InfuSystem Holdings Inc (INFU) 2018 Q2 法說會逐字稿

Good afternoon, everyone, and welcome to the InfuSystem Holdings Inc. Reports Second Quarter of Fiscal Year 2018 Financial Results Conference Call. (Operator Instructions) Please note, today's event is being recorded.

At this time, I'd like to turn the conference call over to Mr. Joe Dorame, with Lytham Partners. Sir, please go ahead.

Thanks, Jamie. Good afternoon, and thank you for joining us today to review the financial results of InfuSystem Holdings Inc. for the second quarter of 2018, which ended on June 30, 2018. As Jamie indicated, my name is Joe Dorame, and I'm with Lytham Partners. With us today representing the company are Rich Dilorio, President and Chief Executive Officer; and Greg Schulte, 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 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 the documents filed by the company with the United States Securities and Exchange Commission, including the annual report on Form 10-K for the year ended December 31, 2017. 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 Dilorio, President and Chief Executive Officer. Rich?

Thanks, Joe. Good morning, everyone, and thank you for participating in today's earnings call. I'm joined on today's call by Greg Schulte, our Chief Financial Officer; and Gregg Lehman, our Chairman of the Board.

After an eventful second quarter, we are pleased to report on the continuing progress of our strategic initiatives. As shown in the financial results released today, we are steadily growing our revenues, our gross profit and our cash flow. EBITDA has also continued to be strong in the second quarter with a $100,000 increase over the second quarter last year and a $2.2 million increase year-to-date. In addition to improvements in our operations, we have recently strengthened our banking relationship, resolved a highly disruptive shareholder dispute and convincingly won a contested proxy contest. All of this, we believe, positions us to deliver on our previously communicated 2019 goals of $80 million in revenue and $16 million in adjusted EBITDA.

Before continuing to discuss the second quarter, I'd like to reiterate our strategic initiatives. We are focused on accomplishing the following: first, providing the highest level of patient safety, clinical support and biomedical service to our oncology, infusion products and pain management customers and most importantly our patients; secondly, pursuing the right opportunities and improving our billing practices to ensure that we get paid in a timely manner for the services we provide; and third, to manage our pump fleet as efficiently as possible to rightsize our CapEx spend.

In the second quarter, we capitalized on the momentum of previous quarters and it's clear that our operating plan is working. We were able to increase revenues before the adoption of ASC 606, the new accounting pronouncement, by 5%. We also improved our gross profit margin, absent the ASC 606 adoption, from $10.3 million to $10.5 million. Both of these factors have resulted in continued strong cash flow. Our banking relationships, an indication of our financial strength, were bolstered by the amendment of our credit facility that we announced 2 weeks ago. This amendment has allowed us to resolve an outstanding shareholder issue and will provide additional working capital that we can use to invest in our state-of-the-art pump fleet.

A month ago, we held our Annual Shareholder Meeting and worked through a contested proxy, a battle which we won. As a result, we have entered into an agreement with and repurchased the outstanding shares from the activist shareholder that had been involved in the company for the last 5 years. This will allow us to move forward without that distraction to our business.

I will now turn the call over to Greg to discuss our second quarter financial results.

Thank you, Rich. Before going into detail on the quarterly results, I'd like to talk about the accounting change that Rich referred to earlier and other accounting-related issues. ASC 606 provides guidance on how companies recognize revenue. For the last several years, InfuSystem has reported its revenue on the income statement as gross of the provision for doubtful accounts or bad debt expense. Under ASC 606, revenue is now reported net of this provision, consistent with what we used to report as net collected revenue. Because InfuSystem adopted ASC 606 on a modified retrospective approach, after each quarter this year, we will be calling out the effect of the adoption in year-over-year comparisons of our financial results, since it will allow us to analyze revenues, gross profit and the provision for doubtful accounts on an apples-to-apples basis.

2018 results will show the revenue after the reduction of bad debt, whereas 2017's net revenue is without the reduction for bad debt and is shown on a separate line in the selling, general and administrative section of the income statement.

The effect of this change in the second quarter of 2018 was to reduce our reported net revenues by $1.4 million. Despite our reported net revenues being lower in the second quarter, our actual net revenues have increased before the impact of ASC 606. Also late last year, InfuSystem recorded significant items related to income taxes in impairment of intangible assets and pump write-offs. In addition to the significant noncash charges taken for tax expense and valuation allowances, we booked noncash charges for depreciation and amortization. Due to the lower carrying value of these assets, the pump and IT writeoffs in 2017 has the effect of decreasing the company's depreciation and amortization expenses beginning in 2018.

I would like now to discuss the results of the second quarter of 2018 in detail. Net revenues in the second quarter 2018 were $16.4 million, a $0.5 million decrease or 3% compared to $16.9 million in the second quarter of 2017. Net revenues were impacted by the $1.4 million reclassification from bad debt to net rental revenue during the 2018 period. Absent the implementation of ASC 606, total net revenues would have been $17.8 million, a $0.9 million increase or 5% from the same prior year period. In addition, net rental revenues absent the implementation of ASC 606 would have been $15.5 million, an increase of $0.6 million or 5% compared to the same period -- prior year period. And net revenues from product sales were $2.4 million, an increase of $0.2 million or 9% compared to the same period of 2017.

Gross profit for the second quarter 2018 was $9.6 million, a decrease of 8% compared to $10.3 million for the same period -- same year prior period. As a result -- as a percentage of net revenues, gross profit was 58% of net revenues in the second quarter of 2018 compared to 61% in the comparable prior year quarter. Gross profit was impacted by the $1.4 million reclassification from bad debt to net rental revenue during the second quarter of 2018. Absent the implementation of ASC 606, gross profit would have been $10.9 million, an increase of $0.6 million or 6% when compared to the prior -- same prior year period. With the implementation of ASC 606 in 2018, there is no longer an amount recorded for provision for doubtful accounts for the quarter as it is recorded against revenues. As such, bad debt expense decreased by $1.3 million from the second quarter of 2017.

Amortization of intangible assets for the quarter ended June 30, 2018, was $1.2 million, a decrease of $0.2 million compared to the same prior year period, attributable to previous mentioned asset impairment of some internally developed internal-use software projects that was recorded in the fourth quarter of 2017. Therefore, the related amortization of these projects no longer existed in 2018.

During the quarter ended June 30, 2018, selling and marketing expenses were $2.3 million, an increase of less than $0.1 million or 1% compared to the same prior year period. During the quarter ended June 30, 2018, G&A expenses were $6.3 million, a decrease of $0.2 million or 2% from $6.4 million from the quarter ended June 30, 2017. The decrease in G&A expenses versus the comparable prior year period was primarily due to decreases in capital lease retirement charges of $0.3 million and outside service expense of $0.2 million, partially offset by legal fees and shareholder costs of $0.1 million and employee compensation-related expenses of $0.3 million. The increase in employee compensation expenses was primarily attributable to a $0.5 million net increase in incentive bonus accrual, $0.2 million of salaries and related expenses and $0.1 million of stock appreciation rights and stock compensation expense. These increases were partially offset by a $0.5 million decrease in the severance costs.

During the 3 months ended June 30, 2018, we recorded other expense of $0.3 million, which was $0.1 million less than the prior year quarter, primarily due to decreased interest expense on lower debt balances. During the 3 months ended June 30, 2018, the company recorded an expense provision for income taxes of less than $0.1 million. The income tax provision relates principally to the company's state and local taxes and foreign operations in Canada. During the 3 months ended June 30, 2017, the company recorded a benefit from income taxes of $0.4 million. The net loss of $0.5 million in the second quarter of 2018 compared to a net loss of $1.1 million in the same period -- same prior year period, or a 54% improvement.

Adjusted EBITDA was $3.2 million compared to adjusted EBITDA of $3.1 million for the same prior year period. Net cash provided by operating activities for the 6 months ended June 30, 2018, was $4.8 million compared to cash provided by operating activities of $1.2 million for the 6 months ended June 30, 2017. This increase was primarily attributable to the cash flow effect of the operating improvements, resulting in reduced net loss from first half of 2017 versus the first half of 2018, net improvements in account receivable and the effects of noncash transactions and adjustments to net income, including deferred income taxes. Net cash used in investing activities was $1 million for the 6 months ended June 30, 2018, compared to cash provided by investing activities of $0.7 million for 6 months ended June 30, 2017. The decrease was due to a $0.7 million decrease in cash proceeds from the sales of medical equipment and a $1.2 million increase in cash used to purchase medical equipment, which was partially offset by a decrease in cash used to purchase plant and equipment of $0.2 million. The timing of the sales of medical equipment varies from year-to-year and accounts for the unfavorable proceeds year-to-date.

Net cash used in financing activities for the 6 months ended June 30, 2018, was $4.9 million compared to cash used of $5.3 million for 6 months ended June 30, 2017. As of June 30, 2018, we had cash and cash equivalents of $2.4 million and $9.2 million of availability on our revolving credit facility compared to $3.5 million of cash and cash equivalents and $9.2 million of availability on our revolving credit facility at December 31, 2017. Because of the excess -- success achieved in paying down the company's debt during the second half of 2017 and the first half of 2018, on March 12, 2018, our Board of Directors approved a stock repurchase program, authorizing the company to repurchase up to 1 million shares of the company's outstanding stock, subject to market conditions, the periodic capital needs of the company's operating activities and the continued satisfaction of all covenants under the company's existing credit agreement. On July 31, 2018, InfuSystem amended its credit agreement to allow for, among other things, a loan to the company for the repurchase of capital stock from a specific group of investors of $8.6 million and capital expenditure financing for the company for the sole purpose of purchasing medical equipment of $6.4 million.

Also on July 31, 2018, the company, an individual shareholder, the affiliates and a second shareholder entered into a stock purchase agreements for the purchase by the company of the shares of its common stock cumulatively owned by the sellers for an aggregate amount of $8.6 million. The purchase price was funded with the proceeds from the amendment to its credit facilities entered the same day.

With that, I will turn the call back over to Rich.

Thanks, Greg. I would like to conclude today's prepared remarks by thanking the InfuSystem team and letting them know how proud I am of their efforts. I have absolute confidence in our leadership team and their ability to continue to build on our momentum and deliver strong results for the remainder of 2018. We all know there is more to do, and I am excited to see what we can accomplish.

We would now be happy to answer any questions.

(Operator Instructions) And our first question today comes from Beth Lilly from Crocus Hill Partners.

I wanted to just get an insight into -- as you look at the business and what you think you're going to be able to grow on the top line and as you continue to expand the market and put -- bring the pumps into new markets, what type of expectation should we have in terms of the top line growth for the company?

Thanks, Beth. Great question. So I think we're still targeting high single-digit growth moving forward without any kind of unseen changes, positive or negative. I think we're pretty confident in that when you roll up all 3 businesses.

Okay. And would you say that what you guys have gone through this past 6 months has been a distraction in terms of your top line growth?

Yes. I would say that's an understatement. Yes.

Okay. And again, would you remind us expectations for EBITDA margins over the next couple of years, what you think you can achieve?

So I think, total EBITDA by the end of the year, we're targeting $14 million, and I think we're at $6.7 million, $6.8 million so far year-to-date. So I think we're marching towards that $14 million number. And then in 2019, by the end of 2019, we should be at $16 million. We're still confident in those numbers.

Okay. And on a margin basis then, would you remind me of what -- so that's over the next 2 years, but as you -- as this business is -- gets leveraged and is being run more efficiently, what EBITDA -- what type of EBITDA margin should we expect?

Beth, it's Greg. This is Greg. Obviously, as we approach 2019, we'll be moving to the 20% of top line. Obviously, we expect that to be accretive as we move beyond 2019 and better leverage our fixed cost. So we don't project -- we haven't projected beyond 2019. But that's -- we can expect, obviously, in the north of 20% at that point.

North of 20% EBITDA margins?

Yes.

Yes.

Our next question comes from Josh Jonas from Gabelli & Company.

I had a similar question. I guess, just on a sequential basis, I was just -- I thought between seasonality and some of the operational improvements that you've been making, that there would have been some sequential improvement from the March quarter. So I guess, I just wanted a little color on what happened there? Because it looked like it got slightly worse.

Yes. So we're up just a tick from $3.1 million to $3.2 million, between Q2 of this year versus last year. I think if you look at Q1 versus Q2, we're trying not to look quarter-to-quarter. There's lots of puts and takes during a turnaround, the ebb and flow of the numbers and some things we have to do. But I think if we look at it longer term, even for the first 6 months this year, we're up $2.2 million year-to-date versus the first half of 2017. I think that, that number is more significant to us. Up and down from one quarter to the next is -- during the turnaround period is a little bit tougher. But if we look at the bigger picture, we're still marching towards that $14 million this year and $16 million next year.

(Operator Instructions) Our next question comes from Michael Potter from Monarch Capital Group.

My first question, I think you just answered but second question would be on the pain side. I know you're not breaking out the numbers yet, but can you give us a little bit of color of how that part of the business is progressing?

Sure, Michael. So I think that business is really starting to gain some traction. We're continuing to add big teaching institutions. We're adding more and more accounts every day, every week, every month and more patients. So I think, as expected, it's a real growth driver for us. It's getting bigger every day. It's still too small for us to break it out, but we're very, very positive on the pain management side of the business.

How many accounts do we currently have? And how many, I guess, teaching institutions are we positioned in?

So I don't want to disclose the -- this for competitive reasons, the number of accounts. But there is a -- early on, there wasn't a lot of teaching institutions. Once we refined the program over the last few years, now we're able to take it in there and really drive the business that way. But we'll see more and more teaching institutions come onboard every day.

(Operator Instructions) And at this time, I'm showing no additional questions. I'd like to turn the conference call back over to Rich DiIorio for any closing remarks.

Thank you. And thank you, everybody, for your interest in InfuSystem. We appreciate you taking the time to learn more about the company, and we look forward to speaking with you after the conclusion of the next quarter. Have a great day.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for joining. You may now disconnect your lines.