InfuSystem Holdings, Inc Q1 FY2020 Earnings Call

Good morning and welcome to the InfuSystem Holdings, Inc. Reports First Quarter 2020 Financial Results Conference Call. All participants will be in a listen-only mode. Please also note, today's event is being recorded. At this time, I would like to turn the conference call over to Joe Dorame. Sir, please go ahead.

Thanks, Jamie. Good morning, and thank you for joining us today to review the financial results of InfuSystem Holdings, Inc. for the first quarter of 2020 ended on March 31, 2020. With us today on the call are Rich DiIorio, President and Chief Executive Officer; and Barry Steele, Chief Financial Officer. After the conclusion of today’s prepared remarks, we will open the call for a question-and-answer session. If anyone participating on today’s call does not have a full text copy of the press release, you can retrieve it from the Company’s website at www.infusystem.com or numerous other financial websites. Before we begin with prepared remarks, I would like to remind everyone, certain statements made by the management team of InfuSystem during this conference call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Except for the statements of historical fact, this conference call may contain forward-looking statements that involve risks and uncertainties, some of which are detailed under Risk Factors in documents filed by the Company with the Securities and Exchange Commission, including the annual report on Form 10-K for the year ended December 31, 2019. Forward-looking statements speak only as of the date the statements were made. The Company can give no assurance that such forward-looking statements will prove to be correct. InfuSystem does not undertake and specifically disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. Now, I’d like to turn the call over to Rich DiIorio, President and Chief Executive Officer of InfuSystem. Rich?

Thanks, Joe. Good morning everyone and welcome to our first quarter 2020 earnings call. Thank you all for taking the time to join us this morning. I hope you and your families are staying safe as we continue to deal with the effects of COVID-19. It's times like these when we really gain perspective on what's important in life and just how important it is to charge our time with our family and friends. Now, onto our first quarter results. I'm extremely pleased with our first quarter performance, not just the numbers but how the InfuSystem team responded to a situation where there is literally no playbook. Against the backdrop of rolling nationwide lockdowns, we had record-setting revenue in the quarter of $21.7 million, which is an increase of 18.5% versus the first quarter of 2019 and our adjusted EBITDA grew by 30% versus the first quarter of 2019. This was accomplished while transitioning 85% of our team to working from home. I couldn’t be prouder of the InfuSystem team. To me, that is a definition of executing on a plan in extreme conditions. On top of that, we've been able to put contingency plans in place for future potential short- and long-term disruptions on our operations from COVID-19. In early March, when we first began to assess the potential impact of COVID-19, we believed certain scenarios would most likely take place. First, we believed that our oncology service, which helps facilitate lifesaving treatments to patients, would not be dramatically impacted. We were correct. In fact, we treated more oncology patients in March than in any other month ever and treated more patients in the first quarter than in any other quarter in our 33 years of providing the service. Second, we believed our DME platform, specifically pump sales and rentals, would likely see increased customer demand when hospital admissions increased. We knew that we would need to adapt and execute from a biomedical and logistics standpoint to meet that demand, and we absolutely did this. The operations team deployed more devices than I would have ever thought possible. The operations team has always been part of our front line with our clinical team and deserves so much credit for making sure our patients get the safest devices wherever and whenever they need them. Third, we expected elective surgeries to see a dramatic decline as hospitals began to reserve and redeploy most of their resources to be able to handle any potential surge in COVID-19 cases. Unfortunately, we were correct about this as well. The pain management numbers were quite strong for early March before showing a steep decline in surgeries. In fact, the pipeline and numbers were slightly ahead of plan, and we had anticipated doubling revenue again this year after accomplishing that feat in 2019. I have absolutely no concerns long-term, but we are seeing a sharp short-term impact. More on that later. Fourth, we believed customer access for our sales teams would be severely impacted. In addition to our own internal travel restrictions, most hospitals restricted access to any non-essential visitors and rightfully so for everyone's safety. These restrictions had a bigger impact on the newest addition to our integrated therapies platform, Negative Pressure Wound Therapy, as part of our partnership with Cardinal Health. As with any new product, service, or partnership, face-to-face meetings are critical for both selling and customer training. The impact has made our rollout processes move a little slower than planned since we announced the new therapy in February. Despite these challenges, we are currently serving patients and customers, and expect to add new customers through the end of the year, albeit at a slightly slower pace. The great news is that we see very strong demand in the market for the powerful combination of our ITS platform partnered with Cardinal's device. The long-term potential for this therapy remains significant with a current addressable annual market of $600 million. And with that, I would like to turn it over to our CFO Barry Steele to provide a review of our financial results.

Thank you, Rich. And thanks for joining everybody on the call today. As Rich mentioned, the first quarter represented a stronger start to 2020, likely continued double-digit year-over-year growth in both net revenue and adjusted EBITDA, along with improved gross margin and adjusted EBITDA margin percentages. During the quarter, we did not incur significant extra costs associated with the health crisis, nor did we encounter any reduction in net revenue or other operational disruptions. On the contrary, the demand for our services increased due to COVID-19, driving urgent need for equipment and services in our DME services segment. In responding to the crisis and the increased demand, our preparedness activities included increasing our levels of both disposable medical supplies and accelerating our capital expenditures for DME equipment. These purchases provided both safety in stock in case of supply disruptions and allowed us to respond to requests from customers heavily burdened by the crisis. Net revenues for the first quarter of 2020 totaled $21.6 million, representing an increase of $3.4 million, or 18%, over the prior-year first quarter. Integrated therapy services led this growth, increasing by $2.8 million or 25%, along with a respectable increase in our durable medical equipment services segment of $540,000 or 8%. The growth for the integrated therapy services segment was mainly due to increased market share in oncology but also benefitted from a small increase in pain management oncology customers. The durable medical equipment services segment's net revenue growth was led by increased equipment sales. The high revenue translated into higher adjusted EBITDA which increased by above $1 million, or 30%, to $4.1 million during the quarter. A higher adjusted EBITDA margin grew to 18.8% during the current quarter compared to 17.1% in the prior year. This improvement was driven by an improved margin mix tapering from the higher margin ITS segment, while excelling in general and administrative cost coverage, offset partially by a higher provision per account and a decrease in DME services segment gross margin. The bad debt provision increased, but this was mainly driven by an accrual adjustment which reflected slower customer collections performance and a difficult comparison to the prior-year period which included an accrual reversal. The lower gross margin in the DME services segment was due to proportionally higher equipment sales and a mix of lower-margin items. During the first quarter, operating cash flow totaled approximately $600,000 and represented a decrease of $700,000 from the prior year. The current year period was impacted by higher working capital utilization associated with our COVID-19 preparedness activities. The positive operating cash flow combined with the use of $2.3 million of cash on hand and net borrowings of $1.2 million supported the net capital expenditures of $4 million, which were $1.3 million higher than the prior year first quarter. This increase in capital expenditures primarily comprised increases in our durable medical equipment fleet, representing an acceleration in our current year capital plan timing due to the COVID-19 preparedness and market demands I mentioned earlier. Note that our financial position has still improved slightly. As of March 31, 2020, our ratio of funded debt to adjusted EBITDA decreased to 2.07 times versus 2.11 times at the end of 2019. Our total available liquidity at the end of the first quarter totaled $14.5 million, consisting of $8.4 million in availability on a revolving line of credit, $5.7 million available under an open capital expenditure facility, and $300,000 cash on hand. This total represented a decrease in our available liquidity of $20.9 million as of December 31, 2019, driven mainly by the COVID-19 related capital expenditure acceleration and working capital investment. We estimate that our liquidity position will decrease slightly during the second quarter but improve during the second half of 2020 as our working capital positions start to decline to normal levels and operating cash flows overtake our capital expenditures. With that, I'd turn it back to Rich.

Thanks, Barry. At our last call in March, I said it was too early to understand the financial impact COVID-19 would have on our business and I did not reiterate our 2020 guidance of $89 million of net revenue, $22 million in adjusted EBITDA, and $16.5 million in cash flow from operations. As of today, I have 100% confidence in our team to execute our plan. We have the necessary contingency plans in place for future effects of this pandemic. However, at this point, there are still too many unknowns outside of our control for me to reiterate those numbers. As I sit here today, I can share some things I know for sure. What I do know is that our oncology patient census continues to grow and is higher than ever. Our DME services team will continue to see higher-than-normal demand for both pump sales and rentals. In pain management, as states begin to open and elective surgeries get rescheduled, we are already seeing the demand for patients coming back online. Moreover, as our hospital access improves, we will win negative pressure market share. So what does all this mean? I think we'll be fine. I believe we should be able to drive towards our original numbers, but I also think it'll be foolish in these uncertain times for me to try and predict the future. A lot of questions remain that we can't control and can't predict that could negatively impact growth within certain therapies. We will likely see a surge in COVID-19 as the restrictions are lifted state by state, forcing additional shutdowns, that's one of our questions. Will we see a resurgence of the virus in the fall as we do with the flu? I am hopeful that when we talk again in August, some of these questions will be answered and we can have better clarity on our full-year financials. I've been with InfuSystem for 16 years and, even with everything going on around us, I have never been more confident and passionate about our strategy. Why? Because there are a few things I know for certain that will allow us to overcome any challenge. I know across all of our functions from top-to-bottom, this team has been built to withstand anything. I know Tom Ruiz and his sales team will be relentless when it comes to managing our growth by expanding into new therapies. I know Carrie Lachance and our operations team will be relentless when it comes to our constant drive to improve operational efficiencies and make sure that our patients and customers receive the industry-leading service they are accustomed to. I do know that all 280 members of the InfuSystem team are committed to ensuring our platforms are solid and infinitely scalable. I do know that any impact will be short-term, and we'll come out on the other side of this stronger and sharper than ever before. And with that, I'm happy to answer any questions.

And our first question today comes from Brooks O'Neil from Lake Street Capital Markets. Please go ahead with your question.

Thank you, good morning guys. I have a few questions and I admit up front there's been a whole lot of things going on on my end this morning that I may have been distracted during some of your prepared remarks. So if I ask about things you've talked about, I apologize, but it would be helpful if you could go into detail. I was hoping first to get just a little color on the pain and oncology businesses' results during April and early May. I think you alluded to a little improvement, but could you just give us a little more color on what you're seeing out there in the marketplace right now? Thank you very much.

Thank you, Brooks. In oncology, we are seeing strong patient demand, and our numbers continue to grow. The trends we observed in April and May are consistent with our performance in the first quarter, which was our best ever, with March being our best month. This aligns with our expectations. Oncology involves critical treatments that can't be postponed; it's essential care, not elective procedures or routine check-ups. Patients need to go to hospitals for these treatments, and the facilities are accommodating them well. Therefore, oncology is performing robustly, and we have no concerns in that area. As for pain management, we noted a decline in patient numbers at the close of March and early April. However, as we progressed through April and into May, the demand for pumps and related patients began to return. While we aren't back to our ideal levels yet, we're optimistic as states reopen and surgical schedules resume. Overall, the outlook for pain management looks positive, provided there are no significant COVID-19 surges in the summer, which should bode well for us this year.

Absolutely, that's great. I'm particularly interested in the negative pressure business. Obviously, you said in the release that there was some disruption to the launch of related services due to COVID. But can you give us a little more detail on that? Again, maybe April, May and what you're seeing out there in the marketplace in terms of response to your offering?

Yes. So from a launch standpoint, it is definitely going slower than we anticipated. The negative pressure sales process is really driven through the hospital. That poses a challenge when the hospitals are not letting any non-essential people in and they're not allowing visitors in to see patients. So that access has definitely slowed down quite a bit, especially in some of the larger cities. That being said, when the hospitals start to ease those restrictions—which we haven’t seen happen in April—we don’t know when that'll happen. It should be pretty soon; again, as states start to open up, they will lessen restrictions and let us back in. The good news is that there are a lot of hospitals waiting for us to come back and we were able to talk to them before shutdowns occurred. So, there’s a tailwind effect from February or early March; they were excited about what we were offering with our service combined with Cardinal's device. So, we definitely see the market opportunity there. Now, once those doors open up in the hospitals, I think we'll start gaining some market share in negative pressure.

Yes, that's great, that's fantastic. I think you guys noted a slight increase in bad debt expense in the quarter. I'm just curious if you could elaborate on that a little bit so we could understand what's going on.

It’s actually a little slower collection that we've noticed. Our process of accruing is driven by how quickly we collect. So, we had to slightly increase our accrual during the quarter. In the prior year, there was actually a significant reversal that just makes for a bad comparison.

Okay, I got it. Then, last but not least, I'm curious how you feel about your available liquidity. Obviously, you mentioned it has come down again a little bit in Q2 and that maybe it could improve as you get into the latter part of the year. But do you feel like you have the capital you need to get through this period and onto what lies ahead?

Yes, I’m a believer in having as much liquidity as possible. That said, I feel very comfortable; we definitely see earnings being very strong. We will generate significant cash flow as we progress through the year, just from our operations. Right now, what is happening is that we have a working capital investment to build our supplies and ensure we want stock should there be any kind of disruption. So, we’ve been building the inventory in particular. We’ve also accelerated pump purchases. We've been able to manage that, and I think soon we will see our working capital will start to decline, and the cash utilization has slowed—so we won't have that as a drain for a few months. I see it coming back strong as we continue through the year.

Great. Congratulations on the great start to the year and keep it up.

Thanks, Brooks.

Our next question comes from Douglas Weiss from DSW Investment. Please go ahead with your question.

Hi, congrats on a good quarter. You mentioned in the press release $3 million in medical equipment purchases at the end of the quarter, and you're going to have an additional $3 million in medical equipment. What is that more specifically?

I haven’t really talked about the future, but we've been buying pumps mainly for a couple of reasons. Firstly, there is a significant demand for products to serve facilities treating COVID patients. So, our DME segment has been essentially trying to find pumps anywhere they can to meet that need. A lot of that revenue started coming in the second quarter, but that's the primary reason. We foresee our capital expenditure activity being higher than what we planned for the year, but it is happening a little bit earlier in the year due to the COVID crisis.

Okay. And then you also mentioned safety stock of medical supplies for oncology; what is that?

We deliver services to patients. We provide them with equipment, but they also get a supply kit. I think they receive it a couple of times during the course of their use of the pump. So, we brought in extra supplies to make sure that if something happened in our supply chain, we would still be able to serve patients. That was basically building safety stock to prepare ourselves.

Is that kind of a one-time thing or is that ongoing?

It's a one-time thing. We've submitted our orders, and some of it arrived during the quarter with a little more showing up in the second quarter. We’ll just consume that stock as we go through the rest of the year.

Have you made the capital investments for this year already in the room care equipment, or will that show up later in the year?

Yes. One of the nice things about this business is that you can scale your capital expenditures to what your needs are. In contrast to the automotive industry, where if we had to buy a piece of equipment, it probably wouldn’t be available for years. We could quickly adjust our capital expenditures based on our immediate needs; so, we have been buying in pumps for the devices used for negative pressure, but only what we need to serve the initial stages of the business.

My sense is you haven’t really put much in your guidance as far as that business; is that true?

That's correct.

Yes. There was no revenue from negative pressure in that guidance because we wanted to share when it would launch this year.

Do you have any kind of goals you might offer on that, or is it too early?

I think it's too early. We had initial goals and what we thought we could achieve. All bets are off when it comes to access to the hospitals for the next couple of months. So, it's just tough to say. If we gain market share faster than expected, we could probably catch those numbers. But we'll probably have to wait until June or July to start to see that happen.

Okay. All right, well thanks and congrats again.

Thanks, Doug.

Our next question comes from Erin Brockovich from E.S. Capital. Please go ahead with your question.

Hey guys, good morning. Great start to the quarter, or to the year, excuse me. You've mentioned in the last call, Rich, that the DME side might mitigate some of the losses from the ITS side or some of the delays. You said that you didn’t think it'd be in the multiple millions, but based on your results today, it looks to me like maybe that’s changed; perhaps it is now a little bit more than you expected back in March. Is that accurate, and if so what led to that change?

Yes, thanks Erin. So in the first quarter, we actually didn’t see a big drop in ITS revenue, and that's mostly because oncology had a record quarter, and pain management really didn’t get impacted until the third week of March from an elective surgery standpoint. So we had much to overcome in the first quarter. The real impact is truly in the second quarter, and again, the only hit we’re taking is on the elective surgery side for all of April, and maybe all of May or part of May. DME came out of the gate strong; they ended the first quarter strong and they came out strongly in the second quarter as well. So, we think the second quarter could still be good if pain comes back online quickly, driven by strong oncology patient numbers, a strong DME quarter, and some recovery on the pain side.

Sounds good. I mean, I think then this elective surgery loss must be a small part of the overall business based on what you just outlined.

Yes, absolutely. Pain management is our smallest piece of the ITS segment, obviously working under oncology. We don’t want to lose it for longer than we have to, and certainly not for quarters. But a few months will be manageable.

I certainly understand you're not wanting to commit to certain numbers given the uncertainty out there. However, taking a look at this, extrapolating on your numbers from the quarter and the comps from last year, it seems to me like you could be on pace to do as high as $95 million and $23 million in adjusted EBITDA. Is there anything that's happened so far in the second quarter that would make you think those increases in revenue like the 18% and that 30% increase in adjusted EBITDA, any reason for that to really get off track so far based on what you’ve seen in the second quarter? Is that still playing out that way, given that some of the losses on one hand are being made up on the DME side?

I think $95 million and $23 million are pretty aggressive, even without COVID-19. There are certainly a lot of unknowns in the second half of the year. Do I think we’ll get to our plan? If pain comes back online, and if DME stays strong, and oncology continues to grow, I think we can reach it, sure. However, do I know what's going to happen in the next month or even next week with COVID? Absolutely not. None of us do.

Yes, right.

There are concerns as we plan. There are concerns about the boomerang effect, where, as states open up, will the cases start to go back up and force further lockdowns? If that happens, that’s a problem. Even if it stays flat in the summer but comes back in the fall, who knows? Again, we can have another issue on our hands and we don’t know what the second round would bring. We are unsure if oncology would maintain its strength, and we think it will, but certainly elective surgeries could be postponed, and those types of situations have to be taken into account. There are just so many factors we don’t know, and we can’t predict. That's why we're holding off on the numbers.

How concentrated is your business there in the oncology side in terms of percentage based in areas that have already been hard hit, or how spread out is it across the country? I don’t know how concentrated it is to particular regions.

Sure. So, we're in all 50 states; it's exactly what you would think. The major cities—Boston, New York, Los Angeles—obviously have the most hospitals and doctors, so we have a significant market share there. It's well-represented across the country, but we do have a heavy concentration in New York and Boston, as well as Detroit, our hometown, all of which have been hit hard. Even in those cities, we haven’t seen much of an oncology impact at all.

Yes. And that sounds good for the future. Given that they've been the hardest-hit cities, and you still haven't seen that disruption, that sounds encouraging. Final question for me then: you talked about leveraging your relationship with Cardinal Health, and obviously, that's still very early on. But I'm just wondering if you've seen anything on that; if you’ve been able to do anything on the DME side with them here?

With Cardinal, we have devices beyond just the negative pressure setup; we also have other devices we rent and sell in the hospital markets as part of our offerings. So, that’s always been the case; that hasn’t changed during the COVID crisis.

Okay. Thank you, guys. I appreciate it. Stay safe and good luck.

Thanks, Erin.

You too.

And ladies and gentlemen, with that we'll end today's question-and-answer session. I'd like to turn the conference call back over to Mr. DiIorio for any closing remarks.

Thanks, Jamie. We are certainly living in extraordinary times. On behalf of the team, I truly appreciate your continued support. I want to thank you for participating in today's call, and I look forward to speaking to you again when we report our 2020 second quarter results. Please stay safe, and thank you.

Yes. Ladies and gentlemen, with that we'll conclude today's conference call. We thank you for attending. You may now disconnect your lines.