InfuSystem Holdings, Inc. (INFU) Q1 2020 Earnings Report, Transcript and Summary

Good morning and welcome to the InfuSystem Holdings, Inc. Reports First Quarter 2020 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please also note, today's event is being recorded. At this time, I would like to turn the conference call over to Joe Dorame. Sir, please go ahead.

Thanks, Jamie. Good morning, and thank you for joining us today to review the financial results of InfuSystem Holdings, Inc. for the first quarter of 2020 ended on March 31, 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 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 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. Good morning everyone and welcome to our first quarter 2020 earnings call. Thank you all for taking the time to join us this morning. I hope you and your families are staying safe as we continue to deal with the effects of COVID-19. It's times like these when we really gain perspective on what's important in life. And just how important it is to charge our time with our family and friends. Now, onto our first quarter results. I'm extremely pleased with our first quarter performance, not just the numbers but how the InfuSystem team responded to in situation where there is literally no playbook. Against the backdrop of rolling nationwide lockdowns, we had a record setting revenue in the quarter. $21.7 million, which is an increase of 18.5% versus the first quarter of ‘19 and our adjusted EBITDA grew by 30% versus the first quarter of 2019. And this was accomplished while transitioning 85% of our team to working from home. I couldn’t be prouder of the InfuSystem team, to me that is a definition of executing on a plan in extreme conditions and on top of that, we've been able to put contingency plans in place, a future potential short and long-term disruptions on our operations from COVID-19. In early March, when we first began to assess the potential impact of COVID-19, we believe certain scenarios will most likely take place. First, we believe that our oncology service which helps with so facilitate lifesaving treatments to patients would not be dramatically impacted. We were correct. In fact, we treated more oncology patients in March than in any other month ever and we treated more patients in the first quarter than in any other quarter in our 33 years of providing the service. Second, we believed our DME platform specifically pump sales and rentals will likely see increased customer demand when hospital admissions increased. We knew that we would need to adapt and execute from a biomedical and logistics standpoint to meet that demand and we absolutely did this. The operations team deployed more devices than I would have ever thought possible. Operations has always been part of our front line with our clinical team and deserves so much credit for making sure our patients get the safest devices wherever and whenever they need them. Third, we expected the elective surgeries, we're going to see a dramatic decline as hospital started to reserve and redeploy most of their resources, can be able with any potential surge with COVID-19 cases. Unfortunately, we are correct about this as well. The pay management numbers were quite strong for early March before showing a steep decline in surgeries. In fact, the pipeline and numbers were slightly ahead of plan, we had them doubling revenue again this year after accomplishing that feet in 2019. I have absolutely no concerns long-term but we are seeing a sharp short-term impact. More on that later. Fourth, we believe customer access for our sales teams would be severely impacted. In addition to our own internal travel restrictions, most hospitals restricted access to any non-essential visitors and rightfully so for everyone' safety. These restrictions had the bigger impact on the newest edition to our integrated therapies platform, Negative Pressure Wound Therapy to our partnership with Cardinal Health. As with any new product, service or partnership face-to-face meetings are critical for both selling and customer training. The impact is our role of processes moving a little slower than planned when we announced the new therapy in February. Despite these challenges, we are currently serving patients and customers and expect to add new customers through the end of the year just at a little bit slower pace. The great news is that we see very, very strong demand in the market for the powerful combination of our ITS platform partnered with Cardinal's device. A long-term potential for this therapy remains significant with a current addressable annual market of $600 million. And with that, I would like to turn it over to our CFO Barry Steele to provide a review of our financial results.

Thank you, Rich. And thanks for joining to everybody on the call today. As Rich mentioned, the first quarter represented a stronger start to 2020, [most] like continued double digit year-over-year growth in both net revenue and adjusted EBITDA and improved gross margin and adjusted EBITDA margin percentages. During the quarter, we did not incur a significant extra cost associated with the health crisis, not really encountered any reduction in net revenue or other operational disruptions. On the contrary, the demand [percent] of our services increased due to COVID-19 driving urgent need for equipment and services to provide in our DME services segment. And responding to the crisis and the increased demand, our preparedness activities included increasing our levels of both disposable medical supplies and accelerating our capital expenditures for DME equipment. These purchases have provided both safety and stock in case of supply disruptions and have allowed us to respond to request from customers heavily burdened by the crisis. Net revenues for the 2020 first quarter, a $21.6 million represented an increase of $3.4 million or 18% over the prior-year first quarter. Integrated therapy services led this growth, increasing by $2.8 million or 25% in topping a respectable increase in durable medical equipment services segment of $540,000 or 8%. The growth for the integrated therapy services segment was mainly due to increased market share in oncology but also benefitted from a small increase in pain management oncology customers. The durable medical equipment services segment net revenue growth was led by increased equipment sales. The high revenue translated into higher adjusted EBITDA which increased by above $1 million or 30% to $4.1 million during the quarter. And a higher adjusted EBITDA margin which grew to 18.8% during the current quarter compared to 17.1% in the prior year. The improvement was driven by both an improved margin mix tapering the higher margin ITS segment excelling general and administrative cost coverage offset partially by a higher provision per [drop] account and a decrease in DME services segment gross margin. The bad debt provision increased but mainly driven by an accrual adjustment which reflected slower customer collections performance and a difficult comparison to the prior year period which included an accrual reversal. The lower growth margin in the DME services segment was due to proportionally higher equipment sales and a mix of lower margin items. During the first quarter, operating cash flow totaled about $600,000. And represented a decrease of $700,000 from the prior year. The current year period was impacted by higher working capital utilization associated with our COVID-19 preparedness activities. The positive operating cash flow combined with the use of $2.3 million of cash on hand and net borrowings of $1.2 million supported the net capital expenditures of $4 million which were $1.3 million higher than the prior year first quarter. This increase in capital expenditures was primarily comprised of the increases in our durable medical equipment fleet and represented an acceleration in our current year capital plan timing due to the COVID-19 preparedness and market demands I mentioned earlier. Note that our financial position has still improved slightly. As of March 31, 2020, our ratio of funded debt to adjusted EBITDA decreased to 2.07 times versus 2.11 times at the end of 2019. Our total available liquidity at the end of the first quarter which totaled $14.5 million consisted of $8.4 million in availability on a revolving line of credit and $5.7 million available under an open capital expenditure facility and $300,000 cash on hand. The total represented a decrease in our available liquidity of $20.9 million as of December 31, 2019. With this again, mainly due to the COVID-19 related capital expenditure acceleration and working capital investment. We estimate that our liquidity position will decrease slightly during the second quarter but then improve during our [indiscernible] 2020 as our working capital positions starts to decline to normal levels and operating cash flows overtake our capital expenditures during the back half of the year. With that, I'd turn it back to Rich.

Thanks, Barry. At our last call in March, I said it was too early to understand the financial impact COVID-19 would have on our business and I did not reiterate our 2020 guidance of $89 million of net revenue, $22 million in plus an adjusted EBITDA and $16.5 million in cash flow from operations. As of today, I want 100% confidence in our team to execute in our plan. We have the necessary contingency plans in place for future effects of this pandemic. However, at this point there are still too many unknowns outside of our control for me to reiterate on numbers. As I said here today, there are some things I know for sure. What I do know is that our oncology patient census continues to grow and is higher than ever. Our DME services team will continue to see higher-than-normal demand for both pump sales and rentals. In pain management, as stage begin to open and elective surgeries are getting rescheduled, we are already seeing the demand for patients coming back online. And that as our hospital access improves, we will win negative pressure market share. So what does all this mean? I think we'll be fine. I think we should be able to drive towards our original numbers but I also think it'll be foolish in these uncertain times from me to try and predict the future. A lot of questions remain that we can't control and can't predict that could negatively impact growth within certain therapies. We will see a huge, we will see a surge in COVID-19 as the restrictions are lifted state-by-state forcing additional shut downs, that's one of our questions. Will we see a resurgence of the virus in the fall as we do with the flu? I am hopeful that when we talk again in August that some of these questions will be answered and we can have better clarity on our full-year financials. I've been with InfuSystem for 16 years and even with everything going on around us have never been more confident and passionate about our strategy. Why? Because there's a few things I know for certain that will allow us to overcome any challenge. I do know across all of our functions from top-to-bottom, this team has been built to withstand anything. I know Tom Ruiz and his sales team will be relentless when it comes to managing our growth by expanding in new therapies. I know Carrie Lachance and our operations team will be relentless when it comes to our constant drive to improve operational efficiencies and making sure that our patients and customers receive the industry leading service they are accustomed to. I do know that all 280 members of the InfuSystem team are committed to make sure that our platforms are made solid and infinitely scalable. I do know that any impact will be short-term and we'll come out of the other side of the stronger and sharper than ever before. And with that, happy to answer any questions.

[Operator Instructions] And our first question today comes from Brooks O'Neil from Lake Street Capital Markets. Please go ahead with your question.

Thank you, good morning guys. I have a few questions and I admit upfront there's been a whole lot of things going on in my end. This morning that I may have been distracted during some of your prepared remarks. So if I ask about things you've talked about, I apologize but it would be helpful if you could go in. I was hoping first to get just a little color on the pain and oncology businesses of results during April and early May. I think you alluded to a little improvement but could you just give us a little more color on what you're seeing out there in the marketplace right now. Thank you very much.

Sure, thanks Brooks. Regarding oncology, patient demand remain strong. So our senses continues to grow. What we see in April and May is no different than we saw in the first quarter which the first quarter is the best quarter we've ever had. March was the best month we've ever had. So it's exactly what we thought. On oncology, people are receiving lifesaving treatments and that’s not something you can delay. It's not an elective surgery. It's not something -- it's not just a normal physical annual physical, it's something that you have to go to the hospital -- in the hospitals and old patient clinics are accommodating those patients. So oncology remains strong, there's no concerns at all. Pain as I mentioned is coming back online. So we saw, patient senses drop at the very end of March and early April. As we kind of came out of April end of May, we started to see the need for pumps and those patients coming back up online. We're not back to where we want to be for sure. It's going to take a little while as every state has to open and the surgeries have to be scheduled. But all things are pointing positive for pain management as well as long as there is no rebound of COVID-19 and the summer involved. They should be in pretty good shape this year.

Absolutely, that's great. And I'm particularly interested in the negative pressure business. Obviously, you said in the release that there was some disruption to the launch of related to COVID. But can you just try to give us a little more color again maybe April, May and what you're seeing out there in the marketplace in terms of the response to your offering in that market?

Yes. So from a launch standpoint, it's definitely going slower than we thought. So negative pressure, the sales process is really driven through the hospital. And that's a challenge when the hospitals just not letting any non-essential people and they're not letting some visitors in to visit patient. So that access has definitely slowed down quite a bit especially in some of the big cities. And that has slowed down the launch. That being said, when the hospital starts to ease those restrictions which we haven’t, we haven’t seen happen in April yet. So we don’t know when that'll happen, it should be pretty soon. again, as states start to open up, they're going to lessen restrictions here and let us back in. The good news is that there are a lot of hospitals waiting for us to come back and we were able to talk to them before the shutdowns happen. So tailwind of February or early March, they were excited about the offering that we have with our service combined with Cardinal's device. So we see the market opportunity there for sure. Now, it's -- once those doors open up from the hospital, I think we'll start gaining some market share and negative pressure.

Yes, that's great, that's fantastic. I think you guys a little bit too somewhat of an increase in bad debt expense in the quarter. And I'm just curious if you could elaborate on that a little bit so we could understand what's going on.

It's actually a little bit slower collection is what we've noticed that our process in accruing is driven by how quickly collect. So we had to increase our accrual slightly during the quarter. In that prior year, actually it was a significant reversal that just makes a bad comp.

Okay, I got it. And then, last but not least, I'm kind of curious how you guys feel about your available liquidity. Obviously, you mentioned it come down again a little bit in Q2 and that maybe improved as you get into the back part of the year. But you feel like you have the capital you need to be able to kind of get through this period and on to the Promised Land is quite obviously up ahead?

Yes, so I'm kind of a believer in having as much liquidity as possible. That said, I feel very comfortable, we definitely don’t see but we do see the earnings being very strong. So we'll have a significant good cash flow as we go through the year just from the operations. Right now what's happening, we're just -- we just we had a working -- investment working capital to build our supplies and make sure we want the stock if there was any kind of disruption. So we built that inventory in particular. And then be accelerated pump [indiscernible]. We've been able, we'll kind of pass that and now we'll see pretty soon our working capital will start to go down and the [indiscernible] has slowed so we'll have -- we don’t have that as use of cash for a few months. So I see it coming back strong as we go through the year.

Great. Congratulations on the great start to the year and keep it up.

Thanks, Brooks.

Our next question comes from Douglas Weiss from DSW Investment. Please go ahead with your question.

Hi, congrats on a good quarter. You -- in the press release you mentioned, $3 million in medical equipment purchases at the end of the quarter and you're going to have an additional $3 million in medical equipment. What is that more specifically?

I haven’t really talked about the future but we've been buying pumps mainly for a couple of reasons. 1) With a hell of a demand for products that to go into facilities they're actually serving COVID patients. So, our DME segment has been basically trying to find pumps anywhere they can or that to serve into that. A lot of that revenue started -- is coming into the second quarter but that's basically the reason. We don’t see a sort of capital expenditure activity not for the year, higher than what we will hit on our plans. But it just happening a little bit earlier in the year because of the COVID crisis.

Okay. And then you also mentioned safety stock of medical supplies for oncology, what is that?

So only we deliver services to patients. We give them more of a [indiscernible] but they also get supply kit. I think they get a couple of times during the course of their using the pump. So what we did is we brought in extra supplies to make sure if something happened in on our supply chain we would be able to serve patients. That was basically building safety stock in order to prepare ourselves.

Is that kind of a one-time thing or is that ongoing?

It's a one-time thing. We put our orders and we have some of it that arrived during the quarter a little bit more that's showing up in the second quarter. And then, we'll just eat into that stock as we go through time for the rest of the year.

And then, have you made the capital investments for this year already in the room care equipment or is that you kind of show up later in the air.

Yes. One of the nice things about this business is that you can really -- you can scale your capital expenditures to what your needs are. A company automotive industry or if we had to buy a piece of equipment that we probably couldn’t we wouldn't put all the we won't take up the comparison that piece of equipment for years. I think you can [Indiscernible]. So we have bought in pumps for the devices for negative pressure but only what we need to serve the initial stages of the business.

Okay. My sense is you haven’t really put much in your guidance as far as that business, is that true?

That's correct.

Yes. There was no revenue from negative pressure in that guidance because we want to share when it would launch this year.

Okay. Do you have anything you any kind of goals you might offer in that or is it too early?

I think it's too early. We had initial goals and what we thought we could do the share. All bets are off when it comes to access to the hospitals for the next couple of months. So it's just tough to say I mean if we get more market share fast than expected, we could probably catch those numbers. We'll probably have to wait till June or July to start to see that happen.

Okay. All right, well thanks and congrats again.

Thanks, Doug.

[Operator Instructions] Our next question comes from Erin Brockovich from E.S. Capital. Please go ahead with your question.

Hey guys, good morning. Great start to the quarter or to the year, excuse me. You've mentioned on the last call Rich that the DME side might mitigate some of the losses from ITS side or some of the delays. And you said that you didn’t think it'd be in the multiple millions but based on your results that you had today, it looks to me like maybe that’s changed, perhaps it is now a little bit more than you expected back in March. Is that accurate and if so what's led to that change?

Yes, thanks Erin. So in the first quarter we actually didn’t see a big drop in ITS revenue and that's mostly because oncology and a record quarter and pain management really didn’t get impacted till the third week of March from an elective surgery standpoint. So we had much to overcome in the first quarter. It's really the second quarter and again the only hit we're going to take is on the elective surgery side for all of April, maybe all of May or part of May. DME will be – will, should recover anything of that, money again it's still not in the millions of dollars. Its 100s or 1000s. And DME is, it came out of the gate strong or they ended the first quarter strong and they came out again in the second quarter strong as well. So we think, the second quarter could be a good quarter if pain comes back online here pretty quick with strong oncology patient senses, a strong DME quarter and some recovery on the pain side.

Sounds good. So I mean, I think then this elective surgery losses are and there must be a small part of the overall business based on --

Yes, absolutely pain management is our smallest piece of the ITS segment. Obviously to work by oncology. So we don’t want to lose it for longer than we have to and certainly not for quarters-and-quarters. But a few months we'll be able to recover from.

All right. I certainly understand you're not wanting to commit to certain numbers with all the uncertainty out there as you mentioned still a lot of uncertainty about what'll happen even in the fall. But just taken a look at this I mean extrapolating on your numbers from the quarter and the comps from last year. I mean, it looks to me like you could be on pace to do as high as like $95 million, $23 million in adjusted EBITDA. Is there something, is there anything that's happened so far in the second quarter that would make you think that those increase in revenue like the 18% and that 30% increase in adjusted EBITDA. Any reason for that to really get off track so far from what you've seen in the second quarter is that kind of still playing out that way given the fact that some of the losses on the one hand are being made up on the DME side.

I think $ million and $23 million are pretty aggressive even without COVID-19 and there are certainly a lot of unbalance in the second half. Do I think will get to our plan, If pain comes back on line and DME stays strong and oncology continues to grow to? I think we can get there sure. Do I know what's going to happen next month or even next week with COVID? Absolutely not, none of us do. Right, so.

Yes, right.

There's concerns as we plan, there's concerns about the boomerang effect, so states open up, does start to -- the cases start to go back up and the current starts to steep in again. If that happens, that's a problem. Even if it stays flat in the summer but comes back in the fall who knows. Again, we can have another issue on our hands and we don’t know what the second round would bring. We don’t know if oncology would stay strong, we think it would. But certainly elective surgeries would be postponed to get in those sorts of things. So there is just so many factors we just don’t know, we don’t know and that's why we're kind of holding off on the numbers.

How concentrated is your business there in the oncology side in terms of like percentage that were being in areas that have already been hard hit or how spread out. Is it across the country, I don’t know how concentrated it is to one -- a couple of patients.

Sure. So, we're in all 50 states, it's exactly what you would think. The big cities, the Boston's, New York, LA’s of the world, obviously at the most hospitals most doctors. So we have so much of the market share. It's pretty well-represented across the country. So yes, we've a heavy concentration in New York and Boston, in Detroit our home town, all of those have been hit for sure. Or we haven’t not, even in those cities we haven’t seen much of an oncology impact at all.

Yes. And that sounds good for the future and then -- as well I mean given that they've been the hardest cities and you've still not seen that disruption. So that sounds good. Final question for me then is, you talked about leveraging relationship with Cardinal Health and obviously that's still very early on. But I'm just wondering if you've seen anything on that. If you've been able to do anything on that related to COVID-19 and on the DME side. Was them here?

With Cardinal, so we have other Cardinal devices just like we have [indiscernible] devices outside of negative pressure. That we [rent] and sell in the hospital markets and just different types of infusion pumps and products. So that's always been the case, that hasn’t changed during the COVID crisis.

Okay. Thank you, guys. I appreciate it. Stay safe and good luck.

Thanks, Erin.

You too.

Thank you.

And ladies and gentlemen, with that we'll end today's question and answer session. I'd like to turn the conference call back over to Mr. DiIorio for any closing remarks.

Thanks, Jimmy. We are certainly living in extraordinary times. And on behalf of the team, I truly appreciate your continued support. I want to thank for participating on today's call and look forward to taking to you again when we report our 2020 second quarter results. Please stay safe, and thank you.

Yes. Ladies and gentlemen, with that we'll conclude today's conference call. And we thank you for attending. You may now disconnect your lines.