InfuSystem Holdings Inc. Q1 2023 Earnings Call
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At this time I would like to turn the conference over to Joe Gourmet managing partner. Please go ahead.
Good morning, and thanks for joining us today to review <unk> financial.
Financial results for the first quarter of 2023 ended March 31 2020 through.
With us today on the call are rich <unk>, Chief Executive Officer, Barry Steele, Chief Financial Officer, and Kerry La <unk>, President and Chief operating Officer.
After the conclusion of today's prepared remarks, we will open the call for questions before we begin with prepared remarks, I would like to remind everyone. Certain statements made by the management team of entry system. During this conference call constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095.
Some of 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 Exchange Commission, including the annual report on Form 10-K for the year ended December 31 2022.
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.
<unk> systems 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.
I'd like to turn the call over to rich Diiorio, Chief Executive Officer of MP system Rich.
Thank you Joe.
Everyone and welcome to MTS Systems' first quarter 2023 earnings call. Thank you all for joining us today.
We issued our first quarter earnings press release earlier, this morning, and the message I want to convey today is that we are off to a strong start in 2023, we achieved another milestone with a record quarterly revenue, surpassing $30 million a first in the company's history.
We see strong demand for our services led by our core oncology in our biomedical service business with GE healthcare as.
As discussed in our last call we entered the year with a strategic focus to execute against current opportunities, most particularly our business with GE and biomed and scenario and wound care driving organic growth, while seeking continuous improvement in our operational efficiencies.
Our focus is paying dividends and we are executing the negative pressure pump orders. We had expected last December started to ship in the first quarter, we recognized approximately $500000 in revenue from leases through the end of March and have materially more in the pipeline that we expect to realize over the coming quarters.
Pain management continues to be strong with the top line of 28% up 28% from the prior year quarter.
I want to emphasize that our pain business is and will continue to be an important contributor to our business.
But today I want to highlight the strong performance of our biomedical services during the first quarter, particularly the onboarding of new facilities and devices under the Master service agreement with GE healthcare our.
Our progress with GE has been especially strong and I am pleased to report that we are running ahead of our plan for the year in order to do so and as Barry will further explain we accelerated our plans to add biomed servicing capacity and the related onetime expenses by hiring Onboarding and training additional technicians, we believe the execution on the.
GE agreement is important to NP system today, and then it will drive long term value creation.
Before handing the call over to Barry first financial summary of the first quarter I wanted to touch on a couple of more key points.
In addition to starting to ship a material number of negative pressure devices manufactured by our partner Cork last week, we announced our new distribution agreement with <unk> to be our second negative pressure equipment supplier.
This looks to be another strong partnership with gender and making available it's an entire portfolio of devices and wound care products.
This addresses an important initiative that will help to mitigate supply chain issues and provide our customers with multiple options.
As I hope everyone is well aware negative pressures now only part of our wound care strategy and as Carey will discuss in a few minutes. Another positive development is that we recently received the accreditation necessary to sell and bill for advanced wound care products under our Si wound care joint venture with scenario.
Finally oncology it is off to a great start in 2023, we're seeing market share gains higher patient volumes higher collection rates and improved pricing.
And with that I'd like to have our CFO , Barry Steele walk us through a more detailed discussion of our first quarter financial results.
Thank you rich and thank you everyone on the call for joining us today.
A focus on two topics the main drivers for the current quarter's results and the status of our financial resource reserves.
First let me touch on our financial results for the period.
Net revenues for the first quarter of 2023 totaled $30 4 million, representing a 13, 5% increase from the prior year and setting a new all time revenue record for the fifth straight quarter.
Also the <unk> in the last seven quarters.
The year over year growth came from both of our operating segments with oncology and biomedical services, leading the way in dollars with increases totaling $1 6 million for oncology and $1 7 million for biomed.
Percentage basis wound care and pain management were both very strong with growth of 63% for wound care and 28% for pain management.
Biomed took the percentage improvement crown by achieving a 98% increase in revenue over 2022.
The improvement in oncology resulted from the usual suspects, including improved volumes and collection yield but also was helped by some incremental improvements in pricing.
The biomedical services revenue included revenue from that New Master services agreement with a leading global health care technology and diagnostic company, Yes, GE healthcare that was launched in April of last year.
As we foreshadowed during our previous call revenue under that agreement accelerated significantly during the first quarter, even faster than we had previously thought and a greater pace is expected to continue as we proceed through the next few quarters.
The increase in wound care was driven by negative pressure equipment sales that we had previously hoped to ship in the fourth quarter. We can now safely predict that more will follow prep.
Preparations for this large biomedical services agreement along with other anticipated biomedical services volume created additional costs during the quarter in both cost of sales and general and administrative expenses.
These diminished the gross profit margin percentage for the D. DNA services segment and increased our G&A expenses.
These higher expenses, which included both an increase in our biomass workforce and other expenses were partially offset by the higher biomed revenue during the quarter and are expected to decrease or get absorbed as we continue to grow these revenues.
<unk> of this cost is attributable to building our capacity that is our workforce and both onboarding devices in the contract as well as managing manage higher overall service volumes.
Largely include employee acquisition and development cost such as recruiting fees.
<unk> recruiting fees and hiring bonuses training time and lower initial productivity in the field.
This also included higher travel expenses for the field team. These upfront expenses were higher than we predicted because the timing of when we needed to bring in these team members with earlier than previously planned.
We anticipate that these elevated amounts will continue at some level during the onboarding phase that should dissipate over the next several quarters and then our margin environment will approach our original estimates.
As a result of these impacts our adjusted EBITDA was $4 2 million or 14% of net revenue during the 2023 first quarter, which represented a slight increase in amount totaling 93000, but a decrease in margin totaling one 5% from 15, 5% last year.
Turning to a few points in our financial position and capital reserves.
You may have seen from an 8-K, we filed earlier this week that last week, we amended our 2021 credit agreement.
The amendment changed our interest rate index to terms sofa from LIBOR and also renewed the term to five years.
Because of this 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 operating cash flow significantly decreased this quarter, primarily due to the higher loss expenses for the Biomet service team previously mentioned and increases in our working capital related to the higher revenue volumes.
This metric is expected to recover in the coming quarters.
Our net debt increased by $3 1 million to $36 1 million and our available liquidity totaled $38 2 million at the end of the quarter.
The increase in total debt offset partially by the slightly higher adjusted EBITDA caused our ratio of total debt to adjusted EBITDA for the last 12 months to increase modestly to 173 times at the end of the quarter as compared to one five times at the end of the 2022 fourth quarter.
Part of this increase attributable is attributable to the $1 9 million in stock repurchased during the trailing four quarter period.
Our debt consists of borrowings on our revolving line of credit with no term payment requirements.
<unk> five years of remaining term and with $20 million of the outstanding borrower balanced protected from increasing interest rates to an interest rate swap for the next two years.
Next up is our president and Chief operating Officer, Carey with chance, who will provide some additional color on developments and our wound care business.
Thanks, Barry and good morning, everyone.
I would like to provide color on two recent developments in our wound care business. The receipt of accreditation to sell scenarios advanced wound care products and our partnership with Genzyme as a distributor for their full line of negative pressure wound therapy products.
Firstly accreditation we are very pleased to announce that we are now authorized from CNS to submit for reimbursement of scenarios products to our broad network of private payers as well as Medicare.
This authorization is a critical step in the success of the business, we are pursuing with the scenario partnership.
When we entered wound care with Cardinal our robot is mostly limited to provide last mile clinic to home solutions that did not require us to obtain additional accreditation. In fact, we were contractually limited as distribution agreement with Cardinal prevented us from selling into the long term care and skilled nursing facilities.
Under the new joint venture those facilities are our initial focus we are going and offering a suite of products and services such as negative pressure wound pump, but also exclusive distribution in those channels for scenarios advanced wound care products.
<unk> system is a great partner first scenario not only because we pulled together the suite of products, but also because of our billing and payer expertise allowed us to acquire cap accreditation and updated CMS status and near record time.
With the accreditation now in hand, we have commenced creating the cables codes and connections necessary for our revenue cycle team to efficiently submit request for reimbursement to all payers. This is a complex process that we expect to be completed in the second quarter, allowing our wound care sales force to begin third party payer selling a scenario.
In the second half of the year.
I've said a couple of times now that we are moving toward a suite of products in wound care. This is exemplified by the announcements related to our new relationship with Canada in Canada and is based in New York and specializes in negative pressure systems and products.
We are moving quickly into the wound care market to remain device agnostic offering customers multiple device options similar to our other lines of business like.
This is part of our concierge level of service approach, but it is also important given how supply chain and other issues can and do impact the ability of any one manufacturer to have devices and supplies available when they requested.
I am happy to report that we have made significant progress during the first quarter advancing our agenda to take our retooled and far stronger wound care offering to market. We expect the ESI wound care partnership with <unk> to commence in the second half of the year and to deliver material results starting in 2024 at this point.
I'd like to turn the call back over to rich.
Thanks, Gary before going into Q&A I'd like to spend some time further developing a few strategic topics.
The 2023 is going to be a year focused on execution. This.
This means our focus is driving organic growth with our existing business opportunities and especially the new partnerships with GE healthcare and scenario each of which we think will be a major growth driver for years to come.
After the last call. Many of you have asked why we spoke of pain management differently than in the past I want to assure you that pain is still an important part of our future growth as can be seen from the strong first quarter results of 28% year over year.
While we were trying to convey on the prior call is that <unk> system has multiple growth opportunities and that the two strategic opportunities, we announced last year J D and our new wound care offerings through our joint venture with scenario have breakout potential. It is our current expectation that biomedical services. This year and wound care next year will grow quickly and easily.
<unk> contribution to our top and bottom line.
Additionally, we wanted to call that out because these opportunities are still in the early stages of development. They will be getting the bulk of our growth resources in it and marketing.
We made the appropriate investments to build our pain business, which is now in a good position. This allows us to reallocate our resources to wound care and GE.
Material developments relating to wound care and biomet are occurring at a steady pace. We are now shipping core pumps, and Nevada agenda and as a second supplier. We also received accreditation and can begin the process of implementing the third party billing processes that we hope will allow us to launch this in our products in the second half of the year.
On the Biomet side, I'm happy to reiterate and emphasize that the relationship with GE launches into the system into the acute care space. This is a really big thing for US. We spent years focused on home health in various niche markets. All the time, knowing there was a large tam outside our reach in acute care.
Each stage of the rollout plan for this year will not only add materially to our top line, but it will also advance our agenda to further build out our national service footprint our.
Our deployment model for biomedical services under the GE contract has two components, our mobile team and our local presence.
The mobile team is built to go from site to site anywhere in the country, but in each major city. We are hiring regional technicians will be there to provide the year round service and maintenance when the rollout is complete we will have regional Texas adjacent to all of the most important health care centers in the country.
Creating this regional presence in addition to the mobile strike teams as a potent new asset with potential beyond initial performance under the Master service agreement with GE.
The <unk> system will be in 200 facilities solving problems on a daily basis. This will lead to additional biomedical service opportunities with GE with the hospitals and manufacturers and involving a growing variety of devices and then there is our depot service of all.
Available each of our seven centers of excellence geographically dispersed in covering the U S and Canada.
You've heard me say before I think biomedical services is the most likely business to catch and exceed the revenue we see from our oncology business.
I speak to this opportunity I'm not just talking about revenue only coming from the current GE contract.
Im talking about the revenue that can result from the infrastructure and reputation that the GE relationship is helping <unk> system to build.
Theres three final ideas I want to highlight before moving off the strategic discussion of our biomedical services business.
First the Master service agreement with GE is really Jumpstarted, our biomedical services business moving it to a level on par with the therapies. We previously focused on in our <unk> business unit.
Second this year, where we are obsessive we focused on the <unk> rollout is allowing us to build the infrastructure, we will leverage in the future and nothing look good can come from GE being a very pleased reference account.
And lastly, our business plan is not to become the biggest biomedical services company, but instead, we expect to retain our contours like approach, where our services are available for those willing to pay for white glove levels of service.
We often use the <unk> analogy to describe our desired market positions.
We believe our role is to deploy our unique assets and talent to solve discrete problems. For example, our oncology business solves problems for health care providers and facilities, making sure high quality dependable equipment is always available.
Take care of the billing and provide a 24 hour patient hotline to resolve issues that might arise anytime a day.
These skills and assets are redeployed in pain management, where we solve the problem of opioids being prescribed post surgery.
The facilitating a continuous peripheral nerve blocks can reduce the need for opioids solving problems for the patient and society and our service includes patient surveys could help providers and facilities deliver an improved quality of care.
In wound care and a few systems working with scenario to provide patients providers and payers advanced technologies for healing, improving patients' lives and reducing costs.
<unk> system has a unique and valuable set of assets and skills in high demand by some of the largest health care companies because they solve problems that regularly plagued the delivery of quality health care.
The system is all about is helping to facilitate quality inefficient healthcare providing.
Solutions benefiting the patient.
Health provider Payors and device manufacturers, we help with logistics, we provide last mile solutions performed revenue cycle management educate answer patient questions, and most especially maintaining deploy quality dependable and safe durable medical equipment and supplies.
We are extremely pleased with the progress made during the first quarter and we're off to a strong start in 2023 and I look forward to continuing the momentum for the rest of the year and beyond.
As of today.
We are reaffirming our annual guidance for the full year 2023, with estimated net revenue growth of 8%, 10% and greater than 19% adjusted EBITDA margin, we need to get further into the year to have more visibility on how events will play out and see if we will make any changes to.
To conclude my prepared remarks, I would like to thank our shareholders for their continued support and the entire <unk> system team for their hard work and dedication in helping our patients live healthier and longer longer lives and with that we're happy to answer any questions.
We will now begin the question and answer session. As a reminder to ask a question you May Press Star then one on your telephone keypad.
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At this time, we will pause momentarily to assemble our roster.
Today's first question comes from Brooks O'neil with Lake Street Capital markets. Please proceed.
Good morning, and thank you for that.
Broad comments, you've made you've covered a lot of territory, but I wanted to start kind of with the traditional oncology business. The results this quarter were.
Quite a bit better than we've been seeing do you think that that kind of performance is sustainable.
Good morning Brooks.
I think so.
Not sustainable year after year, but we're definitely going to have some good good times like this we added we added one big customer.
After our supply chain issues late last spring early summer.
It's given us a little bit of a lift our revenue cycle team is doing a phenomenal job collecting on the bill so.
Those are the improvements that have been going on for a while.
We're starting to see that impact our numbers so.
Is it a it's never going to be a 10% grower year after year, but there'll be some times when it's a little bit higher but its still kind of a low mid single digit growth business.
Okay.
Let me ask this.
Maybe Gary can speak to it since she was talking about the wound care opportunity.
<unk> sense is there are some pretty good reimbursement opportunities for wound care in Europe .
Field nursing.
Facilities.
Are you guys positioned do you think.
Benefit from strong reimbursement in that city or.
How do you think about reimbursement.
What you're going to do in that area.
Good morning, Brooks I hope, you're well I do think we have some opportunity.
I do think we have some opportunity.
We have a pretty large billing and collections team. They are very good at what they do a little bit newer for us in the in the skilled nursing facility, but.
Much of that is a retail base from our sales team selling the product in there and then from there those patients to go home very similar to our <unk> line of fitness in anywhere so that that billing team, we foresee no problems a little bit different but.
We have an interesting alright, thinking we're going to be successful there.
Yeah Cool and then maybe just to ask rich I mean, if I was listening correctly. This morning, you have your traditional businesses that historically at least in my brain seem to focus on.
Healthcare in the home and bringing your durable medical equipment.
In services to patients there.
This morning, Cary and I, just talked a little bit about the never seen AUM opportunity with wound gear and then you also mentioned the tremendous growth you see in vehicles.
Medical services in acute care facility so.
Do you think youre spreading to broadly by focusing on all three of these.
Studies of care or maybe the flip side is just.
Enormous opportunity because all three of these are.
Offer opportunities to deploy.
So basically.
Yes, so I think they are markets, we've always wanted to get into but I think the important part. It's a good. It's a fair question Brooks just to ask if we're spreading ourselves thin I think the answer is no because everything we're doing is still in our core competency right. So we're still the revenue cycle piece installed the clinical piece, it's still built around devices. So.
Even on the Biomet side, we've been repairing devices for 30 years. So it's doing it on site or at the hospitals no different right. It's the same skill set so I think as long as we can stay.
Within our core competencies the market itself I wouldn't say, it's irrelevant, but it's less important as long as we have the right sales team in place to go into those markets and they have the contacts and they have the ability to sell to those customers, which that's.
That's what we have to do right. When we build out of <unk>, we have to find pain reps that are specific specific within orthopedic surgeons and anesthesiologists on the wound care side, we have some great.
Our reps that have experience in the <unk> and skilled nursing facility. So that's really the only difference, but we're bringing our core competencies into those markets. So it's not something I'm worried about.
Great. Thanks for taking my questions congratulations on a strong start to the year.
Thanks Brooks.
The next question comes from Alex Nowak with Craig Hallum Capital. Please proceed.
Okay, Greg good morning, everyone.
Don't take this the wrong way, but it seems like in Q1, it seems like the lead weights are removed.
I'm curious.
Through 2022, and it's always been kind of maybe one step forward two steps back I think this quarter is very much three steps forward.
What changed since Q4.
So.
It's a good question I think that.
The performance in the first quarter was was because of things we've been doing for the last year and a half rate. They finally showed up.
It's not one thing Alex right. So that so the leases for for wound care. An example, right. They should have come in in the fourth quarter, we had a supply chain issue theyre showing up now right. So nothing really changed other than the supply chain issue freed up there on the GE side. We knew there was going to be a ramp up period. It was just a little bit slower and it showed up in Q1, but that's effort.
That was put in a.
A year ago by our biomedical and operations team. So I don't know if anything has dramatically shifted other than it's starting to show up right everything we had talked about and hoped for over the last year or so.
It's not all here yet either wound care is still kind of on its way and it's more of a 'twenty four thing, but certainly on the <unk> side.
I think we had mentioned on the February call. It here right. This isn't like hopeful we hope to get onboard some devices, we have visibility until we know what's coming.
So I think things are just starting to fall into place that we've been working on for quite a while and.
We knew would show up we just didn't know exactly when on the calendar.
Yes, it's great to see and given the other call it in that.
Device reports that we've seen so far this earning cycle.
It does seem a little bit of a rising tide lifts, all where hospitals are back nurses are back staffing stack whatever it might be.
Health care seems to be just getting back to normal, but also a big help as well I've got to imagine it is.
Yes normal is good right just don't Jinx us, but I think in general.
Yes, I mean, we feel like we did.
Pre COVID-19, we don't really hear from the field that they're having trouble getting into facilities and theres, some more credentialing and those sorts of things but in general.
It feels much more normal as a business knock on wood, even from a supply chain standpoint, we're in decent shape. So hopefully we're kind of through the through the floor is there an end.
It's a smoother sailing.
Makes sense when I look at the numbers from Q1, Aaron as we look at the full year guide though.
Based on my model you were expecting basically no sequential growth.
You've talked through a number of dynamics here why we should see sequential growth whether it be wound GE in biomed.
So maybe maybe expand on that.
Why we shouldnt expect some sequential growth.
Slide in your guidance.
So.
There are a lot of growth opportunities right. So we have more leases coming.
You're already in this quarter and then the next quarter.
We should see oncology remains strong we should see a little bit of wound care lift at the end of the year.
It's just a little bit early for us to move the guidance right. There is just what if the supply chain issue hits US next month that we don't see or something like that so I think we're just being conservative and we're giving ourselves a little more runway behind us before we make any changes.
And then just two final questions on the D&B costs, they were higher even as Scott said I think that all makes sense, but you're keeping the EBITDA guidance. The same so where do you see the.
Cost gains come from and then just the status of fixing the internal control issues that pop up last quarter.
Yes.
The extra cost for the biomet activity is really things that we could plan for we have to build the team we have to build the workforce.
There's the step functions as you add on costs, so that will clearly improve as we get through the year and we believe that.
Our original estimate for the margin of that business, which are lower than our other businesses are still accretive to our EBITDA margin will play out we won't be completely through that ramp up by the end of the year, but we'll begin call. So.
Significant improvement the first quarter margins are usually a little bit low just generally.
Higher bad debts and things like that typically so we'll just have some that natural lift as we go through the year.
And so in.
There'll be other things that just timing of expenses a little bit tougher in the first quarter. Two so we still have.
A good view of where our margin will end up for the year and our guidance is still.
Still in tact for that.
What was your other question I think given.
Just the internal controls.
And then frankly, we literally.
A month ago, or obviously working hard too.
Address the different devices as the auditors found where we've made some progress there, but we need more time to get through it. We're obviously planning for success to have our 10-K be clean next year, but maybe even before that will eliminate some of the material weaknesses.
Okay I appreciate the update thank you.
Thanks, Alex.
Okay.
As a reminder, if you do have a question for the management team. Please press Star then one.
The next question comes from Jim Sidoti with Sidoti <unk> Company. Please proceed.
Hi, good morning, Thanks for taking the questions.
The gross margin was impacted by the startup cost related to TV, but can.
Can you give us some sense, where you think gross margin will it come in for the year.
Yes.
We're not giving.
Guidance on gross margin, we do obviously it'll improve because.
These costs will go away.
It costs us from an EBITDA perspective about 4%. So you can probably expect that similar number maybe a little bit better in terms of improvement back to on the gross margin side.
Okay and then on the.
Sales and marketing and general and administrative costs were there any onetime items in the quarter.
More typically you run rates going forward.
Yes.
Some of the expenses, we have do come in the first quarter.
Marketing things, we do and whatnot, we also had.
On the audit and internal controls audit, we had an extra cost to finish up that all of that was a couple of hundred thousand so that will hopefully be a one timer, but generally theres somewhat just heavier cost typically in the first quarter as you look at the pattern from the prior years.
So is it reasonable to assume that.
In general.
Cash flow should should improve throughout the year.
You should be.
Close to free cash flow positive for the year.
Yes, but the main driver for the cash flow being slightly negative was working capital. We built inventory some of that was parked inventories we needed for the biomet contract.
Supplies that we need to support the higher volumes for oncology et cetera, et cetera, So that will that will moderate our actual reversals opex back as we go through the rest of the year.
Okay, and then last one.
Annual revenue from GE do you still expect it to be in that same level that you had before.
Maybe not 2023 24 and beyond yes, yes, what we said is.
That somehow.
Sometime in the first quarter next year of 2010.
Q4 will have onboard all the devices that we expect to get under the contract and Thats, maybe a little bit north of $12 million on an annual basis from what we see in the first quarter, we might be a little bit quicker.
Hi.
Third and fourth quarter sort of shake out where it's maybe a little about that.
Not perfectly certain what's the what's the thirds will go to how many devices are there.
We could we could add up a little bit below that sooner than we think to get to the Hyatt.
It'll level.
Okay, but you still think that $12 million of annual revenue.
Starting 2024.
A good number.
Yes, I think that where we have really good opportunity to start at that run rate in 2024, if not just a little bit higher.
And are there price escalators built into the agreement.
I can hear the question.
Well pricing are there price escalators.
Escalators.
Part of that agreement will pricing and crude oil in 2020.
Yes pricing is flat throughout the contract.
Alright, thank you.
At this time, we're showing no further questioners in the queue and this concludes our question and answer session I would now like to turn the conference back over to rich Diiorio for any closing remarks.
Thank you Chris I want to thank everyone for participating on today's call I Hope everyone has a great day and I look forward to talking with you again, when we host our second quarter call. Please stay safe and thank you.
Okay.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
Okay.