InfuSystem Holdings, Inc. (INFU) Q3 2019 Earnings Report, Transcript and Summary

Good morning. And welcome to the InfuSystem Holdings Inc. Third Quarter Fiscal Year 2019 Financial Results Conference Call. All participants will be in listen-only mode [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions [Operator Instructions] Please note, today’s event is being recorded. I would now like to turn the conference over to Joe Dorame with Lytham Partners. Please go ahead sir.

Thanks, Rocco. Good morning. And thank you for joining us today to review the financial results of InfuSystem Holdings Inc. for the third quarter of 2019, which ended on September 30, 2019. With us today on the call representing the company are Rich DiIorio, 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-answers 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 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, 2018. 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, everybody. And thank you for joining the InfuSystem third quarter 2019 earnings call. This is an exciting time at InfuSystem and I am so proud to be part of a team that continues to execute on our plan of smart growth, while also being engaged in a program to improve operating efficiencies. As I mentioned on our last call, our plan to take advantage of opportunities and gain market share in oncology is going exactly as planned. I’d like to share a couple of updates and highlights before our CFO, Greg Schulte walks through the numbers. First, as expected, we continue to see strong growth across both of our platforms. In our integrated therapy services the oncology team is executing on the market share gains attributed to the exit from the market of the leading elastomeric pump provider, as well as our largest direct competitor. And pain management continues to add large acute care hospitals to its growing customer list. Our DME services platform continues to have solid rental revenue in addition to strong pump and consumable sales. In the third quarter, we saw VAT growth deliver additional revenue resulting in 28.7% year-over-year increase. What’s most exciting is that we are not done growing as a second phase of our market share gains are now producing revenue. As we have discussed on prior earnings calls, it can take up to six months for new business to flow through our revenue cycle process and with a lot of our new customers coming on in the second quarter of 2019, we are still seeing the revenue ramp resulting from the market share gains and expected to be realized in oncology. Secondly, I am pleased to report that we are not just growing. We continue to increasingly convert revenue and earnings. Our adjusted EBITDA was $5.2 million in the third quarter, which is an increase of 57.3% versus the third quarter of 2018. Even as we continue to grow at this rapid pace, the team will not lose focus on our spending and cost control discipline. That growth coupled with the discipline should result in additional improvements in our net operating margin with a long-term goal of achieving 25% EBITDA margins. I would like to now turn the call over to Greg to review our third quarter financials. Greg?

Thank you, Rich. I am very pleased to report on the highlights of our strong third quarter performance. Net revenues for three months and nine months ended December -- September 30, 2019 were $21 million and $59 million, respectively, a $5 million or 29% increase and $10 million or 20% increase, respectively, from the same prior year periods. Net income for the quarter and year-to-date ended September 30, 2019, was $1 million, compared with -- to a net loss for the quarter and year-to-date ended September 30, 2018 of $1 million, respectively. As Rich mentioned, adjusted EBITDA for the three months and nine months ended September 30, 2019, was $5 million and $13 million, respectively, a $2 million or 57% increase and a $2 million or 28% increase, respectively, from the same prior year periods. Net cash flows provided by operating activities where $9 million year-to-date, an increase of $1 million or 16% from the same prior year period. I will not turn the call back to Rich.

Thanks, Greg. On prior calls, I have given targets for 2019 and preliminary targets for 2020. I would now like to revise those targets. For 2019, we had target of $74 million in revenue and $16 million in adjusted EBITDA. The new targets for 2019 are $79 million plus in revenue and $17.5 million in adjusted EBITDA. For 2020, we had previously committed targets of $85 million in revenue and $21 million plus in adjusted EBITDA. As we have gained greater visibility in the next year’s operating plan, we are now revising the 2020 targets to $89 million plus in annual revenue and $22 million plus in adjusted EBITDA. We also expect to generate $16.5 million in cash flow from operations in 2020. Comparing our financial targets with our recent history, I’d like to point out that our starting point in 2018, before our oncology market share gains was $67 million in revenue and $13.7 million of EBITDA. Our targets of 2020 represent -- for 2020 represent growth of $22 million in annual revenue and growth of more than $8 million in annual EBITDA. In order to capture that growth, we have to make substantial investments in pump fleet and we anticipate total CapEx in 2019 to be about $20 million, which includes about $4 million to $5 million in maintenance CapEx. This results in an approximate rate of return of 50%, which will likely continue each year for the better part of a decade. As pleased I am -- as pleased as I am with our current performance, I am even more excited to discuss our future growth and strategy. First, I’d like to talk about our business platforms. Going forward, we will talk about our businesses being organized around two platforms. The first one is integrated therapy services and the second is DME services. In addition to rethinking and rebranding our operations around these two platforms, we are evaluating changing our segment reporting at year end to improve visibility into these two sides of our business. The integrated therapy services platform is where you will find our oncology and pain management offerings, and where we will host our new therapies utilizing our full suite of services. We view our company operating in DME, I am sorry, we view our integrated therapy platform is being unique in the industry, as we are unaware of any other company operating in durable medical equipment with a focus, scale and capabilities we bring. Soon we will be announcing a third-party where InfuSystem -- a third -- where InfuSystem will work with a new partner, a large healthcare supplier, bringing our turnkey solution to hospitals and clinics nationwide. This means that just like we do in oncology and pain management, InfuSystem will provide the durable medical equipment, the necessary consumables and will oversee the logistics, provide customer support to the clinics and take care of the procedure billings. Our new partner sought InfuSystem out, asking us to bring our unique capabilities to the market. We believe this is a repeatable event and that we will see significant future growth coming from adding new therapies in this way. Our durable medical equipment services platform supports our integrated therapy services platform and leverages our culture of service to win business in the other medical services and therapies. This platform is where you will find our direct rental business, our pump and consumables, sales and biomedical services. These businesses while having a lower margin then seen in integrated therapies are high turn businesses with strong return on assets. In closing, I’d like to reiterate that over the last 30 plus years InfuSystem has built a reputation based on industry leading service to our patients and partners. During this time, we have perfected our integrated therapy services platform. This platform is driven by our ability to provide an exceptional service built around a device. We offer the gold standard in clinical care, biomedical services, logistics and revenue cycle management to our customers and it’s why thousands of clinicians in oncology and pain management trust us every day to keep their patients safe. The great part about this platform is that it’s completely scalable and device agnostic. It doesn’t matter if it’s a pump for oncology, a pump for pain management or negative pressure wound therapy device. And with that being said, I am happy to answer any questions.

Thank you. [Operator Instructions] And today’s first question comes from Douglas Weiss of DSW Investment. Please go ahead.

Hi. Good morning. Congrats on all the progress you have made and on the good quarter.

Thanks Doug.

So, I guess, your very last comment was, you mentioned negative pressure wound therapy, is that the new opportunity that you mentioned?

It’s one of the opportunities we are looking at, along with DVT devices, deep vein thrombosis. There is almost unlimited amount of therapies and devices that we can look at. But negative pressure is definitely one of the things we are interested in and we see coming soon.

I guess, you don’t want to -- is too early to elaborate on the new business opportunity you have mentioned that where you would sought out?

It is right now. I think, we are only, probably, a couple weeks away from making an announcement. So you will hear something very soon.

Okay. On pain -- pain management -- the pain management opportunity. I think, historically, some of the impediments there were both reimbursement and then doctor adoption. Could you talk to both of those, how those are progressing?

Sure. So on the reimbursement side, the team has done a great job building the model. So it’s not just third-party payer reimbursement, but there is also a direct component. So if we don’t get paid by the clinic, I am sorry, if we don’t get paid by the payer. So the commercial payers and government payers, we actually turn that into a direct pay model and we build the clinics directly. So from a reimbursement standpoint, it’s actually been a great program. As far as adoption and uptake from the clinics and the doctors, with the opioid crisis in the United States, every clinic, every physician seems to be looking for ways to not have to write a prescription for a bottle of opioids. And this is just one of the first things that they can pull off the shelf to use to avoid that. And I think that not only we are seeing just huge teaching institutions in the United States using InfuSystem and our services, but I think that that’s only going to accelerate over the next few years with the focus on. It’s really difficult once somebody is addicted to treat that patient. The hope is that we can get out ahead of it. And we never get to the point where somebody has that addiction and that’s really where our service falls into that program. So I think the adoption is going great. I think the pain management team has done a phenomenal job building the program. So that it’s a turnkey for not just the customer, but obviously, so helpful to the patient and avoiding a problem that is a real, real problem in this country.

So is that a -- is -- do you have designated sales force for that business or is there overlap between oncology and pain management?

So we do have a dedicated team and the oncology team, when it makes sense from a geography standpoint will help both. But there is a dedicated pain team that goes out there and is doing the selling.

And when do you think that would be a large enough contributor to start breaking that the sales of that out?

So I think it would be large enough soon enough that we would have to break it out. But at this point, as we look forward at the end of this quarter beginning of the year, to change our segment reporting around integrated therapies and DME services. That will just become part of the integrated therapies segment along with oncology and any other therapies that we roll in to that. So those will all be together.

Okay. On the insurance side, do you contract with Medicare Advantage, is that correct?

Correct.

So in a way, is that mitigating, because that’s been such a growth area for the insurance companies and so much of Medicare is now moving to Medicare Advantage. Is that mitigating some of the impact of the changes from CMS?

Not really, I mean, CMS and Medicare or Medicaid is still roughly 30% of our business -- of our patient population. The advantage programs have been around for a while, and the payers, that carry those programs we have contracts with so that obviously helps that we have those agreements. That’s really the scale from a payer network that really helps us. I think we cover roughly 95% of the lives in United States. So, Medicare, it’s CMS, it still is what it is and we still have a different model for those patients. But with Medicare Advantage and secondary payers, it does help out.

Right. What percent of the or do you know what percentage direct Medicaid as opposed to Medicare?

I don’t have those broken out. No. It’s a much smaller number that’s Medicaid. And we do have Medicaid contracts at the state level, which helps, but I don’t have the breakout.

Right. Okay. So, I guess, on that -- related to that direct sales segment. Has -- and I asked -- and earlier -- recently about churn levels and competition from the elastomeric pumps. It sounded like things had stabilized there, I mean, I know one competitor left the market, is that accurate?

Yeah. So the marketplace, with the largest direct competitor leaving elastomerics at least the biggest of elastomerics manufacturer being halted from distribution in the United States. It’s obviously helped a lot to stabilize our market share. But even when we had to change this direct model after the CMS changes and even after elastomerics came into the market, kind of with a heavy presence a couple years ago, our churn is still extremely well. Eventually, we retained 99% plus of our customers every year and it really has -- doesn’t really waver from that number very much.

Right. And you guys had a couple press releases earlier in the year about the investment you were making on connected more of a digital, monitoring model where there would be some feedback from the pump to the doctor. Is that still something you are excited about?

So if you are referring to the InfuSystem mobile, which is the app that we came out with?

Yeah.

Yeah. So we are still excited about that. It really is an only in-class product and it’s not necessarily from the doc -- pump to the doctor, it’s more from the patient to us. And it allows us to monitor that patient in a two way communication to make sure that their therapy is going according to plan and basically get out ahead of an event with the patient. So if there’s a miss program or a pump malfunction, we know that before it becomes a real problem for the patient. We basically head off the event where they may end up in the hospital or have some real medical complications. So, yeah, it’s a two way communication, it gets us in the hand of patients which opens up all kinds of opportunities, but from a patient safety platform it’s second to none in the market.

And what percent would you say that is at this point in terms of the pumps you have out in the market?

I don’t know have the number -- yeah, I don’t have the number off the top my head. But it’s something that when we bring it to clinicians, bring it to offices and hospitals. They love the ability that we can help their patient once they leave the clinic, which is something they have always struggled with. These hospitals and clinics put a lot of money and a lot of time and energy into keeping their patients safe at the clinic level when they are there and under their care. Once they leave that clinic, it’s always been tough for them to monitor those patients. So they are excited about, the opportunity and the platform that we bring to give them a level of security that they have never had in the past.

Do you get paid anything -- is the pricing different on that product versus?

No. So it’s just part of the value-added service that we provide.

Okay. I think you had a comment in your prepared remarks on maintenance capital, but I missed it. I had a general question on maintenance capital, if you had just steady-state pumps, so you weren’t investing in new pumps. I know that a lot of that pump maintenance flows into your SG&A. But what is sort of the steady-state CapEx to, obviously, sometimes you have to just replace pumps. I mean, what do you estimate that would be at this point?

Yeah. So we study that number quite a bit. It’s kind of a long answer, but let me give you the short version. We think that number is about $4 million to $5 million a year. And the way that we get there is that we have spent about $70 million to -- on the fleet of pumps we currently own. And I know we depreciate over seven years, but they typically last about 10 years, which brings us to $7 million a year to maintain the fleet. But there’s when these pumps die and we pull them off of patients, there is always value to them. So we can take them for parts we can use them for trade-ins, we can sell them. So once you factor that in, that $7 million comes down to about $4 million to $5 million per year, which is higher than we have talked about in the past, but our fleet has grown substantially. And with the new technologies out there, we think that -- we think $4 million to $5 million roughly if it was just steady-state with no growth, that’s where we would end up.

Okay. Okay. Last question from me, so -- last, sorry, I have quick one after that, but second last question is, you have given guidance based I think on everything you know today. It sounds like there is upside to that to the extent some of these new projects, which you haven’t given a lot of detail on, contributes and maybe some other areas. I mean, what -- maybe you can’t quantify it, but can you maybe talk sort of generally about how big these sort of new opportunities might be from a revenue or earnings standpoint?

Some of these addressable markets are huge, in the hundreds of billions to a billion or two, I mean negative pressure, you mentioned that earlier, that alone is a $2 billion market. The part that we would go after if that opportunity presents itself isn’t maybe smaller than that, but it’s hundreds of millions of dollars in a lot of these markets. The hope is moving forward that we can layer more therapies and especially the integrated therapy platform, that we can leverage our existing infrastructure and our team and without driving up a lot of costs, we can add therapies that again are in just massive markets, which give us huge upside, not just for what’s looking at us in 2020 but two years, three years, four years, five years from now, some of these could really change the way we look in the future.

Yeah. It’s interesting. Okay. And then just a real quick question on the gross margin, which has been kind of stable here at about 57% now really since early 2018. Is that just -- is that a function of sort of the shift to the direct model and that’s where I should sort of model that henceforth or I don’t know, can you talk a little bit to what’s going on with the gross margin. It’s kind of lower than it has been historically, but I mean, it’s been there for about a year now?

Sure. Doug, yeah. This is Greg. We are -- basically the shift in the gross margin, our costs on the oncology side of the business are fairly consistent. We obviously are taking on a little more depreciation on the pump purchases, but the main driver which will tweak the gross margin up or down is really any shifts we have towards equipment sales, et cetera, which tend to run a lower -- a little lower margin than our ecology business. So I think you will see in Q3 we did a fairly strong quarter as far as -- relatively speaking as far as our equipment disposable sales that had a little dilutive effect on the margin. But ultimately, we have a pretty repeatable and predictable gross margin by product line it’s really just a mix that will skew it usually up or down a few basis points depending on it. But I think the run rate is pretty consistent.

Okay. All right. Well, congrats again on the great quarter and talk to you next quarter.

Thanks, Doug.

[Operator Instructions] And this concludes our question-and-answer session. I’d like to turn the conference back over Richard DiIorio for any final remarks.

Thanks, Rocco. Again, I would like to thank the team for their effort. The effort you give every day to deliver the best possible products and services to our customers and keep our patients safe is nothing short of phenomenal. Thank you all for joining the call today. I am looking forward to closing 2019 strong and sharing our progress in future calls. Thank you and have a great day.

Thank you. 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.