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Edited Transcript of INFU earnings conference call or presentation 14-May-20 1:00pm GMT

Q1 2020 InfuSystem Holdings Inc Earnings Call

MADISON HEIGHTS Jul 2, 2020 (Thomson StreetEvents) -- Edited Transcript of InfuSystem Holdings Inc earnings conference call or presentation Thursday, May 14, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Barry G. Steele

InfuSystem Holdings Inc. - Executive VP & CFO

* Joe L. Dorame

Lytham Partners, LLC - Managing Partner

* 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 - Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the InfuSystem Holdings, Inc. Reports First Quarter 2020 Financial Results Conference Call. (Operator Instructions) Please also note, today's event is being recorded.

At this time, I'd like to turn the conference call over to Joe Dorame. Sir, please go ahead.

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Joe L. Dorame, Lytham Partners, LLC - Managing Partner [2]

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Thanks, Jamie. Good morning, and thanks for joining us today to review the financial results of InfuSystem Holdings Inc. for the first quarter of 2020 ended on March 31, 2020. With us today on the call are Rich DiIorio, President and Chief Executive Officer; and Barry Steele, Chief Financial Officer. After the conclusion of today's prepared remarks, we will open the call for a question-and-answer session. If anyone participating on today's call does not have a full text copy of the press release, you can retrieve it from the company's website at www.infusystem.com or numerous other financial websites.

Before we begin with prepared remarks, I would like to remind everyone, certain statements made by the management team of InfuSystem during this conference call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Except for the statements of historical fact, this conference call may contain forward-looking statements that involve risks and uncertainties, some of which are detailed under risk factors and documents filed by the company with the Securities and Exchange Commission, including the annual report on Form 10-K for the year ended December 31, 2019. Forward-looking statements speak only as of the date the statements were made. The company can give no assurance that such forward-looking statements will prove to be correct. InfuSystem does not undertake and specifically disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

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

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

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Thanks, Joe. Good morning, everyone, and welcome to our first quarter 2020 earnings call. Thank you all for taking the time to join us this morning. I hope you and your families are staying safe as we continue to deal with the effects of COVID-19. It's times like these when we really gain perspective on what's important in life and just how important it is to cherish our time with our family and friends. Now on to our first quarter results. I'm extremely pleased with our first quarter performance, not just the numbers, but how the InfuSystem team responded to a situation where there is literally no playbook. Against the backdrop of rolling nationwide lockdowns, we had a record-setting revenue in the quarter, $21.7 million, which is an increase of 18.5% versus the first quarter of '19, and our adjusted EBITDA grew by 30% versus the first quarter of 2019. And this was accomplished while transitioning 85% of our team to working from home. I couldn't be prouder of the InfuSystem team. To me, that is the definition of executing on a plan in extreme conditions. And on top of that, we've been able to put contingency plans in place for future potential short and long-term disruptions on our operations from COVID-19.

In early March, when we first began to assess the potential impact of COVID-19, we believed certain scenarios would most likely take place. First, we believed that our oncology service, which helps facilitate life-saving treatments to patients, would not be dramatically impacted. We were correct. In fact, we treated more oncology patients in March than in any other month ever and we treated more patients in the first quarter than in any other quarter in our 33 years of providing the service. Second, we believed our DME platform, specifically pump sales and rentals, would likely see increased customer demand when hospital admissions increased. We knew that we would need to adapt and execute from a biomedical and logistics standpoint to meet that demand, and we absolutely did this.

The operations team deployed more devices than I would have ever thought possible. Operations has always been part of our front-line with our clinical team and deserves so much credit for making sure our patients get the safest devices, wherever and whenever they need them. Third, we expected the elective surgeries were going to see a dramatic decline as hospitals started to reserve and redeploy most of their resources to deal with any potential surge from COVID-19 cases. Unfortunately, we were correct about this as well.

The pain management numbers were quite strong through early March before showing a steep decline in surgeries. In fact, the pipeline numbers were slightly ahead of plan, which had been doubling revenue again this year after accomplishing that feat in 2019. I have absolutely no concerns long term, but we are seeing a sharp, short-term impact. More on that later. Fourth, we believed customer access for our sales teams would be severely impacted. In addition to our own internal travel restrictions, most hospitals restricted access to any nonessential visitors, and rightfully so, for everyone's safety. These restrictions had the bigger impact on the newest addition to our integrated therapies platform, Negative Pressure Wound Therapy, through our partnership with Cardinal Health. As with any new product, service or partnership, face-to-face meetings are critical for both selling and customer training.

The impact is our rollout process is moving a little slower than planned when we announced the new therapy in February. Despite these challenges, we are currently serving patients and customers and expect to add new customers through the end of the year, just at a little bit slower pace. The great news is that we see very, very strong demand in the market for the powerful combination of our ITS platform partnered with Cardinal's device. The long-term potential for this therapy remains significant with a current addressable annual market of $600 million. And with that, I would like to turn it over to our CFO, Barry Steele, to provide a review of our financial results.

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Barry G. Steele, InfuSystem Holdings Inc. - Executive VP & CFO [4]

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Thank you, Rich. And thanks for joining to everybody on the call today. As Rich mentioned, the first quarter represented a strong start to 2020, marked by continued double-digit, year-over-year growth in both net revenue and adjusted EBITDA and improved gross margins and adjusted EBITDA margin percentages.

During the quarter, we did not incur significant extra costs associated with the health crisis, nor did we encounter any reduction in net revenue or other operational disruptions. On the contrary, the demand for some of our services increased due to COVID-19 driving urgent need for equipment and services we provide in our DME services segment. In responding to the crisis and the increased demand, our preparedness activities included increasing our levels of both disposable medical supplies and accelerating our capital expenditures for DME equipment. These purchases have provided both a safety stock in case of supply disruptions and have allowed us to respond to requests from customers heavily burdened by the crisis.

Net revenues for the 2020 first quarter of $21.6 million represented an increase of $3.4 million or 18% over the prior year first quarter. Integrated Therapy Services led this growth, increasing by $2.8 million or 25% and topping a respectable increase in durable medical equipment services segment of $540,000 or 8%. The growth for the Integrated Therapy Services segment was mainly due to increased market share in oncology, but also benefited from a small increase in pain management oncology customers. The Durable Medical Equipment Services segment net revenue growth was led by increased equipment sales.

The higher revenue translated into higher adjusted EBITDA, which increased by about $1 million or 30% to $4.1 million during the quarter and a higher adjusted EBITDA margin, which grew to 18.8% during the current quarter compared to 17.1% in the prior year. The improvement was driven by both an improved margin mix favoring the higher-margin ITS segment, fixed selling, general and administrative cost coverage, offset partially by a higher provision for doubtful accounts and a decrease in DME Services segment gross margin. The bad debt provision increase was mainly driven by an accrual adjustment, which reflected slower customer collections performance and a difficult comparison to the prior year period which included an accrual reversal. The lower gross margin in the DME services segment was due to proportionately higher equipment sales and a mix of lower-margin items.

During the first quarter, operating cash flow totaled about $600,000 and represented a decrease of $700,000 from the prior year. The current year period was impacted by higher working capital utilization associated with our COVID-19 preparedness activities. The positive operating cash flow, combined with the use of $2.3 million of cash on hand and net borrowings of $1.2 million reported to net capital expenditures of $4 million, which were $1.3 million higher than the prior year first quarter. This increase in capital expenditures was primarily comprised of increases in our durable medical equipment fleet. And represented an acceleration in our current year capital plan timing due to the COVID-19 preparedness and market demands I mentioned earlier.

Note that our financial position has still improved slightly. As of March 31, 2020, our ratio of funded debt to adjusted EBITDA decreased to 2.07x versus 2.11x at the end of 2019. Our total available liquidity at the end of the first quarter, which totaled $14.5 million, consisted of $8.4 million in availability on our revolving line of credit and $5.7 million available under an open capital expenditure facility and $300,000 cash on hand. The total represented a decrease from our available liquidity of $20.9 million as of December 31, 2019. With this, again, mainly due to the COVID-19 related capital expenditure acceleration and working capital investment.

We estimate that our liquidity position will decrease slightly during the second quarter, but then improved during the remainder of 2020 as our working capital position starts to decline to normal levels and operating cash flows overtake our capital expenditures during the back half of the year. With that, I'll turn it back to Rich.

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

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Thanks, Barry. On our last call in March, I said it was too early to understand the financial impact COVID-19 would have on our business, and I did not reiterate our 2020 guidance of $89 million of net revenue, $22 plus million in adjusted EBITDA and $16.5 million in cash flow from operations. As of today, I have 100% confidence in our team to execute on our plan.

We have the necessary contingency plans in place for future effects of this pandemic. However, at this point, there are still too many unknowns outside of our control for me to reiterate our numbers. As I sit here today, there are some things I know for sure. What I do know is that our oncology patient census continues to grow and is higher than ever. Our DME services team will continue to see higher-than-normal demand for both pump sales and rentals.

In pain management, as states begin to open and elective surgeries are getting rescheduled, we are already seeing the demand for patients coming back online. And as our hospital access improves, we will win negative pressure market share. So what does all this mean? I think we'll be fine. I think we should be able to drive towards our original numbers. But I also think it would be foolish in these uncertain times for me to try and predict the future.

A lot of questions remain that we can't control and can't predict that could negatively impact growth within certain therapies. We will see a huge -- we will see a surge in COVID-19 as the restrictions are lifted state-by-state, forcing additional shutdowns. That's one of our questions. Will we see a resurgence of the virus in the fall as we do with the flu? I am hopeful that when we talk again in August that some of these questions will be answered, and we can have better clarity on our full year financials. I've been with InfuSystem for 16 years. And even with everything going on around us, I've never been more confident and passionate about our strategy. Why? Because there's a few things I know for certain that will allow us to overcome any challenge.

I do know, across all of our functions, from top to bottom, this team has been built to withstand anything. I know Tom Ruiz and his sales team will be relentless when it comes to managing our growth by expanding into new therapies. I know Carrie Lachance and her operations team will be relentless when it comes to our constant drive to improve operational efficiencies and making sure that our patients and customers receive the industry-leading service they are accustomed to. I do know that all 280 members of the InfuSystem team are committed to make sure that our platforms remain solid and infinitely scalable. And I do know that any impact will be short term, and we will come out of the other side of this stronger and sharper than ever before.

And with that, happy to answer any questions.

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Questions and Answers

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Operator [1]

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Ladies and gentlemen, with that, we'll begin today's question-and-answer session. (Operator Instructions) And our first question today comes from Brooks O'Neil from 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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I have a few questions, and I admit upfront, there's been a whole lot of things going on on my end this morning and I may have been distracted during some of your prepared remarks. So if I ask about things you've talked about, I apologize, but it would be a help if you could fill in. I was hoping first to get just a little color on the pain and oncology businesses' results during April and early May. I think you alluded to a little improvement, but could you just give us a little more color on what you're seeing out there in the marketplace right now?

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

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Sure. Thanks, Brooks. Regarding oncology, patient demand remains strong. So our census continues to grow. What we see in April and May is no different than we saw in the first quarter, which the first quarter was the best quarter we've ever had. March was the best month we've ever had.

So it's exactly what we thought, that in oncology, people are receiving life-saving treatments, and that's not something you can delay. It's not an elective surgery. It's not something -- it's not just a normal physical, annual physical. It's something you have to go into the hospital for, and the hospitals and outpatient clinics are accommodating those patients. So oncology remains strong. There's no concerns at all.

Pain, as I mentioned, is coming back online. So we saw patient census drop at the very end of March and early April. As we kind of came out of April into May, we started to see the need for pumps in those patients coming back up online. We're not back to where we want to be, for sure. It's going to take a little while as every state has to open and the surgeries have to be scheduled. But all things are pointing positive for pain management as well. As long as there's no rebound of COVID-19 in the summer and fall, they should be in pretty good shape this year.

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

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

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

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Yes, so from a launch standpoint, it's definitely going slower than we thought. So negative pressure, the sales process is really driven through the hospital. And that's a challenge when the hospitals just aren't letting any nonessential people in. They're not even letting some visitors in to visit patients. So that access has definitely slowed down quite a bit, especially in some of the big cities, and that has slowed down the launch. That being said, when the hospitals start to ease those restrictions, which we haven't seen happen in April yet, so we don't know when that will happen. It should be pretty soon. But again, as the states start to open up, they're going to lessen the restrictions here and let us back in.

The good news is that there are a lot of hospitals waiting for us to come back in. We were able to talk to them before the shutdowns happened, so tail end of February, early March. They were excited about the offering that we have with our service, combined with Cardinal's device. So we see the market opportunity there, for sure. Now it's -- once those doors open up in the hospital, I think we'll start gaining some market share in negative pressure.

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

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

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Barry G. Steele, InfuSystem Holdings Inc. - Executive VP & CFO [7]

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

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [8]

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

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Barry G. Steele, InfuSystem Holdings Inc. - Executive VP & CFO [9]

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Yes. So I'm kind of a believer in having as much liquidity as possible. That said, I feel very comfortable. We definitely don't see -- we do see the earnings as being very strong, so we'll have significant good cash flow as we go through the year just from the operations.

Right now, what's happening, we just have to work in -- invest in working capital to build our supplies to make sure we weren't stuck if there was any kind of disruption. So we built that inventory in particular, and then we accelerated our pump purchases. So it's -- we've been able -- we're kind of past that and now we'll see, pretty soon, our working capital levels start to go down and the pump purchases will have slowed. So we'll have -- we won't have that as a use of cash for a few months. So I see it coming back strong as we go through the year.

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Operator [10]

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Our next question comes from Douglas Weiss from DSW Investment.

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Douglas Weiss, DSW Investment - Analyst [11]

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

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Barry G. Steele, InfuSystem Holdings Inc. - Executive VP & CFO [12]

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I don't know that we talked about the future, but we have been buying pumps mainly for a couple reasons. One, we've had a lot of demand for products to go into facilities that are actually serving COVID patients. So our DME segment has been basically trying to find pumps anywhere they can or to serve into that. A lot of that revenue start -- it's coming into the second quarter, but that's basically the reason. We don't see it, a sort of capital expenditure activity for the year higher than what we really had on our plans, but it just happened a little bit earlier in the year because of the COVID crisis.

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Douglas Weiss, DSW Investment - Analyst [13]

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Okay. And then you also mentioned safety stock and medical supplies for oncology. What is that?

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Barry G. Steele, InfuSystem Holdings Inc. - Executive VP & CFO [14]

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So when we deliver services to patients, we give them one of our pumps, but they also get a supply kit. I think they get it a couple of times during the course of their using the pump. So what we did is we brought in extra supplies to make sure if something happened in our supply chain, we would be able to serve patients. So that was basically building safety stock in order to prepare ourselves.

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Douglas Weiss, DSW Investment - Analyst [15]

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Is that kind of a onetime thing? Or is that ongoing?

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Barry G. Steele, InfuSystem Holdings Inc. - Executive VP & CFO [16]

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

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Douglas Weiss, DSW Investment - Analyst [17]

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And then have you made the capital investments for this year already in the wound care equipment? Or is that going to show up later in the year?

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Barry G. Steele, InfuSystem Holdings Inc. - Executive VP & CFO [18]

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Yes. One of the nice things about this business is that you can really -- you can scale your capital expenditures to what your needs are. I come from the automotive industry, where we had to buy a piece of equipment that we probably couldn't -- we wouldn't put all the -- we wouldn't take up the -- the capacity in that piece of equipment for years. Here, you can buy exactly how many pumps you need. So we have bought in pumps for the devices for negative pressure. But only what we need to serve the initial stages of the business.

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Douglas Weiss, DSW Investment - Analyst [19]

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

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Barry G. Steele, InfuSystem Holdings Inc. - Executive VP & CFO [20]

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That's correct.

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Richard A. DiIorio, InfuSystem Holdings Inc. - President, CEO & Director [21]

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That's correct. Yes. Yes, and there was no revenue from negative pressure in the guidance because we weren't sure when it would launch this year.

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Douglas Weiss, DSW Investment - Analyst [22]

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Okay. Do you have anything new, any kind of goals you might offer on that? Or is it too early?

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Richard A. DiIorio, InfuSystem Holdings Inc. - President, CEO & Director [23]

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

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Operator [24]

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(Operator Instructions) Our next question comes from [Aaron Warrick] from ES Capital.

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Unidentified Analyst [25]

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

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

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

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Unidentified Analyst [27]

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Sounds good. So I mean I think then that this elective surgery losses are -- must be a pretty small part of the overall business then, based on what you're saying?

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

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

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Unidentified Analyst [29]

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

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

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I think 95 million and $23 million are pretty aggressive, even without COVID-19, and there's certainly a lot of unknowns in the second half. Do I think we'll get to our plan if pain comes back online and DME stays strong and oncology continues to grow? Do I think we can get there? Sure. Do I know what's going to happen next month or even next week with COVID? Absolutely not, none of us do, right? So there's concerns as we plan. There's concerns about the boomerang effect. So as states open up, does it start to -- the cases start to go back up and the curve starts to steepen again? If that happens, that's a problem. Even if it stays flat in the summer, but it comes back in the fall when the flu does. Again, we could have another issue in our hands. And we don't know what the second round would bring. We don't know if oncology would stay strong, we think it would. But certainly, elective surgeries would be postponed again and those sorts of things. So there's just so many factors. We just don't know. We don't know, and that's why we're kind of holding off on the numbers.

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Unidentified Analyst [31]

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

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Richard A. DiIorio, InfuSystem Holdings Inc. - President, CEO & Director [32]

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Yes. So sure. So we're in all 50 states. It's exactly what you would think. The big cities: the Bostons, New Yorks, LAs of the world, obviously have the most hospitals, the most doctors. So we have so much of the market share. It's pretty well represented across the country. So yes, we have a heavy concentration in New York and Boston, in Detroit, our hometown. All of those have been hit for sure. But we haven't -- even in those cities, we haven't seen much of an oncology impact at all.

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Unidentified Analyst [33]

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

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Richard A. DiIorio, InfuSystem Holdings Inc. - President, CEO & Director [34]

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With Cardinal? So we have other Cardinal devices, just like we have Baxter and B. Braun devices outside of Negative Pressure that we rent and sell into hospital markets and just different types of infusion pumps and products. So that's always been the case. That hasn't changed during the COVID crisis.

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Operator [35]

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

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Richard A. DiIorio, InfuSystem Holdings Inc. - President, CEO & Director [36]

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

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Operator [37]

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