InfuSystem Holdings, Inc. (INFU) Q1 2021 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to your InfuSystem Holdings, Inc. reports First Quarter Fiscal Year 2021 Financial Results. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, Joe Dorame. Sir, the floor is yours.

Thanks, Melinda. Good morning and thank you for joining us today to review the financial results of InfuSystem Holdings, Inc. for the first quarter of 2021 ended March 31, 2021. With us today on the call are Rich DiIorio, Chief Executive Officer; Barry Steele, Chief Financial Officer; and Carrie Lachance, President and Chief Operating Officer. After the conclusion of today’s prepared remarks, we will 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 and documents filed by the company with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the year ended December 31, 2020. 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 would like to turn the call over Rich DiIorio, Chief Executive Officer of InfuSystem. Rich?

Thanks, Joe and good morning everyone and welcome to our first quarter 2021 earnings call. Thank you all for taking the time to join us this morning and I hope you and your families are staying safe. InfuSystem is off to a solid start in 2021 as our business continued to build momentum with strong financial performance in the first quarter. Our strong performance and the rising demand for our offerings is the direct result of our team’s commitment to provide the highest levels of service to ensure our medical devices were available to our patients for uninterrupted and more convenient treatments. I want to thank the entire InfuSystem team for their hard work and dedication in delivering another strong quarter. We will review our financial results for the first quarter, provide an update on our business for the balance of 2021 and discuss our plans for 2021 guidance and the outlook for 2022 and beyond. For the first quarter of 2021, we delivered net revenue of $24.5 million, an increase of 14% over 2020. Adjusted EBITDA of $6.2 million, an increase of 51% from the prior year and operating cash flow continue to grow at $2.7 million, an increase of 376% over 2020. We also put in place a $75 million credit facility and expanded our DME biomedical services with the acquisitions of FilAMed and OB Healthcare, transactions I will touch on more later. Our ITS platform has grown 13% over last year with a solid gross margin of 62.9% driven primarily by the oncology business, which had one of its best operating quarters ever. This is despite the typical seasonality we experienced in the first quarter. Our oncology team did an outstanding job in providing more patient treatments and adding new accounts that increased our market share. Pain management performed better than our already aggressive plans for the quarter. Our pain team did a great job and treated a record number of patients due to both a big increase in new customers and elective surgeries largely coming back online. Given the progress we are making in pain, we continue to expect to double our pain revenue in 2021. During the first quarter, our Negative Pressure Wound Therapy business, continue to build solid momentum. Our team continues to treat more patients every week and the contribution from negative pressure is now materially contributing to the growth seen in our ITS platform. Last quarter, I commented on our observation of some disruption taking place in the wound care space. This disruption is occurring as one of our competitors implemented changes in its service levels. We are determined that these changes create a real opportunity for InfuSystem, and we have made the strategic decision to significantly accelerate and increase our investment in negative pressure. This means we have hired several people with strong knowledge in the space and provided them with the resources necessary to help us capture more market share. We do not anticipate that these investments will have significant revenue impact to be on the rapid growth, we are already expecting in 2021. However, we believe the benefit to net revenue could be material in 2022 and will definitely shorten the pathway for our original goal of capturing 5% to 10% of the estimated $600 million negative pressure home healthcare market. We are more optimistic than ever about our prospects and wound care, particularly now that there is even more opportunity to emphasize our industry-leading service levels and commitment to patient care. Switching to DME, we generated 15% revenue growth and solid gross margins of 40.9% in the quarter, driven by strong continuing market demand for infusion pumps. The new $75 million credit facility we completed during the first quarter, provided us the flexibility to acquire 2 small biomedical services companies in the last 90 days. FilAMed was the first and OB Healthcare was the second, each of the unique and special business providing us with the means to enhance and broaden our service capabilities within the DME platform. The broader range of services includes compression devices, defibrillators, electrosurgical units and patient monitors. Additionally, our biomedical teams will now perform onsite repair, preventative maintenance and physical device inventory management to hospital and healthcare systems nationwide. I firmly believe these strategic acquisitions provide catalyst that can change the growth profile of DME putting it on par with our ITS business. Now, I would like to turn it over to our President and Chief Operating Officer, Carrie Lachance to provide more color on the oncology business and our acquisitions with FilAMed and OB Healthcare. Carrie?

Thanks, Rich. A warm welcome to everyone on the call today. To start, I am more than happy to discuss the great quarter we saw in our oncology platform. As Rich points out, we had our second best quarter ever. Not only are we seeing a post-COVID return to normal treatment numbers in oncology, we continue to make significant workflow improvements. Our customer service and revenue cycle teams are stronger than ever. They are delivering continuous improvements and managing paperwork both at the customer level and within our own back end systems. We are submitting bills, processing claims and getting paid faster than any other time in the past. We have completed the acquisition of OB Healthcare and are thrilled to have their team on board. They have been a wonderful addition and a perfect fit into our team and culture. From an operation standpoint, I am extremely pleased with how smooth the integration has been from the reporting structures of the teams and how well they have merged together to the lightning speed in which the OB Healthcare team has learned and adopted many of our systems. Just like it occurred, following the FilAMed acquisition in February, we saw immediate opportunities by combining our capabilities with our scale and nationwide footprint. We are excited with the synergies created by these two new additions, which significantly expand our addressable markets and puts the company in a position of strength to aggressively grow InfuSystem’s market share in the acute care. With that, I will turn it over to Barry to go through our financials.

Thank you, Carrie. As Rich and Carrie both pointed out during the 2021 first quarter, we improved on nearly every financial metric as compared to the prior year first quarter. We continue to grow net revenue at double-digit rates. We expand all of our profitability margins and dramatically increased operating cash flow and reduce our capital expenditures, providing free cash flow to fund a small acquisition. I will touch on a few of the main drivers for these increases. First, our net revenue increased by 14% due to continued market penetration in oncology, improved collections on billings, a strong market demand for infusion pumps in the DME services segment, and growth in both pain management and the new Negative Pressure Wound Therapy businesses. Improved revenue volumes with the higher gross margin dollars while favorable product mix, better collections on billings and improved fixed cost coverage raised our gross margin and adjusted EBITDA margin percentages. Selling, general and administrative expenses increased by $1.1 million due to increase in non-cash stock-based compensation expense, which was $1.4 million higher than the prior year, but was lower as a percentage of net revenues at 56%, a decrease of 2.6% from the prior year. This reduction was partly driven by lower selling and marketing expenses, which decreased by almost $250,000 despite the higher sales levels and improved net revenue coverage of fixed, general and administrative costs. The improvement in our operating cash flows was driven by the increase in adjusted EBITDA coupled with a smaller investment in working capital as compared to the – of the prior year. The amount was sufficient to cover all of our capital expenditures for the quarter and most of the FilAMed acquisition, requiring only a $500,000 increase in our net debt, which was $29.7 million at the end of the quarter. Despite this increase, our ratio of funded net debt to adjusted EBITDA as of March 31, 2021 decreased to 1.04x down from 1.11x at December 31, 2020. Our total available liquidity at the end of the quarter was totaled $45 million more than doubled since the end of the fourth quarter, mainly due to the refinancing of our bank debt at February 5, and was higher than our actual outstanding debt, leaving ample resources to fund our continued growth. With that, I will turn it back over to Rich.

Thanks, Barry. InfuSystem is building a strong foundation for long-term success in facilitating industry leading in-home healthcare services. The services provided by our teams enable to continuity of care for patients between the hospitals and home-based treatments. As a result, we expect 2021 will be another record year for InfuSystem, with strong double-digit growth in net revenue and adjusted EBITDA, driven by growth in both of our ITS and DME platforms. Our focus for the remainder of 2021 will be on: one, growing the three therapies currently on our ITS platform, oncology, pain management and negative pressure wound therapy; two, launching a new fourth therapy on our ITS platform in the coming months; three, leveraging our recent acquisitions of FilAMed and OB Healthcare and biomedical services to expand our market share in acute care; and four, identifying new strategic partnerships and small tuck-in acquisitions that will enhance and expand our current capabilities and offerings. At this time, I am reaffirming our annual full year 2021 guidance: net revenues to be within the range of $107 million to $110 million, adjusted EBITDA to be within the range of $29 million to $30 million and operating cash flow to be within the range of $21 million to $23 million. We are also forecasting adjusted EBITDA margin to be 27%. Additionally, we are projecting net revenues in our pain management and negative pressure businesses to be in the range of $8 million to $10 million combined in 2021 with us exiting the year on a $12 million run rate. Looking ahead, we are setting a new company goal of 30% adjusted EBITDA margins. We are not setting a timeframe on when this will happen, but we do believe it’s an achievable goal in the very near future. Given the strength of our business, activity planned for the second half for 2021, we plan on revisiting our full year 2021 guidance and anticipate increasing our guidance next quarter, when we have more visibility on these positive developments. I am very excited for the future of InfuSystem as the company is entering the next phase of its corporate development, and we have the right team in place to consistently deliver 15% plus year-over-year growth with strong gross margins. We have identified and are evaluating a number of excellent growth opportunities that we believe have the potential to drive significant top and bottom line growth. I am extremely confident that the team will continue to successfully execute our growth plans by adding new therapies, new services and developing new strategic partnerships. InfuSystem was highly committed in providing our customers with industry leading service and improving patient outcomes. And with that, we are happy to answer any questions.

Thank you. [Operator Instructions] And first, we go to Alex Nowak with Craig-Hallum. Please go ahead, sir.

Good morning. This is Trent McCarthy jumping on for Alex. Quick thing on pain management, can you provide some more color on the status of the pain business? How close are hospital clinics to being fully reopened? And if you could remind us when you could see a potential CPT code and just to clarify as well on the more than double commentary, is this a change at all from your previous double-digit millions outlook or am I just overanalyzing that?

Yes, good morning, Trent. So as far as how close elective surgeries are to being kind of 100% back online, they are relatively close to that number. I think what’s happening is the hospitals and ambulatory surgery centers are pretty much open at this point. They understand how to deal with COVID and resources and those sorts of things. I think there is still a little bit – they are a little bit off numbers wise, but I think that’s more driven by patients that are just maybe don’t want to go back in yet and are a little hesitant because of COVID and catching it, if they walk into the hospital. But overall we are – I don’t know if I could put a number on it, but when it dropped off last year at this time, we were at 20% of the original numbers, we’re much closer to 100%. And with the new customers that the team has added, we’re growing every week. It seems like our patient census. So overall we’re in really good shape, and I think if everything goes according to plan with the vaccine and certain states opening back up again, I think it will be just a matter of a couple of months before we’re fully back on line. As far as the CPT code, we’re dealing with the government in lobbying and we’re probably, if I had to guess 18 months away or so from getting a CPT code for the docs to get paid. I think it’s a no-brainer, when you look at the opioid abuse in this country and with the government rather pay a few hundred dollars for a pump and avoid the use of narcotics or write a prescription and have to treat a patient that gets addicted. So the financials certainly makes sense. It’s just kind of good common sense that this would, this should be covered by CMS. So I think it’s just a matter of time before we get that code. And then as far as doubling the business, it hasn’t changed. We think we will be in double-digit millions by the end of 2022 and the good news is, we’re actually a little bit ahead of pace of this year. So that’s all good news, and like I mentioned, we are not fully open yet and when we do, I think it’s going to be really good news for the pain business, but they are really hitting their stride now and I have a 100% faith that they are going to hit the number this year and even roll into next year in that way.

Got it. And just a follow-up, is there anything you could tell us about the fourth therapy, what kind of partnerships are you exploring here? And I know you mentioned the fifth therapy on the previous call. I guess, what about the fifth therapy potential there? Are there medical partners still reaching out to you to make deals happen?

Yes. So, there are a lot of manufacturers coming to us to partner. It’s just a matter of us picking the right one at the right time. As far as the fourth therapy, we still believe it will happen by the middle of this year. So, over the next couple of months, we will have an announcement. We are at the point now where we are just kind of going through our accreditation and finalizing agreements, but really for competitive reasons, I don’t want to show our hand yet on what’s coming out, but it will be in the next couple of months you will see something. Fifth therapy, we really don’t have a timeframe on, it just depends on the opportunity and the partner and how quick we can get up and running. Could it happen this year? It could, but by the end of next year I would expect something new, but it all depends on market conditions and how much we are growing our DME Services business, how much we are growing the new therapy, how much pain and negative pressure take off. And to me, it’s more important to execute on what we are doing today and what we are about to come out with than it is to kind of launch the fifth therapy just to have a fifth one.

Okay, that’s helpful. And then last one from me, oncology has been in steady grower consistently now. Is there anything you can do to reaccelerate penetration here, or is all your focus now on pain and wound and now the fourth therapy coming online?

In our core oncology business, there is no way to kind of force growth there. If a new drug comes out or a new therapy for different type of cancer that’s given via an ambulatory infusion pump, that will obviously help. But aside from that, it’s more just kind of day-to-day sales guys going out and doing their job and growing it mid to high-single digits for the next – for the seeable future. But there is no way to really kind of force more growth there.

Okay. Thanks for the questions.

Thanks, Trent.

Next we go – I apologize. Next, we go to the line of Frank Takkinen with Lake Street. Please go ahead.

Thanks for taking my question and congrats on the quarter. First one from me, on the guidance, heard your comments about given the strengths in the first quarter, expectations of potentially increase in guidance, with the next quarter. Although I applaud your conservatism completely, I just wanted to ask directly, what is keeping you a little bit more conservative at the beginning portion of this year, as many of your business lines are trending what feels to me ahead of expectations?

Yes, I think it’s just that, but it’s early in the year, Frank. We’re only 5 months in, I wouldn’t want to raise guidance today and then readjust it in a few months if we have some more good news. So I think it’s just the timing feels right to do it. When we all talk next time which will probably be early August, we are working on our models now, there is a lot of good opportunities out there and we don’t want to raise it now and have to have to raise it again. So I’d rather just give you guys better information when we have more visibility in a couple of months.

Okay, prefect. And then secondly on the wound business, just wanted to ask a little bit more about that, heard your comments about the competitive landscape changing a little bit in potential to accelerate the growth to your market share goals. Can you just take us a little bit deeper into how you feel that the competitive landscape is going to change, how that could ramp over the end of this year and the beginning of next?

Yes. So, in wound care and specifically negative pressure, it’s really a high touch service business, very similar to our oncology business. It’s not something you can put on a piece of paper in the catalog and sell it. It’s a conversation, it’s consultative selling, it takes a lot of time and we believe that the service levels of one of our competitors is about to and probably already is dropping off considerably. So what we’ve decided is only and probably a handful of times in any company’s life we see an opportunity like this, where someone else’s decision fits right into your strength right into our wheelhouse and that’s exactly what’s happening now. The fact that we are as good as we are and probably better than anyone on the planet, from a service standpoint, especially in oncology and we can take that in there in the negative pressure. And our – and one of our competitors has decided to pull back their own service levels. It’s a perfect marriage of the two things converging and an opportunity for us and we’d be crazy, not to try to capitalize on. So we’re pushing in more chips, not just more but probably faster than we thought we would have, just because the opportunities in front of us and we’d be crazy not to take it. So does that mean that the 5% to 10% market share gets bigger, the opportunity is bigger? Maybe, time will tell but it certainly accelerate how fast we get there, from the 3 to 5 years, I think I’ve talked about in the past.

Got it. That sounds great. And then last one from me, just talking to your newer longer range EBITDA 30% goal. Can you explain to us – can you pull down what are the most important pieces to getting to that margin? And then, is there an expectation of the recent acquisitions to help to get to that more specifically or just any updated thoughts around how you get to that 30% number?

This is Barry. It’s really a combination of things. As we grow and increase our volumes, we will be able to leverage our fixed costs more and more. And secondly, as we have higher rounds, we will be able to be more productive at those higher rounds. We will use different working tools and things that will be a leverage to SG&A line as we grow. This was actually the main driver.

Perfect. Thanks for taking my questions.

Thanks, Frank.

Next, we go to the line of Jim Sidoti with Sidoti & Company. Please go ahead.

Hi, good morning. I am glad to hear you are doing well. Couple of questions. First, as you enter new markets, it’s pretty clear how you can leverage your reimbursement infrastructure, your service infrastructure but how about the sales team? You’re entering new markets meaning you have to go out and hire additional sales people or can you use the folks you have and just sell to new doctors?

I think it’s probably both, it depends on the partnership. So if we’re partnering with somebody that has a specialty sales team, we might only have to add a couple of people. If it’s something that’s already in the pain space, at this point, the negative pressure space or oncology, it’s just a new therapy in those markets, then we will just leverage our existing team, there is really no need to add anybody other than maybe a specialist or two. So it can be kind of any of the above, it just depends on the opportunity in the market. And that’s really part of the decision-making process too, right. If we have to go and hire 50 people to even break into a market, that’s probably less attractive than if we can get into oncology and leverage our existing 30 plus reps, it just – it will just depend on the circumstance.

So should we assume that whatever market you enter next, you take – you’re pretty – you have the right number of people or at least close to the right number of people to make that immediately profitable?

That’s probably that assumption.

Okay. And then second from me. If we do hit inflation in the end of the year or do you have pricing power that you think you’d be able to pass that cost on?

It depends on which side of the business. So on the ITS side, when it’s reimbursement from the insurers, it’s tough to go get more money from them, right, the way through the rates. On the DME side, yes, there is always potential if we need to pass it through again, it depends on how sensitive the customer is and all sorts of things, but we have that potential on the DME side, not necessarily on the ITS side.

Alright. Thank you.

Yes. Thank you.

Next we go to the line of James Terwilliger with Northland Securities. Please go ahead.

Hi, guys, can you hear me?

Yes. Good morning, James.

Good morning. Nice quarter to start the year off. First question from me is, you talked about the strength in the oncology. Could you go back and talk about, since you’re such a player in this business, but why was that business so strong compared to your historical numbers?

So that business has been strong for the last couple of years, but the sales team has done an exceptional job, there is some new leadership there in the last couple of years. Opening up some accounts that we didn’t have, there were some larger facilities that we’ve recently won, whether it was the end of last year or early this year, and I also think that sales reps with Carrie’s team and operations, the revenue cycle teams and customer service teams are just doing a much better job of processing paperwork faster, better, more efficiently, getting paid more quickly, those sorts of things, so that all contributes to the revenue. So kind of across the board, there is just been significant improvement in that team in the last 6 to 12 months.

Okay, great. And my second question really quickly on those two acquisitions. And then I just – can you expand or comment anymore on the two acquisitions, maybe as it relates to their growth rates, their margin position or how they fit within your company as a whole?

Yes. So I’ll touch on how they fit. So FilAMed brought some expertise that we didn’t have. They worked on device – we’re historically an infusion pump company and that’s really what we’re able to repair and maintain. The FilAMed team is phenomenal at that piece, but they also work on other devices. So that coupled with OB Health, OB Health has a skill set of understanding how to do onsite repair, so they go into the hospital and do it onsite as opposed to having the customer have to ship something or ship thousands of devices to us. So now you have FilAMed who can – who gives us the capability to fix more devices that are in the hospital and OB Healthcare will be help – who gives us access into those hospitals onsite, that’s a perfect combination. And I think Carrie mentioned, if you take those two skillsets and add it to our footprint on a national basis and the thousands of hospitals that we already have as customers, we now have more products and services to sell into existing customers, and that’s why I’m pretty bullish on the DME services business, growing at a considerable rate over the next few years, will be a real player in our growth over the next 3 to 5 years.

But on the margin prospects, they are accretive slightly to the DME business, which is a little bit lower than our average gross margin, but from our EBITDA perspective, they don’t have a lot of SG&A requirements, so they should be very helpful to our bottom line. The other nice thing about both of them is they don’t require lot of capital as we grow those businesses, so it helps create a cash flow stream that doesn’t require a lot of upfront investment.

It’s fantastic. Thanks guys. I will jump back in queue. Thanks for taking my call.

Thanks, James.

[Operator Instructions] And now we go to the line of Doug Weiss with DSW Investments. Please go ahead.

Hi, good morning. Quick question on CapEx, do you have a sense of what CapEx will be this year, and could you break it out between maintenance capital for your existing inventory and capital for new – the new growth initiatives?

We haven’t changed our outlook, I think we said $12 million to $15 million when we gave our guidance and I would suspect that we are still in that $4 million to $5 million range in terms of maintenance for – in that number.

Okay. And then on the DME, so as I understand what you are saying is that service and repair, which historically I don’t think was a big part of your business is becoming an important part of that segment? And I was curious if you could talk a little bit about that business in terms of how big it could become as a percent of our segment sales, and my sense is that repair business would have higher margins over time. I think you indicated that, but if you could just sort of talk to that a little more?

Yes. So that business definitely is pretty high margins, as Barry mentioned, there is almost no capital associated with it. I think that our focus, as an organization with regards to biomed has for the most part been inward looking in repairing our own devices and maintaining our fleet of 100,000 plus pumps, and the team does a phenomenal job at that. And we generate a few million dollars on outside services over the years, but that was more opportunistic than anything else. What we see in the market is a need for another player to come in and be able to do onsite repair of multiple devices, right. We don’t want to be stuck in the corner. We are just infusion pumps. That’s why FilAMed make so much sense for us. So going on into that market and we already have, like I said thousands of customers that are hospital based in the acute care setting. We already have the context there to be able to sell another service and makes sense and now we have the capabilities to service onsite with new products. So the potential, the DME services potential over the next 3 to 5 years could certainly match a new ITS therapy. So going from almost a couple of million dollars a year in revenue to tens of millions of dollars in the future, we can see the pattern.

And do you think the onsite portion would ultimately be bigger than the offsite within the DME line?

That’s tough – it’s tough to say. I mean we have a lot of capabilities in-house to have devices shipped to us from a hospital. Some of the bigger ones, they don’t want their hospitals – they don’t want the devices to leave their setting. So we’re really have the capability to do both, which is nice, it gives us optionality based on what the customer wants.

And who do you compete within that? I mean, who will you be competing within that space?

There is a lot of players, the biggest one is probably UHS which is now Agiliti, I think they re-branded themselves. They are the dominant player, but there is a lot of people in the $50 million, $100 million range that will be going in. But I think with our relationships and our ability to repair devices and how good our team is, I think we can really take some market share.

And last question. Is it a fragmented market where you can continue, is there sort of a roll-up aspect to this market?

There is certainly that piece. There is multiple FilAMed’s and OB Health’s out there, they are not all going to be good fits. We – first and foremost, we want to make sure the team fits our culture, but their work has to meet our standards and not everybody does. We were familiar with both of these guys, FilAMed and OB, so it made it a lot easier to make those decisions. But we’re familiar with a lot of people in the market. So we will be very picky. But yes, there is certainly other tuck-ins that we can roll in over time.

Okay, alright. Thanks. Nice quarter.

Thanks.

At this time, we have no further questions. We return to Mr. DiIorio for closing remarks.

Thanks, Melinda. I want to thank everyone for participating on today’s call. I hope everyone has a good day, and I look forward to talking with you again when we report our second quarter 2021 results. Please stay safe and thank you.

Thank you. This does conclude today’s teleconference. We thank you for your participation. You may disconnect your lines at this time. Have a great day.