Good day and welcome to the InfuSystem Holdings Inc. reports Third Quarter 2023 Financial Results Conference Call. All participants will be in a listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Joe Dorame, Managing Partner. Please go ahead.

Good morning and thanks for joining us today to review InfuSystem's financial results for the third quarter of 2023 ended September 30th, 2023. With us today on the call are Rich DiIorio, Chief Executive Officer; Barry Steele, Chief Financial Officer; and Carrie Lachance, President and Chief Operating Officer. After the conclusion of today's prepared remarks, we will open the call for questions. 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 and documents filed by the company with the Securities and Exchange Commission including the annual report on Form 10-K for the year ended December 31st, 2022. 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 except as required by law. Now, I'd like to turn the call over to Rich DiIorio Chief Executive Officer of InfuSystem. Rich?

Thank you, Joe and good morning everyone. Welcome to InfuSystem's third quarter 2023 earnings call. Thank you all for joining us today. I'm going to start this call by reiterating that our key theme for the year has been the 2023 is a year of execution and I believe our financial results show delivery of strong execution. Not only was the recently completed third quarter the seventh consecutive quarter with record revenue, it was the second quarter in a row with revenue up 17% or more when compared to the prior year. Shifting from the topline to the bottom-line, we see continued improvement in our margins and operating income. Operating income in the third quarter increased 80% year-over-year and net income was up 56%. Adjusted EBITDA was $6.2 million for the quarter, up 11% from the prior year. While I think that's a solid adjusted EBITDA number with a nice trend line, on a year-to-date basis, we are slightly behind where we originally planned to be versus our original budget. This is because our adjusted EBITDA was suppressed early in the year because of the investments made in the first quarter to accelerate and pull-forward the onboarding of devices under the initial Master Services Agreement with GE. We elected to make the necessary investments ahead of our original plan and succeeded in pulling forward that revenue, resulting in the strong growth we have delivered over the last couple of quarters. So, 2023 has been an execution year in terms of delivering on new revenue opportunities and setting the stage for more revenue in future years. The next phase of execution will be the fine-tuning and the continuous process of identifying and implementing operating improvements that will improve and maintain our long-term operating margins. That will be the story for the rest of this year and into next year. After Barry provides his review of the quarter, Carrie will provide some color on the things that we are doing and how our margins are improving as we achieve scale and begin ironing out our processes with our GE Biomed business and start leveraging our national network of technicians. Now, turning to guidance. In August, we updated our guidance for the full year estimating net revenue growth of 10%-plus and adjusted EBITDA margin to be between 17% and 18%. We expect our revenue to come in above the range previously provided. How much above depends on a variety of factors some of which are outside of our control. Accordingly, we will continue to take a very conservative approach and raised our full year guidance to have net revenue growth of 11%-plus. For adjusted EBITDA we are maintaining our adjusted EBITDA margin range of 17% to 18%. Now, I'd like to turn the call over to Barry who will provide more detail on our financial performance in the third quarter.

Thank you, Rich and thank you everyone on the call for joining us today. I'm going to focus on three topics. The main drivers for the current quarter's results, our fourth quarter outlook, and our current financial position and how it changed during the quarter. First let me touch on our financial results for the period. Net revenues for the third quarter of 2023 totaled $31.9 million, representing a $4.6 million or 17% increase from the prior year and setting another new all-time revenue record for the seventh straight quarter also, the eighth record in the last nine quarters. The three main drivers of this increase were higher revenue from the GE Healthcare contract totaling $2.6 million, higher lease equipment sales of negative pressure wound therapy devices totaling $1.1 million and higher revenue in oncology totaling $800,000. At September 30th, the annualized revenue run rate for devices onboarded to the GE contract stood at approximately $11 million, an increase of $2 million from where we started the quarter. Gross profit for the third quarter of 2023 was $16.2 million which was $1 million or 6% higher than the prior year third quarter. This was mainly driven by the higher sales, but was partially offset by a lower gross margin percentage which was 50.9% during the third quarter of 2023 down from 59.5% from the prior year. The year-over-year decrease was mainly due to unfavorable product mix changes and additional startup costs for the GE Healthcare Biomedical Services contract. The product mix impact is due to the higher biomedical revenue and the negative pressure wound therapy equipment sales growth both of which have a lower gross margin than the company average. GE Healthcare startup costs are estimated to have been about $1.2 million, for the 2023 third quarter. This amount continues to be higher than we originally planned and was a larger amount than in the first and second quarters due to the higher revenue volume. We continue to anticipate that these elevated amounts will dissipate over the next several quarters and then our margin will approach our original estimates once we reach full ramp and circle past the first year of coverage for the growing number of devices. Selling, general and administrative expenses for the third quarter of 2023, totaled $14.5 million representing a decrease of $333,000 or 2% as compared to the prior year. The amount was 45.6% of revenue which represented a 10.4% decrease from the prior year ratio which was 56%. As a result of these impacts, our adjusted EBITDA was $6.2 million or 19.4% of net revenue during the 2023 third quarter, which represented an increase in the prior year totaling $600,000 and an increase sequentially from the 2023 second quarter totaling $400,000. Turning to the prospects for the fourth quarter, as Rich stated, we now expect our annual revenue growth rate to be over 11%. This amount represents an increase from our outlook at the end of the last quarter when our minimum growth forecast was 10%. While we do expect a sequential decrease in our fourth quarter revenue mostly due to timing issues, the amount implied by an 11% annual growth rate represents a significant hedge that almost ensures that we will not have a year-end miss. The timing issues are two-fold. First, during the fourth quarter it is likely that we will deliver fewer negative pressure wound therapy devices which totaled $1.1 million in revenue during the third quarter. This reflects the quarter-to-quarter variability we typically experience in equipment sales. Second, we are expecting revenue for the GE Healthcare contract to be about $500,000 lower in the fourth quarter compared to the third quarter. This is mainly due to our quicker-than-expected ramp-up in adding devices to the contract during the year, which has resulted in a lower number of devices being onboarded in the fourth quarter and consequently, less of the initial per device onboarding related revenue being recognized. We do not currently see any other specific additional sequential revenue reductions. We are holding our minimum outlook at 11% to provide for an extra measure of assurance. Turning to a few points on our financial position and capital reserves, as we indicated during the second quarter call in August, our operating cash flow for the third quarter totaling $4.3 million, increased sequentially for the second straight quarter and represented an increase of $800,000 over the prior year third quarter. This was due to a lower amount of growth in working capital levels, which reflected a slower sequential revenue increase from the 2023 prior quarter than for the earlier two quarters. We expect this trend to continue in the fourth quarter. Additionally, our net capital expenditures were a relatively low, $300,000 during the third quarter. This lower amount is partially related to the timing of our pump equipment purchases during the year and due to the fact that much of our growth was derived from less capital-intensive revenue sources such as Biomedical Services and Wound care. The capital required to fund Negative Pressure Wound Therapy equipment leases shows up in our working capital investments i.e., operating cash flow and not capital expenditures. Because of these factors, our net debt decreased by $3.5 million to $32.5 million and our available liquidity totaled $41.7 million at the end of the quarter. The decrease in total debt and higher trailing four-quarter adjusted EBITDA caused our ratio of total debt to adjusted EBITDA to decrease modestly to 1.5 times at the end of the quarter as compared to 1.59 times at the end of the 2022 fourth quarter. Our debt consists of borrowing on our revolving line of credit with no term payment requirements, nearly five years in the remaining term and with $20 million of the outstanding balance protected from increasing interest rates through an interest rate swap having the same term. I'm now going to turn the call over to Carrie, who will provide more detail on what we are doing to improve our operating margins.

Thanks, Barry and good morning, everyone. As Rich indicated earlier, I'd like to provide some color on what we are doing to improve our operational efficiencies after new business has been onboarded. Today, that is primarily related to our Biomed business where the opportunity is greatest. In Wound Care, we are still mostly preparing the channel with negative pressure pump placements and activity where we have a lot of prior experience and are already very efficient. To start, the primary driver in biomed is onboarding of the GE master services agreement involving roughly 230,000 devices located in facilities across the country. For each of these facilities there is of course an initial onboarding visit that must occur. We do have as much prior planning as we can but there are several details unique to each facility that our teams must deal with. Where to park, how to gain access, introductions to key people and the big one locating all of the pumps to be serviced. That makes the first visit the most time-consuming and least efficient engagement. Fortunately, we are nearing the end of our initial onboarding and each subsequent visit will build upon the experience of the prior and we expect things to become progressively better as we improve on hiring, training and deploying our personnel and manage travel costs. The biggest area of improvement we see is in staffing and staffing costs. In the beginning, the overarching objective was to please the client. We are known for our premium concierge level services. We get the job done, we do things right and we do it the first time. To ensure this at the beginning, we erred on the side of overstaffing projects. As we settled into the workload and cycles of visiting our contracted sites, subsequent visits will benefit from rightsized teams, more experienced technicians and firsthand experience with the facilities where these teams work. Additionally, and potentially even more importantly, our having used the first year to build our national network of biomed technicians. Our traveling teams were often bigger the first time around because of our regional technicians not being in place. Going forward, when it's time for annual inventory and preventative maintenance, the work will be more organized and will have even greater familiarity with each site that has already been matched with one of our regional technicians. A last point on this, the national network of technicians we are building is an asset that extends beyond the GE relationship. Our biomed technicians are not always locked into a single site. They are locally mobile and will often cover multiple sites. This means that as we gain experience and efficiency, they can and will be used to provide services at locations outside of the GE contracted facilities. We have opportunity in areas to add new business that will absorb the capacity of our regional technicians and add more technicians to geographies where we will win additional business. Each geography will be supported by the surge capacity of our traveling teams. The flexibility of this structure to be lean with the workflow warrants and to be able to surge into parts of the country to satisfy one-off or periodic customer needs aligns very well with our concierge model of service. We have been making steady progress throughout 2023 to put the biomedical services model into place and we believe the benefit will continue to show into 2024 in both the top and bottom line. At this point, I would like to turn the call back over to Rich.

Thanks, Carrie. After completing the first three quarters of 2023, I continue to be very pleased with our performance and I am excited about InfuSystem's future potential. We promised execution. And in 2023, we're delivering strong revenue growth and have started the process of fine-tuning around that revenue, improving our efficiencies and our operating margins. Looking forward, I expect the execution story in 2024 will advance to include material improvements in our operating returns. We are still in the planning phase but as Barry and Carrie explained, we are steadily increasing our efficiencies and expect these trends to continue. For the time being, we expect that Biomed and Wound Care will be our primary growth drivers. We do expect to see incremental growth across nearly all of our activity lines in 2024, but the strongest drivers will be these two. And while we are always interested in learning about material new growth opportunities, we believe our attention going into 2024 will be best focused executing on our continuing opportunities in Biomed and Wound Care. In Biomed, this means completing the GE onboarding and then adding incremental and most likely smaller projects to our growing national network of technicians. In Wound Care, this will mean continuing to place hardware into the channel and working with our joint venture partner Sanara to open that channel to the distribution of the joint venture's Advanced Wound Care products. Both of these opportunities will continue to scale and they will become significantly more accretive in 2024. Both have tremendous remaining potential and both are expected to be material contributors to our top and bottom line growth for years to come. Operator, we are now ready for questions.

Thank you. We will now begin the question-and-answer session. Our first question comes from Brooks O'Neil with Lake Street Capital Market. Please go ahead.

Good morning, everyone and congratulations on the strong results. I have a few questions. I guess, I'd like to start by focusing on your two growth businesses. It sounded like in facilities where GE has equipment that you're primarily focused on servicing GE. And I'm curious is the pipeline of incremental opportunities beyond GE really building. Can you give us any color on that? And did I hear you correctly that where GE has the presence you're primarily focused on them?

Yes. So where GE has a presence we're definitely focused on them, right? So they don't have a contract for just the pumps they have contracts for everything in that hospital. So we wouldn't want to kind of step on their toes. I think as far as incremental opportunities outside of GE and beyond GE we have a team that's going to be their job is selling the biomedical services into non-GE facilities, which there's roughly 2,000 or 3,000 beyond GE's purview. We've been purposely holding off on that because we wanted to establish the team where they were working on hiring out the challenges from a logistics standpoint and be ready. And we knew we had to execute on GE first and foremost. Now we're not starting to get to a more stable space and even more so in the first quarter. Once that happens then we can start bringing in non-GE facilities. But if we had done that too early we would have fielded on both sides.

Sure. That makes total sense. I appreciate that color. Let me turn to Wound Care. I guess I'm not as familiar as maybe I should be with the lease arrangement that you referenced and the dynamics there. So if you could give us a little bit of color on what that is and what's going on there that would be great. And then as well if you could give us a little more color on how things are going with the joint venture with Sanara that would be extremely helpful too.

So on the lease side we're leasing equipment directly to customers and through a distributor, a large distributor. So we lease their equipment. Barry can get into how we recognize the revenue in a second, but it's core devices. There'll be some Genadyne devices coming in soon too. We lease them we book them as a sale effectively. They put them into the skilled nursing facility the long-term care facility and they sit there and they effectively own them once we ship them. And Barry, I don't know if you want to talk about how we recognize.

Yes. It's basically just equipment sales where we get the payments over 36 months the lease one qualifies for what's called the sales-type lease accounting. Again we're booking revenue. The cost of the equipment to us is our cost of sales. So it's just like any equipment sale. We just wait to get paid. There is a small cost of capital component built into us. We recognized a little bit of interest revenue and the revenue line over the 36-month period, but it's not very much.

And then on the Sanara piece we are starting now. The team is now - all the back-end systems are effectively done. There's still something to do but the team now has a pipeline with physician groups to go out and start placing the BIAKOS and high call products from Sanara, and we're going to start seeing that pretty soon. I think, we're still expecting it to be kind of real and significant at the end of next year. But there'll be some products that start going out the door here very soon hopefully by the end of this year or very early next year.

Great. Can you help me understand if there is an overlap between the Sanara partnership and the placement of these negative pressure devices in nursing homes, or are they relatively separate opportunities as you see it today?

I believe the placement of the leases is distinct to begin with. It's primarily a single channel through a distributor. The positive aspect is that once our equipment is integrated, that relationship should grow, allowing us to introduce Sanara products into the same nursing homes and long-term care facilities. We should be able to integrate those products in those facilities, not in every case, but there should definitely be some synergies.

Interesting. Let me ask one last question, I apologize. I have a sense that there are some mobile operators in the Wound Care business today that are I think having some pretty good success. Have you seen that? And is there any opportunity for you guys to interact with mobile operators or do you see this as being primarily focused on nursing homes and what I might call fixed site locations?

Brooks, do you mean in mobile operators you're talking about the traveling physician groups?

Yeah. And I just have a sense that there are people who have bands that put negative pressure devices in there and go around not just operating on nursing homes, but maybe the patients in multiple nursing homes in a community or that kind of thing. I think that opportunity is growing pretty fast since I've gotten.

We refer to those as traveling physician groups. These are doctors contracted by various facilities, rather than being employed by any specific one. This represents a significant opportunity, possibly one of the largest we've seen, since there are so many across the country. Although they tend to be regional, having access to these groups allows us to service numerous skilled nursing and long-term care facilities, as these facilities usually do not hire a full-time wound care doctor. This is certainly a major opportunity, and we are already working on building relationships with these groups. We expect that when we start to see real revenue next year, they will certainly contribute to that growth.

Yeah. Great. Okay. Thanks for taking my question.

Thanks, Brooks.

Our next question comes from Alex Nowak with Craig-Hallum. Please go ahead.

Hey, good morning, everyone. So the bolus of Wound revenue in the first three quarters of the year that's because you placed a lot of these systems. So is that recurring 36-month payment going to start to kick in more in future quarters and that helps with margins and kind of treat that like a consumable play. I'm just trying to think of all the systems that you placed so far like this is going to be a longer-lasting benefit over the next few and next three years?

I believe we recognize the revenue immediately. We will also sell consumables, although that constitutes a much smaller amount. For example, if we have $1 million in leases for the quarter, consumables might be around $100,000 or even less. This is the consumable aspect we expect to see in the near future. It's important to note that we have a significant number of leases in the first three quarters, but that doesn’t mean we will stop; leasing will continue to be part of our forecasts indefinitely. We are still securing leases, and our pipeline is robust. While we won’t speculate on the timeline for these leases coming to fruition, our sales representatives are actively selling leases outside of our distribution agreement every day. This means we won't experience sharp spikes in revenue every quarter for an extended period, but we will keep placing more leases.

Okay. All right. No that makes sense. And I know we've talked about this in the past, but the revenue from the Sanara JV when can we start to say that's contributing to top line in a meaningful way. Is that a 2024 time period?

Yes. The leases were an integral part of the joint venture, so we can make that clear now. Any future revenue we generate will be reflected on our top line, and the joint venture serves primarily as a purchasing mechanism that allows us to share the profits created within the supply chain.

Okay. Okay. Got it. Got it. All right. That makes sense. So then the gross margin, it's been impacted in the last couple of quarters here and you walked through all those sort of operational improvements you're going to be making. So, that's very helpful. I guess as you get into the middle of 2024, do you get back to a high 50s gross margin or is it really we got to wait until end of 2024 or 2025 until we can start to see the leverage there?

Yes, I’m not sure we will return to the high 50s gross margin. Keep in mind that some of the additional business has a lower gross margin, such as biomedical services, for example. The positive aspect is that it doesn't significantly increase our general and administrative costs. From an EBITDA margin perspective, we are getting close to the 20% margin, and we expect to surpass that at some point next year as we continue to improve our efficiency in delivering those services.

Okay. Got it. And then on the revenue guide, I appreciate the conservatism. There's a lot of factors that play here outside to control. So, what's at a level that we can beat. But on the flip side, 11% growth that gets you to the lowest four it would essentially put your Q4 at the lowest quarter of the year, which based on the commentary I don't think would be necessarily correct. So maybe just the puts and takes there? I mean it seems like more like 12% 13% growth is more the likely scenario.

Yes. So I think I think you're right that we shouldn't have the lowest quarter of the year in the fourth quarter. I would look at the 11-plus percent is that we just moved the floor up, right? So we still expect to beat that number. I can never guarantee a number, but we should be able to beat 11-plus percent. How much more we beat it by? Is there's timing issues? Are there other leases that come in that replace, what happened in the third quarter and prior quarters? I think Barry went through the $500,000 in GE just on the timing of the onboarding of new devices and the leases in Q3. Outside of that, I don't have line of sight into anything else that's going to bring us down that far. But we've also had the experience in the last two years where things that we didn't have line of sight into, hit us in the fourth quarter that we didn't expect, right? We had Omicron in December of 2021. Last year, we had the supply chain issue that we had an order for and couldn't get the devices out the door. So we're just giving ourselves some space. So, if something like that happens, we can still hit the number, because that's one thing, that we're going to do is we're going to hit numbers when we put them out there. We just want to make sure, we can account for things that we don't even know, yet.

Totally understood and great to hear. Appreciate the effort, thank you.

Thanks, Alex.

The next question comes from Jim Sidoti with Sidoti & Company. Please go ahead.

Hi, good morning and excuse me – Thank you for taking the questions. So first one on SG&A. You don't typically see a company grow the top line 17% and have lower SG&A. Now I know, you did reduce some of the sales teams slightly in 2023. But were there any other one-time expenses in 2022 that haven't come back? And do you expect to continue to be able to leverage this SG&A line in 2024?

Yes. So there are some seasonal things. So Q1 is a little bit higher in the selling cost as some of our sales meetings and some of our shows and things, we do. So you should expect that to come up a little bit. I think that the stock comp bounces around, a little bit. So you have to be careful about that. You'll be able to see that amount in the adjusted EBITDA table, so you can kind of pull that out of the sort of the trends if you will. I think that's our theme is to try to leverage the fixed cost built into G&A as best we can, by growing a little faster on the top line. So I think you should hope to see that we can improve margins somewhat, by leveraging our SG&A.

All right. And then can you talk a little bit more about, how you're preparing with Sanara. Obviously, you're getting the pumps out there in 2023. But have you started training with those people or are you ramping up for anything specific in 2024? Just give us some color on how that all plays out.

The team is well-prepared and ready to proceed. They have been building the pipeline for several months, especially after obtaining the necessary accreditation and licensing earlier this year. The team is now starting to discuss the products in the market. We have set up all the back-end systems, including the specific details of the documentation required for doctors. This work is largely complete, allowing our representatives to engage with the product again and pursue deals in the pipeline. We have already seen a couple of patients begin using supplies from Sanara, and as we continue to roll this out, we expect acceleration to happen relatively quickly. However, sales cycles can take six to twelve months, which is why we anticipate significant growth towards the end of next year. We do expect to see some revenue early next year, as the team is prepared. Additionally, our representatives have already started discussions with traveling physician groups, so when we are ready to initiate, we believe things will progress smoothly and rapidly.

So just to be clear, so now that you have these pumps out there, you do expect them to generate some type of service and consumable revenue in 2024 for the patients, who are using these pumps. Is that correct?

Yes. Yes that's correct. I don't think it's a big number. I think it's hundreds of thousands of dollars, not millions of dollars for the pumps that are out there today. The hope is that, as we add more equipment in the market the consumable piece drives up with it, but it's not millions of dollars in '24, it's a relatively small number.

Okay. All right. And then assuming that things play out the way you're saying and you do see some decent revenue growth with margin expansion that should translate into better cash flow. When the cash flow does start to improve, what's going to be the priority? Is it debt pay down? Are you going to look at other opportunities? What do you think regarding cash generation?

Sure. Yes. So I think, our priority is still to grow the business to feed the business where we have to. When there are devices to buy with the money or acquisitions to make, then we'll look at, is it debt? Is it stock buybacks? And it's what we've done in the past, right? It's opportunistic. If we think the stock is a good value, then we'll go buy some stock back. You can see in the third quarter, we paid down debt with it, write a couple of million dollars. So there's a variety of factors, but I think the priority is still number one to invest in the business when we have to. If we have a window of opportunity where we don't have to invest in the business, we'll look at buybacks or paying down debt.

All right. And then with regards to GE, how many more folks do you think you need to bring on to service all their equipment?

We're probably down to getting regional technicians in place in certain geographies. It's a couple of dozen people. It's not a ton of guys.

So you're about 80%, 90% done with the staffing?

Yes, I think that's a fair assessment.

Okay. All right. Thank you.

Thanks, Jim.

As we see no further questions, this concludes the question-and-answer session. I would like to turn the conference back over to Rich DiIorio, the CEO of the company for any closing remarks.

I want to thank everyone for participating on today's call and we look forward to our call in the spring to discuss our fourth quarter and full year results. I hope everyone has a great day.

The conference has now concluded. Thank you for attending today's presentation. You may all now disconnect.