Q2 2022 InfuSystem Holdings Inc Earnings Call
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Good day and welcome to the MTS system Holdings incorporated reports second quarter fiscal year 2022 financial results Conference call all participants will be in listen only mode.
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Please note. This event is being recorded I would now like to turn the conference over to managing partner Mr. Joe Doormats. Please go ahead.
Thanks, and good morning, and thanks for joining us today to review <unk> system, holding Inc. Financial results for the second quarter of 2022 and at June 32022.
With us today on the call are rich Dilorio, Chief Executive Officer, Barry Steele, Chief Financial Officer, and Kerry La chance, President and Chief operating Officer.
After the conclusion of today's prepared remarks, we'll open the call for questions.
If anyone participating on today's call does not have a full text copy of the press release, you can retrieve it from the company's website at <unk> system Dot com or numerous other financial websites.
Before we begin with prepared remarks, I would like to remind everyone. Certain statements made by the management team of <unk> system. During this conference call constitute forward looking statements within the meaning of the private Securities Litigation Reform Act 1985.
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 31 2021.
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 Diiorio, Chief Executive Officer of <unk> system Rich.
Thanks, Joe and good morning, everyone and welcome to our second quarter 2022 earnings call. Thank you all for taking the time to join us today as.
As communicated in this morning's press release and few systems core business segments delivered very solid second quarter results. Our Ics business led by continuing strength in oncology grew revenue by 6% over the prior year, our <unk> business, which includes rentals and related pump and consumable product sales experienced topline growth of 15%.
Together, our two business units grew in the second quarter by 9% on a year over year basis operating cash flow in the first half of the year increased 8% to $9 $5 million with sequential quarterly cash flow, increasing by 33% compared to the first quarter.
If we were still E&P system of a couple of years ago, the second quarter would likely be viewed as a tremendous success, but of course, we are not that company anymore. We now consider ourselves a growth story with several exciting high Tam initiatives, including those in pain management wound care and biomedical services.
While 9% growth in the second quarter was solid it is below the pace, we were expecting to be at halfway through this year.
Having successfully repositioned NP system from its long history as a niche oncology company to its new model is a specialist in providing last mile solutions for durable medical equipment, we find ourselves with no shortage of exciting growth opportunities. This includes an increasing number of large and successful health care companies that have recognized and fee systems unique capabilities and our commitment to.
Quality, resulting in a steady stream of industry leaders approaching us and proposing significant opportunities for us to grow our business.
We continue to analyze and assess these opportunities passing on high risk and flashing within ideas in favor of those that we believe play to our core strengths and present, the best opportunities for sustainable and profitable long term growth.
As pleased as we are by our new positioning and the opportunity that is presenting our business transition and the increasing work with much industry, leading with larger industry, leading players does present, a particular challenge few things in health care happened quickly.
<unk> system is a relatively small company that provides itself on being nimble, but many of our new partners and customers are massive diversified organizations. The result for US is frequently a hurry up and wait cycle.
Where we stand ready to execute but I have to wait for our partners to work through their longer and more complex are internal processes.
Now being patient and waiting for revenue to work its way forward is nothing new to entry system. We've always explained that investments in new business must be made quarters in advance of significant new revenue appearing on our income on our income statement. What has changed is the anticipated scale of our new business initiatives until recently, a new customer win meant being paid.
And while maybe tens of thousands of dollars per quarter work its way through the revenue cycle process.
But this year, we announced the single contract win with GE, the impact of which is expected to ramp to more than $10 million annually. That's a single contract that by itself could add more than 10% of our top line.
It is hard to be patient with opportunities like that and we are going through some growing pains as we adjust to the scale of our new business opportunities last year, when we began making material investments in order to be ready to execute under the large pending biomet services contract. We follow. The example, we set a few years earlier when a major competitor exited the third party payor oncology market and we assume.
Much of their business, we tightened we tried to be as transparent as possible explain that increasing expenses were being driven by anticipated material revenue growth that would ramp over a period of a year or more.
That was one <unk> system first started providing annual guidance.
We followed this template in 2021 and it didn't work out as well as the last time, we knew a lot of the new work was coming that we needed to invest to be ready and then investors who want an explanation. So we were as transparent as we believe we could be while waiting for the contracting process to be completed and that process took much longer than we expected taking until April of this year to be finalized.
Yeah.
It is now August of 2022, and we're happy to report that the work began under the large biomed services contract during the second quarter, but as discussed in this morning's press release, the ramp has been much slower than expected in the mid to long term the reasons for the delay of good news is our white glove approach identified the need for significantly more device repair work as part of the Onboarding.
Process with the potential of touching upwards of 300000 devices as part of this first contract under the Master services agreement more work and more trust directed towards <unk> system is something we should view as an extremely positive.
But getting through the process with such a large diverse large diversified companies GE to significant time. The good news is we believe there could be more revenue than originally forecast. The bad news is that less of that revenue came through during the second quarter and as Barry will explain shortly this has the effect of pushing back revenue under the contract enforcing a change in our guidance for the remainder of 2022.
Stepping back from this one contract or a broader view.
<unk> system is seeing a lot of opportunities and we have no doubt that we are now a growth company that is capable of generating average long term growth of around 20% per year, we can control, which opportunities are pursued and the amount and timing of the investments we make into those opportunities. Unfortunately, when working with much larger and more complex national and global health care companies, where some.
Its place in a position of accepting and not dictating the timing of the contract process and the ramp up of the new revenue emerging out of these opportunities.
The result is that while the average rate of our future growth might be in the range of 20%.
That growth will be lumpy and with some years coming in above and others below based on when the new business initiatives begin and ramp towards a potential.
I've said that our repositioning as a services company.
As a specialist providing last mile solutions for patients has resulted in no shortage of exciting growth opportunities with many involving large health care companies approaching us as these opportunities as these as these are opportunities that we will continue to pursue and as it has become clear that pandemic supply chains and extended negotiating periods make it very difficult to pin down when the.
These initiatives will start we will start and ramp we are we have determined that we need to change the way in fee system provides us financial guidance.
Starting today, our annual revenue guidance will include only revenue where the associated work is already being done and with respect to growth, where we have very good visibility in extremely high confidence in the revenue ramp. We hope this will free us up to talk about strategy and developments in our business without having to predict the precise timing and revenue impact of new initiatives. We believe it is.
We move forward. This change will allow us to get back to the beat and raise paradigm that characterized in fee system prior to 2021.
Turning to the discussion on the second quarter, we see that it provides one example, after another of the challenges we have faced providing guidance related to a new class of significantly larger growth initiatives for <unk> system.
Call that after the first quarter, we discussed our full year guidance included provision for all types of possible risks, but even that in the second quarter had some surprises before reviewing the details let's remember that the second quarter was still a very solid quarter with 9% year over year growth. Despite the various challenges we were presented with.
I've already.
Provided some detail of the first few months of our big New Biomed services contract with GE healthcare during our team's initial onsite visits we determined there was more than expected amount of repair work required in addition to the routine preventative maintenance.
This led to a pause as we work with GE to achieve alignment on the scope of the work required.
As of August we're back to Onboarding facilities in pumps and we are doing this in an elevated pace.
Given the size of the project, we expect it to take approximately 15 months to ramp to onboard all of the work in sites anticipated.
With the potential of additional work under the Master services agreement as the relationship continues to develop.
In terms of guidance for the year, we're modeling cautiously, including making no assumptions regarding incremental revenue relating to the higher service levels due to increased pump repair work.
Moving next to our pain management business, we remain very positive and excited about the program and its near term prospects in the second quarter, we had some supply chain issues, which didn't allow us to onboard all of our growing backlog and new accounts. The issue is resolved and we were still able to end the quarter with record patient treatments and expect this ramp to continue in fact patients.
Treatments in June were up over 50% versus June of 2021.
In terms of guidance for the year, we have adjusted our numbers to reflect the first half and interruptions, but continue to forecast strong growth in our core pain management program through the balance of the year.
And our wound care business, we also experienced material supply issues here, we are taking a different path one consistent with our long term plan to expand our service offerings in both pain and wound care by among other things diversifying our OEM equipment partners. We plan on adding multiple best in class products to our offering in order to win market share. We have made significant progress on this.
Area and hope to soon be issuing a press release announcing a new partnership.
In the meantime, we have put our two large lease opportunities on hold and remove the forecasted revenues relating to these deals from our guidance in anticipation of our new supplier relationship we have already begun customer assessment of the alternative devices.
The net effect of the new approach to providing guidance guidance together with the supply and other impacts discussed above is to revise our full year 2022 revenue growth guidance to be in the range of 10% to 13% and adjusted EBITDA to be in the range of 20% to 21%.
These figures are based upon the current trends in our core services and newer businesses that are currently producing revenue new initiatives with less visibility regarding ramp and timing are largely taking out of the forecast.
And we will be updated when the timing is clear and we can precisely calculate the timing and the rate of ramp.
While we were taking revenue out of our guidance that is uncertain as to timing we cannot take out the expenses that will be realized in anticipation of that revenue rich.
<unk>. This we will seek to remain transparent with respect to where and why we are investing speaking to the potential of our new business initiatives, but not including revenue forecast in our guidance until it is well defined and we have high confidence in its rate of ramp.
Now I would like to call turn the call over to our CFO , Barry Steele, who will provide a review of our second quarter financial results.
You rich and thank you everyone on the call for joining us today I'm going to focus on three topics. The main drivers for the current quarter results. Some details related to the change in our revenue financial guidance for the rest of 2022 and the status of our financial resource reserves first let me touch on our financial results for the second quarter, which included both year over year and sequential.
On various metrics.
Net revenues for the second quarter of 2022 totaled $27 million, representing a 9% increase from the prior year and setting a new revenue record for the second quarter in a row.
The year over year growth came from both of our operating segments with oncology and pain management increases leading the way in our Ips segment and with equipment rentals and Biomed services pushing us forward in the <unk> segment.
On a product by product basis, the highest percentage growth contributors were biomass services at 36% and pain management, which grew by 26%.
The biomedical services revenue included initial amounts of the revenue from that New Master services agreement with a leading global health care technology diagnostic company.
That was launched in April 2022.
Revenue under this agreement, which was not significant during the.
During the second quarter is expected to grow to approximately $10 million to $12 million annually. After our initial ramp up period of approximately 15 months.
Preparations for this large biomedical services agreement, while along with other anticipated biomedical service volume.
To create additional cost during the quarter in both cost of sales and general administrative expenses.
These slightly diminished the gross profit margin percentage for the <unk> services segment and increased our G&A expenses.
These higher expenses, which include both an increase in our biomed workforce and other expenses were partially offset by the higher biomed revenue during the quarter and are expected to be further absorbed as we continue to grow. These revenues is that another way in a short term additional revenue will be highly accretive given that the cost basis support higher revenue is essentially fit.
Next in the short term.
Three.
Additional factors that unfavorably impacted profit margins.
The following.
First we increased our estimate a reserve for missing pumps by 700, Taiwan.
During the quarter.
Investment was partially related to recent physical inventories taken at various customers, but also due to a change in assumption used to calculate the estimated amount of the reserve.
Second equipment maintenance expenses for the Ips segment, which can fluctuate from quarter to quarter, depending on the timing of the repairs were slightly elevated to the current.
During the second quarter without the PREPA reserve adjustment and a slightly higher equipment maintenance expenses. The gross margin for the Ics segment would have been slightly higher comparatively during the current quarter on both a year over year and sequential basis.
Third we incurred additional costs totaling 400000 relating to the increased sales team for Nader pressure, one therapy and pain management, which started during the second quarter of 2021.
And related marketing program expenses. This increase was evenly split between selling expenses and G&A expense.
Partially offsetting these were a decrease in our stock based compensation expense due to lower stock valuations on New awards.
Sequentially lower selling expenses related to timing of marketing activities, which are now being conducted in person are typically higher during the first quarter of each year.
And a decrease in accrued short term incentive plan expenses related to the lower 2022 outlook.
As a result of these impacts, particularly the added investment in our sales force and our investments in the Biomed teams adjusted EBITDA was $5 4 million or 26% of net revenue. During the 2022 second quarter. This amount was 300000 lower than the second quarter of 2021, but represented eight.
One 4 million or 34% increase sequentially from the 2020 to first quarter.
That takes me to the subject of the outlook for the rest of the year as Rich mentioned, we are now forecasting 2022 net revenue to be between 113 and $116 million, which represent it represents an increase over net revenue during the prior year of 10% to 13%.
That is approximately $5 million to $7 million lower than our previous estimate.
This reduction is very large, but it's driven by only a handful of development.
The most important these are the equivalent leases that have been put on hold due to a supply disruption. We have now moved all leasing revenue out of our forecast model and into our opportunities list with a resulting revenue reduction of $3 million to $4 million for 2022 from the prior guidance level.
Second as rich mentioned, we lowered the amount of current year on year current year Onboarding ramp related to the large biomed contract that commenced work in early may.
Our previous assumption had more pumps coming online during earlier parts of the estimate a 15 month ramp period. This change reduced our revenue estimate for 2022.
By $1 million to $2 million.
Third we move back the starting date, but did not change that happened as level two other biomed contracts the impact was approximately $1 million and lower revenue outlook.
Our previous estimates included too low of an impact related to the supply chain headwinds that impacted the pain management, new customer pipeline, while largely resolved in the final weeks of the second quarter the higher than anticipated delay resulted in about $1 million reduction in the 2022 revenue.
Partially offsetting these reductions as an increase in our outlook for equipment rental revenue, which outperformed our expectations for the quarter and resulted in a $1 million increase in our full year revenue expectation Ironically, a part of this improvement resulted from the same market wide supply disruption that hurt us in pain management.
As a result of the decreases in revenue, we expect that adjusted EBITDA for 'twenty to 'twenty two to be within the range of 23% to $24 million adjusted EBITDA margin is expected to be between 20 and 21%.
Turning to a few points on our financial position and capital reserves, we continue to be well positioned to fund net revenue growth with strong cash flow from operations backed by significant liquidity reserves available from our revolving line of credit and manageable leverage and debt service requirements, our net debt decreased by $1 2 million.
The quarter at 2% to $33 4 million and our available liquidity increased by that same amount to $41 million at the end of the quarter.
The reduction in total debt offset partially by the lower 2022 EBITDA.
Our ratio of total debt to adjusted EBITDA for the last 12 months increased modestly to 154 times at the end of the quarter as compared to 137 times at the end of the 2021 fourth quarter.
Most of this increase is attributable to the 4 million stock repurchase.
Purchase without these repurchases without these funds without which these funds would have gone to paying down the revolver and reducing the debt ratio to only 131 times.
That consists of borrowings on our revolving line of credit with no term payments term payment requirements, almost three and a half years remaining at a term and $20 million of which is protected from increasing interest rates through an interest rate swap having the same tenor.
And with that I'd like to turn it back over to Mr. Diarra Diorio. Thanks Barry.
In closing our model our motto is safe smart and trusted and for more than 30 years, we've worked hard to build a culture that embodies the patient at the center of everything we do.
The foundation of the company has never been stronger and we are confident in our growth plans to build a bigger and better in fee system, we are making progress in transforming <unk> system into a leading healthcare service provider improve.
Improving the quality of care by enabling continuity of care for clinic to home and acute care markets. We are well positioned for multiple growth opportunities and we are highly focused on executing on our plans and driving operational excellence for long term success.
I want to thank the entire <unk> system team for their hard work and dedication in ensuring our customers partners and patients receive our industry leading service.
Before we take questions I would like to let everybody know that as part of our compensation. Some members of the executive team, including myself were awarded stock options in the fall of 2017 that are now coming up on their fifth year anniversary and are set to expire we will likely see some form form four filings as the team needs to execute some type of transaction with respect to those options.
They expire it is an absolutely no way a reflection of our confidence in the business for the future of this great company.
And now we're happy to answer any questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.
Charlie a question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
My first question is going to come from Alex My lack of Craig Hallum Capital Group. Please go ahead.
Good morning, everyone. This is Jason on for Alex So just starting out.
Wanted to dig in a little bit more on the full year guidance.
So just for what's included in that Biomed contracts, so that one to two and a half million we're expecting for the year now and then if we could get a bit more linear on growth assumptions for Ics in dnb.
The growth assumptions for each business and then you know where do you think it ended the year run rate is for pain and wound just kind of some updated assumptions that it would be helpful. Thanks.
So taking the question on.
<unk> contracted I think we had in our older guidance three to four and a half or I think it was maybe $4 eight we took that down now or we.
We took a couple of million out of that its about two two and a half million now.
Yes.
The run rate.
The pain in the <unk> side.
Coming out of the fourth quarter pain is probably pushing 10 million on its own right it might be eight or nine but it's somewhere in that range.
We can kind of when we look at the forecast for the pain business and the customers we have in the pipeline and the ones where we've already in service over the last couple of months the ones were about in service.
This is the most optimistic we've ever been on the pain business and we've been pretty optimistic on it but without really a big COVID-19 impact that we can see with the supply issues largely resolved with the pipeline that this new team that we hired last summer is built.
We expect it to be an $8 million to $10 million business coming out of the fourth quarter from a run rate perspective.
No that's helpful.
And then just kind of digging in a little bit more on that point could you kind of expand on where paint and wounded been through <unk> through <unk> through July and now into August here. It sounds like obviously things have been covered but just trying to pair that with with what was taken out of guidance kind of what are you seeing what's the what are the dynamics there and it certainly sounds like you guys are excited and so just some commentary there.
Yes, I think Barry can give you the numbers, but on the wound care side, largely what's been taken out of guidance as the leases.
We had a supply chain issue, where we just can't get the devices we need.
It's kind of for two against that we're already looking at another manufacturer to have the second device. So the leases. Although we are still hopeful we're going to get them. We don't know if theyre going to come in the third quarter the fourth quarter next year.
So we pulled that out of the wound care and Thats largely what we pulled out of out of that segment alright.
We're out of that business on the pain side. It was really the delay with COVID-19 at the beginning of the year and then the supply chain issue, mostly in April and May we just have to push that revenue out.
And Barry I don't know if you have the number on pain, I think we pulled a million or two out of PE.
About $1 million a lot of pain.
The leases was $2 million to $3 million range.
And then just lastly for me it'd be great to get your guys thoughts on the reimbursement changes we've seen within home health recently.
Do they have any impact on your business.
Sure makes total sense and then maybe just for Barry quickly. Obviously, you went through the status of the balance sheet and the cash flows but in general how do you feel about capital allocation and your ability to.
To manage through all of the great opportunities you have in front of you.
I think we have a wealth of dry powder to.
The investment business, we're very well set too.
And anything that comes our way far as BLM finance it so we feel very comfortable.
Great. Thank you very much congratulations thanks.
Thanks Brooks.
As a reminder, if you have a question. Please press Star then one on <unk>.
Next question will come from Jim Sidoti of Sidoti <unk> Company. Please go ahead.
Hi, good morning, Thanks for taking the questions. So it sounds like the major factor that caused the guidance reduction would be.
The ramp of GE ramp of revenue from GE can you just go over again.
Why those initial homes needing a little more serve as the new thought resulted in the delay in the arena revenue.
Yes, so we walked into the first Big hospital. It was a pretty good sized place they had kind of a 45000 devices.
They were a mess.
They were devices everywhere they were broken and really the program itself is to repair kind of some devices and maintain the rest we ended up repairing a lot of devices and we get to charge for that right and that's the good news part of that story. The Bad News is GE was a little caught off guard at home messy their customer wants.
We sat down together and kind of work through what we did why we did it make sure our systems are talking and those sorts of things. So it just it positive a positive rollout by call. It $30 to 45 days. The good news is all of that is ironed out.
In this month alone I think we're going to onboard probably twice as many devices as we did in June and July combined so it's all been worked through with just kind of pause the program for a little bit until we all get our feet under us and could assess what was going on we don't expect that to be at every hospital, but there'll be some there'll be messy, some that'll be cleaner than others.
I think it caught them probably off guard more than it even did us but the good news is the customers happy they get all their devices fixed repaired maintained now.
Now they can redeploy them back up on patient floors, and do what they need to do which is treat patients.
So although the initial revenue from the contract is going to be a little lower than you thought it sounds like the <unk>.
Potential revenue over the next vehicle year, there's a little bit higher than you think.
Than.
You thought initially.
I wouldn't say that it's the initial revenue the revenue from the initial contracts going to be lower it's just going to be delayed by a few months, but we're still looking at $10 million to $12 million in revenue from that initial contract with upside from there I think one way Jimmy could think about it as it is.
The tail and it just got pushed that helps you a little bit shorter than this year, just a matter of work cutoff for 2022 about how very quickly in the first few months of ramps up so so sort of the outlook is actually as good or better than the upfront revenue, which is kind of a one timer is actually better overtime to we just need to get the pumps on boarded in order to get the revenue.
Alright, and then looking at the balance sheet inventory is up about 20% since the beginning of the year is that finished goods components.
Is that something youre doing the hedge against some of these supply chain issues.
Yes, it's mostly our supply that we use in both businesses and the components and parts that we use the repair devices. So it's actually for US is a pretty small number generally saw a little bit of a change can be a high percentage.
Yeah, that's just the building our stock up in order to be prepared for any potential future supply issues.
Alright that was it for me thank you.
Thanks Chip.
This concludes our question and answer session. At this time I'll now turn the conference back over to Mr. Rich store front.
<unk> for any closing remarks. Please go ahead. Thanks.
Thanks, Ian 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 host our third quarter call. Please stay safe and have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Yes.
Sure.
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Yes.