InfuSystem Holdings, Inc. (INFU) Earnings Call Transcript & Summary

Good morning, and welcome to InfuSystem Holdings, Inc. Full Year 2020 Guidance and Business Update Conference call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Joe Dormay. Please go ahead.

Thanks, Jason. Good morning, and thank you for joining us today to review InfuSystem's full year 2021 guidance and business update. With us today on the call are Rich Dilorio, President and Chief Executive Officer; and Barry Steele, Chief Financial Officer. After the conclusion of today's prepared remarks, we will open the call for a question-and-answer session. 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 www.infusystem.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 InfuSystem during this conference call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 and 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, 2019. 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. InfuSystem 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 Dilorio, President and Chief Executive Officer of InfuSystem. Rich?

Thanks, Joe, and good morning, everyone, and thanks for joining our call today. I hope you and your families remain safe and well during the holiday season. Today, we will cover our annual full year 2021 guidance, and we will also provide a business update as we wrap up our 2020 year-end and prepare for 2021. After our prepared remarks, we'll be happy to answer any questions you may have. We are projecting that 2021 will be another record year for the company with solid double-digit growth in net revenue and adjusted EBITDA, driven by strong growth in our ITS segment. This is a direct result of executing on our strategic growth plans, driven by increased revenue in pain management and our Negative Pressure Wound Therapy business and successfully executing on a cross-selling initiative to capitalize on our 2,100 sites of care in oncology. Now on to our full year 2021 guidance. Based on confidence in our business, we are projecting net revenues to be within the range of $107 million to $110 million, adjusted EBITDA to be within the range of $29 million to $30 million, operating cash flow to be within the range of $21 million to $23 million. We are also forecasting adjusted EBITDA margin to be 27%. It is important to note that our 2021 guidance does not include any potential onetime pump sales as a result of COVID-19. For 2021, we are projecting net revenue growth of 15% and adjusted EBITDA growth of 20% based at the midpoint of our guidance. This will mark the third consecutive year of strong double-digit growth in net revenues and adjusted EBITDA with a 3-year compound annual growth rate of 17.4% and 28.9%, respectively. Net revenue growth in 2021 is being driven by pain management and Negative Pressure Wound Therapy, which are part of the ITS platform. In 2020, the combined net revenue for pain and negative pressure was in the low single digits. And in 2021, we are projecting net revenues from pain and negative pressure to be in the range of $8 million to $10 million combined. Additionally, we will be exiting the fourth quarter of 2021 on a $12 million run rate for net revenue in pain and negative pressure. We are confident that both pain and negative pressure therapies will be the key growth drivers that allow us to deliver solid and sustainable growth of approximately 15-plus percent for years to come. The strong cash flow nature of our business provides us with more than sufficient operating cash to fund our growth in 2021. We are projecting cash used to purchase medical devices and other capital expenditures for the full year of 2021 to be within the range of $12 million to $15 million. We believe we are also on track to announce a new therapy in the first half of 2021 that will become a new revenue source for the company in 2022. This will represent the fourth therapy within our ITS platform, and we expect to support it with our existing infrastructure and negligible capital investment. This means there will be minimal upfront cost for the company and that a significant percentage of incremental revenue will drop straight to the bottom line, further improving our margin profile. As part of our strategic plan, we are looking to enhance and expand our capabilities within our biomedical services business which we believe will generate more revenue. We believe our team is well equipped and well trained to repair additional devices outside of our current fleet of infusion pumps. We have identified a select group of possible acquisitions that will be a good fit for InfuSystem, and I believe it's reasonable that we will make a small tuck-in acquisition in 2021 that will enhance the capabilities and reach of both our ITS and DME platforms. Additionally, we plan to implement a new cross-selling initiative in 2021 that will become another source of revenue for the company. We plan on leveraging our supplier relationships along with our 2,100 customer relationships in oncology to sell more products, including other infusion supplies. These sales will have a lower margin profile, but will have a very high return on capital -- of invested capital. Moving on to Cardinal Health. I'm extremely pleased with how our relationship has evolved and how our sales teams are working together. A lot has been accomplished in a relatively short period of time. Our sales team is levering its capabilities and relationships to successfully deliver patient services. As I said on the last call, we entered into a new agreement with Cardinal, and we've added their enteral pumps to our fleet. These new pumps have been deployed to customers and are already generating rental revenue that we believe will continue post COVID-19. Although this is not a large opportunity, it does bring in revenue and more importantly, deepens our relationship with Cardinal. With the recent rise in COVID cases, I want to give you an update on what we're seeing in our business. While there are some hospitals that are restricting access, it is not anywhere near what we experienced in the first quarter. Hospitals are better prepared and well equipped to manage the safety of their staff and their patients. Elective surgeries are an important part and profit center for hospitals. And I think the hospitals learned that they just can't turn off these highly profitable procedures and expect to be a viable business for long. As a result, we are experiencing a slight reduction in elective surgeries, but nowhere near what we saw in the first quarter when 80% to 90% of elective surgeries were offline. Our oncology business remains solid and generating good cash flow that will continue to help fund our growth. As I said on the last call, there are 3 main elements driving the growth in oncology: first, we are continuing to increase market share by adding new clinics; second, the number of treatments performed by providers is increasing; and third, the efficiency of our revenue cycle management continues to improve each quarter, resulting in a higher percentage of treatments that we provide delivering to the bottom line. Our DME business experienced increased demand for new customers, driving growth in our DME rental revenue associated with COVID-19, which will carry into 2021. We believe this new dynamic is not going to change anytime soon and could become a permanent revenue stream as medical facilities want to ensure they have a proper inventory to always care for the patients. Our case management service initiative continues to gain traction, which improves the workflow for our clinics and positions us to better manage the billing and paperwork to process our claims. To date, we have about 500 of our oncology customers live on this program, and these process improvements continue to have a positive impact on both our top and bottom lines. Operationally, our focus remains on growing the top line, while leveraging our cost infrastructure and providing the gold standard in service and safety to approximately 2,100 oncology customers. This critical mass provides important advantages that's enabled us to grow during these challenging times. InfuSystem is uniquely positioned with the right team members in place to develop on these growth opportunities, and I'm very excited for the future of the company. With that, I'm happy to answer any questions.

[Operator Instructions] The first question is from Brooks O'Neil from Lake Street Capital Markets.

Rich, can you hear me okay?

I can, Brooks. Good morning.

So if I was listening correctly, I think I heard you say that beyond things that are completely outside your control, things seem to be going pretty well. Is that a fair characterization?

Absolutely fair. Nobody can control what's going on. No one can predict what will happen. But outside of those 2 things, I think, overall, the core business is as solid as it's ever been. And the new therapies, I really think in '21 and beyond are -- it's just about to take off. Kind of ex-COVID, I think next year, regardless of what happens, we're going to have a good year with our new therapies, add a new one and then future years out, '22, '23, it can be pretty exciting.

Yes. That's great. Can you say whether you're actually seeing traction in the new businesses right now? Or is it just sort of initial indications from customers that they have interest in doing business with you in pain and PWT?

Sure. So there's absolutely traction. Negative pressure even with the limited access for the first 6 to 8 months of COVID, we do have customers up and running. We are servicing patients now. So there's certainly traction and some customers that we've signed up and paying even with elective surgeries with what happened with those in the spring and basically almost coming fully offline. We're still up. We've still treated more patients than we did last year through this point in the year. So even with all the craziness and things outside of our control, both of them have added customers and both are currently treating patients. So those are, I think, 2 very positive signs for both businesses.

Yes. That's great. That's fantastic. So I'm curious about the guidance. You mentioned in your prepared remarks, new platform and potential small tuck-in acquisition? Would you say that you and Barry included any impact from those 2 things in the guidance? Or would you say the guidance simply reflects your expectations for, sort of the -- what we might call the core IPs and DME businesses?

Yes, I think that's exactly it. So the guidance has really the core business and what's online today. Even if we add a new therapy or when we add a new therapy in the first half of the year, depending on the specific therapy, you can take a little while for the revenue to show up actually in the ITS side, right, with the billing and revenue cycle process. So we really have no impact from anything in 2022 as far as a new ITS therapy. The small tuck-in, it will be relatively small. But none of that isn't here either because we don't want to put anything in here that isn't an absolute. So what you see today is what we believe will happen kind of absent any nonorganic moves.

Great. And then the last question I have is, if I did the math properly, and it's always possible that I didn't, it looks like you're going to generate excess cash in 2021. And I'm assuming you're just going to use that possibly to pay down debt or maybe continue to invest in the core businesses, but would you comment on what your plans might be today as you think about the possibility of generating excess cash next year?

I'll take that. Brooks...

Yes, go ahead, Barry.

We certainly can pay down debt. We look to improve the flexibility in our capital structure. There's opportunities to pay down our revolver and things like that. So for the most part, if we have acquisitions and other opportunities like that, we'll be looking at them, and that will probably be -- it will be more investing in ourselves at this moment.

[Operator Instructions] The next question is from Alex Nowak from Craig-Hallum Capital.

Kind of to go off the Brooks' questions there on what you're seeing, specifically in the pain and the wound side, I guess, can you maybe reconcile what you're having the conversation? What sort of conversations you're having with Cardinal? What sort of forecast you're sharing between them and yourselves? And then what gave you the confidence, I guess, to issue the guidance now and particularly above the Street estimates versus waiting a bit until you get into 2021?

Yes. So let me go kind of in reverse. So I think that we're really confident where we are from an FP&A planning standpoint. We think we have a lockdown. We know what -- we don't know what COVID is going to do, but we know what the impact will be kind of either way, and that's why there's a range, and it's not just one number. If it hurts us, we're at the lower end of the range. If we get a little bit of tailwind, we'll be at the higher end of the range. So we're not overly concerned about being outside of those numbers with or without COVID. And we're just confident where our business is and what we're going to do. As far as the forecast for negative pressure in pain, we have some run rates that we're at today. We can see the sales pipeline, customers coming on board on both sides of that business, that make us pretty confident. And that combined, they're going to be in that $8 million to $10 million range in '21. And if elective surgeries come back online quicker, there's upside to that. So we'll see how that works out. But we're pretty confident in all of those numbers that we're going to hit them.

Okay. That's great. And then we're seeing some programs pop up across the country. UnitedHealth has most recently announced one, but it's beginning with the pilot of the Eli Lilly and the Regeneron COVID antibiotic cocktails for at-home infusion. Obviously, you have a very big, large, strong infusion fleet. I know the volume is pretty small at these pilot programs right now. But if we did actually see COVID antibody cocktail at-home infusion ramp up here, how would you expect the DME Services business to benefit over 2021?

Yes. So it depends on exactly how they're going to administer it. So let me take a step back. Any kind of drug, whether it's the cocktail for COVID or a new chemo or anything that's being given in the home through a home infusion via pump will certainly help our business, right? We have a good amount of market share. We have most of the big players as customers. So if they need pumps, it should help our business just kind of fundamentally. That being said, the Lilly cocktail, I believe it's dosed over an hour. And with an hour-long infusion, it's probably not being given with a pump. It can be just given by gravity. So you just hook the bag up to the tubing, open the valve and let it go. In that case, we won't see any uptick, but that doesn't mean that some home infusion providers don't use a pump for it. If pumps are used, then yes, we might see a little bit of lift. I don't think the volume is going to be high enough to really move the needle for us necessarily, but there might be some small incremental revenue in there.

Okay. Got it. That makes sense. And then just last question for me. Any thoughts on Q4 here just as you're more than 75% way through the quarter, any thoughts?

My thoughts are, we're going to be where we thought. If you look at our guidance for the rest of the year, I think the fourth quarter is playing out about as we expected. So we should be right on those numbers that we gave out about a month ago or so. So yes, no big change in either direction.

The next question is from Rimmy Malhotra from Nicoya Capital.

Congratulations on the incredible progress. Barry, maybe for you. In terms of assuming no acquisitions or the guidance as you set out, where would you see net debt at the end of 2021, assuming you didn't have an acquisition opportunity and the excess cash had to or presumably would go to pay down debt?

Yes. That's really as we generate cash, and that's the free cash flow, as you can see because we gave guidance on our spending. It's in the $5 million to $10 million range. That would certainly go to pay down debt. There is some amortization due in our debt. But again, that's not our priority when it comes to capital allocation. So outside of those other opportunities, that's what we'd see.

So just to be clear, and I don't have the last balance sheet in front of me, but if I remember, net debt was sort of low to mid-30s last quarter, assuming a little bit of cash generation this quarter, low 30s. So we're saying that net debt would be mid-20s?

Yes or maybe a little less. We'll breach the 30 range in this quarter. We'll generate a little cash here and even fourth quarter. So we would -- this guidance implies that we'd be able to generate enough cash to get in the low 20 range on net debt.

Perfect. And then the obvious -- I just want to say out loud is then your sort of debt-to-EBITDA ratio is getting very close to onetime versus a few years ago, 2x, 3x, correct?

That's exactly right. Yes. Again, we wouldn't necessarily say that debt reduction is our highest priority in terms of capital allocation.

All right. There are no more questions in the queue. This concludes our question-and-answer session. I'd like to turn the conference back over to Richard DiIorio for any closing remarks.

Thanks, Jason, and thank you all for participating on today's call and for your interest in InfuSystem. We look forward to sharing our progress on our next quarterly conference call when we report our fourth quarter results in early 2020 -- '21. I wish you and yours a safe and joyous holiday season. Thank you all, and have a great day.

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.