InfuSystem Holdings, Inc. (AMEX:INFU) Q1 2024 Earnings Call Transcript

InfuSystem Holdings, Inc. (AMEX:INFU) Q1 2024 Earnings Call Transcript May 11, 2024

InfuSystem Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Aaron Warwick:

Operator: Good morning, ladies and gentlemen, and welcome to the InfuSystem First Quarter 2024 Financial Results Conference Call. I will now turn the program over to Joe Dorame.

Joe Dorame : Good morning, and thank you for joining us today to review InfuSystem’s First Quarter 2024 financial results ended March 31, 2024. With us today on the call are Rich Dilorio, 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. 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 and 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, 2023.

Forward-looking statements speak only as of the date the times were made. The company can give no assurance except forward-looking statements prove to be correct. InfuSystem does not undertake and specifically disclaims any obligation to update any forward-looking statements, except as required by law. Now I’d like to turn the call over to Rich Dilorio, Chief Executive Officer of InfuSystem. Rich?

Rich Dilorio : Thank you, Joe, and good morning, everyone. Welcome to InfuSystem’s First Quarter 2021 Earnings Call. Thank you all for joining us today. I’ll get things started this morning with a quick overview of how we started the year. Barry will go into detail on our financial results for the first quarter, and then Carrie will provide updates on our Biomed Wound Care programs. I’ll conclude our prepared remarks with a discussion of how our growth strategy has evolved over the last couple of years, and the types of opportunities we are seeing and intend to pursue in the future. First quarter revenue was $32 million and represented the ninth quarter out of the last 11 that delivered a sequential increase in revenue. Our results were driven by continuing strength in our Device Solutions business unit, which was up 16% year-over-year with both biomedical services and equipment sales being strong contributors.

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Q&A Session

One of the themes, I’ll be developing on today’s call is the increasing diversification of our business. Carrie discussed last quarter how the nature of our service business creates a cycle where we first have to invest to enable new growth opportunities. Then second, we onboard the new business, followed by a third stage focused on constant process improvements driving long-term profitability. We have said that 2024 is going to be an accretion year. This because 2023 delivered a lot of growth in our biomedical business and maximizing the profitability of that new revenue center is 1 of our top priorities for this year. But while our operating teams are heads down delivering on their efficiencies mandate, our sales teams are readying the next layer of biomedical contracts that we expect to close this year.

And while that is happening, we have closed a large rental deal in an oncology customer that will start showing up in our second half numbers, and our Wound Care initiatives are ramping with material contributions expected by early next year. The reason it is [indiscernible] for most quarterly press releases to announce a new revenue record is the presence of more and more diverse revenue sources. When 1 part of our business is in investment mode, it is likely another part is in a growth phase. Our first quarter operating results came in on plan. There are diverse growth initiatives working their way forward all across our business, and we are confident in our revenue target for the year. Moving to profitability. We are seeing the operating improvements that are a big part of the plan for this year.

Gross margins came in at 51.5%, with this driving a 10% increase in gross profit compared to the prior year. Unfortunately, the first quarter’s strong operating performance was impacted by nonrecurring expenses of approximately $1.2 million, approximately $400,000 of which impacted our adjusted EBITDA. Stepping back and looking at the long-term picture, I believe it is clear that our new and more diversified business initiatives are gaining operating momentum that they are targeting and executing on improved efficiencies and as I will discuss in a few minutes, our strategic outlook and our pipeline of new business opportunities have never been better. But before that, I’ll turn it over to Barry, who will provide detail on the first quarter results.

Barry Steele : Thank you, Rich and thank you, everyone, on the call for joining us today. I’m going to focus on 3 topics, including the main drivers for our current quarter’s results, our current financial position and how it changed during the quarter. And finally, I’ll give you a preview on our plans to invest in our information systems. Now let me start with our financial results for the period. First quarter 2024 net revenue totaling $32 million was another all-time record. As Rich pointed out, that makes 9 record-breaking quarters out of the last 11 reported. The amount represented a $1.6 million or a 5% increase from the prior year. The growth came from the Device Solutions segment and included higher revenue from the GE Healthcare contract totaling $1.2 million strong equipment sales and higher rental revenue.

The Patient Services segment revenue was slightly lower, mainly due to a tough comparison to the prior year for Oncology and Wound Care. For Oncology, higher billing volumes were offset by lower per billing net revenue. The lower net billings amount, which is usually lower during the first quarter due to higher amounts of patient co-pays and deductibles followed a more normal quarterly pattern in the current year after having been particularly strong during the first quarter of 2023. We anticipate sequential improvement in the per billing net revenue in the coming quarterly period following the normal seasonal pattern. Net revenue for Wound Care showed a small increase. This despite a very strong prior year amount of negative pressure wound therapy equipment sales on lease.

Higher wound care treatment revenue in 2024 offset the lower equipment sales. Gross profit for the first quarter of 2024 was $16.5 million, which was $1.5 million or 10% higher than the prior year first quarter. That was partly due to higher sales, but mainly driven by higher gross margin percentage which was 51.5% during the first quarter of 2024, up 2.3% from the prior year. The year-over-year increase was mainly due to reduced start-up costs for the GE Healthcare contract and a reduction in estimated expenses for missing equipment. These were partly offset by the lower per billing net revenue previously mentioned. Start-up costs for the GE Healthcare Biomedical Services contract were particularly high during the 2023 first quarter when the contract ramp-up pace was accelerated.

These expenses have abated, resulting in the current year improvement. Additional improvements are expected as we move through the year. Selling, general and administrative expenses for the first quarter of 2024 and totaled $17.3 million, representing an increase of $2.3 million or 15% as compared to the prior year. This increase included nonrecurring expenses, totaling $1.2 million, timing-related increases of $604,000 and expense increases associated with inflation and a higher revenue buy in totaling $700,000. First quarter expenses that we do not expect to recur in the coming periods include a fee paid to a former Board member in conjunction with a cooperation agreement and related legal expenses totaling $650,000. Fees paid to the company’s former audit firm for their consent to file our 2023 annual report totaling $300,000, approximately $100,000 in legal and accounting fees associated with a reorganization project to simplify our legal structure, and other onetime expenses totaling $200,000.

The timing impacts, which resulted in higher expenses mainly included amounts recorded during the quarter for the company’s short-term management incentive program, which was $250,000 higher in 2024 and a higher amount of expense recorded in equity-based compensation totaling $300,000. These amounts vary from quarter to quarter based on program metrics and other factors. The remaining increase in SG&A included annual increases in compensation rates, higher commission expenses tied to higher revenue and other volume-driven increases in operating expenses. Adjusted EBITDA during the 2024 first quarter was $3.9 million or 12.1% of net revenue which represented a decrease of $400,000. This amount did not include some of the items I just mentioned, including the benefit related to the lower missing pump expense, the fees and expenses for the cooperation agreement and a portion of the other nonrecurring expenses totaling $200,000.

Nonrecurring expenses that were included in adjusted EBITDA totaled $400,000. Turning to a few points on our financial position and capital reserves. Our operating cash flow for the first quarter totaled $400,000, an improvement of $500,000 over the prior year first quarter. This was due to a lower amount of growth in our working capital levels, which reflected slower sequential revenue increases over the immediately prior quarterly periods. Additionally, our net capital expenditures were relatively low $400,000 during the 2024 first quarter and represented a $2.6 million decrease from the prior year amount. This lower amount is partly related to the source of our revenue growth being driven from less capital-intensive revenue sources such as biomedical services and from initiatives we have begun been pursuing to increase pump utilization, including reducing the number of lost pumps.

We expect higher amounts through the remainder of 2024 as revenue growth partly shifts back to more capital extensive product lines. Because of these factors, we continue to be positioned well to fund continued net revenue growth with the growing cash flow from operations backed by significant liquidity reserves available from our revolving line of credit and manageable leverage and debt service requirements. Our net debt increased slightly by $200,000 to $29.1 million during the 2024 first quarter. Our available liquidity continued to be strong and totaled $45.2 million at the end of the quarter. Our ratio of total debt to adjusted EBITDA was a modest 1.3x at the end of the quarter. Our debt consists of borrowings on our revolving line of credit with no term payment requirements nearly 4 years in remaining term and with $20 million of the outstanding balance protected from increasing interest rates through an interest rate swap having the same expiration.

Finally, let me share some of our plans to invest in our information technology and business applications. As Rich mentioned, when we reported our 2023 earnings, we have embarked on a project to upgrade some of our core business applications. This includes a full replacement of our main ERP application and other upgrades. These changes will facilitate our continued growth and enhance our operating efficiency but are also necessary due to the approaching end of life for support. The product, which has been under investigation and vendor selection for the past year, was launched in the past couple of weeks. The total expected cost of the project is expected to be between $3 million and $4 million and will include software subscription expenses, integration consultant fees, staff augmentation costs, absorption of internal direct staff time where staff augmentation is not deployed and miscellaneous expenses.

The project and related expenses will occur over an 18- to 24-month period. The planned productivity improvements, particularly as we continue to grow, are expected to provide a full payback over time and a favorable return on investment after the project is complete. I will now turn over the call to Carrie.

Carrie Lachance : Thanks, Barry. In my comments, I will be providing a brief summary of current developments related to our Biomed and Wound Care business initiatives. First, Biomed as planned, during the first quarter, we completed the initial onboarding of facilities and pumps under the master service agreement with GE Healthcare. While there will always be changes in updates related to GE adding or dropping locations, for the most part, we are now working with facilities of which we are familiar, and we are in full swing shifting focus to operating efficiencies. We have onboarded approximately 220,000 devices to date. Our work cycle has 2 annual parts. First, we perform annual preventative maintenance to certify all equipment.

That certification, inventory and repair is what we focus on when each device is onboarded. Second, we provide necessary biomedical services to maintain the equipment in good working order throughout the following year. Having completed the initial onboarding and preventative maintenance, our work now involves going back to recertify the devices we onboarded last year, the second year and subsequent years will be vastly different than the initial onboarding year. As we already know the facilities and staff we need to coordinate with, and we know the fleet and the condition of the devices because we’ve had our team taking care of that equipment over the course of the prior year. Additionally, this year, we have our technicians already positioned in each geography.

As a big part of the onboarding was putting our team into place to maintain the equipment in each facility covered under the MSA. This is the national network of biomed technicians we refer to on every call. Now that we have technicians in the geography, the task of doing the annual preventative maintenance cycle is a smaller look for us. Fewer people are necessary, there is less travel cost and the work can be staged by our local staff to minimize both time and effort. Moving into our second full year with almost all devices already onboarded, in our systems and being taken care of on a day-to-day basis by our text, operating efficiencies will be much higher than last year. That said, our culture is to strive for continual process improvements and we will keep managing towards greater efficiencies and higher margins as we proceed deeper into the term of the MSA.

There is the second major driver that will be improving our Biomed efficiencies this year and into the future. In addition to lowering costs, we plan to increase our Biomed revenue by leveraging the resources that we have built over the last 18 months to execute under the MSA. The technicians we have positioned in various geographies can be leveraged to perform additional work under new contracts. Rising efficiencies will allow us to increase absorption and deliver incremental revenue with substantially higher realized margins and contribution. During and following the first quarter, we are making good progress both in delivering the planned cost efficiencies and in identifying the first round of these incremental Biomed revenue opportunities.

Now turning to Wound Care. While revenues in this area are still relatively small, we are making significant progress in developing multiple aspects of our Wound Care opportunity, especially those being pursued under our joint venture with Sanara. In addition to the negative pressure wound therapy business that we saw last year, we are increasingly distributing Sanara’s advanced wound care products into an expanding channel of facilities and distributors. We are confident that there will be more news about our programs in Wound Care in the near future. Back to you, Rich.

Rich Dilorio : Thanks, Carrie. In my opening, I started to communicate our excitement about the direction and growing momentum within the business. I also noted that InfuSystem’s revenue sources are becoming increasingly and purposefully diversified. In addition to providing from the more consistent growth trajectory I referenced earlier, we are also seeing a welcome diversification in the capital intensity of our business. We have commented before that our Biomed business, now that the national network has been set up, we’ll require relatively little incremental investment as it continues growing. Now we are also seeing that in our wound care initiatives that they should be less capital intensive than what we have seen historically with our oncology and rental businesses.

Going further and discussing the evolution of our business, recall that a few years back when we started pursuing opportunities beyond oncology, we adopted and described the platform strategy that was one of product line extensions. That is, we would replicate our business in oncology by extending our third-party payer model to other therapies. That was a fairly obvious thing to do in response to Cardinal approaching us to partner with them to improve the negative pressure offering. What they wanted was for us to create a last-mile solution for their pumps, similar to what we had created in Oncology and then Pain Management. So in announcing the Cardinal opportunity, we framed it as negative pressure becoming our third therapy. But since announcing that platform strategy, our business has evolved in other directions, and we now see significant growth opportunities away from our earlier pump centric orientation.

We are evolving into more of a platform services company. Offering a suite of highly developed assets and skills increasingly in demand by other companies that see these opportunities to leverage our InfuSystem as a partner. This platform services model is increasingly compelling, allowing us to wrap our unique assets and skills around our partners’ products and business plans. We are seeing a steady stream of opportunities, many of which are bigger, require less upfront investment by us, present the likelihood of a faster payback and generally involve less business risk than initiatives we might pursue on our own. Along those lines, we’ve been saying for a while that the opportunities in front of us relating to our partnerships with GE and Sanara are more than enough to drive growth over the next several years.

Let me explain this by walking through some of the opportunities we see developing in or around these new partnerships. GE Healthcare is, of course, a multibillion-dollar revenue company, that among other things, takes care of equipment in over 1,000 hospitals and clinics across the country, and they approached us looking to leverage our expertise in maintaining large fleets of small medical devices such as infusion pumps. We have to [indiscernible] been focused on the master services agreement. But we have also emphasized in the beginning that the MSA is only a starting point for a much bigger Biomed growth initiative. We continue to speak with GE about additional work we can do for them beyond the original MSA. On top of that, we are seeing opportunities coming to us that results from having GE as a reference account and our new ability to deploy a national network of biomed technicians.

There are deals in the works that we hope to announce later this year. And on top of the biomed opportunities, there are developing prospects for us to expand our core rental business into the acute care channel through some of the doors the GE relationship is open for us. Turning to Sanara. This opportunity came to us as a direct result of our work in Wound Care with Cardinal. Just as we see occurring with GE, the opportunities under this new partnership continue to expand as the relationship matures. I can’t go into much detail today, but the initiatives we are currently pursuing include the original third-party payer solution, where InfuSystem distributes Sanara’s advanced wound and skin care products as well as supplies and negative pressure solutions into the channel that includes long-term care, skilled nursing and wound care facilities.