% from first quarter fiscal 2019.

Gross margin increased to 73.5% from 69.6% in the first quarter fiscal 2020. Adjusted EBITDA for the first quarter of fiscal 2020 was $4.4 million compared to adjusted EBITDA for the first quarter of fiscal 2019 of $3.7 million, representing an 18% increase year-over-year.

Adjusted EBITDA margins for the first quarter of fiscal 2020 increased to 19.4% compared to 18.2% for the first quarter of fiscal 2019. Current assets totaled more than $27.3 million at fiscal year-end 2019 compared to $23.5 million in net short-term liabilities, demonstrating continued strength in our liquidity.

While we do not release detailed forecast, we continue to stand by our previously stated objective of obtaining an annualized revenue run rate of $100 million at some point during 2020. When achieved, it would equate to an increase of at least 20% compared to fiscal year-end 2019.

We have had a number of recent investor inquiries regarding the coronavirus. I want to say that we have not seen any impact of this on our operations. At this stage, we see 0 impact of coronavirus on our financial performance going forward. As always, we will keep investors posted on any material developments on this front.

To summarize, our balance sheet is in excellent condition, and our operating performance continues to improve. In this quarter, we again posted industry-leading margins. We are confident in our ability to continue with this trajectory. Our focus remains on accelerating revenue growth, process improvement and cost rationalization.

Thank you. And with that update, I will turn the call back to Greg.

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Gregory J. Crawford, Protech Home Medical Corp. - Chairman, President & CEO [4]

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Thanks, Hardik. We have been very pleased with our operating performance over the last year and are delighted to report today that solid organic growth continues into fiscal 2020. I want to take a moment to explain in a little more depth what we are doing differently and why we have been able to achieve the results we have and why we continue to be so excited about the future.

Protech uses unique, efficient delivery cost models and technology to change the way in which home medical equipment is delivered to a growing aging U.S. population. This segment of the market, known as the durable medical equipment or DME providers is estimated to approximate $60 billion. This is underlined by the fact that over 10,000 people in the U.S. will turn 65 every day for the next 15 years. This is our core market.

In the last 12 months, we have set up or delivered approximately 0.25 million pieces of equipment to over 85,000 patients. We operate out of over 40 locations in 10 states and now have over 15,000 referring physicians.

Our core product offering is for chronic illnesses that are treatable at home. Using streamlined logistics and distribution, Protech can offer home delivery and maintenance on this equipment, which is a first for many of these patients.

The respiratory market, one of our key target markets, is interesting and the demand for services continues to rise but the supply side is fragmented and shrinking as significant reimbursement cuts have reduced the number of providers in this segment. There are very few companies like Protech that have the scale and competitive advantages, including those from technology and logistics, to benefit from such structural changes and the balance sheet to seize upon these opportunities.

I would now like to review with you the 3 components of our growth strategy. First, we are laser-focused on capturing market share economically and profitably. Our industry growth rate is about 3% to 5% per year. However, we believe we can continue to achieve well more than double the growth rate of our industry by focusing on significantly increasing our market share in key target regions within the markets we serve.

To execute on this, we are continuously hiring and training new sales representatives, and we'll continue to expand our product base. It is important to remember that this is an industry of scale and Protech is still at the early stages of reaping the full benefits of being one of the only companies that can benefit from that given our relative size. These benefits will further magnify as we continue to grow both organically and through acquisitions.

Secondly, we continue to lead the industry in technology deployment and in our use of data mining tools to drive efficiencies and profitability. A patient's ability to order a piece of equipment, a service call or other ancillary option via the touch of a button is where the industry is headed. We have made significant investments in developing these tools, and we'll continue to invest in them to continue to maintain our technological advantages over our competitors.

The third component of our growth strategy is acquisitions. The key focus for our acquisition program is to focus on geographies where we already operate so that we are best able to integrate acquisition targets onto our platform by consolidating distribution channels, driving efficiency and substantially improving overall profitability. We have made 2 acquisitions this quarter, which are well on their way to being successfully integrated.

I am very confident in our abilities to continue to integrate acquisitions as we find and execute on them. Although we have a very robust pipeline of acquisition targets, we remain hyper-focused on closing more material acquisitions on favorable deal terms. Overall, I sincerely believe that our 3-pronged strategy has and will continue to propel our company towards sustained financial growth and continued profitability.

I want to say how proud we were to be awarded a ranking in the 2020 TSX Venture 50. The TSX Venture 50 represents the top 50 performing companies on the TSX Venture Exchange based on 3 key criteria: share price appreciation, market capitalization growth and trading volume. I believe the ranking further substantiates that our strategy is on the right track to maximize shareholder value.

In conclusion, I want to leave you with 3 clear messages: First, our core target market is growing, and we continue to expand our market share therein to exceed the industry growth rate. Secondly, our strong balance sheet, expanding margins and cash flows allows us to speedily respond to strategic acquisition opportunities which creates a dynamic and, we believe, highly attractive investment opportunity. Finally, engaging with capital markets on both sides of the border is a top priority for us. We draw your attention to our February 4, 2020, press release discussing our proposed listing on the OTCQX in the United States.

We have fielded many calls from interested investors in the U.S. and believe that this move makes sense for a company headquartered in the U.S. and deriving 100% of its revenue from U.S. customers. I believe this is the first step towards fulfilling our ambitions of graduating to a U.S. stock exchange, such as the NASDAQ or NYSE. I want to make it clear that to unlock shareholder value, we are committed to tirelessly share and promote our story to the capital markets in Canada and expect to continue to do so going forward. In fact, over the preceding 12 months, we have added 2 prominent investment analysts to the roster covering our company and expect more over the coming months.

I would like to take a moment here to thank the entire Protech team for its tireless efforts and stakeholders for all their continued support. We look forward to continuing to demonstrate strong financial results, and we'll continue to communicate with our retail and institutional shareholders the progress we're making towards our goals.

This concludes our prepared remarks, and we will now open for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Doug Cooper with Beacon Securities.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [2]

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I just want to talk about organic growth, first of all. If we take Q1 last year, $20.5 million, you had I guess some contribution from Cooley and Acadia and I guess maybe an FX impact. Can you just walk me through what you think the organic growth rate was in the quarter?

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Hardik Mehta, Protech Home Medical Corp. - CFO [3]

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Yes. We had a pretty flat organic revenue growth for the quarter. And partly of that reason, as we do our analysis, I think our deliveries and setups were high for our organic piece. But we took a little bit of a higher revenue reserve as compared to what was taken in Q1 of fiscal 2019, and we did that just to be consistent with the results of fiscal 2019, and we took the same revenue reserves that guided us -- that came over for the year and applied that to Q1, which resulted into a lower net revenue. But on the gross revenue basis, we were definitely higher year-over-year.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [4]

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So -- sorry, can you maybe just explain the revenue reserve? What does that mean exactly?

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Hardik Mehta, Protech Home Medical Corp. - CFO [5]

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So our ERP comes up, we have a gross revenue number from our ERP. And then there is a revenue reserve internally that we allocate. Sort of it's a left pocket, right pocket between bad debt and revenue reserve. And within our audited numbers of fiscal 2019, the percentage that was recommended by the auditors was a little bit higher than -- about 3 points higher than what was used in first quarter of fiscal 2019. And since we applied a little bit higher percentage on our gross revenue, our net revenue kind of came out to be flat. But if I look at it on a gross basis, it was about 3% to 4% organic growth.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [6]

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Okay. The bad debt provision, that's a line item within your G&A. And that looked like it ticked up to 8.7% of revenue, a little higher than it's been in the last several quarters. Any comment on that?

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Hardik Mehta, Protech Home Medical Corp. - CFO [7]

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No. I think we are just, again, nothing underlying. I think we are heading, starting the year with a slightly, I wouldn't say conservative, but we feel that it might recover over the rest of the year.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [8]

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You mentioned in the MD&A, the implementation of IFRS 16, I think, which increased -- I think which you said increased depreciation and amortization by $390,000 and maybe decreased G&A by $300,000, I guess the offsetting amount.

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Hardik Mehta, Protech Home Medical Corp. - CFO [9]

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Yes.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [10]

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So that would have had a positive impact on EBITDA margin, reported EBITDA margin by maybe 100 basis points or so. Is that compared to -- is that fair?

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Hardik Mehta, Protech Home Medical Corp. - CFO [11]

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Yes.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [12]

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Yes. So when I'm looking at Q1 versus Q1 last year in terms of margin, am I looking at an apples-to-apples comparison? Or was that IFRS adjustment not made in last year's Q1?

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Hardik Mehta, Protech Home Medical Corp. - CFO [13]

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It was not made retrospectively. We are just adopting the guidance going-forward basis. I do want to take a moment here to point out that Q1 and also Q2 would continue to see some downward pull on the margins related to acquisitions of Cooley and Acadia. So the numbers we have presented is obviously absorbing that downward pull. So again, organically, we can (inaudible)

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [14]

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Right. So it's on a -- so on a year-over-year basis, on a comparable basis, EBITDA margin was down slightly because of the acquisition of Cooley, the integration work necessary for Cooley and Acadia, and you would expect that to recover or -- over the balance of the year, second half. Is that fair?

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Hardik Mehta, Protech Home Medical Corp. - CFO [15]

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Second half, yes. Well, I think we expect to fully recover in the second half. The first half, we will definitely -- that would be a continuing factor for the first 2 quarters because our integration efforts are expected to last 6 months.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [16]

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Okay. And I guess my final question, just free cash flow. What do you think your estimate for free cash flow generation was prior to any acquisition of new, I guess, monitoring equipment and repayment of capital leases?

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Hardik Mehta, Protech Home Medical Corp. - CFO [17]

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I think we -- I think that by the end of fiscal 2020, I think maybe we should be on our way to be positive after deduction of all those what you just mentioned from the payment of some of the overhangs we have had from 2019 and some acquisition-related lease payments for Cooley and Acadia.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [18]

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And just one final one for me, sorry. You have broken down the segments as you normally do, I guess, between sales of medical equipment and rentals of medical equipment. I guess the sales of medical equipment, $9.9 million in revenue. And the -- I guess the gross cost of sales of $6 million is fully reflective of the sale of those -- of that stuff. So can you maybe just give us a comment on what you think the profitability? Does 1 of the 2 have better profitability? Or the -- at the end of the day, they -- when you subtract out the amortization against the rental, are they sort of about the same?

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Hardik Mehta, Protech Home Medical Corp. - CFO [19]

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I think some of the cost of revenue also includes cost for rental in medical equipment. I wouldn't say that everything on the cost of revenue line item belongs to the sale. There are disposables and ancillary products that go with the rental equipments and the services related to rental equipment. So I just wanted to point that out anyway. And I guess I missed the second question.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [20]

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Did -- I guess the profitability attached to each segment, does one contribute greater to the profitability than the other? Or are they similar?

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Hardik Mehta, Protech Home Medical Corp. - CFO [21]

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No. I think in the longer run, they -- I think they have a very similar unit metrics, and so I wouldn't say it that way. I mean even if they are off, they're probably off 5% to 10% compared to other, but I wouldn't say they are materially different.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [22]

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Okay. And sorry, one final, final question. AdaptHealth reported their earnings the other day. And just certainly on the surface of the stock, looks like they traded about 9.5x EBITDA. Looks like they're bullish on the sleep side of their business, which I guess is a big part of your business. Why do you think the market continues to have -- you guys trading in and around 4, 4.5x EBITDA and the market valuing them at 9.5? And maybe just some color from your perspective and I'll leave it there.

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Hardik Mehta, Protech Home Medical Corp. - CFO [23]

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Sure. Honestly, we don't know that. We are surprised and perplexed ourselves that we have very identical profiles, identical business models and -- I mean I would say they are probably a couple of points more than -- on the EBITDA margin than us but nothing substantially better. And the market continues to have this kind of response, which, again, we hope to be traded close to where they are trading. But we don't have a particular reason why we have been traded where we are. We have always believed that we should be trading differently.

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Operator [24]

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Our next question comes from Andrew Hood with M Partners.

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Andrew Hood, M Partners Inc., Research Division - Research Analyst [25]

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Good quarter. I'll start with the setups and deliveries and the unique patient growth year-over-year. How much of that was just from Acadia and Cooley?

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Hardik Mehta, Protech Home Medical Corp. - CFO [26]

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A decent portion was, I think, on the setup side. I think organic growth, if that's where this is heading, I think it was close to about 4% to 5%.

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Andrew Hood, M Partners Inc., Research Division - Research Analyst [27]

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Okay. And then how about for patients, is that mostly Acadia and Cooley?

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Hardik Mehta, Protech Home Medical Corp. - CFO [28]

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Yes.

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Andrew Hood, M Partners Inc., Research Division - Research Analyst [29]

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Okay. In your MD&A, you mentioned on the gross margin improvement to 74% roughly. You said that improvement was mostly from consolidation of vendor accounts and better ordering models. I didn't see any mention of product mix. So does that mean that this is a sustainably higher level in your view?

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Hardik Mehta, Protech Home Medical Corp. - CFO [30]

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We are definitely hoping for that, and we continue to work to make that an ongoing, permanent -- well, not permanent, but at least sustainable efforts.

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Andrew Hood, M Partners Inc., Research Division - Research Analyst [31]

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Okay. And then for your SG&A, I think $1.5 million of the increase in SG&A was from Cooley and Acadia and obviously those are both partial quarters. So how much could you see SG&A going up for those 2? Or is there room for improvement on cost-cutting measures there?

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Hardik Mehta, Protech Home Medical Corp. - CFO [32]

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Sure. So Cooley was for a full quarter, the acquisition being done on October 4. And Acadia was only 1/3, the acquisition being done on December 4. I think about $200,000 to $300,000 is probably -- it will go up by another $200,000 to $300,000 to accommodate for those 2 acquisitions in the next quarter.

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Andrew Hood, M Partners Inc., Research Division - Research Analyst [33]

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And is that including any sort of cost measures? Because my understanding, obviously, when you make these acquisitions, you make some improvements. Is that more so just on the gross margin aspect? Or is there some SG&A savings measures you could apply as well?

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Hardik Mehta, Protech Home Medical Corp. - CFO [34]

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I think I just pointed in a more of a factual way of what we see happening in Q2, not accounting into any cost rationalization that has already occurred or will take place. I think our first goal right now over the first couple of quarters post an acquisition is to really integrate the business. I think cost rationalizations takes place as a side effect of that. But I think the real effects come after that. The first step is to integrate and then the cost rationalization comes after that.

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Andrew Hood, M Partners Inc., Research Division - Research Analyst [35]

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Right. Fair. Now I'd like to talk a bit about the finance lease spending. Obviously, this quarter was a bit of an uptick. I think it was about $5 million, which I think -- I guess I'm wondering, is that abnormally high because of Cooley and Acadia sort of refreshing their equipment there. And then also, what are your expectations on the remainder of the year for how much you anticipate spending on the finance leases?

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Hardik Mehta, Protech Home Medical Corp. - CFO [36]

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You are 100% correct. The biggest impact was through Cooley and Acadia. Part of the purchase price was paid through absorption of their liabilities. And we see that for Q2, it will continue to be there in the Q2 and then go down in Q3 and 4. It -- just so you know, the impact in increase in our -- increase on our balance sheet related to lease liability also included the new IFRS 16 guidelines for -- related to how property leases are being treated. We just answered that prior to this call -- prior to your questions, we just answered that for Doug.

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Andrew Hood, M Partners Inc., Research Division - Research Analyst [37]

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So I guess in a more quantitative way then, so on your cash flow statement, it was $5 million on finance leases this quarter. What do you kind of see there for the remainder of the year on that line item?

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Hardik Mehta, Protech Home Medical Corp. - CFO [38]

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I think it just trend downwards in Q3 and 4. I wouldn't be able to such -- give you a quantitative answer to that, but it definitely should trend down into Q3 and 4.

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Andrew Hood, M Partners Inc., Research Division - Research Analyst [39]

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Right. And then sort of even longer term to maybe assist in our understanding of this, is it correct to say longer term, since you get more life out of the equipment than you pay on leases -- like let's say you get 7 years of life out of a piece of equipment, but you pay on leases for 3 years, for example, does that kind of mean in general, as the business grows, you can kind of see a downward tick on the spending there since you're simply -- you maybe refreshed a bunch of your equipment recently?

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Hardik Mehta, Protech Home Medical Corp. - CFO [40]

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Correct. Theoretically, definitely, in a 0-growth model, that would be the case. And -- but in a growth model that we currently have, I think we expect that could either stay constant, which is I guess a good thing, given that it's a growth model because you've got to buy new equipment to support the growth.

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Andrew Hood, M Partners Inc., Research Division - Research Analyst [41]

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Okay. And then just a couple more questions then I'll pass the line. Obviously, the share price performance hasn't been as strong as you guys would like. And to Doug's question, the valuation is quite a bit cheaper than peers. I was just wondering if it ever crossed you guys' minds to consider a share buyback. Maybe even -- after last quarter, you mentioned taking on some debt, even using debt and taking those proceeds and buying back shares. Is that something that you guys have considered at all?

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Hardik Mehta, Protech Home Medical Corp. - CFO [42]

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We have considered. It's obviously a constant topic amongst the team and the Board. But at this point, I would say we have no further comments on that.

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Andrew Hood, M Partners Inc., Research Division - Research Analyst [43]

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Okay. And then just one more question here. I won't ask for political opinions, but I'm just curious in a sort of democratic presidency or a Bernie Sanders presidency, how do you view any sort of potential impact there on your business?

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Gregory J. Crawford, Protech Home Medical Corp. - Chairman, President & CEO [44]

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Andrew, this is Greg. We think most of the things that are going to impact our particular industry in that are already in play in the political side, and that will probably drive future potential changes and things. So I don't see that one side or the other in that would be a benefit or a deterrent on our business.

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Hardik Mehta, Protech Home Medical Corp. - CFO [45]

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And I think it's also too early to understand their actual plans for it, and can't predict at this point.

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Operator [46]

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This concludes the question-and-answer session. I would like to turn the conference back over to Greg Crawford for any closing remarks.

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Gregory J. Crawford, Protech Home Medical Corp. - Chairman, President & CEO [47]

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Thank you, operator. And thank you all for your participation today. As always, you can find us on the web at protechhomemedical.com, where we will be posting a transcript of this call and also our updated investor deck. On the site, you can also view some of the exciting products and developments discussed on this call. Thank you, and goodbye.

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Operator [48]

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This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.