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Edited Transcript of INFU earnings conference call or presentation 14-Aug-19 1:00pm GMT

Q2 2019 InfuSystem Holdings Inc Earnings Call

MADISON HEIGHTS Sep 7, 2019 (Thomson StreetEvents) -- Edited Transcript of InfuSystem Holdings Inc earnings conference call or presentation Wednesday, August 14, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gregory Schulte

InfuSystem Holdings Inc. - Executive VP & CFO

* Richard A. DiIorio

InfuSystem Holdings Inc. - President, CEO & Director

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Conference Call Participants

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* Brooks Gregory O'Neil

Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst

* Douglas Weiss;DSW Investment, LLC

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Presentation

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Operator [1]

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Good day and welcome to the InfuSystem Holdings Second Quarter Fiscal Year 2019 Financial Results. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Joe Dorame, Managing Partner. Please go ahead.

Thank you, Nicole. Good morning, and thank you for joining us today to review the financial results of InfuSystem Holdings, Inc. for the second quarter of 2019, which ended on June 30, 2019. With us on the call today representing the company are: Rich Dilorio, President and Chief Executive Officer; and Greg Schulte, Chief Financial Officer.

After the conclusion of today's prepared remarks, we will open the call for a question-and-answers session. If anyone participating on today's call does not have a full text copy of the press release, you can retrieve it from the company's website at www.infusystem.com or numerous other financial websites.

Before we begin with prepared remarks, I would like to remind everyone certain statements made by the management team of InfuSystem during this conference call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Except for the statements of historical fact, this conference call may contain forward-looking statements that involve risks and uncertainties, some of which are detailed under Risk Factors in documents filed by the company with the United States Securities and Exchange Commission, including the annual report on Form 10-K for the year ended December 31, 2018. Forward-looking statements speak only as of the date the statements were made. The company can give no assurance that such forward-looking statements will prove to be correct. InfuSystem does not undertake and specifically disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

Now I'd like to turn the call over to Rich DiIorio, President and Chief Executive Officer of InfuSystem. Rich?

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Richard A. DiIorio, InfuSystem Holdings Inc. - President, CEO & Director [2]

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Thanks, Joe. Good morning, and thank, everybody -- I want to thank everybody for joining the second quarter 2019 earnings call. Before I begin, I would like to thank the team at InfuSystem. We have taken on significant market share and we haven't missed a beat as our operations continue to run smoothly. I would specifically like to thank the sales and revenue cycle teams. You efforts during the first half of the year have been tremendous. The sales team continues to drive new business, and the increases in market share have put us in a position for strong and sustained growth in 2019 through 2020. The revenue cycle team continues to execute on a multiyear upgrade of systems and practices resulting in improved collections that are additive to revenue, earnings, EBITDA and cash flow.

Our plan to take advantage of opportunities and gain market share in oncology is going exactly as planned. I'd like to share a couple of highlights before our CFO, Greg Schulte, walks through the numbers.

First, we are starting to see the strong growth that we first began to talk about late last year. At that time, we discussed the exit from the market of a leading elastomeric provider and how we believed that, that exit would result in InfuSystem market share gains and revenue growth in 2019. In the recently completed second quarter, we saw that additional revenue. The 20.2% year-over-year increase was the result of the elastomeric wins plus strong product sales in our IPD growth -- IPD group and growth in our pain management program.

What's most exciting is that we are now in the second phase of our market share gains. As discussed on the first quarter 2019 earnings call, our largest competitor has changed its business model in oncology, and we are taking full advantage of and winning new customers every day. As that new business flows through our revenue cycle process in future quarters, we'll see an even greater and significant positive impact on our revenue.

Secondly, I am pleased to report that we are not just growing, we are converting revenue into earnings. Our adjusted EBITDA was $4.5 million in the second quarter, which is an increase of 42.6% versus Q2 of 2018. As our share grows and we maintain our spending and cost control discipline, we expect to see steady improvement in our net operating margin with a long-term goal of achieving 25% EBITDA margins.

I will add some color to our progress in oncology, but first, Greg will review the second quarter financials.

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Gregory Schulte, InfuSystem Holdings Inc. - Executive VP & CFO [3]

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Thank you, Rich. I'm very pleased to report on the highlights of our strong second quarter performance. Net revenues for the 3 and 6 months ended June 30, 2019, were $19.7 million and $37.9 million, respectively, a $3.3 million or 22% -- 20.2% increase and $5 million or 15.3% increase, respectively, from the same prior year periods.

Net income for the quarter ended June 30, 2019, was $0.4 million compared to a net loss of $0.5 million for the same prior year period. Net loss year-to-date June 30, 2019, was $0.6 million compared to a net loss of $0.3 million year-to-date June 30, 2018.

As Rich mentioned earlier, adjusted EBITDA for the 3 and 6 months ended June 30, 2019, was $4.5 million and $7.6 million, respectively, a $1.4 million or 42.6% increase and $0.9 million or 13.4% increase, respectively, from the same prior year periods.

Cash flows provided by operating activities were $4.3 million year-to-date, a decrease of $0.5 million or 10.9% from the same prior year period primarily due to a net increase in the change of an accounts receivable of $2.1 million related to our growth. These working cap -- below net cash outflows to support our significant growth have been minimized by overall working capital improvements.

Our growth in headquarters relocation and facilities improvements have necessitated year-to-year capital expenditures of $7.9 million that were financed primarily by internal cash flow and a $2 million financing arrangement. We expect capital expenditure needs to continue into the second half of 2019 to support the next phase of our growth that we'll finance through improving internal cash flow and existing credit facilities.

I will now turn the call back to Rich.

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Richard A. DiIorio, InfuSystem Holdings Inc. - President, CEO & Director [4]

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Thanks, Greg. Now I'd like to give an update on the additional growth opportunity that we are starting to see come to fruition in the oncology market. As I mentioned, we are progressing through 2 phases of market share gains in our oncology business: the first from elastomerics, which started late last year; and the second from our largest competitor changing its business model, which started in the second quarter of this year.

Because of the way our oncology revenues work, we provide the service and then start the billing process, and we don't recognize the revenue until that billing process is completed. While our quarterly revenue grew by over 20% and $3.3 million versus the second quarter of 2018, only about $300,000 of that growth was from business we have won from our direct competitor during the second phase. I explained on our last earnings call that the second phase of revenue will start to show up in the second half of the year, and that timing is holding true to form. What this means is that we are still early in the process and then oncology revenue will continue to ramp through this year and into 2020.

With the material new revenue expected, we continue to invest in our already outstanding team, our operations, facilities and our best-in-class pump fleet as we scale to handle a higher volume of business. These investments have negatively affected profitability in the first half of the year when the costs were incurred but the matching revenue has yet to be recognized. This will begin to normalize in the second half of the year, and we expect earnings to improve.

On the last call in May, I gave preliminary targets for 2020 of $80 million in revenue and $20 million in adjusted EBITDA. Now that we have had more time to onboard new customers and get a better sense of the timing of the revenue, we are revising the 2020 targets. The updated targets for 2020 are $85 million in annual revenue and $21 million plus in adjusted EBITDA.

With that being said, I'm happy to answer any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Brooks O'Neil of Lake Street Capital Markets.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [2]

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Congratulations on the terrific work you're doing. I'm hoping you might just backtrack a little bit and describe in a little bit more detail the change that your competitor made, why it's benefiting you guys and how you see sort of the longer-term opportunity. You seem to describe a great growth opportunity in the back half of this year and the first half of next year, and I'm curious if you see that continuing on as you move through 2020 and beyond.

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Richard A. DiIorio, InfuSystem Holdings Inc. - President, CEO & Director [3]

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Thanks, Brooks. So the change that our competitor made was they effectively got out of the third-party payer model where we bill the insurance company on the patient's behalf. They changed their model and decided to just rent directly to the customer. We knew that most customers were using our model and their model on the third-party payer side for a reason. And as expected, most customers decided to come over to us because they just -- they liked the model, they liked the workflow, they liked the financial piece of it. So that's why it's kind of holding true to form as far as the conversion rate. So that's the benefit. Also, it's a huge market share opportunity for us to gain their business. As far as the long-term opportunity, yes, I mean we're certainly going to see it in the back half of this year and through 2020. We actually think it'll take probably a couple of years to fully bake all that -- all those customers and get them all on board. So this opportunity should be an 18- to 20 -- 24-month opportunity for us.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [4]

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Great. And then I'm just curious, obviously, there's been a big merger in the home infusion business between the BioScrip and Option Care. Do you see that affecting you guys either positively or negatively, or not at all?

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Richard A. DiIorio, InfuSystem Holdings Inc. - President, CEO & Director [5]

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If there's any effect, it would be positive. Home infusion still has a decent market share. They don't love this business, and we continue to win business from them every day. Any time a merger like this happens, there's some disruption in the market, which tends to help us. I mean it won't be substantial, but it could be -- there could be some benefit from it.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [6]

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Sure. And then one other topic I'm curious about, apparently, there is both strong growth and some supply constraints in the IG business. Does that affect you guys at all? And if so, how?

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Richard A. DiIorio, InfuSystem Holdings Inc. - President, CEO & Director [7]

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It doesn't affect us at all.

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Operator [8]

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(Operator Instructions) Our next question comes from Douglas Weiss of DSW Investment.

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Douglas Weiss;DSW Investment, LLC, [9]

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Congrats on a good quarter. Can you break out the sales and the rental number? Is that possible?

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Gregory Schulte, InfuSystem Holdings Inc. - Executive VP & CFO [10]

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I don't have that in front me right now, Doug. We'll see on that. We'll follow up.

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Douglas Weiss;DSW Investment, LLC, [11]

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I have a qualitative question related to that, which is if I assume it's -- well, looking at last quarter, is the composition of the sales line changing in the sense that, historically, it had been primarily the sale of pumps out of your fleet? And is there -- is it becoming more of a consumable -- is there more consumables in the mix at this point?

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Richard A. DiIorio, InfuSystem Holdings Inc. - President, CEO & Director [12]

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Yes. So Doug, that's a good question. So on the infusion products division, the IPD side of the business, they sell pumps, they rent pumps and they sell consumables. The mix hasn't changed dramatically but the consumable growth has gone up at a decent trajectory over this year. But as far as rentals and sales, those are -- from a percentage standpoint, they haven't changed that much. But consumable growth has definitely happened, which is obviously helpful.

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Douglas Weiss;DSW Investment, LLC, [13]

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And is that an opportunity? Do you think that you can expand that further?

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Richard A. DiIorio, InfuSystem Holdings Inc. - President, CEO & Director [14]

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I think so, yes. I mean the growth that we're seeing now, there's no reason to see it slowing down. And it is substantial growth on a business that the margins aren't as good as the oncology side, but the beauty of it is, we never touch the product in most cases, so it's high turn. So that growth is growth that we definitely want.

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Douglas Weiss;DSW Investment, LLC, [15]

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I mean, I guess can you -- are there other products you can add as -- that the salespeople could bring to the doctor's office?

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Richard A. DiIorio, InfuSystem Holdings Inc. - President, CEO & Director [16]

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Sure. It's -- we don't want to get into the true distribution business with tiny margins, and so every med surg supply out there. But when it's a good product with decent margins that the sales team could put in their bag, absolutely. I mean we have, at this point, over 3,000 relationships in oncology clinics and home infusion providers and long-term care. So to leverage that, those relationships with new products is certainly something we continue to look at.

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Douglas Weiss;DSW Investment, LLC, [17]

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Okay. And what's your estimate for CapEx this year?

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Gregory Schulte, InfuSystem Holdings Inc. - Executive VP & CFO [18]

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Doug, we expect -- obviously, as we've discussed, we have the second phase of our growth coming, so we expect the second half CapEx to be in line with the first half, potentially, a little larger based on the larger opportunity.

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Douglas Weiss;DSW Investment, LLC, [19]

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And what was it in the first half?

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Gregory Schulte, InfuSystem Holdings Inc. - Executive VP & CFO [20]

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The CapEx number was $7.4 million.

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Douglas Weiss;DSW Investment, LLC, [21]

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Okay. So most of your cash this year is going into CapEx?

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Gregory Schulte, InfuSystem Holdings Inc. - Executive VP & CFO [22]

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Yes. This is the investment this year, yes.

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Douglas Weiss;DSW Investment, LLC, [23]

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And then how about next year? If EBITDA grows, I would -- you'd have a fair amount of pre-CapEx free cash flow. What's the thought process in terms of investing that cash?

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Gregory Schulte, InfuSystem Holdings Inc. - Executive VP & CFO [24]

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We continue to look at opportunities to utilize the cash and looking at what will make the best use of it based on cost of capital and where we best put the cash. So we're look at all different opportunities.

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Douglas Weiss;DSW Investment, LLC, [25]

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Is -- how is it going with the pain business? Is that growing? Is that a place you would potentially put more capital?

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Richard A. DiIorio, InfuSystem Holdings Inc. - President, CEO & Director [26]

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So it is growing. The team has done a great job at perfecting that model, which is it continues to allows us to gain traction in large teaching institutions. And with the big increase in new patients in new clinics, we expect it to double this year, and my expectation is for it to double again next year. So with some of that cash, absolutely, we're going to -- if it makes sense to invest in that business and buy more devices, and I think that's true across the board. If we continue to see growth, we'll continue that investment. If we think that a buyback is in our best interest, we'll do that. We'll pay down debt when that makes sense. But those are probably the 3 things we'd look at first.

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Douglas Weiss;DSW Investment, LLC, [27]

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Are the pumps for pain specialized? Or are they interchangeable with the chemo pumps?

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Richard A. DiIorio, InfuSystem Holdings Inc. - President, CEO & Director [28]

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To a degree, they're specialized. They're not special to just us in pain management. We wouldn't necessarily have a lot of use for them, but in the market, we could go sell them if we needed to.

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Douglas Weiss;DSW Investment, LLC, [29]

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But I mean to the extent you're expanding that business, you have to buy pumps specific to that business?

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Richard A. DiIorio, InfuSystem Holdings Inc. - President, CEO & Director [30]

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Correct, Doug. Yes, that's accurate.

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Gregory Schulte, InfuSystem Holdings Inc. - Executive VP & CFO [31]

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And Doug, I said $7.4 million of CapEx, I should've said $7.9 million. Sorry about that.

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Douglas Weiss;DSW Investment, LLC, [32]

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Okay. On seasonality, the second half is historically, I think, been a good seasonal quarter. Do you see business kind of continuing to accelerate through the back half of the year?

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Richard A. DiIorio, InfuSystem Holdings Inc. - President, CEO & Director [33]

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Yes. I mean I think -- yes, there's definitely a little bit of seasonality, but more than anything else, this market share gain in oncology is really going to hit in the second half. So there should be considerable expansion over the next 2 quarters.

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Douglas Weiss;DSW Investment, LLC, [34]

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Okay. I mean just doing basic arithmetic, it looks like your revenue targets are, if anything, conservative given just where you are at this point in the year and assuming some sequential ramp.

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Richard A. DiIorio, InfuSystem Holdings Inc. - President, CEO & Director [35]

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Targets for this year you mean, or next year?

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Douglas Weiss;DSW Investment, LLC, [36]

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Well, I guess, both really.

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Richard A. DiIorio, InfuSystem Holdings Inc. - President, CEO & Director [37]

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Yes. And I think this is early, right? We haven't really gone through the complete budgeting process for next year. So for 2020 numbers, they're numbers that we feel comfortable we can hit if there's new and improved opportunities. Again, we'll revise them as we go when we think it makes sense. But they're numbers we think we can certainly hit next year and even this year.

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Douglas Weiss;DSW Investment, LLC, [38]

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I guess -- and then I just -- in terms of the CapEx, are you -- does that imply that you're sort of fully utilizing your existing inventory of pumps? Or is there opportunity to sort of reduce the downtime on those pumps and improve the utilization at this point?

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Richard A. DiIorio, InfuSystem Holdings Inc. - President, CEO & Director [39]

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So I think we are always looking to improve utilization. I don't think we're ever done with that process. But we also feel comfortable that when we're buying pumps, we're buying them because we need them and that there's not a lot out there to go get and redeploy. I think we spent the last couple of years doing a lot of that cleanup and improving those numbers, and that helped over the last couple of years suppress the CapEx number. I think we're at the point now where accounts have about the right number that they need. We have a great logistics team that makes sure that they're in the right spot at the right time. So now when we buy pumps, we're buying them because we need them for patients.

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Douglas Weiss;DSW Investment, LLC, [40]

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And are you typically buying the pumps new? Or are you buying them used and then refurbishing them?

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Richard A. DiIorio, InfuSystem Holdings Inc. - President, CEO & Director [41]

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Both. The majority are new.

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Douglas Weiss;DSW Investment, LLC, [42]

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Okay. Is there potentially -- given you have a competitor that's sort of downsizing its business is there potential to buy some of their inventory?

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Richard A. DiIorio, InfuSystem Holdings Inc. - President, CEO & Director [43]

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It's possible. It just depends on the opportunity and it depends on -- it really comes down to the mix, too. So if we needed different type of device and they don't have it, then there's no opportunity to buy it from them. But we don't leave any stone unturned when it comes to pump acquisition.

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Douglas Weiss;DSW Investment, LLC, [44]

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Okay. And as -- one of the issues historically had been, and where a lot of energy went, historically, was in terms of insurance negotiations. There have been some reimbursement pressure at various times. How are things going in that regard? How much energy is going into establishing new relationships? What's -- how are reimbursement rates holding?

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Richard A. DiIorio, InfuSystem Holdings Inc. - President, CEO & Director [45]

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So reimbursement rates are holding great. We have a team that does a phenomenal job every day. We've actually picked up a couple of new contracts recently that should be fantastic for us. So it's not something that I lose sleep over, and I actually think we're getting better at it every day.

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Douglas Weiss;DSW Investment, LLC, [46]

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Okay. And how about bad debt? Is that -- what are the trends there?

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Gregory Schulte, InfuSystem Holdings Inc. - Executive VP & CFO [47]

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Doug, the bad debt is actually down year-over-year. Obviously, it's now put -- it's baked into our revenue numbers now, but we're seeing a lower percentage. Last year, bad debt year-to-date was about 17% of revenue, this year, it's about 15%. So...

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Douglas Weiss;DSW Investment, LLC, [48]

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Okay. Last question. You were hesitant to give -- to sort of size your revenue opportunity in terms of the exit of your competitor or the change in strategy of your competitor. Is -- can you give any more visibility at this point in terms of what the competitor sales were and what the opportunity might be in total?

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Richard A. DiIorio, InfuSystem Holdings Inc. - President, CEO & Director [49]

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Yes. So what we've seen with a combo of the elastomeric and the competitive changes is that it's somewhere north of $10 million, that's at least our initial estimates.

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Operator [50]

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(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Rich DiIorio for any closing remarks.

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Richard A. DiIorio, InfuSystem Holdings Inc. - President, CEO & Director [51]

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Thanks, Nicole. Again, I'd like to thank the team for their efforts, specifically the biomedical and clinical teams, for being the reason why thousands of clinics trust us every day to keep their patients safe. I'd like to thank everybody for joining the call. This is an exciting time for InfuSystem, and I'm looking forward to future calls and sharing our progress. Thank you, and have a great day.

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Operator [52]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.