InfuSystem Holdings Inc (INFU) 2012 Q1 法說會逐字稿

Welcome to the Q1 earnings call. My name is John, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I'll now turn the call over to Mr. Jonathan Foster. Mr. Foster, you may begin.

Good morning, everyone, and welcome to InfuSystem Holdings first-quarter 2012 conference call. This is Jonathan Foster, Chief Financial Officer. With me on the call today are Ryan Morris, Executive Chairman, and Dilip Singh, Chief Executive Officer.

The Company issued its Q1 2012 earnings press release yesterday evening. It is posted on the Company's website at www.InfuSystem.com. The release is also available on most financial websites. Additionally a Web replay of this call will be available on the Company's website for 30 days.

Except for the historical information contained, the matters discussed in this conference call are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those predicted by such forward-looking statements. These risks and uncertainties include general economic conditions as well as other risks detailed from time to time in InfuSystem's publicly filed documents. The Company has no obligation to update the forward-looking information contained in this conference call. While discussing our performance we will refer to certain non-GAAP measures such as EBITDA, which is not considered a measure of financial performance under generally accepted accounting principles.

Now I'd like to turn the call over to our new Executive Chairman, Ryan Morris. Ryan?

Thank you, John and good morning, everybody. On April 24 the concerned InfuSystem stockholders consisting of my fund, Meson Capital Partners, Boston Avenue Capital and (inaudible) Capital Partners working with the prior Board of Directors reached a settlement that resulted in changing 5 of the 7 Board members as well as the CEO. Negotiating this significant change was truly a remarkable achievement for all parties involved in the process and it ultimately speaks to the common collective nature of the discussions as well as everyone's desire to see InfuSystem succeed.

Our reconfigured Board has extensive experience in both healthcare and finance. We have already begun to set the tone for future transparencies and the importance of creating shareholder value at the top. Our new Chief Executive Officer, Dilip Singh, enjoys a wealth of turnaround experience. The Board is confident that he will develop and implement a growth strategy and [that] operational initiatives to generate sustainable growth and profitability in the upcoming quarters. Our new CFO, Jon Foster, who also has vast turnaround experience will play a key role in implementing several key policy initiatives.

As Executive Chairman I look forward to working with both the Board and the whole management team and being part of the renewed success of our Company. Though the Q1 results presented today predate our involvement with the Company I would just like to share a couple of items that highlight our philosophy of shareholder alignment and value creation.

First, the newly appointed directors will receive zero cash compensation. Rather, they are to be compensated exclusively with options which [strike at $2.25], which was the price of the stock when we took office. Second, I as Executive Chairman firmly believe in this Company. 2 weeks ago I acquired through my fund, Meson Capital Partners, over 1 million shares also at $2.25 from the former CEO of InfuSystem who wished to make a clean break and undertake his new endeavors.

I will let our future results speak for themselves but please know that our actions to date reflect the commitment and sincerity with which the new Board views the importance of shareholder alignment.

I would now like to turn it over to our new CEO, Dilip Singh.

Thank you, Ryan. Good morning, everyone. Before providing perspective on our future plans and actions I first want to thank our InfuSystem family for (inaudible) remarkable transaction was nevertheless a stressful one for our employees. Uncertainty will do that.

Therefore, it makes me extremely proud that our employees and operational management generated important topline revenue growth in the midst of a broad and Board and management changes. The first thing I learned in joining the Company and meeting with our employees is that they take a great deal of pride in the service they deliver to our customers and their patients. And at the end of the day, that is what our business is about.

Our employees are the most important assets. Their loyalty which I've seen in the last 4 weeks is outstanding.

Moving forward, let me share with you our goals as we undertake our mission. We intend to address issues and opportunities in our business model -- strategic, operational, and financial -- wherever they need addressing. Secondly, restore and build the Company's credibility with investors, employees, business partners, customers, and all our other stakeholders. And thirdly, create solid long-term value for a company we all deeply believe in.

I firmly agree with Ryan's statements regarding our dedication to shareholder alignment and creating value. I place a high priority on developing operating plans focused on improving performance in our core business areas, and further fully integrating and realizing the operating synergies attendant to the Company's acquisition of First Biomedical Inc., FBI.

Initially, we are focused on stabilizing the Company and maximizing cash generation, thereby establishing a solid core foundation to sustain the Company over the long term. You can also expect to see these cost-saving initiatives in the near future including some that are already in effect. These operational items are the first steps in making a broader strategy designed to achieve long-term sustainable growth and profitability.

Simply put, we want to be the supplier of choice in the markets we serve. Our goal is to enhance customer service solution that make it easier for various partners, channels and customers to rent, lease or buy new and reconditioned pumps with just-in-time inventory which is essential for the marketplace.

There clearly are a number of other significant one-time and recurring opportunities for organic growth as well, as we enter the other vertical market disciplines and in time expand our footprint globally. We look forward to sharing some of these opportunities with you in the very near future.

Jon Foster will discuss Q1 results in great detail momentarily. Suffice to say we are pleased to report meaningful revenue growth.

Q1 revenue was $14.3 million, up 11% over the same percent last year. EBITDA exceeded $1.6 million. This is a good start to the year but we hope to do even better in the future.

In conclusion, I am encouraged by our employees' enthusiasm and our topline revenue growth in the first quarter of 2012. As we move forward in 2012 and execute on our operational plans and cost-saving initiatives, I am excited about the Company can grow the topline revenue while improving EBITDA and ultimately the bottom line.

With that, I will turn the call over to Mr. Jonathan Foster, who will discuss our financial results in more detail and after which we will open the call to your questions. Jonathan.

Thank you, Dilip. Good morning, everyone. For the first quarter of fiscal 2012 as Dilip just mentioned, revenues were up $1.4 million or 11% from the first quarter of 2011, to $14.3 million. This is due to 3 factors.

First of all, locating business at new larger customer facilities with high patient counts. Secondly, revenues generated from continued penetration into our existing customer facilities, and lastly the resolution of the oncology drug shortage which makes our pump delivery system available to more individuals in need.

Moving on to gross profit. This was $10.4 million for the first quarter of fiscal 2012, up 15% from $9.1 million in the prior year period. The increase in revenues was the main factor for the $1.4 million increase in gross profit between the periods. Gross margin was 73% versus last year's 70%, up slightly. 2 factors contributed to the increase in the gross margin. First of all, we've improved vendor contracts which contributed to the improved margins and, secondly, we had a slight decrease in our depreciation.

Turning to SG&A, this was $10.9 million for the first quarter of 2012 or up 24% from $8.8 million in the prior fiscal period. As a percent of revenues, SG&A was 76% for the latest quarter compared with 62% in fiscal 2011. 2011 numbers excluded non-cash intangible asset impairment charges. The major factor contributing to the increase of $2.1 million in SG&A was that we had professional fees and other expenses of $1.5 million related to the activities for the settlement agreement entered into with the concerned stockholder group as described in the 8-K we filed on April 26.

Finishing over the income statement, we reported other loss of approximately $600,000 consistent with the $0.5 million loss a year ago, the slight difference being due to higher interest expense. Our income tax for the quarter was a benefit of $197,000 compared to a benefit of just $146,000 from the prior period. All of this led to a net loss of $915,000 which is equal to $0.04 per diluted share versus last year's first-quarter net loss of $171,000 equal to $0.01 per diluted share.

EBITDA for the first quarter of fiscal 2012 was $1.6 million compared to $2.4 million a year ago. Excluding the one-time fees I just mentioned, EBITDA would have been $3.1 million. We use EBITDA as a means to measure the Company's operating performance. We have a full reconciliation of EBITDA, a non-GAAP measure to net income in our press release issued yesterday evening. The Company defines EBITDA as earnings before interest, taxes, depreciation, and amortization and is, as you know, an internationally used indicator for a Company's operating performance.

Now let's move on to our financial condition. At the end of the quarter we had a cash balance of zero as of March 31, 2012, and long-term debt of $21 million. This excluded our current portion of $6.3 million. We had availability of our -- on our revolving credit facility of $2.4 million.

Subsequent to the period ended March 31, 2012, we have also entered into the Fifth Amendment to our credit agreement which focuses on the following key areas. The changes in the composition of our Board of Directors as a result of our recent changes does not constitute a change of control under the credit agreement. Secondly, we changed the maturity date to July 1, 2013. It also permits exclusion of certain expenses pertaining to the recent settlement with the concerned stockholder group, addition of a minimum liquidity covenant of $1.5 million at the end of each day and $2 million at the end of each month. And lastly a monthly [ticking] fee of 1% of our outstanding term loan and on our revolving credit facility beginning August 2012.

Now we do intend to refinance our debt prior to maturity in order for us to maintain sufficient funds for our operations and alleviate the burden of these additional fees. In addition, we believe the combination of our normal cash and revolving credit facility is sufficient to fund our current operation of working capital needs for the next 12 months.

We ended the quarter with accounts receivable day sales outstanding DSO of 53 days which increased over this time last year due to the increase in revenue that we talked about earlier coming late in the quarter. Our day sales in inventory increased to 25 days due to [opportunistic] used pump purchases.

Our allowance for doubtful accounts was up slightly at $2 million but improved as a percent of revenues from 14.8% to 14.1%.

Overall, networking capital [stayed] at $1.7 million or 12% of revenues versus $1.3 million or 10% of revenues a year ago. Net cash provided by operations for the quarter was less than $100,000, down $2 million from the prior year period due to increased costs as described earlier for SG&A. Cash used in investment activities for the quarter was $1.3 million compared to $2.4 million in the prior period. The decrease is primarily due to a decrease in capital expenditures which included a small asset acquisitions in the first quarter of 2011.

Cash provided by financial activities for the quarter was approximately $400,000 compared to $1.5 million used in the prior year. The increase is primarily related to [withdrawals] and revolving credit facility of $2.5 million. All this leads to a decrease of about $800,000 in our cash balance.

In summary, as Dilip stated earlier, the latest quarter continued our growth in revenues and, excluding onetime charges that we've mentioned, EBITDA as well. With that, let me turn the call back over to Dilip for a few brief moments.

Thank you, Jon. Let me conclude by reminding and once again sharing with you all the 3 key objectives we have set for myself and my management team and the employees of InfuSystem. We intend to address issues and opportunities in our business model, restore and build the County's credibility, and create solid, longtime, sustainable growth and profitability.

With that, we now welcome questions from all of you and once again thanks for joining us on this call.

(Operator Instructions).

We are ready for the questions. Go ahead, operator.

Dennis Van Zelfden, Brazos Research.

Good morning, gentlemen. Before he left, Sean hired an investment banker to explore ways to increase shareholder value which included, I think, a potential sale of the Company. Can you update us on that status?

Yes. I'll be more than happy to update you on that. We are continuing with Houlihan Lokey to consider their strategic alternatives and present that to us. As we go ahead and review their findings, we will be more than happy to make the announcement in terms of the next steps. But I can tell you that there are no definite conclusions which have been drawn at this time.

Okay, but in your speech you had talked about a lot of avenues for growth and so on and so forth. Does that mean though that you would not sell the Company if someone offered you a reasonable price?

So, again, Dennis, the Board and the management team is focused on maximizing shareholder value. Houlihan Lokey continues to advise us in the strategic alternatives with respect to this. And as I said before, no definite conclusions have been drawn at this time.

To the extent there are any changes in the Company's strategic posture or in Houlihan Lokey's role we'll be more than happy to make the announcement and update you. But at this time we are considering all the strategic alternatives available and having discussions with Houlihan Lokey.

Okay. Fair enough. In the press release you talked about you have already implemented some cost cuts. Can you tell us about any potential annual savings from that?

Thanks for asking that question. Here is what we are doing. We are focusing on optimizing the current operations and looking for opportunities in the cost savings area. We are hands-on and have already met with our management team and are defining those initiatives at this point in time. The areas which we are looking is to seek opportunities to create synergies and integrating activities where possible but the details of the cost savings and growth opportunities, we will be more than happy to share with you in the near future, most probably at the end of the second quarter and some of them may be towards the end of the third quarter.

Okay. Last question. You also mentioned in the press release that there may be some more tag ends of proxy-related expenses in the second quarter. Do you know about how much that would be?

Jon?

Roughly I think as we mentioned in the Q that there's going to be roughly $2.4 million in expenses as we currently estimate that relates to expenses, legal expenses, professional fees and severance costs. And we will update that number in the second quarter.

That is the amount in the second quarter or is that the total amount over the 2 quarters?

No, that would be second amount in the second quarter.

Okay. Thank you, gentlemen.

Michael Potter, Monarch Capital.

Congratulations on winning this long and hard-fought battle. I had a couple questions and I just wanted to continue with the prior caller's last question. We had $1.5 million in kind of proxy fi-related costs for Q1. Is that correct?

That is correct.

Alright, so all in we are going to talk -- we are going to be in at about $4 million?

That is our current estimate. $1 million of that goes with the former CEO's severance agreement. These are expensive undertakings on both sides of the fence, and right now we are going through the invoices and talking to our professional fees and we are doing our best to negotiate those downward in the best interest of the shareholders.

Seems like an awfully, awfully high number for a company of this size.

Speaking as a CFO, yes, I would definitely like to see the number lower, but from the standpoint of going through all the invoices and dealing with all of the professionals that were involved, it was a very complex process.

Okay. You -- we have an interim CEO currently. Can you bring us up-to-date or tell us what the plan is for a search for a permanent CEO?

This is Ryan Morris. I think I'll answer that. So Dilip agreed at first to be on for 6 months and this is a current commitment that we have right now. But it is not like we have a seer that Dilip is going to bail on us after 6 months or anything like that. So really it's -- we are going to evaluate things as time goes by and, certainly, at the moment I would say Dilip is exactly what this Company needs in terms of bringing in some operational discipline at the top. And so it's a perfect solution right now.

But certainly as we determine what the best course of the Company is over the next 4 or 5 months that's something we are going to be considering. But there is no search going on at the moment but we will update you whenever we get to that point.

Okay. You mentioned here with regards to having a just-in-time inventory plan. Do we have an inventory issue with our current line of products?

No, but the market's demands are increasing in terms of reducing the inventories on their shelves and we want to make sure that we can optimize our inventory management systems, the process and procedures and provide proper training to our personnel here. That we should be seen as a leader, that when the market needs any kind of pump then we become the logical choice for our customers in terms of providing them the depth and breadth of the inventory of these pumps from off-the-shelf availability for InfuSystem.

What is our current turnaround assuming your customer does not have the appropriate pump on their shelf?

We can turn around the pumps in 24 hours literally.

Okay, so, realistically is it realistic for us to reduce that shipment process to less than 24 hours?

Not really. But also the maturity process really starts, Michael, from the time we actually put the purchase order for our goods, and put them on our shelves and then move them from our shelves to -- on a consignment basis in the third party payer model to the shelves of our customers, and getting them back here and cleaning them and recalibrating them and bringing them out again. If you look at it, it is a pretty complex inventory process which we are trying to optimize.

You mentioned multiple times your kind of 3-pronged approach of what you are looking to achieve in the near term here. You mentioned credibility multiple times, which is terrific, obviously a great deal of work needs to go into that. What credibility or what's your plans for getting credibility with the shareholders, who obviously like yourselves have had to endure this what has gone on at this Company for several years. Dilip, do you plan to get out there on the road and meet with the shareholders any time soon?

Well, Michael, again, thanks for asking that question. I think credibility comes in threefolds. One is full transparency and fairness, in terms of informing and communicating with the shareholders and stakeholders, which are the employees of the Company and customers and partners.

Secondly, no surprises and give the news as it is. Sometimes it is good news but sometimes it could be challenging news. And third is coming to know the shareholders and informing them of the -- yes, the answer is yes to your question that I would definitely like to meet the shareholders and the stakeholders. I have met all of the stakeholders here which are my employees. Next is to go after and meet the customers and partners and then, concurrently, I am not putting the shareholders where I put -- whose asset this Company is in the last in the queue, but definitely meet with them also. But transparency, total transparency, fairness, on-time availability of information. Open channel for providing the information and letting them know the good or the bad news.

Terrific. Well, I'll look forward to meeting with you soon.

Thank you very much, Michael.

Thanks, guys.

Joe Munda, Sidoti & Company.

Good morning. Just real quick, on the last call they talked about the drug shortages affecting overall revenue. Are you guys still experiencing that?

From a standpoint of our customer base, no, we are not seeing that.

Okay and then just a follow-up on the last caller. Do you guys expect another $2.5 million you said in legal expense in the second quarter?

That also includes $1 million of severance to the former CEO.

Okay. Is it going to end in the second quarter? Or do you expect further charges to continue throughout the year?

From a standpoint of -- that should be the meat of it. I don't really expect much bleeding into the third quarter.

Okay and my last question is, in terms of the gross margin is this a sustainable level going forward or is this a one-off scenario?

I think it is sustainable. Now, it's -- in all of the healthcare business there is continuing pressures from a standpoint of bidding and negotiating insurance contractors always pressure from that standpoint. That gets back to what Dilip mentioned earlier, where we got to look internally to optimize on cost savings and inventory turnover. So it is a continuous game.

Okay, all right. Thanks.

(Operator Instructions). Boris Peaker, Oppenheimer & Co.

Good morning. I just wanted to know what percentage of your pump use is for [private view] in colorectal cancer? It seems like that would be probably the majority but I just wanted to know if you know the number. Hello?

Yes, well, I would say we are at north of 75% of that number. For competitive reasons I don't want to give the exact number but we are north of 75%.

And do you discuss new treatment paradigms with the physicians [regular]. I'm just curious to know what their thoughts is of Xeloda in the near-term and when it becomes a generic drug.

So, I mean this is certainly a question that I looked at a lot before making investment here. I mean you don't want your reason to exist just to disappear. Xeloda has actually been on the market for I think about 10 years now, and it has had relatively stable market share. I think they have actually been shifting their marketing dollars more towards breast cancer treatment now and that is where it has been growing.

My understanding on when it becomes generic, and that was a concern of mine too, was that I thought it has been over 10 years, it should be coming generic relatively soon. My understanding is they have actually been doing some tweaks to the drug or adding other ingredients over its lifetime and, as such, extending its patent life.

So I don't believe it actually becomes generic for quite a long time. Although I could be mistaken on that. But I believe that is the case. So there (multiple speakers) doesn't seem to be -- doesn't seem to be a threat.

And I'd just be curious and maybe we can take it off-line because it is going to be generic within a year so I don't remember the date myself here so I'd just be curious to know at least the research that you have done in colorectal cancer for Xeloda. But speaking beyond colorectal cancer, are there other indications or uses for your pumps that you see in the near future to expand the market outside of colorectal cancer?

Yes. We are considering other vertical markets and building a strategy around it and, hopefully, by the end of the second quarter when we get into that call, we will be able to discuss more about the areas which we are entering. Because at this stage, we cannot tell you more because of competitive reasons. But yes, we are definitely considering the use of the pumps and other vertical healthcare markets.

Okay, well, I look forward to that update. Thank you very much for taking my questions.

Dennis Van Zelfden, Brazos Research.

Just one follow-up question here. Does Meson or anyone else there contemplate purchasing stock from any of the other former directors or officers like you did with Sean?

As part of our settlement agreement, where we changed 5 of the 7 Board members, there was a standstill at 5%. So I purchased the maximum number of shares that I could purchase under the [standstill]. It was 4.99% or something like that. And so I apparently am tapped out from that point of view. Other members of the group certainly could if they choose to which would be Boston Avenue and Kleinheinz. But I am not allowed to, under settlement agreement.

Okay, thanks. That's all I had.

(Operator Instructions). We have no further questions at this time. Do you have any final remarks?

Yes, this is Dilip. On behalf of Ryan and Jon here and my team, we thank you for joining the call. I'd like to extend an invitation to all the shareholders either on this call or who are not here to join us for our Annual Meeting of stockholders which will be held on Friday, May 25, 2012, at 31700 Research Park Drive, Madison Heights and that meeting is commencing at 10 AM.

So, please, this will be a good opportunity to meet some of you and have further discussions on the kind of important questions which and very good questions which you all raised during the call. Once again thank you all and look forward to seeing you individually.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.