Q4 2020 Electromed Inc Earnings Call
Greetings and welcome to Electromed, Inc.'s fourth quarter and full year fiscal 2020 financial results Conference call.
At this time all participants are in listen only mode. A question answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Kelly all of the equity group. Thank you Mr. all you may begin.
Thank you Diego and good afternoon, everyone, a electromed fourth quarter fiscal 2020 financial results were released today after the market close.
A copy of the earnings release can be found in the Investor Relations section of the company's website at Www Smart 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 implants.
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 expectations as of today's date.
You should not place undue reliance on the forward looking statements in the company does not undertake any obligation to update or revise forward looking statements, whether as a result of new information future events or otherwise.
We refer to the company's FCC filing for further guidance on this matter.
Joining us from Electromed. This afternoon, our Kathleen, Scotland, President and Chief Executive Officer, and Mike Mccormack, Chief Financial Officer.
Kathleen will begin with them opening remarks, after which Mike will present, a summary of the company financial results.
We'll open the call for questions.
Now, it's my pleasure to turn the call over to Kathleen.
Thank you Kelly good afternoon, everyone and thank you for joining us today in fiscal 2020, we delivered increased revenues enhanced profitability and achieved significant bottom line improvement with record net income of $4.2 million were 47 cents per diluted share more than doubling from fiscal.
2019.
We accomplished these results despite a challenging fourth quarter during which the pandemic disrupted global economies health care systems and People's lives.
<unk> SAR with those individuals whose help whose health has been jeopardize by this crisis.
We extend our gratitude to the health care professionals fighting Cobot 19 on the front line.
Our fourth quarter revenues declined 20.1% year over year to $6.9 billion as 'cause it 19, dampened industrywide interactions among clinicians and patients leading to lower home care referrals.
During the quarter, we accelerated our virtual sales and patient training efforts.
<unk> direct to patient marketing and generated awareness of centers for Medicare and Medicaid system waivers that temporarily relax certain rules for prescribing smart best airway clearance devices.
You are non commercial Medicare population.
These actions combined with an upward trend in physician office, three openings and greater clinician activity as the quarter progressed allowed us to exit the quarter and commenced fiscal 2021 with home care referrals approaching near pre cobot 19 levels.
We are encouraged by the recent trends and referrals, which is a leading indicator for our business and command the excellent work of our sales team to balance virtual and in person visits during the pandemic.
Moreover, the CMS waivers, which eliminates certain clinical indications.
Documentation and face to face prescribing requirements for respiratory devices like smart best.
I've been extended to the end of October.
With the CMS waiver, we believe that are higher than average percentage of CMS referrals, we received can turn into approval.
CMS business represents between 50, and 55% of our home care revenue.
In the fourth quarter, we successfully navigated extraordinary volatility and could not have done so without the amazing dedication of our employees, whose health safety and well being remain our top priority.
Our team had to adjust to staggered hours socially distance to workstations remote work arrangements Maskin glove protocols virtual meeting travel restrictions strict sanitation practices and in some cases furloughs.
Well, all while continuing to serve our clinicians and patients with best in class customer service and differentiated smartest airway clearance products.
We are pleased to report that all of our furloughed employees returned to work in August coinciding with an uptick in physician office Reopenings and the easing up restrictions in certain regions of the country.
Moving onto some recent changes in our leadership team in May we appointed Mike Macquarie as our new financial officer. He brings to Electromed approximately two decades of financial leadership and multi dimensional business experience across a range of medical device consulting and fortune 500 companies.
Prior to his most recent role as senior director of commercial finance at Starkey hearing technologies. He spent over nine years at Medtronic in roles of increasing responsibility concluding as divisional CFO of the long health fitness business for the last five years.
He has an extensive consulting background, primarily at Pricewaterhousecoopers, where he held management roles in both financial process improvement and business analytics I believe Mike will optimize electromed finance function and I am very excited to be working with him.
[laughter] separately in mid July we promoted Doug Fetters, two senior director of National sales overseeing all domestic sales initiatives.
Doug has two decades of sales leadership experience in the health care industry.
And has been instrumental in accelerating growth in the Companys institutional market.
His appointment coincides with the departure of our former Vice president of sales, but I'd read.
Who resigned from the company to accept an executive officer position at a privately held medical device company.
Doug worked very closely with bad to enhance our sales talent incentives and approach over the past year and a half thus far the sales leadership transition has been seamless.
We plan to commence a national search process to recruit a leader for the newly created position a chief commercial officer.
Which will oversee both the sales and marketing teams out electromed.
We'll plan to keep you updated on that progress of about higher.
On the institutional side of our business. Despite Kobe 19 related weakness this quarter as hospitals and long term care facilities, adjusted operating protocols and procurement management related to all airway clearance therapies.
Based on their concern of covert 19 spread in the hospital.
Our direction, though remains to focus on fortifying the hospital call point and strengthening our partnerships with the integrated delivery networks.
As a reminder growth in the institutional business should augment our home care revenue as Hfs CW brand used in the hospital is often the default brand described when discharging a patient.
Finally, we view our home care distributors segment as that third like of the stool that reiterate that our direct sales channel remains our primary focus.
We believe the homecare distributor channel is complimentary to our core business, particularly in those areas of the country, where our smart that breast smart that's brand is under recognized and we see opportunities for accelerating growth on a supplemental basis.
In closing as we execute on our growth strategy across our three primary segments.
And as the impact of Cobot 19, Abates, we believe we can resume longer term low double digit revenue growth and improved profitability.
Well the interim situation remains uncertain Electromed has a strong balance sheet with $10.5 million in cash.
No debt along with a robust cash flow generation profile.
Our long term thesis remains intact non cystic fibrosis bronchiectasis represents a significant and growing market opportunity.
Actively estimated at more than 4 million individuals in the United States.
We believe that approximately 630000 people with a bronchiectasis diagnosis could benefit from Hfs CW therapy, yet only an estimated 77000 patients in the Medicare population have been treated with a device like smart best to date.
As our nation emerges from this pandemic, we anticipate returning to the strong cadence of profitable growth, we achieved pre covered 19.
With that I will turn it over to Mike for a more detailed discussion of our financial results.
Thank you Kathleen and good afternoon, everyone I'm really excited to be participating in my first call with Electromed and look forward to many more to come.
Our net revenue in the fourth quarter of fiscal 2020 decreased 20.1% to 6.9 million from 8.6 million in the fourth quarter fiscal 2019, driven primarily by lower home care revenue.
Hunker revenue declined 21.3 million to six point, 21.3% to 6.3 million, primarily due to lower referrals as a result of the covert 19 pandemic.
At quarter end, our field sales employees totaled 44 of which 37 were direct sales compared to 40 at the end of the fourth quarter fiscal 2019 of which 30 forward direct sales.
And your wife's home care revenue was $670000 per direct field failed employee below our target productivity range of 750 to $850000 due to the revenue decline associated with the covert 19 pandemic.
Institutional revenue decreased 25.9% to $273000, primarily due to a decrease in the volume of devices and garments old that's hospitals and long term care facilities have adjusted their operating protocols and procurement management in relation to the covert 19 pandemic.
[laughter] and the first quarter fiscal 2020, we began selling to home medical equipment distributors distributor revenue totaled $14000 during Q4 fiscal year 2020.
[noise] International revenue, which is not a strategic growth area for electromed totaled approximately $262000 compared to $192000 in the prior year period.
Quarter to quarter sales variability can be expected due to the nature of our business and the covert 19 outbreak will likely continue to have a temporary overall negative impact on our revenue.
That's Kathleen mentioned, however, we were encouraged to see a pickup in home care referrals as we exited the fourth quarter to near pre covert 19 levels.
Gross profit decreased 16.2% to 5.6 million or 81.3% of net revenue in Q4 fiscal year 2020.
6.7 million or 77.5% of net revenue in Q4 fiscal year 2019.
The decrease in gross profit dollars resulted primarily from the decrease in home care revenue.
The increase in gross profit as a percentage of net revenue was driven by a higher average allowable based on payer mix lower warranty returns and greater in house versus outsourced training compared to the prior year.
We expect our longer term gross margins will be in the mid to high 70% range.
Operating expenses, which include Ftn, a as well as R&D expenses totaled 4.3 million or 62.5% of revenue in Q4 fiscal year 2020, compared with 5.2 million or 60.2% of revenue in the same period up the prior year.
After DNA expenses decreased 5.5% to 4.8 million in Q4 fiscal year 2020 from 5.1 million in Q4 fiscal year 2019.
Primarily due to lower incentives and reduced travel due to covert 19, and lower gionee cost related to our temporary furloughs.
[noise] R&D expenses increased to $415000 in Q4 fiscal year 2020 from $107000 in Q4 fiscal year 2019, reflecting our continued investment in new product development.
Operating income, which included point 9 million of government stimulus income from the provider relief fund established by the care Sac totaled 1.3 million compared to 1.5 million in Q4 fiscal year 2019.
[noise] net income before income tax totaled 1.3 million in the fourth quarter fiscal 2020, compared to 1.45 million in the prior year quarter.
In the quarter income tax benefit was $9000 compared to income tax expense of $432000 and the same period of the prior year.
During Q4 fiscal year 2020, <unk> income taxes benefited by a discrete tax benefit of $343000 related to the exercise of stock options.
Our net income totaled 1.3 million or 15 cents per diluted share in the fourth quarter fiscal 2020, compared to 1.1 million or 13 cents per diluted share in the prior year period.
[noise] briefly summarizing our results for the fiscal year ended June Thirtyth 2020.
Revenue grew 3.7% to 32.5 million from 31.3 million in fiscal 2019.
Driven by $430000 of incremental distributor revenue.
24.7% increase in institutional revenue and a 1.3% increase in home care revenue.
Gross margins were 77.6% compared to 76.2% in the prior year on net income was approximately 4.2 million or 40 cents 47 cents per diluted share compared to 2 million or 23 cents per diluted share in fiscal 2019.
Now moving on moving to the balance sheet and operating cash flow.
Our balance sheet at June 30, 2020 included cash and cash equivalents of 10.5 million no long term debt working capital of 25 million and shareholders' equity of 30.2 million.
Cash flow from operations in Q4 fiscal year 2020 totaled 1.3 million compared to 1.4 million in Q4 fiscal year 2019.
Operating cash flow was 4.2 million for the fiscal year ended June Thirtyth 2020, compared to 2.6 million in the prior year.
We're very pleased to be debt free and well positioned to continue building our cash reserves to support Electromed long term growth strategies.
Moreover, given uncertainties surrounding the covert 19 crisis, we're fortunate to have the financial flexibility that our balance sheet affords us.
We have been evaluating longer term option surrounding the optimal use of cash to maximize shareholder value for the foreseeable future. However, we plan to retain our cash.
This concludes our prepared remarks, operator, please start the Q and a portion of the call.
Thank you.
I'll now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone indicate that your line is in the question Q.
You May press Star followed by the number two if you would like to remove your question from the Q4 participants do think speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Once again to ask the question Press Star one on your telephone keypad, we will pause for a moment to pull for questions. Thank you.
Our first question comes from Kyle Bowzer with Collier Security. Please state your question.
Hi, Good evening, Kathleen and Mike Thanks for taking my questions and congrats on an impressive fiscal 20 here.
First you talked a little bit about it but.
Can you provide any metrics that can give us a sense of.
How beneficial to relax guidelines are for example, turnaround time or conversion rate or just anything would be helpful.
Oh, Hi, Kyle it's a thank you so much and Mike's going to take that question for US Yeah sure Kyle.
Yeah, so the CMS waiver really benefits us into distinct ways.
First we are receiving a higher number approvals for previously noncovered diagnosis like see or PD.
And those referrals are being approved at a much higher rate than normal. So noncovered diagnoses are still a small overall percentage of our total referrals, but we have seen an increase with the CMS waiver.
Second what's the waiver virtually all of our cover diagnoses are being approved we typically have very high approval rates on our covered diagnosis in a normal operating environment, but with the CMS waiver in place. He is approval percentages are getting close to 100%.
The waivers also reduce the amount of time required to gain approval due to the left documentation being required. So overall as a rough rule of thumb. The time, it's taking us to gain a Medicare approval is rent been reduced by about 50%.
One other minor one other benefit is there as a second question sequestration tax of 2% that's been applied I believe since 2014, that's temporarily been suspended I'm starting in May of this year through December of the ended the year and that has the net effect of improving the revenue by 2% on our Medicare.
Sure approvals.
Okay.
Okay. That's great appreciate that.
And in a I was surprised to see homecare channel was actually down less than that institutional channel early on in a pandemic it.
It seemed like hospitals reuse eat anything and everything to treat cobot patients with with respiratory conditions.
Smart best <unk>.
As it has cooled off a bed and are you starting to see the ordering patterns kinda resemble pre coal but levels.
No great question, Kyle So you're absolutely correct in the prior to co they'd really.
In increasing cases across the United States, we did see an uptick in our institutional revenue and as we look historically at that it appears that that was somewhat of a stocking order a lot of hospitals were preparing for the cases, knowing it was respiratory thinking that they would be used.
Saying more airway clearance, including HFC trio.
What a what turned out and we've been dealing with our physician advisory board on a number of Cajun locations about the situation is that there was a pull back.
Due to covert 19, because those hospitals treating cobot 19 patients were very concerned due to the contagious nature of the disease.
Through droplets and a lack of access to personal protective equipment that their health care professionals and other patients might be in jeopardy of contracting that in the hospital.
And so that.
Protocol of limiting all airway clearance that has to do with nebulizers as well as HFC W., though.
In in the hospital has continued to be limited.
I will comment, though that we have seen in the early part of quarter. One some pick up in some of our disposable wrap sales so that could be an early indicator that hospitals are figuring out how to use the these safely in the hospital or it could also indicate that.
There are less individuals being hospitalized for covered 19 as well.
Got it and AD com following up on that to the extent you can share you talked a little bit about wrap sales, but how how have a adoption trends kind of lumped in July and August.
So as we stated exiting the quarter four we did see homecare referrals then be.
Turning to near pre coded levels, we would see similar trends in the early part of quarter, one as far as for institutional again. It is starting to show some pick up but I think it will take some time to return to normal levels for institutional business <unk>.
Okay.
And.
Can you talk a little bit more about the development of the Nexgen device, how how has that been going well. It give you an advantage in the marketplace and are these enhancements kind of a function of consumer demand and request you've received from docs in the field.
So we are on schedule for our.
On the development timeline for next Gen product, we have not talk specifically about those innovations for competitive reasons, nor specifically when we plan to launch, but we will continue to update as we believe that makes sense <unk>, but it was they but I will say.
To your question that we are taking primarily into a college voice at the customer from patients and from physicians around what they believe will be innovative in helping patients to find the treatment easier and more simple to use and.
That seems to continue be the focus that that were on there.
Okay, Great and I'm just lastly.
Any plans to kinda utilize your cash balance anymore than kind of what you talked about are you just sitting tight until we get through cobot here. Thank you.
Yeah, we eat as we've talked on on previous calls Kyle we've engaged the board in talking about our longer range plans for the organization for the company and what the appropriate uses of cash maybe to support that long term strategy, we did temporarily suspend them.
We are going to those start those discussions again start or internal planning and on those long range plans here over the next six to nine months.
I think though that because of the uncertainty of cobot 19, we think the best use right now is to hold onto the cash for the foreseeable future.
Okay got it thanks, so much for the update.
Thank you Kyle.
Thank you Mr. might have to ask a question at this time press star one under telephone keypad, we'll pause for a moment.
Ladies and gentlemen, there seems to be no additional request for questions. At this time I'll turn it back to kathleen's carbon for closing comments. Thank you.
A few Diego.
Thank you all for participating on our call. This afternoon, well, we won't be on the road for Investor conferences in the near term given cobot 19, we will be participating in the colliers institutional Investor Virtual conference on September 10th and we do remain accessible for one on one calls please reach out to our investor.
<unk> relations from the equity group. If you are interested in scheduling a follow up call.
We do look forward to reporting back to you in November when we will release, our first quarter fiscal 2021 financial results have a good day and stay safe.
Thank you that concludes today's conference all parties may disconnect have a good day.