Electromed, Inc. (ELMD) Q4 2019 Earnings Report, Transcript and Summary

Greetings, and welcome to Electromed, Inc.’s Fourth Quarter Fiscal 2019 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kalle Ahl of The Equity Group. Please go ahead.

Thank you, Donna, and good morning, everyone. Electromed's fourth quarter fiscal 2019 financial results were released yesterday after the market closed. A copy of the earnings release can be found in the Investor Relations section of the Company's website at www.smartvest.com. As a matter of formality, I need to remind participants that remarks made by management during the course of this call may contain forward-looking statements about the Company's results and plans. Such statements are subject to risks and uncertainties that could cause actual performance or achievements to be materially different from those projected. The words believe, expect, plan, intend, estimate, anticipate, should or could and similar expressions are words that are used to identify forward-looking statements, but their absence does not mean a statement is not forward-looking. In addition, any projections as to the Company's future performance represent management's estimates as of today, August 28, 2019. You should not place undue reliance on these forward-looking statements. We expressly do not undertake any duty to update forward-looking statements, whether as a result of new information, future events or otherwise. We ask that you please refer to the Company's SEC filings for further guidance on this matter. Joining us from Electromed this morning are Ms. Kathleen Skarvan, President and Chief Executive Officer; and Mr. Jeremy Brock, Chief Financial Officer. Kathleen will begin with some opening remarks, after which Jeremy will present a summary of the Company's fourth quarter fiscal 2019 financial results, and then we will open the call for questions. Now it's my pleasure to turn the call over to Kathleen.

Thank you, Kalle. Good morning, everyone, and thank you for joining us. We ended fiscal 2019 with strong outcomes. Our fourth quarter net revenue increased by 9.3% to a record $8.6 million driven by 10.1% growth in home care revenue. On a year-over-year basis, Electromed’s approvals, shipments and referrals all increased this quarter, reflecting ongoing excellence in our reimbursement operations and greater productivity from our field sales staff. Enhancing our sales force productivity has been a top priority. And last quarter, I discussed that our goal was to be at $750,000 to $850,000 in home care revenue per direct field sales employee in fiscal 2020. We were extremely pleased to see positive results this quarter ahead of schedule. With approximately $908,000 of annualized home care revenue per direct field sales employee, we exceeded our target range of between $750,000 and $850,000. We also came in well ahead of comparable figures of $669,000 for the third quarter of fiscal 2019 and $705,000 for the fourth quarter of fiscal 2018. Our sales force productivity clearly benefited from our March 2019 sales restructuring in which we narrowed our focus from five to four sales regions, paused our sales force expansion and executed better on clinical frequency and communicating SmartVest patient wellness feedback to clinicians. At quarter end, our field sales employees totaled 40 of which 34 were direct sales compared to 42 at the end of quarter three fiscal 2019 of which 36 were direct sales. Our plan is to peak at approximately 38 direct sales reps in first half of fiscal 2020. However, let me reiterate that we don't plan to add significantly to our sales team count until we have demonstrated sustained productivity levels at which time we would reassess rebuilding in a moderate and controlled way. While quarter-to-quarter fluctuations in our business can be expected in fiscal 2020, we are confident about attaining our target productivity levels of $750,000 to $850,000 for the full-year by focusing on strategic high prescribing clinics and home care referrals with hospitals, pursuing the right balance of competitive accounts and greenfield opportunities, enhancing direct sales recruitment assessment and evaluation practices, increasing sales leadership co-travel with new field sales employees, and leveraging sales training programs, account planning tools, management coaching and our CRM utilization. It has been approximately four months since Bud Reeves took over as our new Vice President of Sales, and we are excited about what we are hearing from both Bud and the sales team. During his first 90 days, Bud traveled throughout each of our regions, visited our key prescribers hearing very positive feedback about the SmartVest brand, our service level and the opportunity to broaden awareness of SmartVest, which has been underway the past year through our extensive digital marketing initiatives. We anticipate Bud will play a key role in improving our institutional and home care sales with his vast knowledge and years of experience working in the respiratory care medical device industry. Regarding the institutional side of our business, net revenue declined this quarter compared to the prior year period, but we continue to make progress developing relationships with the integrated delivery networks. Today our Institutional segment represents a small percentage of our overall business. However, it is very important focus of ours because the High Frequency Chest Wall Oscillation or HFCWO brand used in the hospital is often the default brand prescribed when discharging a patient. We are positioning our sales reps targeted accounts to include a higher number of call points in the hospital setting to encourage prescription of SmartVest at the time of patient discharge. We are focusing our sales efforts primarily on SmartVest hospitals, where a brand is used with patients during their stay. Our discharge referrals from hospitals in fiscal 2019 increased by approximately 35% compared to the prior fiscal year. As a reminder, hospital discharge referrals are categorized as home care revenues. Shifting to expense management and profitability. We were very pleased that this quarter's SG&A expenses rose at a slower rate than our revenue growth, driving a 17.5% year-over-year increase in operating income to $1.5 million. We achieved this growth despite the prior year quarter, benefiting from a refund of a medical device tax that reduced fourth quarter fiscal 2018 SG&A expense by $406,000. Fourth quarter fiscal 2019 operating margin improved by approximately 120 basis points to 17.3%, demonstrating the operating leverage inherent in our business as revenue grows. Moving on, I'd like to touch on two exciting announcements we made subsequent to the quarter end. On August 15, we announced that our Board of Directors elected John Erb and Gregory Fluet to serve as Electromed Directors, increasing our Board from six to eight. These two highly accomplished executives possess a wealth of medical device industry knowledge and experience that will compliment the credentials of our other Board members and I believe be invaluable to Electromed as we execute on our growth strategies. Starting with John Erb. He is currently CEO, President and Chairman of the Board at NASDAQ-listed CHF Solutions. He also is CEO and Chairman of NeuroMedic, a private company he co-founded in 2014. Chairman of the Board of Osprey Medical, and a Director of MiroMatrix, a private biotech company. Previously, John was CEO of NuAx, Incorporated, a private medical device company and he also served as Chairman of the Board of Vascular Solutions until its acquisition in 2017. Gregory Fluet, currently is a consultant with Ferring Pharmaceuticals focused on microbiome commercialization and partnering. Previously, he was Chief Business Officer at Rebiotix until its acquisition by Ferring Pharmaceuticals and a strategic consultant working with various life science companies. Before that, he served as COO, Interim CFO and CEO of Urologix, Incorporated, and was an associate at Sapient Capital Management, a healthcare focused venture capital fund. We welcome Greg and John to our Board and we look forward to their input and their guidance. The second announcement we made last week was, our agreements with two Home Medical Equipment or HME distributors, one national and one regional that will distribute and sell the SmartVest Airway Clearance System in the United States home care market. We have commenced sale of SmartVest through HME distributors in targeted geographies in the first quarter of fiscal 2020. We intend to continue our direct sales channel as our primary home care revenue source. The strategy to engage selected HME distributors supports the need to broaden the SmartVest brand, particularly in geographies where we have a low market share and maybe particularly beneficial in the Western United States. The addition of HME distribution channel broadens SmartVest’s overall home care exposure without pulling resources from our internal sales force, which will continue to focus on the direct-to-patient and provider channel. This hybrid go-to-market strategy supports our profitable growth strategy for Electromed. Our home care distributor partners will sell SmartVest directly to patients upon receipt of a physician prescription. We anticipate that new agreements will have minimal impact on our fiscal 2020 revenues and expenses. Looking ahead, we reiterate our expectation for low double-digit revenue growth over the next few years as we execute on our strategic initiatives and we anticipate improved earnings through our cost containment efforts. For those joining our call for the first time, Non-Cystic Fibrosis or NCFB represents a significant and growing market opportunity conservatively estimated at more than 4 million individuals in the United States. We believe that approximately 630,000 people with a bronchiectasis diagnosis could benefit from HFCWO therapy. Yet only an estimated 66,000 patients in the Medicare population have been treated with a device like SmartVest to-date. We have a tremendous opportunity to tap further into this large underserved market by educating physicians on SmartVest value in improving quality of life and outcomes for bronchiectasis patients. In April 2019, BMC Pulmonary Medicine published a first-of-its-kind independent study that concluded early initiation of therapy with SmartVest decreases severe exacerbations, reduces antibiotic use and stabilizes lung function for bronchiectasis patients. This study validates previously published Electromed outcomes studies in Respiratory Therapy in 2016 and 2018 namely that significant decreases in exacerbation rates are achieved by patients using SmartVest, HFCWO in the treatment of Non-Cystic Fibrosis Bronchiectasis. The growing body of clinical evidence supports the use of Electromed's SmartVest Airway Clearance device as a standard-of-care among individuals with NCFB. In conclusion, we have made a lot of progress this past year and believe Electromed is on the right track for successful fiscal 2020 supported by an outstanding team and best-in-class product that helps people feel better and keeps them out of the hospital. With that, I will now turn it over to Jeremy for a more detailed discussion of our financial results. Jeremy?

Thank you, Kathleen. Good morning, everyone. Our net revenue in the fourth quarter of fiscal 2019 increased 9.3% to $8.6 million from $7.9 million in the fourth quarter of fiscal 2018. This was driven by growth in our home care revenue. Home care revenue increased 10.1% to $8 million primarily due to a higher average allowable due to payer mix as compared to the prior year and greater productivity from our company's field sales staff. Institutional revenue decreased to $369,000 from $454,000 in the prior year quarter and international revenue, which is not a strategic growth area for Electromed totaled approximately $192,000, compared to $114,000 in the prior year period. We are well positioned for low double-digit revenue growth in fiscal 2020 and improve profitability as we execute our organic growth strategy though quarter-to-quarter sales variability can be expected due to the nature of our business. Gross profit increased 8.1% to $6.7 million or 77.5% of net revenue in the fourth quarter of fiscal 2019 from $6.2 million or 78.4% of net revenue in the fourth quarter of fiscal 2018. The increase in gross profit resulted primarily from an increase in home care revenue, and the decrease in gross profit as a percent of net revenue was driven by a lower selling price per device in our institutional market. Operating expenses, which includes SG&A as well as R&D expenses, totaled $5.2 million or 60.2% of revenue in the fourth quarter of fiscal 2019, compared with $4.9 million or 62.3% of revenue in the same period of the prior year. In the fourth quarter of fiscal 2019, SG&A expenses rose 4.4% to $5.1 million as Kathleen mentioned, SG&A expenses grew less than our net revenue did, despite the prior year quarter benefiting from a refund of medical device tax that reduced fourth quarter fiscal 2018 SG&A expenses by $406,000. We also had higher amortization expense of $117,000 in Q4 of fiscal 2019 due to our decision to terminate a lease of office space which required us to accelerate the leasehold amortization associated with that property. As a percentage of revenue, SG&A expenses improved to 60.2% compared to 62.3% reflecting our ongoing cost containment efforts. R&D expenses increased to $107,000 from $41,000 in the fourth quarter of fiscal 2018 due to the work on an innovative product feature, which include Bluetooth capability designed to improve patient's access to treatment adherence data. Operating income in the fourth quarter of fiscal 2019 increased to $1.5 million from $1.3 million in the fourth quarter of fiscal 2018 and net income before income tax expense, totaled $1.5 million in the fourth quarter of fiscal 2019, compared to $1.3 million in the prior year period. In the fourth quarter of fiscal 2019, income tax expense totaled $432,000 compared to $339,000 in the same period of the prior year. And our effective tax rate in the fourth quarter was 28.4%, compared to 26.2% in the prior year period. Our net income totaled $1.1 million or $0.13 per diluted share in the fourth quarter of fiscal 2019, compared to $1 million or $0.11 per diluted share in the same period in the prior year. Now a brief recap of a few full-year highlights. For the fiscal year ended June 30, 2019, our revenue grew 10.6% to $31.3 million from $28.3 million in fiscal 2018, driven by the 10.3% increase in home care revenue. Gross margins were 76.2% compared to 76.9% in the prior fiscal year, and net income was approximately $2 million, or $0.23 per diluted share compared to approximately $1.8 million or $0.21 per diluted share in fiscal 2018. Moving to the balance sheet and operating cash flow. Our balance sheet at June 30, 2019 included cash and cash equivalents of $7.8 million. We have no debt, working capital of $20.9 million and stockholders' equity of $25.7 million. Cash flow from operations in the fourth quarter of fiscal 2019 totaled $1.4 million compared to $600,000 in the fourth quarter of fiscal 2018. We are very pleased to be debt-free and to be able to continue building our cash reserves to support Electromed's long-term growth strategies. As I discussed on our last two conference calls, we have commenced a building expansion project here in New Prague. We expect the project to cost approximately $1.5 million to $1.7 million and when complete will save us over $130,000 a year in annual lease expense, while providing us with sufficient infrastructure to support our long-term growth. We believe the new building will be finished in September. Overall, we are focused and confident with the direction of the business. And this concludes my remarks. Operator, can we start the Q&A portion of the call, please?

Thank you. The floor is now open for questions. [Operator Instructions] Our first question is coming from Kyle Bauser of Dougherty & Company. Please go ahead.

Hi. Good morning, Kathleen and Jeremy.

Hello, Kyle.

Great quarter here. My first question, you spoke a little bit about the sales force reduction contributing to the significant improvement in home care revenue per rep. Were there other contributions that will sustain this level of productivity?

Thank you for the question Kyle and I will take that one. Certainly, the workforce reduction did contribute. We also were very excited though about the actual referrals per TAM during that quarter as well that were accelerated. And we also benefited from a slightly higher ASP. And when we benefit from an ASP, often that's a combination of the teamwork and productivity between the sales force and the reimbursement group as we accelerate and advance and improve on our service level to the clinics, where the patient is receiving reimbursement because we're able to educate and increase awareness with the clinician about what that reimbursement criteria is, what they need to be looking for and how quickly we can process that on a patient's behalf. So those were some other contributing factors. Also the focus then that leadership could provide to that remaining workforce in the field and help support them with co-travel and additional coaching, so those would be some factors that I would also add to how we accomplished that additional productivity.

Got it. And regarding the favorable first-of-its-kind study, you mentioned in your prepared remark, Kathleen, have you seen traction with this new clinical evidence as it relates to developing the HFCWO market or Electromed revenue growth, et cetera?

We really appreciate that question, Kyle. And we couldn't be more proud. There's a huge body of evidence related to High Frequency Chest Wall Oscillation being used in the Cystic Fibrosis population. But for the Non-Cystic Fibrosis Bronchiectasis population, there's very little clinical evidence, and so we're very proud to be the most published of all of the HFCWO suppliers in that area. And so the UAB study, it's early, but we're very proud of the fact that our sales force can go in and share the outcomes. As I mentioned earlier that when measuring lung function through FEV1 that there was a significant – there was no significant change in that lung function over a year of using HFCWOs that algorithm of care. The number of severe exacerbations of course was significantly reduced as well and then the number of courses of antibiotics and we think that's meaningful for those docs that are looking for that clinical evidence and outcomes. So it's going to take a little time to get a high accelerated traction, but we're out there talking to docs and using that published study and it's very meaningful.

Okay, thanks. And then you announced a couple of great additions to the Board. I know it's early, but can you talk about any updates or contributions you expect to implement following the appointment of these independent directors?

Absolutely. John and Greg, of course, I've had the opportunity to spend time with them personally and they of course joined us at our August Board meeting here last week and I was certainly impressed and pleased at their participation. The number of questions they're asking and also the immediate input they've provided to me and the rest of the Board members on how we can develop this market, hopefully faster. We can accelerate our sales and get to the providers and the clinicians that we need to, like as I was saying to help grow the awareness of our brand and the need for HFCWO to treat Non-Cystic Fibrosis Bronchiectasis patients. So really great meeting in August and their contributions were high. And again, I think it's really about how do you grow a market when you're developing it and how can we market it more effectively. So again, I think we're on the right track with those two additions.

Okay. That's helpful. Thanks so much for taking the questions.

Thank you, Kyle.

Thank you. Our next question is coming from Brooks O'Neil of Lake Street Capital Markets. Please go ahead.

Good morning, Kathleen and Jeremy. Congratulations on the terrific end to the year. I was just hoping recognize all the things you're working on. If you could just give us a quick overview of the competitive environment and how you see Electromed differentiated from the competition both probably in terms of SmartVest and in terms of your go-to-market strategy? And maybe you could just touch briefly a little bit more on how you hope to penetrate that hospital segment of the market that sounds pretty promising to me? Thanks a lot.

Okay. Thanks Brooks. Great question. So when I think about the competitive market or we do at Electromed in general, our first competitor is the lack of awareness by pulmonologists to look for bronchiectasis. And then when they do find bronchiectasis that they think about lung hygiene and using Airway Clearance, and that to me is our number one competitor. And you might not think of competition that way, but that's where our challenge is primarily. Let me then turn to the HFCWO competitors and other Airway Clearance competitors. As most of our shareholders know, Hill-Rom has the number one position in the market. They of course were first on to the market. They also have the highest market share in the institutional area with inpatient use of HFCWO. And then of course RespirTech would be next and they were purchased by Philips. Now it's been almost two years. So we have two very large formidable competitors. But based on the market still developing and growing, we don't need to always take market share in order to compete. So we're out there developing a deeper awareness and education to clinicians that we already do business that there are more bronchiectasis patients to be identified. We also though have a great balance of competitive clinics that we're targeting as well, because often our features and benefits can win out against the competitors when we think about the ease of using our device, our product performance testing that indicates how we can provide more comfortable therapy typically at lower settings, which is often important especially with a patient that's already has comorbidities and could be frail and elderly. So Hill-Rom has a number of other respiratory devices and we often think about their salespeople are selling different respiratory devices. And we liked the idea and Philips as well that we’re singularly focused on High Frequency Chest Wall Oscillation. And that's the solution that we're offering and we can do it the best of anyone. We believe not only competing on the device itself, but also on the service level and how we can help that patient receive that device as quickly as possible and help them with managing their benefits and receiving reimbursement. The other competitor that is out there is AffloVest and AffloVest is a wearable portable device that came on the market about three or so more years ago and Afflo chose to sell primarily through the home care distributor market. The answer here, I'm veering off a bit from your original question, but it's been interesting to watch that market develop through the distributor because four or five years ago, distributors weren't that interested in HFCWO because they believe that the reimbursement criteria was complicated and challenging with AffloVest now offering that through the distributor market. They've paved the way in some respects for that becoming more of a knowledge base for the home care distributors. And also it's broadened the awareness because of more HMEs calling on providers, which then segues into why we believe that this hybrid strategy is a helpful way for us to compete because Hill-Rom has determined that they will not compete through the distributor market. They want to continue to sell direct. And of course RespirTech has started working in the distributor market also. So that's probably more than you were interested in hearing about, but I want to give you a little bit of the lay of the land and maybe you have a follow-up question.

Yes. No, that was really helpful, Kathleen. So my follow-up, I'm just curious thinking about what you led off with in terms of the lack of awareness of the condition and to prescribe your treatment therapy, if you will. I'm curious if you see that same sort of lack of awareness in the hospital segment. I know it's not your primary focus. I understand your dual strategy in the home care and all of that, but I just – I'm trying to make sure I understand sort of lay of the land out there if you will, and where the big opportunities are for you now?

Thank you for narrowing that question and following up on that earlier question around the institutional business. We do believe the served market for institutional is around $25 million to $30 million right now and again, Hill-Rom probably has over 50% of that market share more like 75% RespirTech and our sales have been starting to put more focus on that. And so some of it – I would say, number one is unseating the competition. And we have been quite successful over the last year in doing that. And in fact, you heard that our revenue is down in institution, but in – the facts are that our units are up that we have placed over the last year because some of those are competitive strongholds that we've had very creative proposals in order to get our units placed. And we're excited about that because what we're looking for long-term is the recurring revenue on the rep sales for the patient, while they're staying in the hospital. And then also because then that brand in the hospital is familiar to the hospitalists or the pulmonologists then when they're discharging patients they will look toward that brand that they're most familiar with. So we do see that the hospital market is a unique opportunity because we believe all bronchiectasis patients that could benefit from HFCWO are going to funnel through that hospital at some time during their disease state. So do I have a good number to provide you there? No. But I do think that there is opportunity for all of the competitors, but I think we're singularly – not singularly, but the refocus there and the reemphasis for our team is really going to be beneficial over the next few years.

Great. All that makes a ton of sense. Thanks for all the details.

Thank you.

[Operator Instructions] Our next question is coming from [Howard Roupe], a Private Investor. Please go ahead.

Good morning, Kathleen, and Jeremy. Congratulations on the quarter.

Thank you.

Thank you.

I have two questions. One on your guidance. You said for fiscal year 2020 you're confident about low double-digit revenue growth. And as I look at that kind of get a little bit more flavor for that – for the double-digit revenue growth would be around $34.5 million for the year or about $8.6 million if you kind of level loaded it for the four quarters and you did right about $8.6 million in this fourth quarter which is outstanding performance. What do you see – I know you have high quarterly variability, what do you see in that in 2020 – fiscal 2020 quarterly going forward on the revenue growth and what variations do you see quarter-to-quarter?

Good morning, Howard. It's Jeremy. Yes, I think the math that you did, I think that is correct. I think the way we look at it really comes down from the variability that we see. We do see significant variability in the types of referrals and then the insurance payers that each of those referrals is behind each one of those referrals that come in on a quarterly basis. So we continue to expect that on a quarterly basis. There will be significant variability in our ASP. That said, we think that the ASP over time remains relatively flat, fiscal 2019 over fiscal 2018, our ASP for the full-year, although there was the variability on one – when you look back quarter-over-quarter during those years, there was the variability. It was very stable.

Right. So Q1 is two-thirds in the bag here, do you see Q1 as seasonally soft quarter for you? Or do you see taking Q4 and going up from there, in just general numbers – on general terms, not specific numbers?

Yes. Q1 is generally a seasonally soft quarter. If you go back the last three years, it has been the lowest revenue quarter each year for the last three fiscal years. And I think there's some market dynamics that play into that, but that's something that we generally consider would be consistent on a go forward basis.

Okay. So then my second question is kind of around the stock price and the valuation, and as you know, I'm a long-term shareholder. A lot of us long-term shareholders are disappointed that the stock price doesn't reflect the value of the company. Given the strong cash position you have, the $7.5 million cash, no debt generating $2.5 million plus for a year in free cash flow, what's the appetite for the management and the board for doing something to try to help the stock price, whether it's a stock repurchase, a small one, a $1 million or something like that or even a dividend policy, a small quarterly dividend?

Thanks for the question, Howard. I'll take that one. We certainly want to be – we are focused on increasing shareholder value and we believe that with continued strong sustainable performance that that will happen as well as getting our message out and visiting with shareholders and the investment community, and again, getting that word out and helping people understand what this market potential is and what we can do. As far as the use of the cash and equity, we've had extensive discussions with our board about cash management and at this time, the board agrees with us as well as leadership and our direction that we want to sustain that cash and have it available for growth opportunities in the future. We'll continue to evaluate that though for potential options as you're discussing, but right now we have no plans in the near future to use that for anything, but our growth.

Okay. Thanks and congratulations on the quarter.

Thank you very much, Howard.

Thank you. At this time, I'd like to turn the floor back over to Ms. Skarvan for closing comments.

Thank you all for participating on our call this morning. We look forward to reporting back to you in November when we release our first quarter fiscal 2020 financial results. Have a good day.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or logoff the webcast at this time. Have a wonderful day.