Q3 2020 Earnings Call
Greetings and welcome to the permit third quarter fiscal Twentytwenty financial results Conference call.
At this time just.
Listen only mode, a question and especially the.
The formal presentation.
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As there are lined up this conference is being recorded I wouldn't I like to turn the conference I'm the chief.
Kelly Oh I see equity group. Please go ahead.
Thank you Rachel and good morning, everyone.
Electromed third quarter fiscal 2020 financial results were released yesterday after market close.
A copy of the earnings release can be found in the Investor Relations section of the company's website at Www Smart that's dot com.
As a matter of formality I need to remind you that some of the statements that management will make on this call are considered forward looking statements, including statements about the company's future operating and financial results and plans.
Such statements are subject to risks and uncertainties that could cause actual performance or achievements to be materially different from those projected.
Any such statements represent management's exit patients as of today's date.
You should not place undue reliance on these forward looking statements and the company does not undertake any obligation to up that update or revise forward looking statements, whether as a result of new information future events or otherwise.
Please refer to the company's FCC filings for further guidance on this matter.
Joining us from a electromed. This morning, our missed Kathleen scarves, and President and Chief Executive Officer, and Mr., Jeremy Brock Chief Financial Officer.
Kathleen will begin with some opening remarks, after which Jeremy will present, a summary of the company's third quarter fiscal 2020 financial results and then we'll open the call for questions.
Now, it's my pleasure to turn the call over the Kathleen.
Thank you Kelly good morning, everyone and thank you for joining us to discuss Electromed third quarter fiscal 2020 financial results in recent developments.
Much has changed in the world since our last conference call in February Corona virus, or Cobot 19 has disrupted global economies health care systems and People's lives.
Our thoughts are with those individuals whose health has been jeopardize by this crisis and we extend our gratitude to the health care professionals fighting Cobot 19 in the front lines.
I'm proud of our team's unwavering commitment to ensuring a seamless manufacturing and delivery a smart best airway clearance devices. During these challenging times amidst the onset of because it 19 outbreak we achieved strong revenue growth, 18% from the prior year period and net income.
$653000 in our fiscal third quarter, while prioritizing the health and safety other employees clinicians and patients.
Before discussing our financial results I'd like to review the measures we have taken to protect the wellbeing of our people and the actions we have taken to mitigate the impact of because it 19 pandemic on our business.
Hurting our safety initiatives, we instituted staggered work shifts and created separate workstations to accommodate social distancing.
We implemented a policy requiring all employees to wear masks and additionally, gloves in our manufacturing areas.
We encourage you promote and flexible work arrangements for employees, where feasible. We ceased all nonessential travel and we established strict on and off site sanitation and infection control practices.
Regarding our actions to mitigate the impact of Koby 19 on Electromed business, we strengthened our communication to clinics by a video conference for virtual in services therapy demonstrations and patient follow up we implemented virtual training options for patients to minimize patient to train or contact.
We focused on building awareness among practitioners.
Recent centers for Medicare and Medicaid services, or CMS waiver that modify certain rules for prescribing respiratory related devices of which smart test is included.
Under the waiver clinical indications and documentation typically required will not be enforced for respiratory related products.
This waiver applies to Medicare patients only with noncommercial Medicare plans [laughter] the minimum documentation now requires a valid order and documentation of a respiratory related diagnosis.
Face to face and in person requirements for respiratory devices are being waived also.
Well it is difficult to quantify precisely the impact of cobot 19 on Electra men's operations as we exited March end through April mini clinics close temporarily restricted their operating hours or move to virtual visit.
Many consultations now are happening exclusively via Tele health.
For those locations that remain open pulmonologists often are working significant hours in the hospitals treating cobot 19 patients.
Leaving less time for a traditional consultations.
Electromed homecare referral pipeline and subsequent revenue has been negatively impacted as a result, a few were in person visit starting the onset of covered 19.
The CMS waivers I discussed earlier may somewhat offset the negative impact of fewer in person consultations.
And we have quickly reengaged face to face access to clinics and hospitals in those states where restrictions have started to ease.
Clinicians, who prescribe high frequency chest wall oscillation or HFC W. O therapy, ultimately are keeping individuals out of hospital emergency rooms, and intensive care units minimizing their exposure to corona virus, well freeing the capacity of health care professionals to care for the Sickest Cobot 19 patients.
With the CMS waiver, we believe that a higher than average percentage of the Medicare patient referrals, we received will convert to approvals.
Non commercial Medicare referrals represent about 55% of our business typically.
[noise] overall due to the and inherent uncertainty of the unprecedented and rapidly evolving situation. We are unable to predict with confidence the likely impact of covered 19 pandemic on our future business and financial performance.
Given these uncertainties, we are implementing cost savings measures, which include reducing discretionary and variable spend such as travel and the use of contractors consultants temporary health and employee furloughs in our manufacturing in general and administrative functions in response to the lower near term demand.
And for our products.
We expect these cost reductions will lead to approximately $450000 of savings per quarter.
Which we expect to partially realized in our fiscal fourth quarter.
With the interim situation.
Is while it is uncertain, we remain confident that we can achieve longer term double digit revenue growth once the impact of cobot 19 subsides.
We are hopeful that this current Sarah scenario will be temporary however, if this pandemic persist for an extended period or worsens. We are in a strong position to weather the storm.
First electromed is considered an essential business under federal guidelines second we have a strong balance sheet with approximately 9.9 million of cash no debt and future cash flow on accounts receivable of approximately 13 point threemillion at the end of March.
We also have 2.5 million of availability under our credit facility, providing us extra financial flexibility if needed.
Finally, we participate in a growing industry with favorable long term tailwinds.
Now moving onto our financial results for the third quarter fiscal 2020, starting with her home care business net revenue increased 14.3% year over year, primarily reflecting a higher average selling price per device due to payer mix and a greater percentage of referrals getting approved.
At quarter end or field sales employees totaled 44 of which 37 were direct sales compared to 41 at the end of the third quarter fiscal 2019 of which 35 or direct sales, we produced approximately $880000 or the annualized home care revenue per direct field sales in play well ahead of the.
Comparable figure of $669000 for the third quarter fiscal 2019, and above our target range of between $750000 and $850000.
Our institutional business log to another strong performance with revenue up approximately 47% compared to last year's third quarter, driven by higher average selling price and increased volume of which was driven by some of it which was driven by the cobot 19 pandemic [laughter] shifting to the bottom line, we achieved strong.
Third quarter net income of approximately 653000 or seven cents per diluted share underscored by year over year operating margin between of and improvement of 10.4%.
Accomplished improved margin despite increases in consulting and professional fees and more than doubling our investment in R&D during the quarter for our next generation product.
I'd like to make a brief comment on our CFO transition.
As announced in March Jeremy Barack has agreed to continue in the CFO role until July 1st 2021st of all I want to think Jeremy for his many significant contributions to electromed over the last eight years. He has been in invaluable part of the team and will be missed.
Our national search process is progressing well, we have identified and interviewed an impressive group of candidates we remain on track to bringing a new CFO onboard prior to July 1st and plan to provide an update soon.
In closing, we wrapped up a strong first nine months of fiscal 2020, and our employees have responded admirably during the cold at 19 pandemic.
Our long term thesis remains intact non cystic fibrosis bronchitis. This represents a significant and growing market opportunity conservatively estimated at more than 4 million individuals in the United States, serving our patients, particularly at this time when health care systems, maybe overwhelmed by 'cause it 19 patients it's.
Critically important to improve their airway clearance enhance respiratory function and reduced hospitalizations.
The nation emerge.
Emerges from this crisis, we anticipate electromed returning to the strong cadence of profitable growth that we achieved the last several quarters with that I will turn it over to Jeremy for a detailed discussion of our financial results.
Thank you Kathleen and good morning, everyone.
As Kathleen shared our net revenue in the third quarter fiscal 2020 increased 18% to $8.7 million from $7.4 million in the third quarter fiscal 2019, driven by growth in home care revenue.
Homecare revenue increased 14.3% to $7.8 million, primarily due to higher average allowable based on pair mix and a greater percentage of referrals getting approved.
Institutional revenue increased 46.9% to $609000 from $414000 in the prior year period due to higher average selling price per device and an increase in volume of devices and garments. So.
In the first quarter.
Fiscal 2020, we began selling into the home medical equipment distributors distributor revenue totaled $165000 during the third quarter fiscal 2020.
To reiterate our direct sales channel remains our primary focus we believe the homecare distributor channel is complementary to our core business particular, we in those areas of the country, where Smartpost brand is under a nice and we see opportunities for accelerating growth on a supplemental basis.
International revenue, which is not a strategic growth area for electromed totaled approximately $137000 compared to $142000 in the prior year period.
Quarter to quarter sales variability can be expected due the nature of our business and the Kobin 19 outbreak well like we have a temper or will have a temporary overall negative impact on our revenue that said, we anticipate a resumption of long term double digit revenue growth on the back end of this pandemic.
Gross profit increased 18.3% to $6.6 million or 75.4% of net revenue in the third quarter fiscal 2020 from $5.6 million or 75.2% of net revenue in the third quarter fiscal 2019.
The increase in gross profit resulted primarily from an increase primarily from an increase in home care revenue and the increase in gross profit as a percentage of net revenue was driven by a higher average allowable based on payer mix as compared to the prior year and we expect or long term gross margins continue to range in the mid.
Two high Seventys.
Operating expenses, which include as DNA as well as R&D totaled $5.7 million or 65% of revenue in the third quarter fiscal 2020.
Compared to $5.1 million or 69% of revenue in the same period of the prior year.
As DNA expenses increased 7.1%.
$5.3 million in the third quarter fiscal 2020 from $4.9 billion in the third quarter fiscal 2019, primarily due to higher consulting and professional fees.
R&D expenses increased to $392000 in the third quarter fiscal 2020 from $171000 in the prior year period, and we expect R&D expenses and our fiscal fourth quarter will be slightly higher than this quarter based on the timing of projects related to our continued investment in new product development.
Operating income increased to $913000 in the third quarter fiscal 2020 for $465000 and the third quarter of the prior year.
Net income before income tax expense totaling $947000 in the third quarter fiscal 2020 compared to $492000 and their prior year quarter and in the quarter income tax expense totaled $294000 compared to $139000 than the same period of the prior year.
Our effective tax rate in the third quarter fiscal 2020 was 31% compared to 28.3% in the prior year period.
Our net income totaled $653000 or seven cents per diluted share in the third quarter fiscal 2020, compared to 353000 doors or four cents per diluted share in the prior year period.
Moving to the balance sheet and operating cash flow.
Our balance sheet at March 31st 2019 included cash of $9.9 million no long term debt working capital of $24.2 million and shareholders' equity of $29.3 million.
Cash flows from operations in the third quarter fiscal 2020 totaled $889000 compared to $351000 in the third quarter fiscal 2019.
We're very pleased to be dead free and we continued building our cash reserves, which will support a look from as long term growth strategies. Moreover, given the Moreover, given uncertainty surrounding the over 19 crisis, we're fortunate to have the financials flexibility that or balance sheet affords us.
I'd like to point out the subsequent to the quarter end, we received a stimulus payment and the amount of $913000 related to the Corona virus aid release, an economic Securities Act or the cares Act and it was related to the provider relief fund, which me partially offset losses in revenue due to the impact of covered 90.
Pandemic.
Our ability to utilize the full amount receivable is depended on the guidelines and rules of the carriers act such as the cost incurred to support healthcare related expenses are lost revenue attributable to covert 19 pandemic.
Finally, as this will be my last earnings call with Electromed I'd like to thank our shareholders for their support during the past eight years, it's been a great journey and I look forward to watching Electrolytics business continue to thrive in that years ago.
This concludes our prepared remarks, operator, we started the Q and a portion of the call.
Thank you.
Hi will be conducting a question and answer question. If he would like to ask the question. Please press star one on your telephone keypad, a confirmation time will indicate your line is in my question. King You May proceed stock he would like churn maybe a question from the Q.
Call participants teasing speaking equipment, it may be necessary to pick up your handset pricing the stocky.
Your first question is from Tyler.
14 code.
Please go ahead.
Hi, Good morning, Kathleen Jeremy Thanks for taking the questions.
So.
Maybe first on the relaxed CMS guidelines.
Regarding the waiver so.
Imagine this has been very useful and in institutional channel.
But just kind of curious.
Are you are you utilizing that.
More than institutional setting or home care setting.
Kind of what's the what's been the implication of that thanks, well good morning, Kyle and thank you for the question. The waiver is going to assist patients and pulmonologists.
He primarily in the home care environment.
It also though will help us with a discharge patient. So as people are admitted to the hospital, maybe if a they have the Ur cobot 19, suffering from a lower respiratory infection, they're being discharged and by the way many of those patients are being discharged into a long term health care facility or.
Skilled nursing home and from there there they're being discharged home. So this would be primarily for our home care.
Part of the business because it really has to do with the requirements for prescribing and the medical documentation that's needed to be able to qualify for reimbursement.
Great.
90% of sales come from that channel. So that's great to hear are you.
Right now during the pandemic have you seen smart best being used in a lotta conditions outside of the normal call point Brown, Cactuses cystic fibrosis et cetera.
What we would typically see that will qualify under the waiver that we may not have have qualified or or would have been approved previously we'd be CR P.D. that would be the primary diagnosis that we're seeing at this time, we have received some prescriptions with.
Coded 19 diagnosis. They also would have typically a other co morbidities or underlying issues that they've had even prior to contracting the cobot 19.
But oh, we do think this is a wonderful opportunity for physicians and patients who normally wouldn't be able to access HFC W. O are smart best to utilize the waiver to help more patients and it gives us an opportunity to follow those patients and understand how they too are show.
Selling improved quality of life and reduced hospitalizations. So we're we're looking forward to understanding how this will continue to help more patients over the next a few weeks.
Got it and I'm just a couple more here if I may now that you expect a higher percentage of Medicare patients that will convert over than for the waiver and that's within the Medicare population can you remind me what was the conversion rate in the past and and can that go.
Hi, Ninetys, even 100% or how should we think about that.
We think in that Medicare population that will qualify for the waiver that as you stated it it could be in that 90% or above and that's been the experience. We've seen in the last few weeks already again, if it's a respiratory related disease and the doctor the physician or practitioner has been clear about that.
That will qualify.
Okay, and then you talked about a lot of clinics being closed who are having restricted hours, but some have moved to be virtual you know to the extent you can share I mean any sense as to what percentage of accounts active accounts have.
Reopened and our Reengaging.
Thank you for that question. So we've been we've been doing poll surveys with our with our clinics across all of our territories and so ER.
No the beginning of April versus the beginning of May we have now started to see the number of offices opening.
She is starting to increase and also.
The number of offices doing face to face visits increasing also I would say it's a in the in the high single digit percentage that that has shifted but it's a trend that we're watching very closely and we'll continue to do the to conduct those pulse surveys and that's how.
Oh the sales organization.
Is being made aware that they can then move out and visit those offices, there contacting them on a regular basis, regardless and this way they can get back in and.
I understand the rate of patients that they're seeing how many appointments, they're having per day and ER, we will see that gradually increase we believe over across the United States and getting that's going to be dependent on that stage and what the governor of that state has four specific orders about opening up the there.
There are there particular geographic area, but we're encouraged.
Okay, great. Thanks, Thanks for the updates and Jeremy all the best Thanks, So much.
Thanks.
Thank you once again, if you wish to ask a question. Please press star one on your telephone keypad and wait feeling today and now we will close momentarily any question and to the.
Your next question comes from Michael Dislodge from on the next holding.
Please go ahead.
Thank you good morning show Troy I, just wanted to say I am always brief as you guys know I'm supposed to you Kathleen and Jeremy.
As a very long term shareholder I just want to thank you again for your forthright Molson clarity on your presentation.
No.
So completely thorough.
Totally on less than have been through the year. So thank you for that and on a personal note generally wishing you all the best.
And your future endeavors next adventure may be as wonderful as this one has done well. Thank you as a shareholder and that's it guys I know how difficult. This time is and I think you're doing a fall to this job.
Oh. Thank you so much Mike for those comments and thank you for being a long term shareholder we very much appreciate it Tim yes. Thanks, Mike We appreciate your support over the last eight plus years. So thank you.
Hello.
Thank you I like the other question.
I'll now turn the call back to correctly.
England.
Thank you Rachel Thank you all for participating on our call. This morning, while we won't be on the road for Investor conferences in the near term given cobot 19, we remain accessible for one on one calls please reach out to our Investor relations firm the equity group if youre interested in scheduling a follow up calls we look forward to reporting back to you in August when we.
We'll release, our fourth quarter fiscal 2020 financial results have a good day and stay well.
Thank you. This does conclude today's conference you may disconnect. Your lines. Thank you for participating.
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