InfuSystem Holdings, Inc.
Q3 2020 Earnings Call Transcript

Published: 12 Nov 2020

[Operator:]

Good morning and welcome to the InfuSystem Holdings, Inc. Reports Third Quarter Fiscal Year 2020 Financial Results Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Joe Dorame, Managing Partner of Lytham Partners. Please go ahead.

[Joe Dorame:]

Thank you, Gran. Good morning, and thank you for joining us today to review the financial results of InfuSystem Holdings Inc. for the third quarter of 2020 ended on September 30, 2020. With us today on the call are Rich Dilorio, President and Chief Executive Officer; and Barry Steele, Chief Financial Officer.

[Rich Dilorio:]

Thanks, Joe and good morning everybody, and thanks for joining our call today. I hope that you and your families remain safe and well as we continue to deal with the COVID-19 pandemic. Today we will cover our third quarter results, our revised 2020 guidance and we will provide an update on our business as we move toward year end and prepare for 2021. After our prepared remarks, we'll be happy to answer any questions you may have. Now on to the results. Our third quarter 2020 results demonstrated strong performance from our business once again, as we continue to execute on our mission to facilitate patient care from the clinic to home. Revenue in the quarter was $25.1 million an increase of 16.9% compared to the third quarter of 2019. And we delivered $7.5 million in adjusted EBITDA a 46% increase over last year. Operationally our focus remains on growing the top-line, while cost infrastructure. And during the third quarter we generated $8.5 million of free cash. Barry will provide more details later in his review on our liquidity and cash flow results. As we saw in the second quarter our core oncology business was not materially impacted by COVID-19 as volumes and revenue remain strong. As most of you know, we provide the gold standard in service and safety to approximately 2,100 oncology customers and this critical mass provides important advantages that has enabled us to grow during these challenging times.

[Barry Steele:]

Thank you, Rich, and thank you everyone for joining the call today. As Rich mentioned, during the quarter, we overachieved our revenue and profitability expectations while becoming cash flow positive and reducing balance sheet leverage. Net revenues for the current year third quarter of $25 million, represented an increase of $3.6 million or 17% over the prior year third quarter. ITS segment net revenue growth of $2.2 million or 16%, outpaced the net revenue growth of the smaller DME services segment, which increased by $1.5 million. However, the DME services team was not to be completely outdone by the ITS segment as this represented an 18% increase from the prior year third quarter. ITS growth continued to be driven by favorable market penetration in the oncology business, resulting from an improved competitive landscape.

[Rich Dilorio:]

Thanks, Barry. We're very pleased with our third quarter and year-to-date performance and the continued strong momentum as we begin the fourth quarter. Our core business continues to perform well with approximately 16% revenue growth this year, not including the $2 million to $3 million tailwind from COVID-19 and that's even after the impact that COVID has had on slowing the growth of our pain management and wound care Sales. With continued growth of our core oncology business, rental revenues from our infusion pump fleet remains strong. And the progress we are making in pain management and wound care therapy segments, we are increasing our 2020 financial guidance ranges by tightening our revenue expectation toward the high end of prior guidance and raising our expectations on adjusted EBITDA and operating cash flow. Our new financial targets for 2020 are as follows. Revenue for the year is now anticipated to be in the range of $96 million to $97 million compared to the prior range of $94 million to $97 million. Adjusted EBITDA is now expected to be in the range of $26 million to $27 million up from $23 million to $26 million and our anticipated operating cash flow for 2020 is now expected to be in the range of $18 million to $19 million up from the $16 million to $18 million range. InfuSystem has turned the corner and we believe that our trajectory as we exit this year is a good indicator of our expected performance in 2021. Early indications are for another solid year with double-digit growth from a variety of revenue sources and this does not factor in any significant COVID-19-related infusion pump revenue like we had in 2020.

[Operator:]

Our first question today will come from Brooks O'Neil with Lake Street Capital Markets. Please go ahead.

[Brooks O'Neil:]

Good morning, guys. Terrific quarter. I appreciate the significant positive drivers in the business. And I also appreciate the obvious concerns related to the uncertainty of COVID and people's response to it. It looks to me like there's some implied conservatism in Q4 guidance or the implied guidance. And I'm just curious if you could just sort of walk through where you're most concerned as we look forward to the end of the year?

[Rich Dilorio:]

So I don't think we're overly concerned with the last six or seven weeks of the year. COVID has bounced back pretty significantly in the last couple of weeks. So the impact on pain management is still a little bit to be determined. But we do know that a lot of hospitals and clinics have told us that even if elective surgeries come offline, it won't be to the extent they were in the spring and early summer. Access to hospitals in Negative Pressure is still a little bit slow, but our core oncology business is still strong. DME revenue is still strong. I don't think it's overly conservative. But I also don't think that there's anything major that we see in the next six or seven weeks that could deal real loss either.

[Brooks O'Neil:]

Great. That's fantastic. Were you surprised that Negative Pressure is now out of competitive bidding? And do you think that's a meaningful positive or just sort of an ongoing sort of state of the Negative Pressure business?

[Rich Dilorio:]

So I wouldn't necessarily say we were surprised by it. I think overall it's a positive for anyone in that market because there's -- as of now there's no reduction in reimbursement. So that's obviously a positive. And if they go back to another round of competitive bidding it'll be a while. So we have some runway here for a while without worrying about our reimbursement levels, which will -- instead we can worry about going and winning some market share instead. So overall it's a plus. We didn't get any cut and we didn't have to worry about winning it or anything like that. So complete positive for everybody in the market.

[Brooks O'Neil:]

Yes. That's great. So it sounds like the relationship with Cardinal continues to progress well. The opportunity with Enteral Pump sounds good. Could you just comment on that? And then talk a little bit about whether we should expect to see any additional new product platforms in 2021, or are you going to be focused on building out the Negative Pressure and pain businesses primarily?

[Rich Dilorio:]

Yes. So the relationship with Cardinal has been great. They've been a fantastic partner on the Negative Pressure side. And the Enteral Pump relationship started sometime late in the second quarter into the third quarter. We were able to help them out in some accounts that they needed some help with. And so that's grown which is great. As far as new therapies my expectation is we'll have another one next year. We would have been a guarantee probably this year without COVID. We will still roll one out even with the focus on Negative Pressure and pain but those two therapies pain and Negative Pressure are going to be a huge part of our growth for next year. So that will be the focus of the team for sure. But rolling out a new therapy, we'll make sure we do it at the right time and we don't distract the team and make sure that we're able to execute on not only the new therapy but the existing ones as well.

[Brooks O'Neil:]

Great. And then I just have one more and I appreciate Barry's comments on the capital position. But as you look forward to 2021 and the growth opportunities you have, do you feel pretty good about your available capital?

[Barry Steele:]

Yeah. I think we feel good about our available capital as well as our ability to raise more if we need it. I don't think that we need it in a very short-term but we're feeling pretty good right now. We'd definitely turn the corner and be able to generate cash.

[Brooks O'Neil:]

You bet. That’s fantastic. Thanks a lot for taking my questions.

[Barry Steele:]

Thanks Brooks.

[Operator:]

Our next question will come from Alex Nowak with Craig-Hallum Capital. Please go ahead.

[Alex Nowak:]

All right, great. Good morning everyone. Kind of, going off of Brook's comments on the Negative Pressure Wound business. I know it's early, but can you just give a few case examples of that business with Cardinal, where and which facilities are you seeing the early success in? And how was a wound facility handling their therapy before you? And now after when you and Cardinal came in what does their wound care business starting to look like in that practice?

[Rich Dilorio:]

So all the businesses coming out of acute care hospitals, most of the wins if not all are from the competition. So we're winning market share from existing competition in the market. I think we have a lot of relationships in hospitals with our oncology business. It's been around for 30 years. And obviously Cardinal is extremely strong in the acute care market. So between the two of us, we have a lot of relationships and hospitals that we can walk into and start the discussion. So that's really where it's come from where it started. We didn't have to plant any new seeds or anything. It was customers we already knew that have used one of us and are happy with the service. So now they're using in a lot of cases Cardinal for their inpatient and InfuSystem for their outpatient wound therapy.

[Alex Nowak:]

No, that's great. And then on the oncology business, what do you think about the growth there? I mean, obviously, you're pegging the growth for next year more on the pain and the Negative Pressure Wound Therapy, which makes sense just given your market share already in oncology, but is there still share to be taken there? And you also mentioned you're seeing more prescriptions per clinic. So are there any new drugs or other indication expansions coming along for the cancers that we should be watching for?

[Rich Dilorio:]

Yeah. So let me take the second one first. So from a new indication standpoint there's nothing that we see that's dramatic in the market in the pipeline anywhere. There are a lot of smaller orphan drugs that are delivered via continuous infusion. We've had a pickup of those over the last couple of years. Janssen came out with a drug and drawn a blank on the other company. But there has been a couple of drugs, because we already own that market it's an easy transition for the customer to just continue to use our pumps for more indications. So as those roll out that will certainly help. The -- I'm sorry what was the first part of the question? Drawn up blank on the first part.

[Alex Nowak:]

It was about taking share as a potential there.

[Rich Dilorio:]

On oncology. Yeah, yeah. So oncology is going to grow mid-single digits 5%, 6%, 7% for a long time. It's not going to be the 20% we saw when our competitor exited the market or effectively get out of the market. But it's going to be a solid growth driver for us. It throws off a lot of cash to fund new therapies and our investments. And it will continue to grow just at a steady consistent pace of probably mid-single digits. The real growth is going to come from the new therapies. And for 2021 specifically it will be Negative Pressure and pain for sure. Even if we add a new therapy next year just the time it takes to roll it out and launch it and get customers on board will take a while. So the 2021 revenue is going to come from pain and Negative Pressure for the most part.

[Alex Nowak:]

Okay. That makes sense. And going back to the pain business, in wound therapy of Cardinal, which is certainly helping out it sounds like. In the pain you're doing this obviously yourself. So maybe speak to what needs to be done from either an investment standpoint, or is this just a pure block-and-tackling effort to double the business the next couple of years in pain?

[Rich Dilorio:]

Yeah. So it's a little bit of both. I think the service is really well established. The team has done a great job building a model that is super competitive in the market. We're making a small investment in an additional sales rep. But that's really it for investments. And then a couple on the back end side to support the team, but it is a lot of blocking and tackling. We would have had -- pain would had a phenomenal year this year if it wasn't for the elective surgeries coming offline in the second quarter. But that's out of our control and we'll just kind of roll with it. So what we would have expected this year we expect to see in 2021. Even with the COVID rebound, hospitals have stocked up on PP&Es. So they don't have to pull it from other spots specifically the ORs. They don't have to pull their team away necessarily. So even if it gets affected, it's not going to be what it was before. I mean, I think everybody in the elective surgery world probably saw an 80% decline if not more in their inpatient cases. We don't expect to see anything near that in the future, and we haven't seen it. So overall we think we're going to be in a lot better off position, even if COVID sticks around which although it looks like it's here to stay, it looks like there's some good news on the horizon too as far as vaccine. So next year, I expect great things from those team – that team. I think they're ready to do it ready to execute and it will be fun to watch next year.

[Alex Nowak:]

No that's great. And then just two quick questions for Barry. The first one, looks like better SG&A control in the quarter. Is there juts anything to call out there? And then second, it was mentioned in the prepared remarks about better collections with your oncology customers that are on this case management service platform. Maybe any metrics about what sort of better reimbursement level or better ASP you're getting from those customers versus those who aren't on that service?

[Barry Steele:]

Yeah. So on the first question, well, let me take the second one first. In the reimbursement world we're seeing a better ability to get our – actually harvest collections from existing treatments. So we have – or we don't always collect every single treatment and we're doing better and better with the improvements in the revenue cycle process to get more. It's hard to really say a specific amount, but it's hundreds of thousands of dollars that we're seeing is an opportunity and we're starting to get some of that. On SG&A, you did see in the quarter a little bit higher spend just mostly related to just adjusting our short- and long-term comp programs. We also saw on the opposite side of benefit from decreased bad debt adjustments that we had in the quarter.

[Alex Nowak:]

But you feel pretty good about the SG&A level kind of on a go-forward basis maybe some small increases but nothing too drastic?

[Barry Steele:]

Yeah. There – I think that as we grow this company from the $100 million range to something much, much more, we see as a possibility. There'll be some investments that we need to make, but there's also at a higher scale some leverage, I think we can get not only in just our existing infrastructure already being in place, but improving processes that we can take out cost and just more of a scaling benefit.

[Alex Nowak:]

Okay. Thanks, got it. Thank you very helpful.

[Operator:]

Our next question will come from Douglas Weiss with DSW Investment. Please go ahead.

[Douglas Weiss:]

Hey. Good morning. I wanted to just touch base quickly on bad debt, which is really low. And I guess, you sort of alluded to it in the last answer, but could you just talk a little more generally about whether the current quarter rate which is basically zero is a one-off? And also, just in general why that debt has come up down so much over the last couple of years?

[Barry Steele:]

I didn't quite get the question is it – which metric are we talking about?

[Douglas Weiss:]

The allowances, the bad debt customer allowances.

[Barry Steele:]

Yeah. It hasn't been a real significant issue for us. We did see some degradation in some of our agings and part of the business early in the year and that's sort of reversed. And then we had on the DME side a little bit of degradation in our agings. We don't view it as necessarily things we can't recover from, but our accounting policies dictate that we make – put reserves in play. So again, in the first couple of quarters we had a higher levels, but compared to really tough comps in the prior year, because there were some reversals and then we had a partial reversal on one of our revenue streams in the third quarter, but still elevated level in the other part of the business. So I think that as we go through time, it will continue to be a very small ratio to our overall revenue.

[Douglas Weiss:]

I mean, I guess, because if I look back to like 2017 that was actually a pretty large line item. I believe in 2017 that was $5.6 million. So I was – and I know you shifted to more larger percent of your sales are now direct to hospitals, which I assume have very low default. But –

[Barry Steele:]

I think you're looking at accounting change, where under revenue recognition rules we don't we don't book things exactly the same way. The things are putting netted in revenue now that were not before.

[Douglas Weiss:]

Okay. Okay. That was the question. Then looking at 2021 in terms of what the right base would be to use and maybe in one quarter too early, but I know you had a couple of onetime events this year. I mean, when you – when I sort of think about growth in 2021 should I shave a couple of million off the starting point for onetime COVID effects?

[Barry Steele:]

Yeah. So what you saw in the guidance for 2020 is a $2 million to $3 million number which actually is a pretty similar number on the top line as well as the EBITDA line, because we're – a lot of it – we had a onetime sale in Q2 that was equipment that we already had depreciated almost fully. We have some costs to make it patient-ready. So that's one that won't necessarily return. That said, we see elevated levels and rentals and things that probably are – will repeat somewhat in 2021. So I think that when we kind of step back, we'll see that onetime sale in Q2 has really been a tough comp, but everything else probably as we compare 2021 to 2020, it will be more or less breakeven. Those effects will be equally in each year more or less.

[Douglas Weiss:]

Okay. So, basically it is a reasonable base to start with maybe $1 million.

[Barry Steele:]

Yes. Yes, I think that's right. I think that, as you look at growth for next year, it'll end up being not a huge consequence to us. There's a little bit of headwind obviously, especially in Q2, but it won't be a huge consequence.

[Douglas Weiss:]

Okay. On the enteral pumps, is that a potentially larger business, or is that just sort of a one-off?

[Rich Dilorio:]

So, we have other manufacturers' enteral pumps and it's a significant number from a rental revenue standpoint already. The relationship with Cardinal is new. We didn't have their devices before. It's potentially a big amount. I mean, it's not massive now, but it's certainly contributing to the numbers. So, it's something that when any time you can add a new device from a manufacturer or a company like Cardinal, it's always a benefit. So we expect it to grow over time for sure. I think right now, there were some pumps needed in the field that we sent out. But over time, we expect that relationship specifically on the enteral pump side to bear more fruit for us.

[Douglas Weiss:]

Okay. And then, how about your expectation for CapEx for the fourth quarter?

[Barry Steele:]

Yes you'll see it back a little higher than what we saw here in Q3. As I mentioned, we accelerated a lot into the first four months of the year actually. Again for -- less for -- pump for COVID patients, some for as soon as our business growth that we have. So, it will be back a bit higher, but not -- we'll end the year in that 15, maybe a little higher range. So clearly, we'll be generating cash in the fourth quarter.

[Douglas Weiss:]

Okay. All right. Thanks. That’s all I got. Good quarter.

[Barry Steele:]

Thanks, Doug.

[Operator:]

Our next question will come from Aaron Warwick with ES Capital. Please go ahead.

[Aaron Warwick:]

Hi guys, good morning. Glad, you’re doing well. I've looked to me like one of the most impressive things about your quarter was the $8 million plus in operating cash flow. And then, it looks like you used $7.5 million of that you paid down about 20% of your debt. Is that correct? And then, what should we expect going forward in terms of that cash flow number?

[Barry Steele:]

So yes, you're exactly right. We have revolving borrowings that were able to pay back then we had a billable cash up as well because we have some term debt out there as well. As we look at next year, and obviously, we have more coming to give you some guidance here, we suspect that we'll continue to generate cash, not quite as much as you saw here in the third quarter because that's more -- our cash generation for the current year sort of piled up in the third quarter because of the acceleration into the first half of the year of working capital growth and capital expenditures. We think that will still be cash flow positive next year as well.

[Aaron Warwick:]

I guess, the way that I'm reading it is, if you guys weren't choosing to grow, which obviously is a smart strategy at this point, you'd be throwing off a lot of cash. I mean that's kind of what's coming out of this quarter to me is that, a good way to look at it you think?

[Rich Dilorio:]

Yes. So I...

[Barry Steele:]

I think what I was -- go ahead go ahead.

[Rich Dilorio:]

So I think when you -- when we have times of growth, the cash will slow down a little bit. Times when we're not buying a bunch of pumps and supplies, you'll see us throw off a lot of cash and that will ebb and flow year-to-year and even within the year like we did this year.

[Aaron Warwick:]

Right. Right. Okay. Thank you. Can you tell me, I don't remember, what is the current run rate on the pain management business or revenue?

[Rich Dilorio:]

So, we don't break it out as part of the ITS segment with Negative Pressure in oncology. But right now, it's in the single-digit millions. And that's why we expect it to double and then double again. So, it will be double-digit millions here in the next couple of years.

[Aaron Warwick:]

Okay. Yes that's kind of what I was trying to get at is -- so when you say, double next year, I just got a number. I mean, I have no idea that there's $5 million now this year. You'd expect $10 million next year and then $20 million the year after that. Is that what you're saying, or are you saying, like $5 million extra next year and then $5 million after that again the next year? I'm just trying to figure out that guidance.

[Rich Dilorio:]

Yes. So, it's the first scenario. Yes, it's the first scenario, double and then double.

[Aaron Warwick:]

Yes. Yes. Okay. Okay. And then so, on the Negative Pressure Wound Therapy, over the next three to five years, if I'm reading your guidance right, it looks like you expect to get $30 million to $60 million of that. Is that -- am I reading that correct as well?

[Rich Dilorio:]

Yes. So that's a 5% to 10% of the addressable market of $600 million.

[Aaron Warwick:]

Okay.

[Rich Dilorio:]

As long as we can go out and execute -- yes as long as we can execute and customer adoption is what we think it can be, then that's what we're shooting for.

[Aaron Warwick:]

Great. Thank you, guys. Appreciate it.

[Rich Dilorio:]

Thanks Aaron.

[Operator:]

This will conclude our question-and-answer session. I would like to turn the conference back over to Rich Dilorio for any closing remarks.

[Rich Dilorio:]

Thank you all for participating on today's call and for your interest in InfuSystem. We look forward to sharing our progress on our next quarterly conference call, when we report our fourth quarter results in early 2021. Thanks and have a great day.

[Operator:]

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