InfuSystem Holdings, Inc. (AMEX:INFU) Q3 2023 Earnings Call Transcript

InfuSystem Holdings, Inc. (AMEX:INFU) Q3 2023 Earnings Call Transcript November 7, 2023

InfuSystem Holdings, Inc. beats earnings expectations. Reported EPS is $0.03, expectations were $0.02.

Operator: Good day and welcome to the InfuSystem Holdings Inc. reports Third Quarter 2023 Financial Results Conference Call. All participants will be in a listen-only mode. [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.

Joe Dorame: Good morning and thanks for joining us today to review InfuSystem's financial results for the third quarter of 2023 ended September 30th, 2023. 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. 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 31st, 2022.

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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 except as required by law. Now, I'd like to turn the call over to Rich DiIorio Chief Executive Officer of InfuSystem. Rich?

Rich DiIorio: Thank you, Joe and good morning everyone. Welcome to InfuSystem's third quarter 2023 earnings call. Thank you all for joining us today. I'm going to start this call by reiterating that our key theme for the year has been the 2023 is a year of execution and I believe our financial results show delivery of strong execution. Not only was the recently completed third quarter the seventh consecutive quarter with record revenue, it was the second quarter in a row with revenue up 17% or more when compared to the prior year. Shifting from the topline to the bottom-line, we see continued improvement in our margins and operating income. Operating income in the third quarter increased 80% year-over-year and net income was up 56%.

Adjusted EBITDA was $6.2 million for the quarter, up 11% from the prior year. While I think that's a solid adjusted EBITDA number with a nice trend line, on a year-to-date basis, we are slightly behind where we originally planned to be versus our original budget. This is because our adjusted EBITDA was suppressed early in the year because of the investments made in the first quarter to accelerate and pull-forward the onboarding of devices under the initial Master Services Agreement with GE. We elected to make the necessary investments ahead of our original plan and succeeded in pulling forward that revenue, resulting in the strong growth we have delivered over the last couple of quarters. So, 2023 has been an execution year in terms of delivering on new revenue opportunities and setting the stage for more revenue in future years.

The next phase of execution will be the fine-tuning and the continuous process of identifying and implementing operating improvements that will improve and maintain our long-term operating margins. That will be the story for the rest of this year and into next year. After Barry provides his review of the quarter, Carrie will provide some color on the things that we are doing and how our margins are improving as we achieve scale and begin ironing out our processes with our GE Biomed business and start leveraging our national network of technicians. Now, turning to guidance. In August, we updated our guidance for the full year estimating net revenue growth of 10%-plus and adjusted EBITDA margin to be between 17% and 18%. We expect our revenue to come in above the range previously provided.

How much above depends on a variety of factors some of which are outside of our control. Accordingly, we will continue to take a very conservative approach and raised our full year guidance to have net revenue growth of 11%-plus. For adjusted EBITDA we are maintaining our adjusted EBITDA margin range of 17% to 18%. Now, I'd like to turn the call over to Barry who will provide more detail on our financial performance in the third quarter.

Barry Steele: Thank you, Rich and thank you everyone on the call for joining us today. I'm going to focus on three topics. The main drivers for the current quarter's results, our fourth quarter outlook, and our current financial position and how it changed during the quarter. First let me touch on our financial results for the period. Net revenues for the third quarter of 2023 totaled $31.9 million, representing a $4.6 million or 17% increase from the prior year and setting another new all-time revenue record for the seventh straight quarter also, the eighth record in the last nine quarters. The three main drivers of this increase were higher revenue from the GE Healthcare contract totaling $2.6 million, higher lease equipment sales of negative pressure wound therapy devices totaling $1.1 million and higher revenue in oncology totaling $800,000.

At September 30th, the annualized revenue run rate for devices onboarded to the GE contract stood at approximately $11 million, an increase of $2 million from where we started the quarter. Gross profit for the third quarter of 2023 was $16.2 million which was $1 million or 6% higher than the prior year third quarter. This was mainly driven by the higher sales, but was partially offset by a lower gross margin percentage which was 50.9% during the third quarter of 2023 down from 59.5% from the prior year. The year-over-year decrease was mainly due to unfavorable product mix changes and additional start-up costs for the GE Healthcare Biomedical Services contract. The product mix impact is due to the higher biomedical revenue and the negative pressure wound therapy equipment sales growth both of which have a lower gross margin than the company average.

GE Healthcare startup costs are estimated to have been about $1.2 million, for the 2023 third quarter. This amount continues to be higher than we originally planned and was a larger amount than in the first and second quarters due to the higher revenue volume. We continue to anticipate that these elevated amounts will dissipate over the next several quarters and then our margin will approach our original estimates once we reach full ramp and circle pass the first year of coverage for the growing number of devices. Selling, general and administrative expenses for the third quarter of 2023, totaled $14.5 million representing a decrease of $333,000 or 2% as compared to the prior year. The amount was 45.6% of revenue which represented a 10.4% decrease from the prior year ratio which was 56%.

As a result of these impacts, our adjusted EBITDA was $6.2 million or 19.4% of net revenue during the 2023 third quarter, which represented an increase in the prior year totaling $600,000 and an increase sequentially from the 2023 second quarter totaling $400,000. Turning to the prospects for the fourth quarter, as Rich stated, we now expect our annual revenue growth rate to be over 11%. This amount represents an increase from our outlook at the end of the last quarter when our minimum growth forecast was 10%. While we do expect a sequential decrease in our fourth quarter revenue mostly due to timing issues, the amount implied by an 11% annual growth rate represents a significant hedge that almost ensures that will not have a year-end miss.

The timing issues are two-fold. First, during the fourth quarter it is likely that we will deliver fewer, negative pressure Wound Therapy Devices which totaled $1.1 million in revenue during the third quarter. This reflects the quarter-to-quarter variability we typically experience in equipment sales. Second, we are expecting revenue for the GE Healthcare contract to be about $500,000 lower in the fourth quarter compared to the third quarter. This is mainly due to our quicker-than-expected ramp-up in adding devices to the contract during the year, which has resulted in a lower number of devices being onboarded in the fourth quarter and consequently, less of the initial per device onboarding related revenue being recognized. We do not currently see any other specific additional sequential revenue reductions.

We are holding our minimum outlook at 11% to provide for an extra measure of assurance. Turning to a few points on our financial position and capital reserves, as we indicated during the second quarter call in August, our operating cash flow for the third quarter totaling $4.3 million, increased sequentially for the second straight quarter and represented an increase of $800,000 over the prior year third quarter. This was due to a lower amount of growth in working capital levels, which reflected a slower sequential revenue increase from the 2023 prior quarter than for the earlier two quarters. We expect this trend to continue in the fourth quarter. Additionally, our net capital expenditures were a relatively low, $300,000 during the third quarter.

This lower amount is partially related to the timing of our pump equipment purchases during the year and due to the fact that much of our growth was derived from less capital-intensive revenue sources such as Biomedical Services and Wound care. The capital required to fund Negative Pressure Wound Therapy equipment leases shows up in our working capital investments i.e., operating cash flow and not capital expenditures. Because of these factors, our net debt decreased by $3.5 million to $32.5 million and our available liquidity totaled $41.7 million at the end of the quarter. The decrease in total debt and higher trailing four quarter adjusted EBITDA caused our ratio of total debt to adjusted EBITDA to decrease modestly to 1.5 times at the end of the quarter as compared to 1.59 times at the end of the 2022 fourth quarter.

Our debt consists of borrowing on our revolving line of credit with no term payment requirements, nearly five years in the remaining term and with $20 million of the outstanding balance protected from increasing interest rates through an interest rate swap having the same term. I'm now going to turn the call over to Carrie, who will provide more detail on what we are doing to improve our operating margins.

Carrie Lachance: Thanks, Barry and good morning, everyone. As Rich indicated earlier, I'd like to provide some color on what we are doing to improve our operational efficiencies after new business has been onboarded. Today, that is primarily related to our Biomed business where the opportunity is greatest. In Wound Care, we are still mostly preparing the channel with negative pressure pump placements and activity where we have a lot of prior experience and are already very efficient. To start, the primary driver in biomed is onboarding of the GE master services agreement involving roughly 230,000 devices located in facilities across the country. For each of these facilities there is of course an initial onboarding visit that must occur.

We do have much prior planning as we can but there are several details unique to each facility that our teams must deal with. Where to park, how to gain access, introductions to key people and the big one locating all of the pumps to be serviced. That make the first visit the most time-consuming and least-efficient engagement. Fortunately, we are nearing the end of our initial onboarding and each subsequent visit will build upon the experience of the prior and we expect things to become progressively better as we improve on hiring, training and deploying our personnel and managed travel costs. The biggest area of improvement we see is in staffing and staffing costs. In the beginning, the overarching objective was to please the client. We are known for our premium concierge level services.

We get the job done, we do things right and we do it the first time. To ensure this at the beginning, we erred on the side of overstaffing projects, as we settled into the workload and cycles of visiting our contracted sites, subsequent visits will benefit from rightsized teams, more experienced technicians and firsthand experience with the facilities where these teams work. Additionally, and potentially even more important is our having used the first year to build our national network of biomed technicians. Our traveling teams were often bigger the first time around because of our regional technicians not being in place. Going forward, when it's time for annual inventory and preventative means, the work will be more organized and will have even greater familiarity with each site that has already been matched with one of our regional technicians.

A last point on this, the national network of technicians we are building is an asset that extends beyond the GE relationship. Our biomed technicians are not always locked into a single site. They are locally mobile and will often cover multiple sites. This means that as we gain experience and efficiency, they can and will be used to provide services at locations outside of the GE contracted facilities. We have opportunity in areas to add new business to that will absorb the capacity of our regional technicians and add more techs to geographies where we will win additional business. Each geography will be supported by the surge capacity of our traveling teams. The flexibility of this structure to be lean with the workflow warrants and to be able to surge into parts of the country to satisfy one-off or periodic customer needs aligns very well with our concierge model of service.

We have been making steady progress throughout 2023 to put the biomedical sources model into place and we believe the benefit will continue to show into 2024 in both the top and bottom line. At this point, I would like to turn the call back over to Rich.

Rich DiIorio: Thanks, Carrie. After completing the first three quarters of 2023, I continue to be very pleased with our performance and I am excited about InfuSystem's future potential. We promised execution. And in 2023, we're delivering strong revenue growth and have started the process of fine-tuning around that revenue, improving our efficiencies and our operating margins. Looking forward, I expect the execution story in 2024 will advance to include material improvements in our operating returns. We are still in the planning phase but as Barry and Carrie explained, we are steadily increasing our efficiencies and expect these trends to continue. For the time being, we expect that Biomed and Wound Care will be our primary growth drivers.

We do expect to see incremental growth across nearly all of our activity lines in 2024, but the strongest drivers will be these two. And while we are always interested in learning about material new growth opportunities, we believe our attention going into 2024 will be best focused executing on our continuing opportunities in Biomed and Wound Care. In Biomed, this means completing the GE onboarding and then adding incremental and most likely smaller projects to our growing national network of technicians. In Wound Care, this will mean continuing to place hardware into the channel and working with our joint venture partner Sanara to open that channel to distribution of the joint venture's Advanced Wound Care products. Both of these opportunities will continue to scale and they will become significantly more accretive in 2024.

Both have tremendous remaining potential and both are expected to be material contributors to our top and bottom line growth for years to come. Operator, we are now ready for questions.

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