Q2 2021 InfuSystem Holdings Inc Earnings Call
Good day and welcome to the NPS System Holdings, Inc. Second quarter 2021 financial results Conference call.
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Now I'd like to turn the conference over to Joe Torre Mayor with Lytham Partners. Please go ahead Sir.
Thanks, Rocco good morning, and thank you for joining us today to review the financial results of <unk> System Holdings, Inc. For the second quarter of 2021 ended June 30 of 2021.
With us today on the call are rich Diorio, Chief Executive Officer, Barry Steele, Chief Financial Officer, and carry a chance president and Chief operating officer.
After the conclusion of today's prepared remarks, we will open the call for questions.
Participating on today's call does not have a copy of the press release, you can retrieve it from the company's website at <unk> system Dot com or numerous other financial websites.
Before we begin with prepared remarks, I'd like to remind everyone. Certain statements made by the management team of <unk> system. During this conference call constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of $19.95.
Except for the statements of historical fact this conference call may contain forward looking statements that involve risks and uncertainties. Some of which are detailed under risk factors in documents filed by the company with the Securities and Exchange Commission, including the annual report on form 10-K for the year ended December 31st 2020.
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. If your system 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 <unk>.
Oreo Chief Executive Officer of <unk> system Rich.
Thanks, Joe Good morning, everyone and welcome to our second quarter 2021 earnings call. Thank you all for taking the time to join US. This morning, I Hope you and your families are staying safe.
Today, We will review our financial results for the second quarter 2021 provide an update on our business discuss our guidance for the rest of 2021 and the outlook for 2022 and beyond.
And considering how to best approach this call today and update investors and others outside the company on wearing fee system is I think it's best to highlight a similar point in our recent history.
In late 2018, when we knew they were going with that.
We're going to pick up a material amount of oncology revenue due to the exit of two longtime competitors.
Explain the situation during an earnings conference call.
In that call I shared what I could about developments in the marketplace explained out <unk> system was pivoting to capitalize on the opportunities created and then emphasize that patients would be necessary due to the nature of our business, which is that we often have to make the investments first and then wait a quarter or more before revenues begin to show up in our financials now and 2021, we find in fees.
System in a similar place.
At this time there are four areas of our business that are like the situation back in 2018.
First theres pneumatic compression, which is the business that includes lymphedema.
We announced this during the press release on June 29th as the for therapy in our Ats segment, we see a $1.5 billion Tam and pneumatic compression by far the largest therapy, we've entered to date.
We are making steady progress on this new therapy, but consistent with the nature of our business, we do not expect to see material revenue until 2022.
Second there is loan care.
During our last earnings call, we discussed the decision to pull forward our investments in this therapy because of recent developments in the market over.
Over the last few months, we've hired more than a dozen experienced wound care sales people into our team.
I believe this team will significantly shorten the time it takes to ramp to a 5% to 10% market share in the $600 million Tam market.
While the cost side of this strategic action can be can be seen in our results for the second quarter and have impacted our bottom line guidance for the full year. The nature of our business requires that we'd be more patient with the revenue side as we don't expect to see wound care revenue begin to ramp until the fourth quarter of this year.
Third there is pain management during the second quarter, we were presented with an opportunity similar to that that we had just seen in wound care. Some of the most capable and experienced salespeople in the industry became available to entry system and we seize the opportunity.
All told we have almost doubled our sales team thus far in fiscal 2021, we are very excited about these hires they are strategic and we believe they will materially advance our business, particularly in the wound care and pain management space.
The investments will result in increased annual spend of approximately $2 million, but are expected to return millions of new revenue next year and subsequent years.
Fourth as biomedical services. This is on the <unk> side of our business and represents a major shift in that segment as we told you at the time the acquisition of two small biomedical services companies in the first half of the year represented a strategic move and they provided a long desired opening of opportunity into the acute care space.
Unfortunately, I cannot say a lot right now, but we expect to be issuing a press release soon they will make that clear.
<unk> has the ability to match the double digit growth of our Ats segment.
Our <unk> business has historically been dominated by pump rentals into the home healthcare space in the future, we expect to add large acute care rentals and biomedical services.
Stated in our press release in 2000, 22021 is turning out to be a very dynamic year. Our business development activities are operating at a pace never been never that we could have dreamed of and we expect to be making a steady stream of announcements as we progress through the year as.
As we ready ourselves to take advantage of these new opportunities, we're making essential investments mostly in people. We have made significant additions to our sales teams and have begun hiring a large number of new biomedical technicians. The timing of these investments was not expected at the beginning of the year. When we delivered our annual guidance and the scale was not known at the time of our last earnings call.
We have greater visibility now and because the expenses precede revenues, our adjusted EBITDA guidance is lower for the year. We have no doubt that these investments were justified and we will be rewarded and we would make them again in a heartbeat.
Barry will take you through our financial results for the second quarter in a minute, but first let me go over a few of our highlights for the quarter.
In the second quarter of 2021, we expanded our biomedical services capabilities on our <unk> platform positioning the company for new growth opportunities, we enter a new $1.5 billion market and pneumatic compression, including lymphedema and we also announced a $20 million stock repurchase program.
Now I will give you some color on our two business segments.
Our integrated therapy services platform had growth of 5% over last year with solid gross margin of 64% drove.
Driven primarily by higher treatment volumes in wound care and pain management on a combined basis wound care and pain delivered revenue growth of 114%.
We wound care continues to make solid progress our team continues to add new customers and as treating more patients during the second quarter than ever before the new members of the sales team are all on board trained and are expected to greatly accelerate the capture of market share.
Pain management continues to build momentum as our team treated a record number of patients for the second consecutive quarter.
Business momentum continues to rise, giving us confidence that we will double our paying revenue in 2021 and again in 2022.
With both wound care and pain management betting benefiting from the hiring of additional experienced salespeople. We are now projecting combined net revenues from pain and negative pressure to be on a run rate of approximately $15 million as we exit 'twenty 'twenty. One. This compares to our previous estimate of a $12 million run rate at the beginning of the year.
Continuing to our for therapy in Ats pneumatic compression therapy, which includes lymphedema.
We announced the launch of pneumatic compression at the end of the second quarter and this is the first time, we've discussed it on an earnings call.
<unk> is a collection of fluids that generally occurs in the arms legs or trunk of the body that causes swelling pressure and pain.
This therapy is a fully reimbursable treatment and fits extremely well in our Ics platform.
We have partnered with bio compression systems to be their national turnkey solutions provider of pneumatic compression devices with calibrated and non calibrated gradient pressure and garments.
We are planning to begin onboarding, new customers and treating patients in the third quarter, we do not expect any revenue contribution in 'twenty 'twenty one as it will take six to nine months before we begin receiving reimbursement this.
This means we will be we will begin seeing more revenue contribution in 2022.23 is the year that lymphedema therapy should deliver meaningful revenue growth.
From a market perspective, initially we are targeting our oncology customers because 20, 20% of patients with lymphedema come out of oncology practices and we have 2200 accounts that our sales representatives service on a regular basis.
The estimated addressable market for oncology is approximately $300 million out of the overall market of $1.5 billion.
We are excited about the new lymphedema therapy, and look forward to providing our industry, leading patient care and customer service as we continued to expand our portfolio of home healthcare services.
Switching over.
Two our <unk> business, we see again, how dynamic our business has been in 2021 last year, our rental and sales business surge due to covid at the beginning of the year and through the first quarter. This business looked to be holding steady. However in the second quarter as Covid cases declined sharply in the United States, our healthcare provider partners understandably reacted and started to read.
Turning pumps.
So understandably that trend largely stopped when the delta variance in cases rising again the situation is stable now the equipment and inventory includes the latest technology and we have no concerns about putting it back into service whether that be related to covid flu season or other normal market conditions. The.
The pumps coming back to us in the second quarter cause a 13% decrease in revenue, but we maintained solid gross margins of 45, 5%.
The return of D&B rental pumps in the second quarter, and an inability to predict in which quarter. They will go back into the rental fleet is the biggest factor, causing us to guide to the lower end of our revenue range for the year.
Like to emphasize that much more material and strategic to the Dms business or the recent acquisitions of our two biomedical service companies Ob healthcare and filament are unique assets that material enhance and broaden our capabilities with the significantly expanding the growth opportunities for our <unk> platform, particularly in acute care and.
In addition, a depot service a biomedical teams will perform on site repair preventative maintenance and physical device inventory management to hospitals and healthcare systems nationwide.
As a result of these acquisitions, we are changing the focus of our cross selling initiative previously we were looking to leverage our oncology sales reps to only sell disposables now with our expanded service capabilities. We are focused on selling our biomedical repair services, our value add with a higher margin profile.
I want to strongly emphasize we see key biomedical service opportunities that will change the long term growth profile of our <unk> platform.
Firmly believe our <unk> platform will have the same growth profile as our <unk> platform our.
Our strategy is to maximize the synergies created by our two new biomedical services companies to drive growth and expand our market share in acute care.
Now I would like to turn it over to our President and Chief operating Officer, Carol a chance to provide more color on the oncology business and onboarding of new customers patients and team members Gary.
Thank you rich and good morning, everyone.
There has never been a more exciting time for N. P system in oncology, we continue to see great success with our case management program. We have continued to streamline that offering with our world class clinical team, reaching more patients and meaningful ways than ever before.
It's humbling to have the ability to touch so many patient lives, while continuing to create added value for the ever increasing number of clinics.
Operationally, we continue to make improvements in our backend system by automating processes, improving workflow and adding increased scalability and efficiency as we grow.
These improvements have allowed for decrease denials improved collections and improved bad debt in all areas of the business as a result, our cash collections have improved by approximately $800000 annually without significant additional cost.
And our <unk> business I'm extremely pleased with the <unk>.
Our team on the seamless integration of Ob healthcare.
The acquisition of all the healthcare on April 18th opened the door to multiple opportunities within the acute care space there.
There are expanded capabilities have been the perfect complement to our existing biomedical services.
We have spent the past few months integrating teen completing system integrations and cross training I'm happy to say that everything has been completed seamlessly and in record time.
The great news is that today, we can turn our focus to the sales opportunities that the addition of both Ob healthcare and filling that have given us. We are now focused on getting our teams prepared for the growth in front of us in the acute care space.
With that I'll turn it over to Barry.
Thank you Jerry and thank you everyone on the call for joining us today.
I'm going to focus on three areas one the main drivers for the quarter's results to how those will play into and what we are seeing for the rest of the year and three where we stand from a financial resources position, including the status of our financial reserves available to fund the coming growth in revenues.
First I'll talk about the second quarter financial results.
Net revenues for the second quarter of 2021 totaled $24.8 million. This represented a four 4% decline from the prior year and was below our 2021 plan.
<unk> prior year comparison had been anticipated during 2020, we experience significant covid 19 related windfall, which included an unexpected one time sale of use infusion pumps from a reserve fleet additional elevated sales and other new and used equipment and a significant increase in the volume of ratchet pumps and service.
These prior year, Covid benefit, which had been partially offset by lower pain management revenue volumes were approximately $2 million.
Adjusting for this our second quarter 2021, net revenue would have increased by three 5%.
This increase would have been due to higher revenue and the emerging therapies, a pain management and negative pressure wound therapy, which on a combined basis increased by 700000 or 114%.
New revenues from the acquisition of pillar med during the 2021 first quarter and Ob healthcare, which as Carey mentioned, we acquired halfway through the 2021 second quarter.
And our original expectation for 2021, we had anticipated that the rental volumes would continue at their elevated covid 19 levels.
And even grow further due to the continued market penetration and from additional devices.
That assumption was borne out by continuous strong levels. During this year's first quarter. However, additional market penetration during the second quarter was not enough to offset reduced rental volumes for existing customers as the covid 19 influence market demand softened.
Adding to this shortfall was lower than expected growth in our sales of disposable medical supplies related to a cross selling initiative between the <unk> services segment in the oncology business in the Ics segment.
This decrease reflects an intentional change to focus the sales team and the higher margin biomedical services now available due to the strategic acquisitions of <unk> and I'll be healthcare and less on disposable supplies.
Adjusted EBITDA and adjusted EBITDA margin for the second quarter of 2021 were $24.8 million and $23.7 million respectively.
These were both lower compared to the prior year and to our original plan.
The reductions from 2020 are mainly due to the favorable covid revenue in the prior year, which did not only improve the top line.
Hence our operating margins because they favorite high margin revenues, including rental and used equipment sales.
As rich talked about the adjusted EBITDA and adjusted EBITA margin was also in the current quarter due to the initial amount that we are now spending to accelerate the pain management and negative pressure wound therapy revenue growth programs. This additional amount of it.
Expenditures was approximately 400000 for the second quarter.
Turning now to our revised expectations for the year as Rich mentioned, we now expect that our full year 2021, net revenues will end up at the lower end of our previously stated range of $107 million to $110 million there.
There are four main drivers of that revised the Mt two unfavorable to favorable.
Unfavorable items include a reduction of two to $3 million to $4 million and equipment rental and sales revenue for the year based on what we have seen in Covid 19 recovery related reduced volumes during the second quarter and our current outlook for the back half of 2021.
Sequentially comparing the second half forecast for the first half actual amounts we see increased amounts in these revenue categories Tories, resulting from newly acquired customers in a very modest favorable demand impacts from the proliferation of a delta variant of Covid 19.
We are also reducing the amount of revenue associated with our cross selling program by $2 million to $3 million as we refocus the program away from the high volume low margin sales of disposable medical supplies in favor of biomedical services because of the newly enhanced service offerings from from the film that and it will be healthcare acquisitions.
While this change yield smaller revenue in the current year and margin contribution is much better.
We acquired these businesses mainly to build these capabilities and not necessarily for the small book of business. They came with this.
This brings us to the first favorable adjustment for the 2021 revenue outlook, which is new revenue for these acquisitions totaling $2 million to $3 million that was not in our original 2021 operating plan.
The last adjustment to the outlook is an increase of $1 million to $2 million for pain management and negative pressure wound therapy, representing the early benefits of the additional investments being made in these in these businesses as.
As rich mentioned these increases are expected mainly in the fourth quarter, which means that we expect to end the year at a significantly increased combined annual run rate of approximately $15 million for these two therapies.
We are also changing our full 2021 outlook for adjusted EBITDA margin to 25% a reduction of 2% from the original operating plan. This decrease is mainly driven by the unfavorable gross margin mix as we lower our rental revenue our highest margin revenue category and due to the investment.
And selling expenses.
Run rate to accelerate the growth of pain management and negative pressure wound therapy.
Let me close by providing an update on the status of our financial reserves.
During the 2021 second quarter, our operating cash flow of $6.2 million represented a significant increase over both the prior year second quarter amount of $3.7 million and sequentially in the first quarter, which was $2.7 million.
The amount was sufficient to cover our $2.1 million in capital expenditures during the period and finance nearly two thirds of the Ob healthcare acquisition on.
On a year to date basis, our operating cash flows were approximately $1.8 million ahead of our planned amount. However, due to the reduction in our full year adjusted EBITDA outlook, we are decreasing our full year operating cash flow guidance to $19 million to $22 million from our previous range of $21 million to $23 million.
We continue to anticipate that our investing cash flows which includes cash used to purchase medical devices.
In other capital expenditures and cash provided by the sale of used equipment for the full year of 2021 to be within the range of $12 million to $15 million.
At the end of the 2021 second quarter, our net debt stood at $32.3 million.
Quarterly increase of $2.6 million, mainly due to the cash used for the acquisition of a film that and it'll be healthcare, which totaled $6.3 million and capital expenditures offset partially by the favorable operating cash flows our total available liquidity at the end of the quarter totaled $42.2 million and consisted of $42 million.
In available revolving line of credit availability and 164000 in cash.
With that I'd like to turn it back over to rich.
Thanks Barry.
I'm extremely confident about the future and excited that we are again at a transformative moment for NP system.
We have multiple material initiatives in both our Ats and <unk> segments, the strength of our business model and positive outlook for 'twenty, two and beyond provided our board and management the confidence to authorize a new $20 million stock repurchase program, while our top priority remains making investments in the company to drive long term revenue growth. This program provides us with the flexibility to be.
<unk> and repurchasing shares.
Our focus for the balance of 2021 will be on one growing our four therapies on our Ats platform oncology pain management negative pressure and our new additional lymphedema.
To successfully on boarding our lymphedema customers and patients in the coming months.
Three leveraging our biomedical services to drive growth to expand our market share in acute care.
For integrating additional new team members to successfully grow our business.
And five developing new strategic partnerships small tuck in acquisitions that will enhance and expand our current capabilities and offerings.
While we revised our guidance as Barry mentioned, we will be exiting 2021, better positioned and executing in a greater run rate than we had initially forecasted. This will result in even better top and bottom line bottom line results in 2022 and subsequent years.
I am very excited for the future of NP system, with our lymphedema negative pressure and pain management therapies, and our new <unk> Biomedical services as we are aligning these four growth opportunities to drive sustainable growth for many years to come.
I believe if we can successfully execute our strategic plan any one of these four businesses could be bigger than our current book of business.
I am extremely confident the team will continue to successfully execute our growth plans by adding new therapies biomedical services and developing new strategic partnerships.
<unk> system is highly committed to providing our customers with industry, leading service and improving patient outcomes.
And with that we're happy to answer any questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you were using a speaker phone, let me ask you. Please pickup your handset before pressing the keys.
Your question. Please press Star then two.
Today's first question comes from Brooks O'neil at Lake Street Capital markets. Please go ahead.
Good morning, everyone. We appreciate all of that information, although I, probably didnt get 110th a bit down on a piece of paper so.
I'll have to read the transcript anyway.
Can you guys talk a little bit about the build out of your biomedical services it sounds like that.
A big opportunity and in particular with the recent acquisitions, but I am curious clear.
Clearly those are small acquisitions and how do you get the capability to deliver those services nationally in relatively short order.
Yes, good morning, Brooks, that's a great question so.
We expect Biomed services.
To be a huge huge huge contributor to revenue growth in the coming years and even at the very end of this year so to get that capability. We already have all the information all the training.
All the all the institutional knowledge and a lot of that was gained by the filament team and the Ob health team fill.
<unk> gives us the opportunity to fix additional devices beyond infusion pumps and Ob health allows us to do.
Their devices on site not just in our own depots. So a couple of things are going to happen number one we're going to add a lot of new customers.
Sales team now has more products and services in their bag than they've ever had before we're gonna be able to go into acute care, which we really didn't have an offering before because we can do things on site.
And.
What's great about this is we're adding a lot of biomed technicians, and that's really the key to being able to growth grow and get that capability.
There's not a big there is not a big capital outlay, we're not buying infusion pumps right its people and benches and some tools for them to work on the devices.
The good news is this isn't a we're going to go out and hire a bunch of service techs and we hope that the revenue will follow we actually can see the revenue.
Kind of on the horizon, whether it's the end of this year and certainly into 'twenty, two and 'twenty three and beyond.
So this isn't this is not hiring in anticipation or hoping that we're going to get revenue. This is hiring for the revenue that we see about to come in the door with new customers so to build up that capability.
We need we just need to hire the guys to get in and work on the devices.
It's it's a significant amount of people I mean, we could be hiring.
<unk> of Biomed Texan, that's how significantly we think the revenue is going to be in on the biomed services side in pretty short order.
Right.
Second question so.
I'm pretty excited about the opportunities you have in the Ips side of the business.
I'm curious if you continue to believe you could leverage your existing infrastructure to grow those businesses and whether or not you feel either a need or an opportunity.
Medical personnel to go into the home in any area.
Yeah. So I agree with you on the excitement of Ats between pain wound care now lymphedema.
We can 100% leverage our existing infrastructure.
<unk> put a ton of work in and done a great job over the last couple of years of setting those teams up and fully integrating so it's one team for all therapies as opposed to breaking them out. So we're able to leverage the teams that we have.
As far as adding medical medical folks more nurses and clinicians.
I can certainly see us, adding more and more of them as we grow that business and we add more and more patients we need more people to get all of those patients.
Our business model isn't necessarily to be in the home that doesn't mean that we won't do it where we need to but most likely if we need to do that we'll go partner with somebody that can help us to get people in patients' home you're going to have to hire.
Couple of hundred nurses to do that it's probably just as easy just to partner with somebody.
Sure.
Sure.
Let me just add to that real go ahead, leveraging great doesn't we don't need to add team members to help manage the revenue cycle. Thanks, we have all the infrastructure in place, but we do we will have to deal with that higher volume. The good news, though is that clearly as the AD revenue or volume to all of these therapies. There's it's accretive to our EBITDA margin. That's why we can constantly.
Say that we're really focusing on 30% of the EBITDA margin in the coming years, not 25 or basically at today.
Yes.
I appreciate that Barry could you just say.
Recognize you have liquidity that might make it possible to buyback stock, but how do you feel about the tradeoff between investing in the business buying back stock and do you.
Do you truly believe you have the resources available today to buy back $20 million of stock, while continuing to invest in the business.
Yeah, we think of capital allocation very strategically we have high priorities, which are investing in the existing business I think as I've mentioned in other times, where we're growing at the.
Middle double digits are a little bit lower we definitely are going to be throwing off cash in there as well.
We will have opportunities to buy back shares for sure.
And as we grow much faster, we will want to focus our capital resources, more and where we need it by device and the other thing is although a lot of new business, we're adding a more cash intensive not as much.
They're not very capital intensive which is great lymphedema for example, we don't have to buy them.
So we view it.
And our priority is strategic so when theres opportunities that buy shares for less than what we think the intrinsic values were going to do it but it won't be the main main thing, we do and the $20 million gives us the latitude to do it over the three year period that.
That we put out there for that for the authorization.
Okay, great. Thank you very much for taking my questions.
Thanks Brooks.
And our next question today comes from Alex Nowak of Craig Hallum Capital Group. Please go ahead.
Great. Good morning, everyone. So I wanted to touch on the drawdown of problems on the <unk> side of the business. So.
Let's just say Covid does continue to wane throughout the remainder of the year, excluding the Delta I'm, just curious where does <unk> revenue throughout the remainder of the year. If thats true if the drawdown continues and what is the normalized business there look like on a revenue side.
Yeah. So so.
I can answer that and then Barry can get into the numbers I think that the draw down from what we've seen over the last few months has kind of stabilized. So we saw a pretty significant decline between call. It March and April April may and June were pretty level kind of flattened out again. So we think the drawdown is effectively over.
Take delta very and everything else aside where they could go back out the door, but that's not really in our in our forecast for the rest of the year if that happens that's great, but we can't control that.
So I think we're kind of leveled out it definitely soften in the second quarter, probably quicker than we thought and it was a pretty pretty quick drop to April but may and June kind of followed suit with April. So we think it's we're kind of done right. Then we're back we're back at our new baseline.
But what I would add to that okay. That's great.
We actually.
Had growth in our in our plans and what we'll end up with is back half revenue that's better than the first half slightly and still keeping that above the level of revenue that we had last year. So we're actually not going to go down and we just didn't get them as much gross we thought because of the penetration that we're getting and seeing and new customers didn't quite offset the some of the devices.
Coming back so we feel pretty confident that there is real real growth buried in there. We just got to work through the adjustment.
Yes, okay that makes sense and glad youre, keeping those out of the guidance.
Makes sense.
Woodside that business you mentioned the ramp now really occurring it seems that a pretty material way and Q4 I mean, so much that you raised the run rate guidance exiting the year. So just an update on the wound care market a primary competitor the disruption there, but also why do you.
Where you sit today why do you expect that ramp to occur so much in Q4 now.
Yeah. So just to kind of give you a sense of the ramp up. So we had if you look back in the first quarter, probably three reps were.
We're up to almost 20 and wound care. So that's that's where the investment.
And I think when you look at the growth in the back half of the year and really in the fourth quarter. It's just the sales cycle timing from when we hired the reps in April May June to when they get out in the field when they start to close business. It just starts to show up in the fourth quarter all of their activities start to pay off.
And then we should kind of come Roaring out of 21, and 'twenty two with just tremendous momentum, especially in wound care.
That's really all it is it's just the timing of the sales cycle get it now that everybody is trained they're out in the field there theyre getting the appointments starting to close deals and we will start to recognize revenue in the next few months.
No that makes sense and then just on the lymphedema side, maybe just the thought process that went into partnering with bio compression what didnt file compression have that there.
We're giving them.
What drove you to the lymphedema market and then ultimately how to take share from the I would say the main.
Competitive tactile.
Yeah. So.
Compression has been a great partner I think what they were missing was a national distributor with our with the contracting and in the revenue cycle team that we have they.
They had a lot of regional players, which we're fine for many many years.
We think they are a great device, which is part of what drew us to them, but they were looking for somebody that could serve as kind of all customers all patients and effectively all payers in the United States. So.
And that's not just them right, that's whether it's cardinal coming to us with wound care or other manufacturers coming to us.
The other things in the pipeline that that tends to be the draw right. The contracts that we have that we can leverage.
For new therapies.
Why lymphedema I think it fits perfectly into our Ats segment, especially if you look at the oncology side.
Where we know we have.
30, or so reps, calling on two two plus thousand customers, they're in their everyday with pumps and in paperwork that they're they're they're talking to them about.
It's another product in their bag in a market that we effectively own and there were an everyday so.
Then you add in the fact that the reimbursement is fantastic, it's not a huge lift for the revenue cycle team.
The device doesn't come back and forth like our oncology pumps. So it's not a lot of a lot of weight on the shoulders of the biomedical team.
It was kind of the perfect fit if we can kind of drop what what a perfect new therapy would be in I T. S. It's kind of tough to come up with something better than lymphedema and then you layer in how big the market is.
The addressable market, it's grossly under diagnosed not underdiagnosed undertreated in the U S. So we believe we can go help and create awareness with physicians that there are options out there for patients.
You know the big competitor tactile I mean, they do a good job.
But they have a small small slice of that addressable market. We think we can go after them.
They have one device one product we live in oncology and have provided service to some a lot of customers for 30 plus years, we think we can leverage those relationships and help our customers consolidate vendors and use us for more than just one device. So.
There's some other strategic reasons why we think we can go and take market share but.
No that's really why we entered lymphedema.
Certainly agree on the fifth thanks for the update.
Thanks, Alex.
And our next question today comes from Jim Sidoti of Sidoti <unk> Company. Please go ahead.
Hi.
Good morning, Thanks for taking the questions.
Wanted to ask a couple of questions about the sales force it sounds like you're making some pretty.
Significant investments I think you said you added 12 on the the wound therapy business.
How many did you Ed on the pain management.
Yeah. So when we have we added about 15 I think is the number.
On the pain side, we went from.
Four to eight in the last couple of months, we've doubled that team that wasn't that wasn't.
Something that we expected the end of last year early this year, we think we could have we still could.
Make significant market share gains with the team we had.
But we had an opportunity to hire some real rock stars in the market and we would have been crazy to pass that opportunity up so.
They are just coming on board now and similar to negative pressure.
The timeline and and sales cycle very end of this year into next year is where we should start to see the benefit from those guys coming on board.
And as you get into the Olympic Demon market our therapy market.
Can you use the sales force or you already have phone calls your devices do you have to add specialists for that.
Yeah.
So we will certainly leverage our oncology team.
The largest sales team we have to date.
So we're going to where those guys are going to help us out in oncology. We can also leverage our wound care reps in the acute care space.
So now that we're pushing 15 or 20 people.
Theyre already in there talking to case managers about wound care and a lot of a lot of times. It's the same case manager thats going to deal with lymphedema pneumatic compression so kind of both sides between acute care and oncology. We're gonna take the teams we already have in place. So when we add a specialist here and there sure when we need a clinical person or a true specialist to kind of sit on top.
Of all that we will but we're not going to have to go scale up but on a whole new sales team to do this.
So as you enter that market. It sounds like you don't really have to add much for sales and I don't think you would have to do as much on the reimbursement side either right.
Not a tremendous amount you know as you as you put more billings through the process and collect more revenue. It takes more sets of hands to do that.
But obviously, we have a baseline today and people that can help so theres always going to be incremental heads, especially on the backend support but right now we don't really see much at all on the sales side.
But we'll add some people in the revenue cycle side, maybe some people in customer service to help with new customers as you know it.
It's just a product of the numbers right you add more customers more more patients you're going to need some help to manage all that.
So but is it correct to assume that you'll get it's easier to leverage your existing infrastructure for that business than it would be for let's say the pain management business.
Absolutely and I think that goes back to what I mentioned I think with Alexs question that we we will add some revenue cycle people just because of the numbers but.
We don't have to touch the devices very often if at all.
The revenue cycle pieces, it's a one time reimbursement so we're not billing for the same device over and over and over again, it's just a one big reimbursement at the on the front end.
So, yes, youre, absolutely correct that it will take less.
Man power to kind of grow that business relative to oncology or pain.
Okay.
With these three new markets that you're in.
Already in process developing do you need to do more acquisitions or more acquisitions really the priority or do you have enough on your plate right. Now that you think you can grow double digits without doing any any additional acquisitions.
I, 100%, we believe we can grow.
Double digits fairly easily in the coming years without any acquisitions that doesn't mean, we're not we're going to shy away from a nice strategic move that makes sense for the company, but we're not going to do it to get the growth.
Do it because it's strategic to our business and our growth, but not to get the revenue. The revenue is going to come from flying in here in the back back end of this year and into next year without any additional acquisitions.
Alright, thank you.
Thanks, Jim.
And ladies and gentlemen, as a reminder.
I'd like to ask a question. Please press Star then one.
Today's next question comes from Douglas Weiss.
Ma'am. Please go ahead.
Hey, good morning.
Good morning, Tom.
Alright.
Hum.
On gross margins for I T S.
Just explain why that dropped so much year over year, I mean, I know you've invested in some of these new product lines, but it sounded like a lot of those investments were on the SG&A line.
Yes, so the second quarter last year were $65 nine.
And this year were 64, so it came down just a little of that and the main reasons. We had very very good collections last year during Covid, we got.
We just did very well with the higher amount of revenue.
And this year its more normalized so got covid helps a little bit there.
Yeah.
Uh-huh I mean, it looks like for the first nine months of last year, you were about 70% I'm just looking at the Ats line.
And then kind.
It kind of dipped a kind of dipped in the fourth quarter and then it stayed in the sixties. This year I mean do you think yes.
Yes.
Or is there to improve the.
If you look at it before we have our intercompany charge, which brings up another issue I forgot to mention is that we did have less repairs.
In services.
Keep that fleet during last year, we didn't bring the pumps into the building. So we had a little bit less.
Normal maintenance on those.
So as more and more normalized in the in the current quarter, but when you adjust out in our inner service that we do for ourselves in the gaming business. The Ips business, our gross margin is closer to 55% range.
Mhm.
Do you think this quarter's gross margin is kind of mid nineties kind of mid sixties is the rate.
Number to model going forward or would you say, it's going to improve in the over the next year.
Is that Q2 last years clearly set out of all the quarters as it was almost at 66%.
The other quarter, if you look back four or five quarters in that 64% to 65% of typical range as we add the new therapies, it's likely that helped a little bit but.
But mostly it's going to stay in that same same rates we think.
Okay.
And then in terms of the revenue.
The new revenue guidance.
You had already sort of taken into account the fact that.
You had those large onetime benefits a year ago.
Can you just explain a little more with what it was that surprised you.
So I think.
The difference is the softness in the rentals in the second quarter. It was a pretty steep drop between the first and second quarter.
So when covid kind of declined sharply in the kind of late winter early spring. The rentals came back pretty quick we didn't see that in the first quarter and that's why we thought it was going to hold better than it did I think the good news is it has leveled off and we've seen that happening.
I think the good news is.
Even with even with that the outlook moving forward, whether it's for Dnb rentals of Biomed services or lymphedema negative pressure.
We actually as we're sitting here today in August feeling even better than we did about 2022 and beyond.
Even a month or two ago. So it really it's really just attributed to that softness in the rental piece and it's not something you can make back overnight. So that's really what's driving the guidance.
Mhm.
And I think you may have already said this but.
How much of the.
Change in EBITDA guidance reflects.
Additional investment into the new the new products that you hadn't anticipated.
About $2 million.
2 million okay.
And how much how much.
Incremental EBITDA do you get from the acquisition you did.
For the acquisitions.
We haven't disclosed specifically the profitability of those.
But it's safe to say that the margins that we see from those businesses are kind of in at least from a gross margin perspective in the same range as we see the rest of the <unk> business and that sort of middle 50% range.
Mhm, Okay. They did come on the G&A.
Spot, but they do have somebody on SG&A.
Right Okay.
And then in terms of the trade off between focusing on the higher margin work versus some of the disposables.
My impression was that those disposable sales were pretty low.
It didn't take a lot of effort in terms of the sales force.
Why not just do both what why do you emphasize the disposable worked.
So I don't think we're giving up on disposables.
It's still work right every minute that the sales reps spend talking about that it's one less minute talking about our core oncology business or now lymphedema and Biomed services.
So it just becomes a priority in the bag more than anything else. It doesn't come out of the bag. It just drops below the biomed services and and our capabilities with Ob and fill a med now are just off the charts on what they give us.
Our guys are in the biggest hospitals in the country.
And to walk down to the biomed departments have it and spend some time talking about that and generating huge revenue with huge margins.
We'd be crazy not to just give that a little more emphasis or something.
And then something that has lower margin. It doesn't mean, we're walking away from it. It just means it's going to drop it a little further into the bag.
Mhm.
Okay. Thanks on share repurchase if you were inclined to buy back shares how soon can you come.
How how long you have to wait after earnings announcements.
R R.
Our trading policies.
Basically the day after earnings were allowed to do that.
Good.
Okay.
Okay, all right well, thanks, Chuck next quarter. Thanks.
Thanks, Doug.
And our next question today comes from.
Yes capital. Please go ahead.
Hey, good morning, guys. Thanks for taking the call hope Youre doing well.
Rich I wanted to ask I think it was like your final comments.
That you made we turned it over to Q&A.
Make sure I understood you correctly.
It sounds to me like you've got three or four different.
New aspects to your business.
Each of which could become.
Larger than our current business is that correct.
That's exactly correct.
You know between lymphedema with an addressable market or total addressable market of $1.5 billion, which is the biggest that we're in.
Wound care being 600 million that we think we can go to get five or 10% of.
Pain management, which as you know with especially with the new sales team that we just brought in.
The Sky's the limit for that team and then you layer in <unk> and the biomedical services market that.
I can't put a number on today, but it's massive I mean, it's probably bigger than the lymphedema market.
Any four of those.
If you look at oncology is roughly call it $60 million in revenue.
Any four of those product lines to various degrees could be as big if not bigger than oncology and that doesn't mean, it's going to happen in 2022, but if we're looking out three to five years, which is really what where we spend our time.
I actually don't have any delta at least a couple of those will be bigger than oncology moving forward.
Yeah that was gonna be might you answered. My next question, which was you know what kind of timeframe when you're looking at them I'm sure. It's different for each of those and things can change but.
What I.
I guess when you were talking about that kind of growth it is over.
The three to five years.
Okay.
Do you feel like you're I mean, you are making the investments as you said people, especially but you'd feel it's something that the basic infrastructure of your business could handle all of those different areas at one time.
Yeah, it's it's different in each area right. So we mentioned earlier about <unk> and that's really about getting the Texan place.
You know when we get into lymphedema or when we started wound care and pain, there's more behind the scenes work right. There's a lot more revenue cycle work upfront licensing credentialing those sorts of things.
But when we kind of look across the company. We have warehouse space, we have space for team members to join in we have certain amounts of capabilities already here and available to us.
And.
It's none of this is outside of our core competency right. We already had 70 or 80 biomedical technicians actually it's more than I think its almost 90.
Sitting ascending adventures today, so it's not like we have to learn a new.
Trade to do that same thing on the revenue cycle with lymphedema pain and in wound care that team is as good as it gets it billing and collecting money and they're getting even better every day. So it's core competencies, we already have and that's the beauty of the platforms right. We're not reinventing the wheel for entry system. We've perfected this over 34 years, we're just adding.
In new therapies, new products, new services into core competencies that our leadership team all the way down.
Already has and has a ton of experience doing it.
Yeah, that's fantastic. So obviously as you said the EBITDA margin took a bit of a hit because of this initial investment if I hear correctly I don't know if the zero Barry said that.
You're targeting 30%.
Margins in the long run and when when do you think it will start working up to that how is how soon will that be.
Yeah, So I'll, let Barry.
Talk about how quick we will get there.
But yeah I mean, they hit the hit this time around it's pretty simple right. It's the rentals. There are a lot of that drops to the bottom line.
And a bigger piece is the investment in wound care and pain.
And it's something we went into knowing it was going to happen over the last few months, it's something I will do 10 times out of 10.
Investing a couple million dollars in two markets that.
<unk> could be I don't know tens of millions if not more combined we'd be crazy not to make that investment. So in the short term adjusted EBITDA as you know it takes a little bit of a margin hit, but it's still pretty solid at 25% this year.
And Barry if you want to talk about when we think we can get to 30.
Yes. So the first thing I'd point out is that we're calling for a 25% EBITDA margin for this year, that's with the $2 million in basketball, but its almost 2% so.
If you add that back we're almost halfway there.
Rich mentioned, we think that all the everything we add is accretive to the bottom line again there'll be some SG&A spending, but it's accretive.
I don't know that necessarily would be consistently next year will be in the 30% range but.
These businesses all the things, we're doing move us in that direction pretty quickly.
Yeah.
I appreciate it guys and given us that perspective.
Like you said you'd make that investment tenant a tenant it sounds like a good call. Thank you.
Thanks Sarah.
Ladies and gentlemen, this concludes our question and answer session I'd like to turn the conference back over to rich.
Closing remarks.
Thanks, Rocco I want to thank everyone for participating on today's call I hope everyone has a good day and I look forward to talking with you again, when we report our third quarter 2021 results. Please stay safe and thank you.
Okay.
Thank you Sir This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.