InfuSystem Holdings, Inc. (INFU) Q3 2018 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the InfuSystem Holdings Third Quarter Fiscal Year 2018 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. At this time, I would like to turn the conference over to Joe Dorame of Lytham Partners. Please go ahead, sir.

Thank you, Denise. Good morning and thank you for joining us today to review the financial results of InfuSystem Holdings Inc. for the third quarter of 2018, which ended on September 30, 2018. With us today on the call 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'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 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. In the third quarter, we continue to make progress on our strategic initiatives as we're steadily growing our revenues and cash flow. Absent ASC 606, we had growth of 3% versus Q3 2017. That steady growth coupled with improved operational efficiencies are generating significant increases in operating cash flow. Through the first three quarters, operating cash flow was $8.1 million versus $4.1 million in the prior year. This represents an increase of over – of about 97%. We will continue to use a strong cash generation to invest in our business as appropriate, and to support smart growth and to repurchase stock. EBITDA for the quarter was slightly off when compared to the same period in 2017. The key factor responsible for the difference is the cost of investing in our business in anticipation of some new oncology revenue that we expect due to some recent developments in that market. I will explain that – the new revenue opportunities after Greg provides the third quarter financial detail, but I'd like to briefly remind everyone that when we win new oncology customers, we have to take the steps necessary to fully deliver our services before the first patient receives one of our pumps. When that occurs, the paperwork is generated, we collect it, convert it into billings, which are then submitted to third-party insurance payers. There's always a month or more delay between our launching our services and our beginning to recognize the revenue for those services. And when this timing straddles the end of the quarter, our reports show only the costs and none of the corresponding revenue. As I will discuss in a few moments, we see material revenue opportunities coming our way in the near future, and you can see in our financial reporting that we began investing and incurring costs with respect to that future revenue in the third quarter. I will now turn the call over to Greg to discuss our third quarter financial results.

Thank you, Rich. Before going into detail on the quarterly results, I would like to talk about the change in accounting that Rich referenced earlier. ASC 606 provides guidance of how companies recognize revenue. For the last several years, InfuSystem has reported its revenue on income statement as gross the provision for doubtful accounts or bad debt expense. Under ASC 606, revenue is now reported net of this provision, and consistent we used to report as net collected revenue. Because InfuSystem adopted ASC 606 on a modified retrospective approach, after each quarter this year, we're going to need to call out the effect of the adoption in year-over-year comparisons of our financial numbers since it will allow us to analyze revenues on an apples-to-apples basis. This year's numbers will show net revenue after reduction for bad debt whereas the prior year's net revenue is without the reduction for bad debt that is shown on separate mark in 2017 in selling, general and administrative section of the income statement. The effect in the third quarter of 2018 was reducing our reported revenue number by $1.5 million. Despite our reported net revenue being lower in the second – in the third quarter, our net revenues have increased the impact of ASC 606. In addition, late last year, InfuSystem recorded significant items related to income taxes and impairment of intangible assets and pump write-offs. In addition to significant noncash charges taken for tax expense and valuation allowances, we booked noncash charges for depreciation and amortization. Due to a lower carrying value of these assets, the pump and IT write-offs in 2017 had the effect of decreasing the company's depreciation and amortization expense at the beginning in 2018. I'd now like to discuss in detail the third quarter 2018. Net revenues for the third quarter of 2018 were $16.7 million, a $0.9 million decrease or a 5% compared to $17.6 million for the third quarter of 2017. Absent the aforementioned implementation of ASC 606, total revenues would have been up $18.1 million, a $0.6 million increase or 3% compared to the same period – same prior year period. In addition, net revenue rental absent the implementation of ASC 606 would have been $15.2 million, a slight decrease of $0.1 million or 1% compared to the same prior year period, and net revenues from product sales were $2.9 million, an increase of $0.6 million or 28% compared to the same period 2017. Net revenues for nine months ended September 30, 2018 were $49.6 million, a $2.6 million decrease or 5% compared to $52.2 million for the nine months ended September 30, 2017. Absent the implementation of ASC 606, total net revenues would have been $54.4 million, a $2 million increase or 4% compared to the same prior year period. In addition, net revenues rentals absent the implementation of ASC 606 would have been $47.1 an increase of $1.8 million or 4% compared to the same prior year period, and net revenues from product sales were $7.3 million, an increase of $0.4 million or 5% compared to the same period of 2017. The net loss for the three and nine months ended September 30, 2018 was $0.5 million was $0.5 million or $0.03 per share and $0.8 million or $0.01 per share respectively, compared to net losses of $0.1 million or $0.01 per share and $2.7 million, or $0.12 per share in the same prior year periods, respectively. Adjusted EBITDA was $3.3 million and $10 million for the three and nine months ended September 30, 2018 respectively, an $0.6 million or 15% decrease and $1.7 million or 20% increase respectively, compared to the same prior year periods. The quarter net income decrease was primarily driven by increased provision for doubtful accounts and cost of revenues due to decreased margins on selective disposable supplies, increasing labor servicing expenses, pump demand, decreased the amortization of fully amortized intangible assets, and increased selling, general and administrative expenses, partially due to increase in the stock compensation, incentive bonus accrual, and increased costs related to our contested proxy on Annual Shareholder Meeting. These decreases to net income were partially offset by increased net revenues and decreased income tax provision. Our EBITDA decrease for the quarter was primarily due to margins, revenue product mix short-term cost increases in building the infrastructure with – for anticipated future growth ahead of the associated net revenues, as Rich explained. The year-to-date net income increase was primarily driven by increased net revenues and decreased the amortization of fully amortized intangible assets and selling and marketing expenses, and net increased selling, general and administration expenses primarily due to increases in stock compensation expense, incentive bonus accrual and increased costs related to the Annual Shareholder Meeting. These increases to net income were partially offset by increased cost of revenues due to decreased margins of selective disposable supplies and increased labor servicing expenses on pump demand and decreased income tax benefit from the prior year. Cash flows provided by operating activities for nine months ended September 30, 2018 were $8.1 million, a 97% increase compared with cash flows provided by operating activities for nine months ended September 30, 2017, of $4.1 million. The company has utilized this year-to-date increase in operating cash to increase its net investment in medical equipment and property by $2.7 million and reduce its net outflows for finance activities by $1.7 million, despite financing $1.7 million of stock repurchases through internal cash flows. As of September 30, 2018, we had cash and cash equivalents of $3.9 million and $9.1 million of availability in our revolving credit facility, compared to $3.5 million of cash or cash equivalents of $9.2 million availability in our revolving credit facility as of December 31, 2017. Because of the 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 the 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. To date, the company has repurchased over 0.5 million shares under the program. Additionally, on July 31, 2018, InfuSystem amended its credit agreement to allow for, among other things, a loan to the company to repurchase capital stock from 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 and its affiliates and a second shareholder entered into a stock purchase agreement for the purchase by the company of the shares of common stock cumulatively owned by the sellers for an aggregate amount of approximately $8.6 million. The purchase was funded with the proceeds from the amendment to its credit facility entered into on the same say. In total, the company has purchased approximately 14% of its outstanding stock for $10.3 million year-to-date. Rich, back to you.

Thanks, Greg. I have no doubt the team will continue to execute on our plan of smart growth and improved operational efficiencies. And with the first three quarters behind us, I would like to take a moment to discuss the exciting opportunities that lie ahead as we close out 2018 and move forward into 2019. We have completed our 2019 planning process and our plan shows strong growth in our pain management and oncology businesses. As a result, we are confident that revenue will grow to $74 million in fiscal year 2019, and adjusted EBITDA will rise to $16 million. A key contributor to our anticipated growth will be our pain management program, which continues to be adopted by the market at a fast rate. While we still believe it's too early to break out our pain numbers, we do see the business doubling in size in 2019, and beginning to make a material impact on overall business as the larger teaching institutions that have signed on get fully up and running. I mentioned earlier that there were some recent changes in the oncology market, and I would like to share those with you as they will help drive our growth in 2019. First, the largest supplier of elastomeric pumps in the oncology market has been ordered by the FDA to stop future shipments to its distributors until further notice. We are not sure how long this could last, but we have already and we'll continue to add market share as customers switch to our service. Over the last two months alone, we have begun onboarding new customers that will add more than $1.5 million to our annual revenue. We expect additional gains over the next few months as clinics are searching for alternatives and elect to go with InfuSystem. In the third quarter, we began making investments in our team and infrastructure to allow us to take on several million more anticipated – in anticipated business coming our way in the next coming months. The second major development is something we believe has the potential to completely change the competitive landscape in oncology. We have now formally launched our new app, InfuSystem Mobile, and can't wait to see the impact on our market and most importantly on patient safety. Every company has an app that allows customers, or in our case patients, easy access to essential information and InfuSystem Mobile certainly does that. If that's all we wanted to do, the app would have been launched a year ago. Instead, the team decided to take a quantum leap forward and develop a unique, secure, two-way communication platform between our patients and our clinical team of registered nurses. The alert-based system will allow us to check in at timed intervals with the patients to make sure their pump is operating as expected. This will provide an added layer of security – added layer of safety to the infusion. And without a doubt, it will prevent hospital admissions and will certainly save patients' lives. The potential future impact of this platform is significant. Some of the early adopters of InfuSystem Mobile agree with is that it can set a new standard for care. We believe InfuSystem Mobile has the potential to convert millions in additional oncology business in 2019. We have begun making preparations for this incremental business and if it comes, we could easily find ourselves increasing our targets for 2019 above the $74 million in revenue, and $16 million in adjusted EBITDA, that I cited above. I would like to personally thank the team that has spent countless hours to develop a platform that will keep our patients safe, and let them know that they have – what they have accomplished is why I am so proud to be part of this team. We would now be happy to answer any questions.

Thank you, Mr. Dilorio. We will now begin the question-and-answer session. [Operator Instructions] And the first question will be from Douglas Weiss of DSW Investment. Please go ahead.

Hey, good morning.

Good morning, Doug.

I wondered if you could talk a little more about your comments regarding the elastometer discontinuance? Is that linked to your prior comments about the investments you were making in new business?

Yes. So elastomeric pumps are commonly called disposable pumps. They do compete against our service and our electronic pumps. The FDA issued a letter to the biggest manufacturer of the supplier in the U.S. that they couldn't ship any more devices until further notice. They had some – the FDA did an inspection and found some things that they didn't like. That happened early September. So when that happened, we had customers kind of ringing the phone off the hook asking for pumps and to set up with our service. So that's where the cost can get ahead of the revenue. So we had to ship those pumps' associated supplies. We had to pay overtime to our team to get pumps patient ready. All that happened in a three-week window at the end of September. Unfortunately, we don't see any revenue in September because the pumps after – once they get shipped, patients have to go on and we have to get our paperwork and we have to submit the paper to the insurance companies so the costs certainly get out ahead of that revenue. So that's what drove up our costs in Q3. The good news is long-term that revenue, we will see that it will start to hit in the fourth quarter.

Right. And I guess it – customers presumably could switch to different elastometers but I guess it may be some customers just decided it was the time to rethink entirely?

Yes. An electronic pump is always a safer option. People had made those switches to elastomerics. If they are coming back to our service, my impression is they're going to be back for good. They're not going to go back again when they can start shipping those again. And there's a couple manufacturers out there but most people, it looks like, are electing to come to InfuSystem.

Okay. Well, that’s good news. Okay, I think honestly that’s all I had. I appreciate the answers.

All right. Thanks, Doug.

[Operator Instructions] And at this time, I am showing no additional questions so we will conclude the question-and-answer session. I would like to hand the conference back over to Rich Dilorio for his closing comments.

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

Thank you, sir. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. At this time, you may disconnect your lines.