InfuSystem Holdings Inc (INFU) 2020 Q2 法說會逐字稿

Good morning, and welcome to the InfuSystem Holdings, Inc. Second Quarter Fiscal Year 2020 Financial Results Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Joe Dorame with Lytham Partners. Please go ahead.

Thanks, Rocco. Good morning, and thank you for joining us today to review the financial results of InfuSystem Holdings, Inc. for the second quarter of 2020 ended on June 30, 2020.

With us today on the call are Rich DiIorio, President and Chief Executive Officer; and Barry Steele, Chief Financial Officer. After the conclusion of today's prepared remarks, we'll open the call for a question-and-answer session. If anyone participating on today's call does not have a full text copy of the press release, you can retrieve it from the company's website at www.infusystem.com or numerous other financial websites. Before we begin with prepared remarks, I would like to remind everyone certain statements made by the management team of InfuSystem during this conference call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Except for the statements of historical facts, 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 31, 2019.

Forward-looking statements speak only as of the date the statements were made. The company can give no assurance that such forward-looking statements will prove to be correct. InfuSystem does not undertake and specifically disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

Now I'd like to turn the call over to Rich DiIorio, President and Chief Executive Officer of InfuSystem. Rich?

Thanks, Joe, and good morning, everyone, and welcome to our second quarter 2020 earnings call. I would like to thank you all for taking the time to join us this morning and hope you and your families are staying safe as we continue to deal with COVID-19. Now on to our second quarter results. What an exciting time to be in InfuSystem. We were able to follow up a strong first quarter with a second quarter that had record numbers for net revenue and adjusted EBITDA. Revenue in the quarter was $26 million, an increase of 31.8% versus the second quarter of 2019. And adjusted EBITDA in the quarter was $8.5 million, an increase of 87.2%. We continue to execute on our strategic plan, growing the top and bottom lines as we carefully navigate through these unprecedented times.

The team has been relentless in pursuing operational efficiencies as we continue to develop our 2 service platforms. Both platforms are seeing more opportunity than ever before, and we are making steady progress on our strategic plan to grow each platform by layering on additional therapies.

As we discussed in May, COVID has impacted our platforms and services in different ways. Our core oncology service continued to grow in the second quarter as our team provides the gold standard in service and safety to our 2,100 oncology customers. We saw just under 150,000 treatments in the quarter, and it was the ninth quarter in a row of sequential growth. There were 3 elements contributing to this growth.

First, we have continued to win increased market share. Second, we have an increase in the number of treatments performed by providers. And third -- the third factor contributing to the increased oncology service revenue in the quarter is our improved revenue cycle management.

Every quarter, our revenue cycle efficiency improves, resulting in a higher percentage of treatments we provide delivering results to the bottom line. In 2020, one of our major initiatives is rolling out our case management service, which both improves the workflow for clinics and places InfuSystem in a position to obtain the billing and paperwork we need more timely and more consistently.

We see that positive impact of such process improvements in both our top and bottom line. Our DME platform, specifically pump sales and rentals has seen increased demand as many hospitals turn to us to help them prepare for the potential of treating large numbers of COVID patients. We shipped more pumps in the second quarter than in any other quarter in our history, as we continue to provide a service that is nimble and adaptable to the market. We expect to see the rental portion of this demand remaining strong for the next few quarters as COVID doesn't seem to be going away as quickly as we all hoped. Our pain management service saw a dramatic decrease early in the quarter as the number of elective surgeries in the U.S. declined in order to redeploy hospital resources to treating COVID patients.

The decline began in late March and continued through June. The good news is that as soon as states began to open in July, our patient counts saw an immediate rebound. In fact, through the first half of 2020 due to our steady progress in winning adoption of additional surgery centers, we treated a similar number of patients as we treated during the same period in 2019. I believe it's a very positive sign regarding industry adoption of our pain offering that our team was able to overcome the decline in existing volume by adding a significant number of new facilities. The future remains strong for our pain program as more and more physicians are seeing the value in doing their part to address the opioid crisis in the U.S. by changing their practices to avoid the introduction of oral pain medications. Our new partnership with Cardinal Health and Negative Pressure Wound Therapy is off to a slower start than we first thought as our access to hospitals is still limited. There are, however, many good signs for the long-term potential of this therapy. First, we have confirmed pent-up demand is in the marketplace for the formidable combination of the Cardinal device, matched with the unparalleled service levels we provide via our ITS platform.

Second, on the revenue cycle side of this therapy, we are seeing very solid numbers across a good cross-section of third-party payers, and in some cases, the reimbursements are higher than we initially expected.

And with that, I'd like to turn it over to our CFO, Barry Steele, to provide a review of our financial results.

Thank you, Rich, and thank you, everyone, for joining the call today. As Rich mentioned, during the quarter, we overachieved our expectations in about every financial metric. The pandemic created increased demand for our services due to the urgent need for infusion pumps and other services that we provide mainly through our DME services segment. This demand related to both actual and anticipated COVID-19 patients and was similar to what we experienced at the end of the first quarter.

If you look through the COVID-19-related bump, however, you will see signs of solid growth in net revenues and profitability running throughout the entire organization. Net revenues for the current year second quarter of $26 million represented an increase of $6.3 million or 32% over the prior year second quarter. ITS segment net revenue growth of $3.2 million or 26% was nearly matched by the net revenue growth of the smaller DME services segment, which increased by $3.1 million, a whopping 42%. ITS growth was mainly due to favorable market penetration in the oncology business, resulting from an improved competitive landscape similar to that realized over the past year.

By the way, the ITS segment also grew by over 10% sequentially from the current year's first quarter. Pain management net revenues, which are part of the ITS segment, were flat during the current year second quarter as compared to the prior year due to continuing growth in the customer base being offset by reduced service volume caused by COVID-19 reductions in elective surgeries during the quarter.

The DME services segment net revenue growth was led by increased sales of infusion pumps, which were higher by nearly $2 million and increased rental revenue, which increased by $1.2 million. Most of the DME Services segment growth was the result of the COVID-19-driven increase in market demand.

The higher revenues in both segments translated into both higher adjusted EBITDA, which increased by about $4 million or 87% to $8.5 million during the quarter, and an improved adjusted EBITDA margin, which grew to 32.6% during the current year quarter compared to 22.9% in the prior year, demonstrating the company's strong ability to convert net revenue growth to improved earnings. These improvements were driven by both an improved sales mix favoring higher-margin revenue and fixed selling, general and administrative cost coverage, offset partially by a higher provision for accounts. The improved mix was associated with relatively higher net revenues for the better margin ITS segment as well as higher ratios of rental and preowned equipment revenues in the DME Services segment.

The bad debt provision increase was mainly driven by an accrual adjustment, which reflected slower customer collections performance and an extraordinary difficult comparison to the prior year provision, which included income related to an accrual reversal during that period.

As in the first quarter, we did not incur significant extra costs associated with COVID-19. During this year's first half, operating cash flow totaled about $4.3 million, which was about the same as the prior year. The current year period was impacted by higher working capital associated with our COVID-19 preparedness activities and the significant increase in net revenues.

The positive operating cash flow, combined with net borrowings from our bank facilities totaling $2.5 million, along with the use of $2.1 million in our cash on hand at the beginning of the year supported net capital expenditures of $8.5 million, which were $2 million higher than the prior year first half. This increase in capital expenditures was primarily comprised of increases in our infusion pump fleet and represented an acceleration of our current year capital plan timing due to the COVID-19 preparedness and other market demands.

Our financial position once again improved during the 2020 second quarter. As of June 30, 2020, our ratio of funded debt to adjusted EBITDA decreased to 1.77x, down from 2.07x as of March 31, 2020, and 2.11x at the end of 2019. Our total available liquidity at the end of the quarter, which totaled $11.7 million, consisted of $5.5 million in availability on our revolving line of credit and $5.7 million available under an open capital expenditure facility and $500,000 in cash.

The amount represented a decrease from our available liquidity of $14.5 million at the end of the year's first quarter and $20.9 million as of December 31, 2019. This decrease, which was expected, was mainly due to the COVID-19-related capital expenditure acceleration, working capital investments and amortization of our term debt.

We estimate that our liquidity position will improve in the second half of this year as our working capital position starts to level off, and operating cash flows overtake our capital expenditures during the back half of the year.

With that, I'll turn it back over to Rich.

Thanks, Barry. On our last call in May, I said it was still too early to understand the financial impact COVID-19 would have on our business, and I did not reiterate our original 2020 guidance. Although there are still variables in the marketplace that are outside of our control, we do feel that we have enough data and a better understanding of any possible impacts on our business to resume providing guidance for the remainder of 2020. Our revised guidance ranges for 2020 are as follows: net revenue has a new target range of $94 million to $97 million. This is up from the previous target of $89 million originally provided late last year.

Adjusted EBITDA has a new target range of $23 million to $26 million. This is up from the previous target of $22-plus million originally provided late last year. Cash flow from operations which had a previous target of $16.5 million is being raised to a range of $16 million to $18 million. As you can see, our targets have been all raised from their original numbers, as we believe our core oncology business will remain strong, our DME segment will continue to meet higher-than-usual demand for sales and rentals, and our pain program should fully recover as states continue reopening later this year.

These ranges are wider than we would normally expect, given that we are halfway through the year but this is due to the continuing uncertainty created by COVID. We believe the final number will be solidly in the middle, but if the risks and opportunities break heavily in one direction or another, we could finish the year closer to either end of the ranges.

One final note, we will be participating in both the LD Micro and Sidoti virtual investor conferences in September. Please contact Joe Dorame for additional information. And with that, I am happy to answer any questions.

(Operator Instructions) Today's first question comes from Brooks O'Neil with Lake Street Capital Markets.

Congratulations. I'm thinking there's a good possibility you guys are going to participate in the Lake Street virtual conference in September too, but well, we might have to talk about that offline.

We can make that happen.

Right. So let's see. I was curious, obviously, the strong performance in the DME segment related to the COVID, you commented in your press release it's unlikely to sustain. How much of the forward guidance is based on sort of forward contribution from DME? Can you help break that out a little bit so we could kind of get a better understanding of that?

Yes. I'll take that one. As we pointed out in the guidance in the press release, it's about $3 million to $4 million for the full year. So you had a little bit less than that, about $2.5 million sort of COVID-related impacts for the first half and then for the full year, it's $3 million to $4 million as part of our range.

Great. And Barry, can you say, is there any sort of split in that forward related to rental? I think Rich maybe said, he thought the rental business would remain strong for a couple more quarters? Is the bulk of the $1 million to $2 million in the forward guidance related to rental? Or do you think you might see some incremental equipment sales here in 3Q and 4Q as well?

Yes, there could be some big orders for sales. But it's mainly what we have sort of driving the mill, the range of the target is rental benefit. It's carrying on from things -- first half.

Yes. Great. And then can you just talk a little bit about the cancer business? Obviously, you've benefited -- you've executed superbly and you benefited from the exits from the market from some of your competitors? What is your outlook for the cancer business going forward? Do you think you can continue to grow that business going forward?

Yes. So I think that we still have some growth opportunities just by winning new business plus additional new therapies that physicians are using our pumps for. So I think that you'll see continued growth. I don't think we're going to sustain 20% growth in oncology in the future. But there will be growth for years to come without a doubt. As more and more people get diagnosed and the baby boomers get a little bit older that actually will drive some organic growth on its own.

Great, Rich. And are you seeing -- I mean historically the cancer business has been somewhat concentrated in particular cancer types? Are you seeing a broadening of the use of continuous infusion in other types of cancer? Or is it all sort of growth in your historical core market?

Yes. So we've absolutely seen a change over the last 5 to 8 years, probably. So if you go back probably 8 or 10, about 95% of our patients were colorectal patients. That number has dropped to about 2/3. So there's definitely a change. And that's just new indications for existing drugs, new drugs and new protocols, kind of all add up and just change the mix a little bit.

Great. And then maybe you talked a little bit about what you're seeing in the negative pressure business, but that's an area that you've obviously signaled as tremendous potential. I understand completely the disruption related to COVID. But can you just talk a little bit about what -- the response you're seeing in the marketplace? And how you maybe envision that in the back half of 2020 and into '21 beginning to become a significant business for you?

Sure. So one thing we see. So it's a challenging service to talk about with customers over the phone or even with Go To Meetings and Zooms. So for sure, we need the access to kind of propel it forward. But we've definitely seen pent-up demand for both the Cardinal device and a higher level of service in the marketplace. And that's really where we feel by combining the 2 companies and what we each offer there's some demand out there that's some low-hanging fruit that we should be able to get to the end of this year and in next year as we grow that business. But we certainly think it's going to be a growth driver in '21, '22 and beyond, for sure.

Great. And then just one last one, and I appreciate all the color. My sense is you believe there's significant operating leverage particularly in negative pressure that there's really no need to add a lot of infrastructure to take on that business. Can you just help us to make sure we understand that dynamic and how you see it going forward and impacting the company and the business?

Sure. So that's the whole basis of the platforms is that we already have the infrastructure built, especially on the ITS side. So we already have our revenue cycle team in place. We already have our clinical team, our biomed team and the logistics. So to add some more patients and add some more devices to those teams, you don't have to go out and hire a whole new team. You can just supplement what you already have with some new individuals. And even on the sales side, we can leverage the team we already have in place. They already understand the service. They understand what -- the levels that we expect, what we provide, whether they sell into oncology or negative pressure really doesn't matter.

It's just a different customer. So we can leverage the staff that we already have in place in a lot of different ways.

Great. That's fantastic. Congratulations on the strong first half, and I'm looking forward to the second half.

And our next question today comes from Douglas Weiss with DSW Investment.

Congrats on such a good quarter. Let's see. So typically, the second half of the year is a little stronger than the first half. I mean that's been the case for the last couple of years. Do you think -- excluding the COVID effects, do you think that will continue to be the case? Or is it just -- is this a different kind of cadence because of COVID?

So we definitely saw some -- a COVID bump in the second quarter. Not all of that will recur in the back half of the year, especially some onetime sales that we had. Pain, we believe, will come back in the second half of the year. And historically, that's a busier time for that business. Anyways, as patients have already met their deductibles and are more likely to have elective surgeries, so they wait until the end of the year. And then the flu season typically hits us in the fall. There's some debate kind of nationally on what will happen with the flu season. As more people are wearing masks will it be lower than normal or will it be just as bad with the COVID and that will -- it will all kind of balance out.

So we won't have all the onetime sales necessarily we could. We're not counting on that necessarily. As Barry said, it's mostly the rentals of the DME fleet. So it's a little bit tougher to target, but it should be a pretty strong second half of the year.

Okay. I mean -- and I realize it's a tricky year, but it just -- the guidance looks conservative given that, I think, ex COVID, you did $6.5 million of EBITDA this quarter. So if I just -- if I assume that improves a little bit through the year, it looks like you're sort of on the upper end of your guidance.

Yes. I would say that ex COVID we're closer to a little bit below $6 million.

So the COVID effect was entirely in this quarter, I guess, what you're saying.

Say it again.

I guess there wasn't any -- yes, the COVID effect was entirely this quarter. Okay. Okay. Then on -- let's see. So I guess you talked sort of in general about the next -- I know it's early days, but deep vein thrombosis being something that could follow negative wound care.

Would you work with Cardinal also on that initiative? Or is it just too early to say?

It's possible. They have -- I think they're the market leader on the sequential compression side. So that's one of the partners out there for sure. It's a fairly fragmented market, especially in ambulatory surgery centers. Cardinal is really strong in the hospital market, the acute care side. So it just depends on which market we want to go into, but that's certainly an option with Cardinal.

And is there anything you could say at this point about the partnership with them in terms of how it's going? Or obviously, you'll have more color as we get out of COVID.

Yes. So we do -- we work with those guys a lot, even though Negative Pressure is suppressed a little bit because of COVID. But I will say that they've been a tremendous partner from top to bottom. Everything from -- on the sales side and partnering with our team and their team, even on the operations side, working through logistics and kind of fine-tuning the system between the 2 companies. So we couldn't have asked for a better partner so far.

Okay. And then kind of an accounting question. But in terms of the CapEx, previous to your sort of resegmenting your reporting, it used to be that CapEx included, it wasn't really a true CapEx number because it's had an operating element and that there was the sell-through of DME equipment. Is that still true? Or is that more of a true CapEx number where that's just sort of pumps that are being invested in for multiyear use?

Yes. That actually is true, and it was acute in this quarter. If you looked at the cash flow statement, you can see that within our investing section, there's pretty significant proceeds from sales of equipment. That said, it doesn't hit the cash flow until we actually get paid. So you'll see that tick up as we go through the year as we get paid for some of those large sales. And that's limited to where we sell product out of our rental fleet. So it has to stay down in investment.

That's the cash from disposals that's in the investing section.

Yes. That's right.

So it really hasn't changed. It's still the case that some of that CapEx is really more transactional.

That's right. One thing that's changed it was more this quarter, but again, a delay to the timing of the actual cash collection.

I mean is it possible to break out sort of in rough numbers, how much of that CapEx is long term in nature? And how much of that is more transactional?

I would say that a significant piece is the more transactional type.

(Operator Instructions) Today's next question comes from Aaron Warwick with ES Capital.

Fantastic results. Congratulations on that. I hope your families are well. And one thing I wanted to note before I get into the serious business here is on the last conference call, whoever transcribed had me down as Aaron Brockovich. And I thought that was funny. So thought about calling under that name today, but I'll go with my actual name, Aaron Warwick. On a serious note, in May, when we talked, I said it looked like you guys could do $95 million in revenue and $23 million in adjusted EBITDA, and you guys said that was too high.

And now in August, that's on the low side of your guidance. So I'm just wondering what changed between May and August that gets you to these numbers now?

Yes, Aaron, by the way, I saw the transcript, and it was definitely a good laugh when I saw Aaron Brockovich. As you can imagine, they butcher my name pretty often, too. So yes, to answer your question, you're right. So at the time, we didn't believe that the COVID impact was -- an opportunity would be as big as it is. So it turned out that, that opportunity was bigger than we thought and has also lasted longer than we really thought or, to be honest, hoped for as a society. So that's really what drove the change between saying, "Hey, we can -- I don't think we'll get to 95% and that being in the middle of our range."

I would add to that, that in pain management, we bounced back a little quicker than we thought as well.

Good. Good. And I'm glad, I mean, obviously, a bad situation for the country, but glad that you're able to take advantage of it and to help out in those situations. And obviously, what you're saying there with the $3 million to $4 million in the adjusted EBITDA due to COVID makes sense from what you -- how you answered that question. I guess to drill down a little bit more on that, this pandemic is going on longer than we hoped and even, I would say, broader than we hoped. And so now we're starting to see -- starting to go to some of the smaller cities and towns. I know I talked to a health care provider in a town that's probably, I don't know, a top 40 or top 50 city in the U.S., so not huge, and they told me yesterday that the ICU was like a war zone. So I guess as COVID has gotten to these smaller cities and towns, what are you guys seeing now with that? Is there still opportunity? Or is that opportunity kind of slowed down a little bit as it moves out of those bigger markets that you're already, were involved in like New York and Boston and so forth?

Yes. So I think the opportunity in the smaller towns is still there. If ICUs are full and the hospitals are full, they're going to need infusion pumps, just obviously at a smaller scale. Right, a big hospital in New York City is going to be much different than a small rural hospital. So the opportunity is still there. There was some good-sized onetime sales. And that's what drove the $3 million to $4 million in adjusted EBITDA that we may not see in future years, but we may see some in the back half of the year from the more rural smaller hospitals.

On the Negative Pressure Wound Therapy and your relationship with Cardinal, everything sounds good there. And I appreciate giving us some context about the difficulties of that getting ramped up. It obviously makes sense without your ability to get into the hospitals. And so I'm assuming then in your guidance, even though you mentioned maybe you pick up a little bit of low-hanging fruit at the end. I'm assuming that, that's really built into your guidance. Is that an accurate way to think about it?

It's pretty small. There's something there, but small.

Yes. Okay. Final question for me then. You've talked numerous times about -- on the ITS side, bringing on different services besides the pain, oncology and now when you have the opportunity here post-COVID, Negative Pressure Wound Therapy. What time frame are you looking at right now to be adding another service? And just in general, how should we be thinking about that over the next maybe 6 to 12 months?

Yes. So if you'd asked me in January, I would have said that we would have a new therapy in 2020 with everything going on with COVID and the team really focused on the health and safety of our team and still getting devices out to patients that need it. That's been pushed back a little bit. Just practically, it's tougher to get done. But in 2021, for sure, we'll have a new therapy. And the hope is that we'll roll them out on a fairly consistent basis when they make sense, when we think we can execute on them and drive some revenue and growth. But I wouldn't necessarily expect it this year. It's still possible, but it's more likely early next year. Yes.

So I don't want to tie too much of this, but I mean, you said for sure, 2021, so that sounds to me like you perhaps got some serious prospects maybe in some talks with people. Is that fair to say?

I think that's fair to say.

And ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the conference back over to Rich DiIorio for any final remarks.

Thank you. On behalf of the entire InfuSystem team, I'd like to thank you all for the continued support and for joining us today. I look forward to talking with you again when we report our 2020 third quarter results. Please stay safe. Thank you, and have a great day.

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.