InfuSystem Holdings, Inc. (INFU) Q2 2021 Earnings Report, Transcript and Summary

Good day, and welcome to the InfuSystem Holdings, Inc. Second Quarter 2021 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 question. [Operator Instructions]. Please note today's event is being recorded. I'd 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 second quarter of 2021 ended June 30, 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 questions. If anyone participating on today's call does not have a copy of the press release, you can retrieve it from the company's website at infusystem.com or numerous other financial websites. Before we begin with prepared remarks, I'd 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. And 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'd like to turn the call over to Rich Dilorio, Chief Executive Officer of InfuSystem. Rich?

Thanks, Joe. Good morning, everyone, and welcome to our second quarter 2021 earnings call. Thank you all for taking the time to join us this morning. I hope you and your families are staying safe. Today, we will review our financial results for the second quarter 2021, provide an update on our business, discuss our guidance for the rest of 2021 and the outlook for 2022 and beyond. In considering how to best approach this call today and update investors and others outside the company on where InfuSystem is, I think it's best to highlight a similar point in our recent history. In late 2018, when we knew that we were going to pick up a material amount of oncology revenue due to the exit of 2 long-time competitors, I explained the situation during our earnings conference call. During that call, I shared what I could about developments in the marketplace, explained how InfuSystem was pivoting to capitalize on the opportunities created and then emphasized that patients would be necessary due to the nature of our business, which is that we often have to make the investments first and then wait a quarter or more before revenues begin to show up in our financials. Now in 2021, we find InfuSystem in a similar place. However, this time, there are 4 areas of our business that are like the situation back in 2018. First, there's pneumatic compression, which is the business that includes Lymphedema. We announced this during -- via a press release on June 29 as the fourth therapy in our ITS segment. We see a $1.5 billion TAM in pneumatic compression. By far, the largest therapy we've entered to date. We are making steady progress in this new therapy. But consistent with the nature of our business, we do not expect to see material revenue until 2022. Second, there is wound care. During our last earnings call, we discussed the decision to pull forward our investments in this therapy because of recent developments in the market. Over the last few months, we've hired more than a dozen experienced wound care sales people into our team. I believe this team will significantly shorten the time it takes to ramp to a 5% to 10% market share in the $600 million TAM market. While the cost side of this strategic action can be seen in our results for the second quarter and have impacted our bottom line guidance for the full year, the nature of our business requires that we'd be more patient with the revenue side as we don't expect to see wound care revenue begin to ramp until the fourth quarter of this year. Third, there's Pain Management. During the second quarter, we were presented with an opportunity similar to that that we had just seen in wound care. Some of the most capable and experienced salespeople in the industry became available to InfuSystem and we seized the opportunity. All told, we have almost doubled our sales team thus far in fiscal 2021. We are very excited about these hires. They are strategic, and we believe they will materially advance our business, particularly in the wound care and Pain Management space. The investments will result in increased annual spend of approximately $2 million, but are expected to return millions of new revenue next year and subsequent years. Fourth is biomedical services. This is on the DME side of our business and represents a major shift in that segment. As we told you at the time, the acquisition of 2 small biomedical services companies in the first half of the year represented a strategic move and they provided a long desired opening of opportunity into the acute care space. Unfortunately, I cannot say a lot right now, but we expect to be issuing a press release soon that will make that clear. DME has the ability to match the double-digit growth of our ITS segment. Our DME business has historically been dominated by pump rentals in the home health care space. In the future, we expect to add large acute care rentals in biomedical services. As stated in our press release, 2021 is turning out to be a very dynamic year. Our business development activities are operating at a pace never ever that we could have dreamed of, and we expect to be making a steady stream of announcements as we progress through the year. As we ready ourselves to take advantage of these new opportunities, we are making essential investments mostly in people. We have made significant additions to our sales teams and have begun hiring a large number of new biomedical technicians. The timing of these investments was not expected at the beginning of the year when we delivered our annual guidance, and the scale was not known at the time of our last earnings call. We have greater visibility now. And because the expenses precede revenues, our adjusted EBITDA guidance is lower for the year. We have no doubt that these investments were justified and will be rewarded, and we will make them again in a heartbeat. Barry will take you through our financial results for the second quarter in a minute but first let me go over a few of our highlights for the quarter. In the second quarter of 2021 we expanded our biomedical services capabilities and our DME platform position the company for new growth opportunities. We entered a new $1.5 billion market in pneumatic compression, including Lymphedema. And we also announced a $20 million stock repurchase program. Now I will give you some color on our 2 business segments. Our Integrated Therapy Services platform had growth of 5% over last year, with solid gross margin of 64%, driven primarily by higher treatment volumes in wound care and Pain Management. On a combined basis, wound care and pain delivered revenue growth of 114%. Wound care continues to make solid progress. Our team continues to add new customers and is treating more patients during the second quarter than ever before. The new members of the sales team are all on board, trained and are expected to greatly accelerate the capture of the market share. Pain Management continues to build momentum as our team treated a record number of patients for the second consecutive quarter. Business momentum continues to rise, giving us confidence that we will double our pain revenue in 2021 and again in 2022. With both wound care and Pain Management benefiting from the hiring of additional experienced salespeople, we are now projecting combined net revenues from pain and negative pressure to be on a run rate of approximately $15 million as we exit 2021. This compares to our previous estimate of a $12 million run rate at the beginning of the year. Continuing to our fourth therapy in ITS, pneumatic compression therapy, which includes Lymphedema. We announced the launch of pneumatic compression at the end of the second quarter and this is the first time we've discussed it on our earnings call. Lymphedema is a collection of fluids that generally occurs in the arms, legs or truck of the body that causes swelling, pressure and pain. This therapy is a fully reimbursable treatment and fits extremely well in our ITS platform. We have partnered with Bio Compression Systems to be their national turnkey solutions provider of pneumatic compression devices with calibrated and non-calibrated gradient pressure in garments. We are planning to begin onboarding new customers and treating patients in the third quarter. We do not expect any revenue contribution in 2021 as it will take 6 to 9 months before we begin receiving reimbursement. This means we will begin seeing more revenue contribution in 2022 but '23 is the year that Lymphedema therapy should deliver meaningful revenue growth. From a market perspective, initially, we are targeting our oncology customers because 20% of patients with Lymphedema come out of oncology practices and we have 2,200 accounts that our sales representatives service on a regular basis. The estimated addressable market for oncology is approximately $300 million out of the overall market of $1.5 billion. We are excited about the new Lymphedema therapy and look forward to providing our industry-leading patient care and customer service as we continue to expand our portfolio of home health care services. Switching over to our DME business. We see again how dynamic our business has been in 2021. Last year, our rental and sales business surged due to COVID. At the beginning of the year and through the first quarter, this business looked to be holding steady. However, in the second quarter, as COVID cases declined sharply in the United States, our health care provider partners understandably reacted and started returning pumps. Also understandably, that trend largely stopped from the Delta variance and cases rising again. The situation is stable now. The equipment and inventory includes the latest technology, and we have no concerns about putting it back into service, whether that be related to COVID, flu season or other normal market conditions. The pumps coming back to us in the second quarter caused a 13% decrease in revenue, but we maintained solid gross margins of 45.5%. The return of DME rental pumps in the second quarter and an inability to predict in which quarter they will go back into the rental fleet is the biggest factor causing us to guide to the lower end of our revenue range for the year. I'd like to emphasize that much more material and strategic to the DME business are the recent acquisitions of our 2 biomedical service companies. OB Healthcare and FilAMed are unique assets that materially enhance and broaden our capabilities with the significantly expanding the growth opportunities for our DME platform, particularly in acute care. In addition to depot service, our biomedical teams will perform on-site repair, preventative maintenance and physical device inventory management to hospitals and health care systems nationwide. As a result of these acquisitions, we are changing the focus of our cross-selling initiative. Previously, we were looking to leverage our oncology sales reps to only sell disposables. Now with our expanded service capabilities, we are focused on selling our biomedical repair services, a value-add with a higher margin profile. I want to strongly emphasize we see key biomedical service opportunities that will change the long-term growth profile of our DME platform. I firmly believe our DME platform will have the same growth profile as our ITS platform. Our strategy is to maximize the synergies created by our 2 new biomedical services companies to drive growth and expand our market share in acute care. 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 onboarding of new customers, patients and team members. Carrie?

Thank you, Rich, and good morning, everyone. There has never been a more exciting time for InfuSystem. In oncology, we continue to see great success with our case management program. We have continued to streamline that offering with our world-class clinical team, reaching more patients in meaningful ways than ever before. It's humbling to have the ability to touch so many patient lives while continuing to create added value for the ever-increasing number of clinics. Operationally, we continue to make improvements in our back-end systems by automating processes, improving workflow and adding increased scalability and efficiency as we grow. These improvements have allowed for decreased denials, improved collections and improved bad debt in all areas of the business. As a result, our cash collections have improved by approximately $800,000 annually without significant additional costs. In our DME business, I'm extremely pleased with the -- our team on the seamless integration of OB Healthcare. The acquisition of OB Healthcare on April 18 opened the door to multiple opportunities within the acute care space. Their expanded capabilities have been the perfect complement to our existing biomedical services. We have spent the past few months integrating teams, completing system integrations and cross-training. I'm happy to say that everything has been completed seamlessly and in record time. The great news is that today, we can turn our focus to the sales opportunities that the addition of both OBI Healthcare and FilAMed have given us. We are now focused on getting all teams prepared for the growth in front of us in the acute care space. With that, I turn it over to Barry.

Thank you, Carrie. And thank you, everyone, on the call for joining us today. I'm going to focus on 3 areas: one, the main drivers for the current quarter's results; two, how those results play into and what we are seeing for the rest of the year; and three, where we stand from a financial resources position, including the status of our financial reserves available to fund the coming growth in revenues. First, I'll talk about the second quarter financial results. Net revenues for the second quarter of 2021 totaled $24.8 million. This represented a 4.4% decline from the prior year and was below our 2021 plan. The challenging prior year comparison had been anticipated since during 2020, we experienced a significant COVID-19-related windfall, which included an unexpected onetime sale of used infusion pumps from our reserve fleet additional elevated sales in other new and used equipment and a significant increase in the volume of rental pumps in service. These prior year COVID benefits, which had been partially offset by lower Pain Management revenue volumes, were approximately $2 million. Adjusting for this, our second quarter 2021 net revenue would have increased by 3.5%. This increase would have been due to higher revenue in emerging therapies of Pain Management and Negative Pressure Wound Therapy, which, on a combined basis, increased by $700,000 or 114% and new revenues from the acquisition of FilAMed during the 2021 first quarter and OB Healthcare, which, as Carrie mentioned, we acquired halfway through the 2021 second quarter. In our original expectation for 2021, we had anticipated that the rental volumes would continue at their elevated COVID-19 levels and even grow further due to the continued market penetration and from additional devices. That assumption was borne out by continued strong levels during this year's first quarter. However, additional market penetration during the second quarter was not enough to offset reduced rental volumes for existing customers as the COVID-19 influenced market demand softened. Adding to the shortfall was lower-than-expected growth in our sales of disposable medical supplies related to a cross-selling initiative between the DME Services segment in the oncology business in the ITS segment. This decrease reflects an intentional change to focus the sales team on the higher-margin biomedical services now available due to the strategic acquisitions of FilAMed and OB Healthcare and less on disposable supply. Adjusted EBITDA and adjusted EBITDA margin for the second quarter of 2021 were $24.8 million and $23.7 million, respectively. These were both lower as compared to the prior year and to our original plan. The reductions from 2020 are mainly due to the favorable COVID revenue in the prior year which did not only improve the top line, but enhanced our operating margins because they favored high-margin revenues, including rentals and used equipment sales. As Rich talked about, the adjusted EBITDA and adjusted EBITDA margin was also in the current quarter due to the initial amount that we are now spending to accelerate the Pain Management and Negative Pressure Wound Therapy revenue growth programs. This additional amount of expenditures was approximately $400,000 for the second quarter. Turning now to our revised expectations for the year. As Rich mentioned, we now expect that our full year 2021 net revenues will end up at the lower end of our previously stated range of $107 million to $110 million. There are 4 main drivers of that revised amount: 2 unfavorable, but 2 favorable. The unfavorable items include a reduction of $3 million to $4 million in equipment rental and sales revenue for the year based on what we have seen in COVID-19 recovery related reduced volumes during the second quarter and our current outlook for the back half of 2021. Sequentially, comparing the second half forecast for the first half actual amount, we see increased amounts in these revenue categories resulting from newly acquired customers and a very modest favorable demand impact from the proliferation of a delta variant of COVID-19. We are also reducing the amount of revenue associated with our cross-selling program by $2 million to $3 million as we refocus the program away from the high-volume, low-margin sales of disposal medical supplies in favor of biomedical services because of the newly enhanced service offerings from the FilAMed and OB Healthcare acquisitions. While this change yields smaller revenue in the current year, the margin contribution is much better. We acquired these businesses mainly to build these capabilities and not necessarily for the small book of business they came with. This brings us to the first favorable adjustment for the 2021 revenue outlook, which is new revenue for these acquisitions totaling $2 million to $3 million that was not in our original 2021 operating plan. The last adjustment to the outlook is an increase of $1 million to $2 million for Pain Management and Negative Pressure Wound Therapy, representing the early benefits of the additional investments being made in these businesses. As Rich mentioned, these increases are expected mainly in the fourth quarter, which means that we expect to end the year at a significantly increased combined annual run rate of approximately $15 million for these 2 therapies. We are also changing our full 2021 outlook for adjusted EBITDA margin to 25%, a reduction of 2% from the original operating plan. This decrease is mainly driven by the unfavorable gross margin mix as we lower our rental revenue our highest margin revenue category and due to the investments in selling expenses run rate to accelerate the growth of Pain Management and Negative Pressure Wound Therapy. Let me close by providing an update on the base of our financial reserves. During the 2021 second quarter, our operating cash flow of $6.2 million represented a significant increase over both the prior year second quarter amount of $3.7 million and sequentially in the first quarter, which was $2.7 million. The amount was sufficient to cover $2.1 million in capital expenditures during the period and financed nearly 2/3 of the OB Healthcare acquisition. On a year-to-date basis, our operating cash flows were approximately $1.8 million ahead of our planned amount. However, due to the reduction in our full year adjusted EBITDA outlook we are decreasing our full year operating cash flow guidance to $19 million to $22 million from a previous range of $21 million to $23 million. We continue to anticipate that our investing cash flows, which includes cash used to purchase medical devices and other capital expenditures and cash provided by the sale of used equipment for the full year of 2021 to be within the range of $12 million to $15 million. At the end of the 2021 second quarter, our net debt stood at $32.3 million, a quarterly increase of $2.6 million, mainly due to the cash used for the acquisition of FilAMed and OB Healthcare, which totaled $6.3 million and capital expenditures offset partially by the favorable operating cash flows. Our total available liquidity at the end of the quarter totaled $42.2 million and consisted of $42 million in available revolving line of credit availability and $164,000 in cash. And with that, I'd like to turn it back over to Rich.

Thanks, Barry. I'm extremely confident about the future and excited that we are again at a transformative moment for InfuSystem. We have multiple material initiatives in both our ITS and DME segments. The strength of our business model and positive outlook for '22 and beyond, provided our Board and management the confidence to authorize a new $20 million stock repurchase program. While our top priority remains making investments in the company to drive long-term revenue growth, this program provides us with the flexibility to be opportunistic in repurchasing shares. Our focus for the balance of 2021 will be on: one, growing our 4 therapies on our ITS platform, Oncology, Pain Management, Negative Pressure and our new addition Lymphedema; two, successfully onboarding our Lymphedema customers and patients in the coming months; three, leveraging our biomedical services to drive growth to expand our market share in acute care; four, integrating additional new team members to successfully grow our business; and five, developing new strategic partnerships, small tuck-in acquisitions that will enhance and expand our current capabilities and offerings. While we revised our guidance, as Barry mentioned, we will be exiting 2021 better positioned and executing at a greater run rate than we had initially forecasted. This will result in even better top and bottom line results in 2022 and subsequent years. I am very excited for the future of InfuSystem with our Lymphedema, Negative Pressure and Pain Management therapies and our new DME biomedical services as we are aligning these 4 growth opportunities to drive sustainable growth for many years to come. I believe if we can successfully execute our strategic plan, any 1 of these 4 businesses could be bigger than our current book of business. I'm extremely confident the team will continue to successfully execute our growth plans by adding new therapies, biomedical services and developing new strategic partnerships. InfuSystem is highly committed to providing our customers with industry-leading service and improving patient outcomes. And with that, we are happy to answer any questions.

[Operator Instructions]. Today's first question comes from Brooks O'Neil at Lake Street Capital Markets.

We appreciate all that information, although I probably didn't get 1/10 a bit down on a piece of paper. So I'll have to read the transcript. Anyway, can you guys talk a little bit about the build-out of your biomedical services? It sounds like that's a big opportunity and in particular, with the recent acquisitions. But I'm curious, clearly, those are small acquisitions. And how do you get the capability to deliver those services nationally in relatively short order?

Yes. Brooks, that's a great question. So we expect biomed services to be a huge contributor to revenue growth in the coming years and even at the very end of this year. So to get that capability, we already have all the information, all the training, all the institutional knowledge and a lot of that was gained by the FilAMed team and the OP Health team. FilAMed gives us the opportunity to fix additional devices beyond infusion pumps and OB Health allows us to repair devices on site, not just in our own depots. So a couple of things are going to happen. Number one, we're going to add a lot of new customers. The sales team now has more products and services in their bag than they've ever had before. We're going to be able to go into acute care, which we really didn't have an offering before because we can do things on site. And what's great about this is we're adding a lot of biomed technicians. And that's really the key to being able to grow and get that capability. There's not a big capital outlay. We're not buying infusion pumps, right? It's people and benches and some tools for them to work on the devices. The good news is this isn't a -- we're going to go out and hire a bunch of service techs, and we hope that the revenue will follow. We actually can see the revenue kind of on the horizon, whether it's the end of this year and certainly into '22 and '23 and beyond. So this is not hiring in anticipation or hoping that we're going to get revenue. This is hiring for the revenue that we see about to come in the door with new customers. So to build up that capability, we just need to hire the guys to get in and work on the devices. And it's a significant amount of people. I mean, we could be hiring dozens of biomed techs, and that's how significant we think the revenue is going to be on the biomed services side in pretty short order.

Great. Nice. Second question. So I'm, as you know, pretty excited about the opportunities you have on the ITS side of the business. I'm curious if you continue to believe you can leverage your existing infrastructure to grow those businesses and whether or not you feel either a need or an opportunity to add medical personnel to go into the home in any area.

Yes. So I agree with you on the excitement of ITS between pain, wound care and now Lymphedema, we can 100% leverage our existing infrastructure. Carrie has put a ton of work in and done a great job over the last couple of years of setting those teams up and fully integrating. So it's one team for all therapies as opposed to breaking them out. So we're able to leverage the teams that we have. As far as adding medical folks, more nurses and clinicians, I can certainly see us adding more of them as we grow that business and we add more and more patients. We need more people to get to all those patients. Our business model isn't necessarily to be in the home. That doesn't mean that we won't do it where we need to. But most likely, if we need to do that, we'll go partner with somebody that can help us sort of go -- to get people in patients home, you're going to go have to hire a couple of hundred nurses to do that. It's probably just as easy just to partner with somebody.

Let me just add to that real quick. Leveraging doesn't -- we don't need to add team members to help manage the revenue cycle of things. We have all the infrastructure in place, but we do -- we'll have to deal with the higher volume. The good news, though, is that clearly, as we add revenue or volume to all these therapies there -- it's accretive to our EBITDA margin. That's why we can confidently say that we're really focusing on 30% of the EBITDA margin in the coming years, not 25% or basically at today.

Yes. I appreciate that, Barry. Could you just say recognize you have liquidity that might make it possible to buy back stock? But how do you feel about the trade-off between investing in the business, buying back stock? And do you truly believe you have the resources available today to buy back $20 million of stock while continuing to invest in the business.

Yes. We think of capital allocation very strategically. We have high priorities, which are investing in the existing business. I think as I've mentioned in other times, when we're growing at the middle double digits or a little bit lower. We definitely are to be throwing up cash and we'll have opportunities to buy back shares for sure. As we grow much faster, we want to focus our capital resources more and where we need to buy devices and other things. Although a lot of new business we're adding are more cash intensive, not as much -- they're not very capital intensive, which is great. Lymphedema, for example, we don't have to buy devices on them. So we view it in our priorities as strategic. So when there's opportunities that buy shares for less than we think the intrinsic value is, we're going to do it, but it won't be the main thing we do and the $20 million gives us the latitude to do it over the 3-year period that we put out there for the authorization.

And our next question today comes from Alex Nowak at Craig-Hallum Capital Group.

So I wanted to touch on the drawdown of pumps on the DME side of the business. So if -- let's just say COVID does continue to wane throughout the remainder of the year, excluding the Delta variant, I'm just curious, where does DME revenue go throughout the remainder of the year, if that's true, if the drawdown continues. And what's, I guess, a normalized business there look like on the revenue side?

Yes. So I can answer that and Barry can get into the numbers. I think that the drawdown from what we've seen over the last few months has kind of stabilized. So we saw a pretty significant decline between, call it, March and April. April, May and June were pretty level, kind of flattened out again. So we think the drawdown is effectively over. Take Delta vary and everything else aside, where they could go back out the door, but that's not really in our forecast for the rest of the year if that happens, that's great, but we can't control that. So I think we're kind of leveled out. It definitely softened in the second quarter, probably quicker than we thought, and it was a pretty quick drop to April, but May and June kind of followed suit with April. So we think it's -- we're kind of done, right, that we're back at our new baseline.

I would add to that. We actually had growth in our plans and what we'll end up with is back half revenue that's better than the first half slightly and still keeping the level of revenue that we had last year. So we're actually not going to go down. We just didn't get them as much grocer we thought because the penetration that we're getting and seeing new customers didn't quite offset some of the devices coming back. So we feel pretty confident that there is real growth buried in there. We just got to work through the adjustment.

Yes. Okay. That makes sense. And glad you're keeping Delta out of a guide to that makes sense. On the wood side of the business, you mentioned the ramp now really occurring. It seems in a pretty material way in Q4. I mean so much that you raised the run rate guide impact in the year. So just an update on the wound care market, the primary competitor and the disruption there. But also, why do you -- where you sit today, why do you expect that ramp to occur so much in Q4 now?

Yes. So, just to kind of give you a sense of the ramp-up. So we had -- if you look back in the first quarter, probably 3 reps. We're up to almost 20 in wound care. So that's where the investment happened. I think when you look at the growth in the back half of the year and really in the fourth quarter, it's just the sales cycle timing from when we hire the reps in April, May, June to when they get out in the field, when they start to close business, it just starts to show up in the fourth quarter. All their activities start to pay off. And then we should kind of come roaring out of '21 into '22 with just tremendous momentum, especially in wound care. So that's really all it is. It's just the timing of the sales cycle, get it now that everybody is trained, they're out in the field. They're getting the appointments, starting to close deals and we'll start to recognize revenue in the next few months.

No, that makes some sense. And then just on the Lymphedema side, maybe just a thought process that went into partnering with Bio Compression. What didn't Bio Compression have that you're giving them? What drove the Lymphedema market? And then ultimately, how to take share from the, I would say, the main competitor Tactile?

Yes. So Bio Compression has been a great partner. I think what they were missing was a national distributor with the contracting and the revenue cycle team that we have. They had a lot of regional players, which were following for many, many years. We think they have a great device, which is part of what drew us to them, but they were looking for somebody that could service kind of all customers, all patients and effectively all payers in the United States. So that's -- and that's not just them, right? That's -- whether it's Cardinal coming to us with wound care or other manufacturers coming to us with other things in the pipeline, that tends to be the draw, right? The contracts that we have that we can leverage for new therapies. Why Lymphedema? I think it fits perfectly into our ITS segment, especially if you look at the oncology side, where we have 30 or so reps calling on 2,000-plus customers. They're in there every day with pumps and paperwork that they're talking to them about. It's another product in their bag in a market that we effectively own and that we're in every day. So -- then you add in the fact that the reimbursement is fantastic. It's not a huge lift for the revenue cycle team. The device doesn't come back and forth like our oncology pump. So it's not a lot of weight on the shoulders of the biomedical team it was kind of the perfect fit. If we could kind of draw what a perfect new therapy would be in ITS, it's kind of tough to come up with something better than Lymphedema. And then you layer in how big the market is, the addressable market, it's grossly underdiagnosed -- not underdiagnosed, undertreated in the U.S. So we believe we can go help and create awareness with physicians that there's options out there for patients. The big competitor, Tactile, I mean, they do a good job. -- but they have a small, small slice of that addressable market. We think we can go after them. They have 1 device, 1 product, we live in oncology and have provided service to some -- a lot of customers for 30-plus years. We think we're going to leverage those relationships and help customers consolidate vendors and use us for more than just one device. So there's some other strategic reasons why we think we can go and take market share. But that's really why we entered Lymphedema.

And our next question today comes from Jim Sidoti of Sidoti & Company.

I wanted to ask a couple of questions about the sales force. It sounds like you're making some pretty significant investments. I think you said you added 12 on the wound therapy business. How many did you add on the Pain Management business?

Yes. So wound, we added about 15, I think, is a number. On the pain side, we went from 4 to 8 in the last couple of months, so we've doubled that team. That wasn't something that we expected end of last year, early this year, we think we could -- we still could make significant market share gains with the team we had. But we had an opportunity to hire some real rock stars in the market, and we would have been crazy to pass that opportunity up. So they are just coming on board now and similar to negative pressure, the time line and sales cycle very end of this year into next year is where we should start to see the benefit from those guys coming on board.

And as you get into the Lymphedema market or therapy market, can you use the sales force you already have for oncology devices? Or do you have to add specialists for that therapy?

So we will certainly leverage our oncology team. That's the largest sales team we have to date. So we're going to -- those guys are going to help us out in oncology. We can also leverage our wound care reps in the acute care space. So now that we're pushing 15 or 20 people, they're already in there talking to case managers about wound care. And a lot of times, it's the same case manager that's going to deal with Lymphedema and pneumatic compression. So kind of both sides between acute care and oncology, we're going to take the teams we already have in place. So will we add a specialist here and there? Sure. When we need a clinical person or a true specialist to kind of sit on top of all that, we will. But we're not going to have to go scale up a whole new sales team to do this.

So as you add to that market, it sounds like you don't really have to add much for sales and I don't think you would have to as much on the reimbursement side either, right?

Not a tremendous amount. As you put more billings through the process and collect more revenue, it takes more sets of hands to do that. But obviously, we have a baseline today of people that can help. So there's always going to be incremental heads, especially on the back-end support. But right now, we don't really see much at all on the sales side. But we'll add some people on the revenue cycle side, maybe some people in customer service to help with new customers. It's just product of the numbers, right? You add more customers, more patients, you're going to need some help to manage all that.

So -- but is it correct to assume that it's -- you'll get it's easier to leverage your existing infrastructure for that business than it would be for, let's say, the Pain Management business?

Absolutely. And I think that goes back to what I mentioned, I think, with Alex's question that we will add some revenue cycle people just because of the numbers, but we don't have to touch the devices very often, if at all. The revenue cycle pieces, it's a onetime reimbursement. So we're not billing for the same device over and over and over again. It's just a 1 big reimbursement on the front end. So yes, you're absolutely correct that it will take less manpower to kind of grow that business relative to oncology or pain?

And with these 3 new markets that you're already in process developing, do you need to do more acquisitions? Or more acquisitions really the priority? Or do you have enough on your plate right now that you think you can grow double digits without doing any additional acquisitions?

100%, we believe we can grow double digits fairly easily in the coming years without any acquisitions. That doesn't mean we're not -- we're going to shy away from a nice strategic move that make sense for the company, but we're not going to do it to get the growth. We're going to do it because it's strategic to our business and our growth, but not to get the revenue. The revenue is going to come flying in here at the back end of this year and into next year without any additional acquisition.

[Operator Instructions]. Today's next question comes from Douglas Weiss of DSW Investment.

On gross margins for ITS, can you just explain why that dropped so much year-over-year? I mean, I know you've invested in some of these new product lines, but it sounded like a lot of those investments were on the SG&A line.

Yes. So the second quarter last year, we're 65.9% and this year we're 64%. So we came down just a little bit. The main reason we have very, very good collections last year during COVID, we got -- we just did very well with a higher amount of revenue, and this year is more normalized. So COVID helps a little bit there.

I mean it looks like for the first 9 months last year, you were above 70%. I'm just looking at the ITS slide. And then kind of dipped -- it’s kind of dipped in the fourth quarter and then it stayed in the 60s this year. I mean do you think it is the right model or is there an opportunity to improve that?

Before we have an intercompany charge, which brings up another issue that I forgot to mention is that we did have less repairs and services to keep that fleet going last year. We didn't bring the pumps into the building, so we had a little bit less normal maintenance on of those devices more and more normalized in the current quarter. But when you adjust our inter-service that we do part of sales in the DME business, the ITS business, our gross margin is close to that 55% range.

So I mean, do you think this quarter's gross margin is kind of mid -- on ITS kind of mid-60s is the right number to model going forward? Or would you say it's going to improve in over the next year?

No. What I would say is that the Q2 last year clearly stood out of all the quarters. It was almost at 66%. Every other quarter, if you look back 4 or 5 quarters, in that 64% to 65%, a typical range. As we add the new therapies, it's likely to get helped a little bit, but mostly is going to stay in that same range, we think.

Okay. And then in terms of the revenue, the new revenue guidance, I had thought you had already sort of taken into account the fact that you had those large onetime benefits a year ago. Can you just explain a little more what it was that surprised you?

So I think the difference is the softness in the rentals in the second quarter. It was a pretty steep drop between the first and second quarter. So when COVID kind of declined sharply in the kind of late winter, early spring, the rentals came back pretty quick. We didn't see that in the first quarter, and that's why we thought it was going to hold better than it did. I think the good news is it has leveled off, and we've seen that happening. I think the good news is, even with that, the outlook moving forward, whether it's for DME rentals or biomed services or Lymphedema negative pressure we actually -- we're sitting here today in August, feeling even better than we did about 2022 and beyond even a month or 2 ago. So it's really just attributed to that softness in the rental piece, and it's not something you can make back overnight. So that's really what's driving the guidance.

And I think you may have already said this, but how much of the change in EBITDA guidance reflects additional investment into the new products that you hadn't anticipated?

About $2 million.

$2 million, okay. And how much incremental EBITDA do you get from the acquisition you did, for the acquisitions?

We haven't disclosed specifically profitability of those. But it's safe to say that the margins that we see from those businesses are kind of in -- at least from a gross margin perspective, in the same range as we see the rest of the DME business in that sort of middle 50% range. They did come in the G&A, but they do have some of their own SG&A.

Right. Okay. And then in terms of the trade-off between focusing on the higher-margin DME work versus some of the disposables, my impression was that those disposable sales were pretty low. It didn't take a lot of effort in terms of the sales force. Why not just do both? Why deemphasize the disposable work?

So I don't think we're giving up on disposables. It's still work, right? Every minute that the sales reps spend talking about that, it's one less minute talking about our core oncology business or now Lymphedema and biomed services. So it just becomes a priority in the bag, more than anything else that doesn't come out of the bag. It just drops below the biomed services. And our capabilities with OB and FilAMed now are just off the charts on what they give us. Our guys are in the biggest hospitals in the country and to walk down to the biomed department and have spent some time talking about that and generating huge revenue with huge margins. We'd be crazy not to just give that a little more emphasis at something -- than something that has lower margin. It doesn't mean we're walking away from it. It just means it's going -- dropping a little further into the bag.

It's -- okay. On share repurchase, if you were inclined to buy back shares, how soon can you come -- how long you have to wait after earnings announcements?

Our trading policy is basically the day after earnings were allowed to trade.

Our next question today comes from Aaron Warwick at ES Capital.

Rich, I wanted to ask, I think it was like your final comments that you made before you turn it over to Q&A, make sure I understood you correctly. It sounds to me like you've got 3 or 4 different new aspects to your business, each of which could become larger than the current business. Is that correct?

That's exactly correct. Between Lymphedema with an addressable market or a total addressable market of $1.5 billion, which is the biggest that we're in. Wound care being $600 million that we think we can go to get 5% or 10% of Pain Management, which is -- especially with the new sales team that we just brought in, the sky is the limit for that team. And then you layer in DME and the biomedical services market that I can't put a number on today, but it's massive. I mean it's probably bigger than the Lymphedema market. Any 4 of those -- if you look at oncology, it's roughly, call it, $60 million in revenue. Any 4 of those product lines to various degrees could be as big, if not bigger than oncology. And that doesn't mean it's going to happen in 2022. But if we're looking out 3 to 5 years, which is really what -- where we spend our time, I actually don't have any doubt that at least a couple of those will be bigger than oncology moving forward.

Yes, that was going to be my -- you answered my next question, which was what kind of timeframe we're looking at. I'm sure it's different for each of those and things can change. But -- what -- I guess when you're talking about that kind of growth, it is over the 3 to 5 years. You feel like you're -- I mean, you are making the investments, as you said, in people, especially, but you feel is something that the basic infrastructure of your business can handle all those different areas at one time?

Yes. It's different in each area, right? So we mentioned earlier about DME and that's really about getting the tech in place. When we get into Lymphedema or when we started wound care and pain, there's more behind the scenes work, right? There's a lot more revenue cycle work upfront, licensing, credentialing, those sorts of things. But when we kind of look across the company, we have warehouse space. We have space for team members to join in. We have certain amounts of capabilities already here and available to us. And it's -- none of this is outside of our core competency, right? We already had 70 or 80 biomedical technicians. Actually, it's more than -- I think it's almost 90 sitting at benches today. So it's not like we have to learn a new trade to do that. Same thing on the revenue cycle with Lymphedema pain and wound care. That team is as good as it gets at building out and collecting money, and they're getting even better every day. So it's core competencies we already have, and that's the beauty of the platforms, right? We're not reinventing the wheel for InfuSystem. We've perfected this over 34 years. We're just adding in new therapies, new products, new services into core competencies that our leadership team all the way down already has and has a ton of experience doing it.

Yes, that's fantastic. So obviously, as you said, the EBITDA margin took a bit of a hit because of this initial investment, if I hear correctly, I don't know if it was you or Barry said that you're targeting 30% margins in the long run. And when do you think it will start working up to that? How soon will that be?

Yes. So I'll let Barry talk about how quick we'll get there. But yes, I mean, the hit this time around, it's pretty simple, right? It's the rentals that a lot of that drops to the bottom line. And a bigger piece is the investment in wound care and pain. And it's something we went into knowing it was going to happen over the last few months. It's something I will do 10 times out of 10, investing a couple of million dollars in 2 markets that potentially could be, I don't know, tens of millions, if not more, combined. We'd be crazy not to make that investment. So in the short term, adjusted EBITDA takes a little bit of a margin hit, but it's still pretty solid at 25% this year. And Barry, if you want to talk about when we think we can get to 30%.

Yes. So the first thing I'd point out is that we're calling for a 25% EBITDA margin for this year. That's with the $2 million investment, which is almost 2%. So if you add that back, we're almost halfway there. As Rich mentioned, we think that everything we add is accretive to the bottom line. Again, there will be some SG&A spending, but it's accretive. So I don't know that necessarily will be consistently next year will be in the 30% range, but these businesses and the things we're doing, move us in that direction pretty quickly.

I appreciate it guys. And giving us that perspective, it sounds like you said you make that investment 10 of 10. It sounds like a good call.

Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Rich Dilorio for any closing remarks.

Thanks, Rocco. 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 third quarter 2021 results. Please stay safe, and thank you.

Thank you, sir. 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.