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Edited Transcript of PTQ.V earnings conference call or presentation 29-Jan-20 3:00pm GMT

Q4 2019 Protech Home Medical Corp Earnings Call

Feb 7, 2020 (Thomson StreetEvents) -- Edited Transcript of Protech Home Medical Corp earnings conference call or presentation Wednesday, January 29, 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

* Douglas W. Loe

Echelon Wealth Partners Inc., Research Division - Analyst of Healthcare and Biotech

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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 Fourth Quarter and Full Year Fiscal 2019 Results 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 Chief Executive Officer. 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 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 over the past year with a focus on the last quarter and provide you with our updated outlook for 2020. I hope we will leave you with a resounding impression that Protech is in a strong position in respect of its financial performance, its operations, our balance sheet and the organic and inorganic 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.

On January 28, 2020, we announced our full year audited financial results for fiscal 2019. More on these results in a moment, but first, let me provide you 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 regions, completing hundreds of thousands of deliveries each year to more than 80,000 active patients.

With that background, I'd like to hand the call over to Hardik to discuss our Q4 fiscal 2019 financial results.

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

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Thanks, Greg. In reviewing the audited financial results for fiscal 2019 and Q4 of fiscal 2019, please note that all financial values are in Canadian dollars and the full results are available on SEDAR.

As many of you may know, in the fourth quarter of 2019, the company sold Patient Home Monitoring, Inc., also called PHM, an asset we determined as being noncore. As per IFRS, operating results of PHM is reported under discontinued operations. As a result, please note that all the fiscal year-end numbers for both 2018 and 2019 have been adjusted for this divesture and are reported for continuing operations only.

I would also like to clarify to our investors because of the divesture being reported as discontinued operations for fiscal 2019 and fiscal 2018, it will not be accurate to subtract our previously reported year-to-date numbers from fiscal year-end results to derive fourth quarter performance for both 2019 and 2018.

In the fourth fiscal quarter, fiscal 2019 Protech completed 53,386 setups or deliveries compared to 47,581 in the corresponding period last year, an increase of 12%. The company generated revenue of $19.5 million in Q4 of fiscal 2019, up 8% from Q4 fiscal 2018. Our efforts to streamline operations and standardize regional processes continues to bear fruit. Most of the 8% year-over-year growth is organic with a small contribution from the 2 small acquisitions done.

While quarter-over-quarter growth rate was 8%, our full year revenue growth was 15% year-over-year. Fiscal year 2019 revenue was $81 million compared to $70.5 million in 2018. Recurring revenues for fiscal 2019 increased by 26% to $55.1 million, representing 68% of total revenue and were up 26% year-over-year. It has been a focus of the company to increase this category.

Adjusted EBITDA for Q4 fiscal 2019 was $3.7 million compared to $5.2 million in 2018. However, as we have previously disclosed, the reason for the extraordinary increase in fourth quarter of fiscal 2018 was as a result of favorable fiscal 2018 year-end and out-of-period audit adjustments relating to inventory and revenues.

Adjusted EBITDA margins for Q4 2019 was 19%, which is in line with the normalized adjusted EBITDA for Q4 2018, once adjusted for out-of-period and year-end audit adjustments in 2018, which I mentioned above. We expect our audited -- we expect our adjusted EBITDA margins to remain strong in 2020. Fiscal 2019 adjusted EBITDA for full year fiscal 2019 was $14.8 million, up 39% from fiscal 2018.

At the end of fourth quarter, we had $12.9 million in cash, up from $4.3 million at fiscal year-end 2018. Cash flow from continuing operations for fiscal 2019 was $10.5 million compared to $8.8 million in fiscal 2018. Current assets totaled more than $30.8 million at fiscal year-end 2019 compared to $19 million in net short-term liabilities, demonstrating the strength in our liquidity.

To summarize, our balance sheet is in excellent condition. Our operational base continues to grow, and we continue to post industry-leading margins. Thank you. And with that update, I'll 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 satisfied with our operating performance over the last year and are pleased to report that solid organic growth continues into fiscal 2020. I want to take a moment to explain a little more in-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 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 just under $0.25 million pieces of equipment to over 80,000 active patients. We operate out of over 40 locations in 10 states and now have over 13,000 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 in that 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 achieve more than double the growth rate of the industry as we continue to focus on significantly increasing our market share in key target regions within the markets we currently serve.

To execute on this, we are continuously hiring and training new sales representatives, and will 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 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 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 deploying these tools, and will continue to invest in them to continue to maintain our technological advantages over our competitors.

The third component of our growth strategy is acquisitions. Our key focus for our acquisition program is to focus on geographies where we already operate, so that we can best able to integrate acquisition targets onto our platform by consolidating distribution channels, driving efficiencies and substantially improving overall profitability.

We have made 2 acquisitions in the last calendar year, 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 and do not intend to waver on our acquisition target criteria and will only execute when it makes absolute sense to do so.

I'm very optimistic that you will see the pace of acquisitions continue or even accelerate in the quarters to come. Overall, I sincerely believe that our 3-pronged strategy has and will continue to propel our company towards sustained financial growth and continued profitability.

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. Secondly, our strong balance sheet, expanding margin and cash flows allows us to speedily respond to strategic acquisition opportunities, which continue to create a dynamic and, we believe, highly attractive investment opportunity.

Finally, engaging with capital markets is a top priority for us. We truly believe at our current share price, Protech continues to be highly undervalued on a relative basis when compared to its peers. As such, we are committed to tirelessly share and promote our story to the markets to rid ourselves of that discount. As a result of our efforts, we are delighted to have attracted more attention from the analyst community and look forward to increased traction in the coming months.

While we do not release detailed forecasts, I continue to stand by our previously stated objective of obtaining an annualized revenue run rate of $100 million at some point during fiscal 2020, which would equate to an increase of at least 20% on a run rate basis.

I would like to take a moment here to thank the entire Protech team for its tireless efforts and its stakeholders for all their continued support. We look forward to continuing to demonstrate strong financial results, and will 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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Just a question. First of all, you mentioned M&A targets. Can you just sort of talk about what kind of size you might be looking at, what multiples you might pay, and just to maybe augment the M&A strategy, do you have any -- are any conversations with traditional banking facilities for lines of credit or M&A or acquisition lines?

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Gregory J. Crawford, Protech Home Medical Corp. - Chairman, President & CEO [3]

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Yes. Good questions, Doug. Our target has remained the same. We've been really hyper-focused on companies with annual revenues of $4 million to $12 million. And typically, we see companies like that with EBITDA margins in the mid-single digits to, say, 10%.

And we would typically see a multiple on those that -- pre-integration that we would pay anywhere from 4x to 6x for those. And I think that would be very similar to where you've seen the 2 most recent acquisitions, that we closed in the last half of the calendar year 2019. And I'll let Hardik kind of speak a little bit about our traction on bank lines.

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Hardik Mehta, Protech Home Medical Corp. - CFO [4]

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Sure. And I'll just add to what Greg said. And on a post-integration basis, those multiples are relatively lower once we are -- once we integrate them on to our platform and get to the margins that we have generally enjoyed. For the rest of the company, I think those acquisitions tend to be in the 2 to 3 multiple range.

Yes, we are actively seeking traditional banking facilities, and we are working on providing data to the banks, and we hope we'll have something more material to disclose in the coming months.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [5]

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Got it. Just a question on the environment. I guess a big question always surrounding reimbursement issues. Can you talk about your product lines and any risk from CMS about reimbursement, I guess? And in particular, maybe you can just comment on the noninvasive vent business and what impact that might have on your results, I guess, more so in 2021 through the competitive bidding process?

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Gregory J. Crawford, Protech Home Medical Corp. - Chairman, President & CEO [6]

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Yes. So the competitive bid program and that is set to take effect in January 1, 2021, and we expect to receive more information as far as what those rates are going to look like early summer 2020. And then we expect contracts to be announced early fall 2020.

The noninvasive ventilator right now is approximately about 17% or so of our overall revenue. And Medicare in that a general rule of thumb is around 40% of our revenue. And there's just a certain percentage of that that would actually be affected by the competitive bid because it only covers major metropolitan areas, it doesn't cover the rural areas in that. So we would expect the actual noninvasive vent rates for us would probably affect less than 5% or so of our revenue for any changes in that particular item.

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Operator [7]

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The next question comes from Andrew Hood with M Partners.

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Andrew Hood, M Partners Inc., Research Division - Research Analyst [8]

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So most of my questions are more forward-looking. The first one I'm wondering about, could you talk about your progress so far on your 2 recent acquisitions? I know that they weren't captured in this quarter. But are there any integration efforts left to work on for those?

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

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Yes. We actually are beginning to transition our billing platforms for Cooley, the larger of the 2 acquisitions, and we hope to finish that by end of March. It -- billing times -- billing integrations takes a lot of time. They were on a different platform than our -- the rest of the company. And those efforts are underway. Soon after that, we will work on the inventory side of integration.

As far as Acadia goes, it was on the same platform. So there was less work on that, but we continue to work towards introducing our standard practices across their platform. And we expect that also to be completed somewhere between -- end of April.

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Andrew Hood, M Partners Inc., Research Division - Research Analyst [10]

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Okay. And then just briefly also on both those businesses, what's the split approximately on rentals versus sales?

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

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I think it was in the ballpark of what we general -- what we have across the company. Acadia also has certain product lines that we have for the rest of our companies, while -- which are typically sale items.

And compared to that, Cooley is more on the respiratory side. And -- so it could be more similar to one of our entities called resource capital -- resource group. So we -- in short, Cooley is a little bit more respiratory compared to Acadia. While Acadia is also respiratory, it also has rehab and other product lines.

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Andrew Hood, M Partners Inc., Research Division - Research Analyst [12]

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Okay.

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Gregory J. Crawford, Protech Home Medical Corp. - Chairman, President & CEO [13]

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Which respiratory would equate to more rentals.

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Hardik Mehta, Protech Home Medical Corp. - CFO [14]

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Right.

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Andrew Hood, M Partners Inc., Research Division - Research Analyst [15]

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Yes. Okay. On -- jumping to the M&A strategy, do you guys still think you have about $15 million to $20 million in acquirable revenue in the short term, that you could afford in the short term?

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Hardik Mehta, Protech Home Medical Corp. - CFO [16]

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I would say, $10 million to $15 million, in that range, yes. It depends on -- again, it depends on the profile that we are looking at. We would rather focus on highly profitable companies, which -- sometimes for which you have to pay a little premium for. So that's why I would, like, rather have a range than a number.

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Andrew Hood, M Partners Inc., Research Division - Research Analyst [17]

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Okay. And then also, Greg, you commented on that you're expanding the sales force. Is there any idea how many people or what the incremental is?

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Gregory J. Crawford, Protech Home Medical Corp. - Chairman, President & CEO [18]

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Yes. So we're looking at current geographies in that that are close to where we are, say, the next town over or something. And we plan on probably hiring anywhere from 3 to 5 in that per month and that will begin in February, and that is kind of what February looks like, and we're working on the same thing for March.

We'd like to bring them on kind of gradually in that so we can get them into our system and make sure we're finding good quality candidates. We had done a really decent amount of hiring in that back at the end of calendar 2019, and we're starting to bear some of the fruits in that -- of those sales reps getting their feet on the ground and obtaining referrals.

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Andrew Hood, M Partners Inc., Research Division - Research Analyst [19]

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Okay. So just for SG&A in general, is there -- do you have any sort of expectations there for the year, of how much that will increase?

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Hardik Mehta, Protech Home Medical Corp. - CFO [20]

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Sorry. Say that one more time.

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Andrew Hood, M Partners Inc., Research Division - Research Analyst [21]

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Do you have any expectations for SGA in general, how much it will increase this year?

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Hardik Mehta, Protech Home Medical Corp. - CFO [22]

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I mean not accommodating for the variable growth on the sales side, I think we expect our SG&A to be industry-standard growth rate, 2% to 3%.

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Andrew Hood, M Partners Inc., Research Division - Research Analyst [23]

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Okay. And then the last thing I'm wondering on is your warehouse consolidation strategy. Are any of your leases up this year? Or can you consolidate any of your warehouses this year? And if so, what would be your expected cost savings or margin improvement?

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Gregory J. Crawford, Protech Home Medical Corp. - Chairman, President & CEO [24]

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Yes. We don't quite have a handle on that yet. There probably will be some consolidation in that that once we get the 2 most recent acquisitions consolidated, considering they're pretty close to some of our current location. Once we get them onto our software and our platform 100%, we'll better be able to make a decision like that. So it would probably be in the later half of 2020.

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Operator [25]

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(Operator Instructions) The next question comes from Doug Loe with Echelon Wealth Partners.

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Douglas W. Loe, Echelon Wealth Partners Inc., Research Division - Analyst of Healthcare and Biotech [26]

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Congratulations on all the recent progress. Maybe just a couple of mundane financial statement questions. Hardik, I mean, sure you know you've -- several of your most recent quarters have had working capital balances squarely in deficit range, although that certainly turned around in second half of 2019 fiscal year.

Why don't you just maybe comment on what your near-term working capital requirements are going to be for the core business and whether we can expect more stability, at near neutrality or if there might be some fluctuation in forthcoming quarters? Then I'll have a follow-up.

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Hardik Mehta, Protech Home Medical Corp. - CFO [27]

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Thanks, Doug. I think our -- for the first couple of quarters of 2020, we expect a little bit more increase in our working capital needs, mostly resulting from the acquisitions for -- we've done and bringing their inventory levels to where we [are] or we think. We are currently evaluating the equipment life and equipment status for those acquisitions.

And we anticipate there could be some additional CapEx that we might have to undertake to get the equipment to the quality of what we have for the rest of the company. But we haven't made a determination on that. As you know, these -- some of these equipments are in patients' house. So it takes some time for us to kind of get a good handle on it.

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Douglas W. Loe, Echelon Wealth Partners Inc., Research Division - Analyst of Healthcare and Biotech [28]

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Understood. Good color. And then equally mundane question. Just on bad debt provisioning, it looks as though throughout most of '19, that number sort of stabilized in the 1.4-ish range. Is that a reasonable expectation for us in future years? Or might be there's some additional margin to it from bringing that number down a little bit closer to nil?

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Hardik Mehta, Protech Home Medical Corp. - CFO [29]

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At this revenue level, I think that would be fair and it would maintain. I would not provide a guidance for decreasing. Now we've -- definitely with some meaningful increase in our revenue, we get better purchasing power and that does translate into better margins. But at this point of going into 2020, I would say, we maintain.

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Douglas W. Loe, Echelon Wealth Partners Inc., Research Division - Analyst of Healthcare and Biotech [30]

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Perfect. Okay. And then my counterparts have sort of focused on your M&A strategy a little bit here. Maybe just one sort of related question. And as you probably know most of your -- or many of your public and private peers are somewhat more diversified beyond respiratory and CPAP equipment. And so I think it makes sense for you to focus on that market clearly based on operational excellence exhibited so far.

But would it make any sense for you strategically to sort of diversify into wound care, incontinence, other medical markets as a way to sort of leverage your existing client base? Or do you intend to be more squarely focused on respiratory? And I'll leave it there.

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Gregory J. Crawford, Protech Home Medical Corp. - Chairman, President & CEO [31]

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Yes, Doug, I think we're -- we continue to be hyper-focused on the respiratory and the durable medical equipment market and not necessarily the supply side. We still have a decent amount of revenue that is generated from disposable supplies, but we feel like our operational excellence on the respiratory and the distribution side of the medical equipment is best served at this time.

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Operator [32]

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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 [33]

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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 [34]

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