Q2 2023 InfuSystem Holdings Inc Earnings Call
Hello, and welcome to the in few system Holdings incorporated second quarter 2023 financial results Conference call, all participants will be and listen only mode should you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero. After today's presentation, there will be an opportunity to ask questions too.
Ask a question you May press start and one on your Touchtone phone. Please note. This event is being recorded I would like now to turn the conference over to Joh Dormie managing partner. Please go ahead.
[noise] morning, and thank you for joining us today to review if your system natural results for the second quarter of 2023.
June 30th 2023 with.
With us today on the call a rich diorio, Chief Executive Officer, very scale, Chief Financial Officer, and carry the chance President and Chief operating officer.
After the conclusion of today's prepared remarks will open the call for questions.
He became with prepared remarks, I would like to remind everyone. Certain statements made by the management team of if your system. During this conference call constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 et.
Et cetera, the statements as historical fact this conference call magazine forward looking statements that involve risks and uncertainties summer, which is detailed under risk factors. The documents filed by the company with the Securities Exchange Commission, including the annual report on Form 10-K for the year ended December 31st 2022.
Forward looking statements speak only as of this date the savings rate.
Company can give no assurance of 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, except as required by law.
Now I'd like to turn the calls the rich Diorio, Chief Executive officer of Infusystem Rich.
Thanks, Joe and good morning, everyone and welcome to MP system second quarter of 2023 earnings call. Thank you all for joining us today.
Start by noting that a key theme in her prior to call. This year was a 2023 is going to be an execution here with.
With this morning's press release, we now see strong second quarter numbers building on those from the first quarter and delivering results for the first half of the year that meet or exceed expectations.
Barry will cover the specifics of the quarter in a few minutes, but I will point out that Q1 2023 was the first quarter in our history, where revenue exceeded $30 million and the recently completed second quarter was the first ever above $31 million coming in at $31.7 million, which reflect 17% growth year over year.
Our growth in the first half of the year is the result of strong execution in our biomed in wound care businesses, specifically the rollout under the initial master services agreement with G. E. It's moving rapidly and has achieved the desired momentum.
And wound care, we start another shrunk order of negative pressure device placements is part of our relationship with Cork medical.
A reminder, these device placements not only contribute to our top line, but they were also important to establish our customer base as we prepare for the introduction of scenario products that we hope will be a growth driver starting in 2024.
I'd like to do a quick review of the strategic decisions that paved the way for their performance that we are seeing in 2023.
Prior to 2020 and a few system had a long history is primarily an oncology pump company.
Hidden within that business was a collection of under appreciated and underutilized assets and capabilities.
Include our national payer contracts covering 96% of the U S population are strong and scalable revenue cycle management team and great Biomedical services capabilities.
Starting just a few years ago, we began looking beyond oncology, an infusion pumps to expand the potential of both of our business units patient services and device solutions and this has led to material growth opportunities.
First involving Mckesson, then Cardinal G E and most recently Cork and scenario.
To understand how these partnerships and opportunities grow our business. It is important to emphasize that empty system as a service company, we provide services that solve difficult problems from manufacturers healthcare provider's patients and payers.
What we do is challenging requiring a longterm vision built around a culture dedicated to patient care.
All of this is to explain why it often takes time between when we announced ambitious business initiatives and when the revenue from these initiatives begins to ramp.
We attempt to be as transparent as possible often our initiatives require investments be made several quarters of it in advance of anticipated revenue in this we would like to thank you for your patience as we've all waited for some of the big initiatives, we've been pursuing to begin bearing fruit.
2023 is a year, where the benefits of the hard work and effort in prior years is beginning to show up.
With G E that work began back in 2022 or 21, when we started talking about what would become the Master services agreement, we signed that deal and started work in 22 and now a twenty-three we see how impactful there relationship is and will continue to be the.
The next Big initiative is a joint venture with scenario the nature of that relationship was developed through 22, and 20 twenty-three aware steadily working towards the necessary preparation to allow a material revenue ramp to start in 24.
G E and the scenario joint venture are not the only projects. We are working on but they are currently the biggest and are expected to be the most impactful.
The total addressable market for biomedical services is huge especially in acute care and the G opportunity will open doors for us as we execute on the existing agreement in place our technicians in hospitals all over the country.
The new initiative with cinerea as a much larger opportunity than our initial project a few years ago that involved only negative pressure wound therapy.
But it was that early work with Cardinal they're brought scenario to us and led to the joint venture so.
Scenario has incredible products and a disruptive model that can greatly benefit patients and payers focused on healing patients.
The partnership brings together these products with our national payer contracts robust RCM capabilities and logistics backbone that are needed to address the opportunities.
That's an hour has long seen in skilled nursing and long term care facilities that.
That'll be a 2024 story and I'm happy to report that the progress and preparations remain on schedule.
Now I would like to update everyone on our guidance.
At the beginning of the year, we gave guidance for the full year estimating net revenue growth of 8% to 10% and greater than 19% adjusted EBITDA margin through.
Through the first half of this year a revenue has grown at a pace above the eight to 10 per cent right. We got it for the full year.
We expect our revenue to come in above the range previously provided how.
How much above depends on a variety of factors some of which are outside of our control.
Accordingly, we are taking a conservative approach and raising our full year guidance to have net revenue growth of 10 plus per cent.
We should have even greater visibility when we speak again after a Q3 results in the fall and will give you more color and updated numbers.
Barry will now take us through the financial results for the second quarter and then carry will provide additional color on operations involving G E and scenario.
Thank you rich and thank you everyone on the call for joining us today.
Going to focus on three topics. The main drivers for the current quarter's results are forecast for the rest of the year and our progress towards clearing the internal controls efficiency. It's identified during the 2022 audit.
First let me touch on our financial results for the period net.
Net revenues for the second quarter of 2023, 12 $31.7 million, representing a 17.4% increase from the prior year. This was the sixth straight quarter setting a new all time revenue record and the seventh or record in the last eight quarters.
Both of our operating segment segments contributed to this growth with device solutions, leading the way with increased revenues totaled $2.6 million up.
27%, while the patient services segment delivered an improvement of $2.1 million or 12%.
And device solutions revenue growth was primarily attributed to the continued wrap up of the biomedical services contract with G E healthcare, which book revenue of $2.4 million during the 2023 second quarter compared to only 145000 in the prior year second quarter.
Which was the quarter when the program was first launched in.
On June 30th the annualized revenue run rape or devices onboarded to the contract stood at approximately $9 million and the continued in March towards our current target of $12 million.
The appropriate in patient services was driven by negative pressure equipment sales and Leafs, which total of $1.3 million. This was nearly tripled the amount of 2023 first quarter.
No negative pressure equipment sales during the second quarter of 2022.
Most of the sales for two one customer and this channel is expected to taper off in the next couple of quarters. Most of the rest of the of the improvement in patient services with an oncology, which increased by 900000 for almost 6%.
Gross profit for the second quarter of 2023, 2023 was $16.4 million, which was 1.5 million or 10% higher than the prior year second quarter, and an increase of 900000 or 6% gross profit of this year's first quarter.
This was mainly driven by the higher sales, but let's partially offset by a lower gross margin percentage, which was 51.8% during the second quarter of 2023 down from 55.1% from the prior year, but up slightly from this year's first quarter.
The year over year decrease was mainly due to unfavorable product next changes and additional startup costs with a G health care by a medical services contract.
Product mix impact is due to higher by a medical services revenue in the negative pressure equipment sales growth.
Both of which have a lower gross margin than the company average.
G E healthcare startup costs are estimated to have been about 900000 for the 2023 second quarter.
While this amount is still higher than the originally planned it is significantly lower than the amount we started off with during the first quarter. When we also had lower amounts of revenue on the contract you.
You may recall in this case startup costs largely include employ acquisition and development costs, such as recruiting fees and hiring bonuses training time, lower initial productivity in the field and higher travel classes for the travel team.
These upfront expenses or higher than originally plan does it do to the decision to accelerate the onboarding process when that opportunity was presented.
We anticipate that these higher than plan of expenses will continue to dissipate over the next several quarters and then our margin will approach our original estimates luxury reached full rap.
Selling general and administrative expenses for the second quarter of 2023, a total of 15.6 million, representing an increase of 500000 or 3% as compared to the prior year. However, the amount was 47.9% of revenue during 2023, which represented a 6.4% decrease from the prior year ratio, which was 34.3.
Per cent.
As a result of these impacts are adjusted EBITDA with $5.8 million or 18% of net revenue during the second quarter 2023, which represented a slight increase in Dallas from the prior ear totally 200000, but a decrease in margin of 2.2%.
Sequentially from the first quarter. The dollar amount was 1.6 million better in the margin percentage improve by 4.4 to $18 three per cent.
Turning to the prospects for the rest of the year.
As rich stated, we now expect to exceed our previously stated revenue growth outlook of 8% to 10%. However, we expect a farce slightly short of our adjusted EBITDA expectations important factors that have contributed to the improvement in revenue growth included with a faster than originally planned wrap rate for G E.
For G E contract and a significant amount of negative pressure went therapy equipment sales as we look towards the second half we anticipate a continued steady rapidly he contract, but lower shipments of negative pressure with therapy equipment.
Jassid EBITDA outlook is now expected to be 17% to 18% mainly due to the higher G. Patrick startup expenses, which felt heavy as in the first quarter. We anticipate the adjusted EBITDA margin for the second half to meet or exceed the original 19 plus level.
Finally, let me update you on the progress of Remediating or material weaknesses, and while I'm at it I'll tell you a little bit more about an important change in our annual audit process.
The only file their annual report, we told you about three material deficiencies and our internal control. They include deficiencies in the design of controls over the completeness and accuracy of information produced by the entity and used by control owners. So called I P. E General information technology controls over access rights within certain financial reporting and accounting applications.
And a deficiency in controls or management review of established pricing Patrick terms to support recorded revenue in accounts receivable for some of our revenue categories.
These gentlemen deficiency categories.
With an aggregate result of a number of individuals specific control findings. We have address many of these individual underlying items by redesigning and implementing new procedures and policies and adding specific steps to our existing process. We have made many of the necessary corrections and are working to complete the remainder in a dish.
<unk>, we still need to validate that the new activities are operating as intended which is testing which is a testing interview process that will be.
We will be performing in the coming weeks and months.
Given our current progress we continue to anticipate that the material weaknesses will be completely mitigated by December 31st of this year.
The update or annual audit process I want to tell you about is the recently announced the appointment of delight as are independent registered public accountant.
For the 2023 annual audit.
<unk> has been completely engaged in your work and to complete the second quarter review process before we file the second quarter 10-Q next week.
Next up is our president and Chief operating officer carry less chance, who will provide some additional color on developments in biomedical services and our wound care business.
Thanks, Terry and good morning, everyone.
I'd like to provide more details on the rollout under the current MSA with G E and update the status of the JV with an error.
During the second quarter, we accelerated the pace of the Onboarding and increase the number of devices generating revenue under the MSH and nearly 170000.
As a reminder, we recognize an initial fee when each pumped onboard it and then a monthly maintenance fee that will continue for the life of the contract.
We currently estimate the initial phase of the MFA will involve approximately 230000 devices and at the initial onboarding process will be substantially completed by the end of the first quarter in 2024 as.
As rich mentioned, a key part of the G. E rollout involves building a national network of Biomed technician that will perform ongoing maintenance and complement our mobile strike teams.
The strike teams are responsible for the onboarding process as well as the annual return to each facility to perform required preventative maintenance.
Well, we are still very much focused on delivering like love levels of service under the initial phase of the MSA.
G has made clear its own attention to leverage empty systems rapidly scaling capabilities.
This may include adding different types of devices, such as E. T C O twos and sequential compression devices and adding additional services that are teams can perform within the hospital. A good example of this is the RFP I D inventory project that we have already started.
As our National network is spelt out both that network and our strike team can and will be leveraged to perform biomedical services for manufacturers and facilities outside the network we are doing.
Outside of the work we are doing for G.
Again, we believe that strategic to defer such opportunities into next year. So as to focus on delivering superior services under the G E MSA and building a reputation for quality that will benefit our future business initiatives.
Turning to wound care, we had another strong quarter of negative pressure device placement. This is partly the result of the backlog that develops due to the supply chain issues experienced by our supplier Cork medical at the end of last year.
Corkage resolved all the students and we are currently receiving delivery of devices as expected. However, I'll take this opportunity to remind everyone that we added a second negative pressure device supplier <unk> in the first quarter.
The vast majority of pumps, we have been placing had been going into longterm care facilities. This is strategic as it is.
Allows us to distribute scenarios advanced wound care products and did the same facilities.
With regard to that I'm happy to report, we are making steady progress with our revenue cycle team, taking lead and establishing the processes and connections necessary to successfully implement third party payer billing we are on schedule and expect testing and other selling efforts to begin before the end of this year at this point I would like to turn the call back over to <unk>.
H.
Thanks, Gary.
As we said today a little over halfway through 2023, we are in a very good place. The G. Rolo continues to ramp and is expected to help drive strong revenue growth for the rest of this year and into 2024.
Relationship with G. As in excellent and there are regular discussions on how to expand beyond the scope of the initial MSA.
We expect to be aggressive next year identifying the best opportunities to leverage the National Service network. We are building and this will involve opportunities both inside and outside of G E.
As I said, it's an arris should start materially contributing before the end of 2024 as our other businesses continue making steady progress.
Oncology has been a great contributor this year and paint continues to ramp as we target strategically important surgery centers equipment sales rentals and consumables are holding their own and are ready to make bigger contributions if and when opportunities emergent acute care.
We are now ready to begin the Q&A portion of the call.
We will now begin the question and answer session to ask you a question.
Then one on your Touchtone phone.
If you are using a speakerphone.
Handset before pressing the keys too.
You All your question. Please press Star then too at this time, we will pause momentarily to assemble our roster.
Our first question comes from Brooks O'neill of Lake Street Capital Markets go ahead.
Good morning, everyone. This is Aaron walking around the line for Brooks. So just a couple of questions here you guys mentioned.
In the long term care facilities those opportunities in the wound care area I'm wondering if you could just provide a little more color on that you know do you see any opportunities in the home as well or are you mainly just focusing on those those long term care facilities.
So it's a little bit of both when a patient gets discharged from the hospital and they go down to the step step down to whether it's a skilled nursing facility or a longterm care facility they need their wounds treated so a lot of the care is done at that facility, but when they go home as well if they need continued care, we can places scenario products there as well.
Okay Awesome. Thanks, and then just a quick follow up uhm on scenario actually so you mentioned that they were are you planning for revenue ramp and.
2024, do you have any specific.
Guidance as to where that'd be you know first half or second half or anything like that.
Nothing yet as we build on our budget for the year will will start to roll that in but you know the teams already out there building the pipeline. So we'll see some revenue probably early in the year, but you know it just it should really kick in you know <unk>.
Second half towards the end, but we don't have anything specific you know we haven't built that out for 2024 just yet.
Okay very helpful. Congrats guys on the on the print.
Great Sir.
Our next question comes from Alex knowing of Craig Hullum Capital Group go ahead.
Okay, great good morning, everyone.
Just curious how much of the strength here in queue first in Q1, now and Q2 religious Danny possible environments and staffing back to normal, allowing infusystem Nancy both like get out there and secure the deal to get these deals rap.
Yeah, I guess on the nursing side in hospitals, it's definitely not back to normal and I don't know if it ever will get to where it was but it's really not having an impact on us anymore.
In our core businesses, we're very much viewed as a partner so the access even during COVID-19 wasn't terrible with the new businesses. It I wouldn't say, it's back to normal, but it's good enough to get the access we need to go police products and talk to customers in in serviced them and that sort of thing, but there's definitely stolen that national nursing issue in.
An acute care sites for sure but.
In general Mmm, not really concerned person anymore.
Okay, that's great to hear and you know I think business ramps hearings and still fair to assume that you've made most of the lessons that you needed to do so far and you were gonna start to see some leverage whether it be in the second half of this year or into 2024.
Let's see he just in general yeah. So yeah. They were talking about how investing into an initiative like G. E. Certainly that tape bring down at the the cost to hire people and things like that in the <unk>, especially if you've been training it I'll probably <unk>.
Onboarded and have you been some more time to to completely hollander the effort to get to where we think we ultimately be on that contract that sad. There's other investments that are looming out there for other things that can come up so we'll never saying that we wouldn't be make investments to go to the business, but that but we just that being said the things that we're doing now for the mall.
Part will get passed pretty quickly.
And just just add to that Alex on the wound care in pain side. The big investments are the team to sales teams and those investments already so we can grow those businesses a fair amount over the next couple of years without adding to that costs because they think the teams and please that we need for for quite a bit.
Okay I've got it makes sense and appreciate the update on <unk> you know what other violent deals are out there being discussed in the background.
And a handful of G E like names that would make sense to open my partner within few system to help.
With their devices out there in the market.
Yeah. So so we are taking on some smaller kind of hospital based individual hospitals outside of G. Just when we have time and then our techs I have I have some a gap in their scheduled uhm, but we're <unk>, we're still trying to focus on the G. Stop this year just to get our our fee completely under us we get that stabilized going into 24 I.
I think when we look out we're gonna see individual hospital deals right. We're also will just need just to come in and help them out we're gonna see manufacturers that we're gonna help out and there's a couple of guys out there that you know maybe not the name like G E. But you know we could partner with nothing kind of imminent, but certainly once our footprint is out there and that capabilities.
They're from a logistics standpoint.
We can partner with any of the above and hopefully all of the above.
Okay got it and I just.
One more and then I'm gonna get to be guidance, just real quick Sundar, obviously building up a pretty unique <unk> wound portfolio. How an integral is infusystem to that set up <unk> looking at you know maybe multiple vendors that can provide the same sort of services that after September provide or.
Is if you're really the sole source provider really the only one that I think could provide the service out there.
Yeah. So we're definitely sole source and that's why we went to J V route.
So that we're both integrated with each other and we don't we have a negative incentive in theory ready to go out and get another supplier products in.
They are in the same boat as far as getting another company to go onto their revenue cycle in clinical and logistics and all that environment and everything so we the J V really locks us at the hip which is great. That's that's what we both wanted when we entered that agreement.
Okay. That's good and then on the guidance from obviously, we're not getting a new range here, but you know in the past you know we've had guidance issued and we've maybe fall a little bit short of it or you have just met it so as you're looking about growing above the range is it a meaningful amount above the range I mean.
Versus setting a new range and what sort of.
I guess, a cushion did you leave yourself if a couple of items didn't pan out in the second half or so I'll get above the range.
Well I guess meaningful is a subjective term alright, we you know we're gonna be 10 per cent right. That's you can see it in the numbers are ready, there's always a risk to our business.
We've seen it over the last couple of years right supplier issues things that are out of our control deals don't come in and were small enough that a million dollars or $2 will make a difference.
So we wanted to give ourselves a little bit of cushion you know, we're not gonna we're not gonna show up with 20 per cent growth. This year like that's not on the table, but.
But can we be 10 per cent sure how much we beat it by will will be a combination of factors are hope visit in November you know early November when we announced Q3 will have that much more runway behind us better visibility with only.
Six or eight weeks left in the year that will be able to tighten up the range for you guys and give you a better visibility, but you are absolutely right <unk> you know the last couple of years, we've all lived through it and we wanted to be conservative so that we at a minimum hit the number and hopefully beat it.
Absolutely well congrats on the good results keep up the work and thanks for the update.
Okay.
Again, if you have a question. Please press Star then one if.
If.
Our next question comes from Jim Sidoti of Sidoti and company go ahead.
Good morning, and thanks for taking the question I I think I heard Barry say that equipment sales for the for the negative pressure pumps $1.3 billion in the quarter.
Were there other <unk>.
Consider maybe one time sales in the quarter beyond that.
No nothing that really stands out as a sort of <unk>, that's at our normal equipment or other equipment sales does have a tendency to jump around this with a healthy quarter for regular equipment sales nothing that.
Really I'm outside of the norm on what we can do in the next coming quarters.
And another negative pressure equipment as Kerry pointed out <unk>, we're pulling a backlog doesn't mean I'll go to a zero as we go forward. We certainly have some more but we just it could be it could be a.
A big number it could be a small number.
Okay. So other than the $1.3 billion. It was a pretty you would say sustainable quarter.
It sounds really great.
Yes.
Okay and then.
You've got <unk>, you know <unk>.
Come up on several close you've dealt with a lot of support to the issues in the past between the pumps and whatnot is there anything right now that you're concerned about or do you feel like you've got a dual sources for most of the equipment in place.
I think from a supply chain standpoint, we're in good shape.
Certainly a lot better than we have been in the last couple of years, Jimmy you're you're dead on <unk> on the negative pressure side, we ran into the single source issue at the end of last year that was solved with a gentleman nine agreement this year.
So we're we're pretty stable position that being said, we don't know what phone call. We're gonna get you know tomorrow next week or at the end of the year, but right now we're we're a very good position.
Alright, and then this is next question I think it's been already but I just wanted to be clear.
<unk> starts to ramp up you already have the team in place.
Deal with that or will you have to go out and hire more folks.
That the two steel starts to <unk>.
Yeah. So on the sales side for sure. We're in good shape that team is in place you know they can do some order of magnitude millions of dollars before we have to add people. We will have to add some back and support right customer service revenue cycled team, but but that's as the business comes in we'll add those positions, but as far as the the big investments in the sales team that's in place.
And ready to go in and we have quite a while before we have to add to that team.
Mmk alright.
That would be it for me. Thank you.
Thanks <unk>.
This concludes our question and answer session I would like now to turn the conference back over to Richard Diorio for any closing remarks.
I want to thank everyone for participating on today's call and we look forward to our call in the fall to discuss our third quarter results I hope everyone has a great day. Thank you.
Okay.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Mmm.
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