Mar 8, 2019
Operator
Good morning, and welcome to the InfuSystem Holdings Inc. reports Fourth Quarter and Fiscal Year 2018 Financial Results Conference Call.
All participants will be in listen-only mode [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions.
[Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr.
Joe Dorame, Managing Partner of Lytham Partners. Please go ahead.
Joe Dorame
Thank you, Andrea. Good morning, and thank you for joining us today to review the financial results of InfuSystem Holdings Inc.
for the fourth quarter and fiscal year 2018, which ended on December 31, 2018. With us today on the call representing the company are Rich Dilorio, President and Chief Executive Officer; and Greg Schulte, Chief Financial Officer.
After the conclusion of today's prepared remarks, we'll 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 United States Securities and Exchange Commission, including the annual report on Form 10-K for the year ended December 31, 2017.
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?
Rich Dilorio
Thanks, Joe. Good morning, everybody, and thank you for joining our fourth quarter and fiscal year 2018 earnings call.
I'm excited about today's call. As a matter of fact, it's most excited I've been in 15 years at InfuSystem because of what this team has been able to accomplish over the last 18 months as we built a solid foundation and are in a great position to capitalize on the opportunities ahead of us in 2019 and beyond.
I'd like to go over a few highlights and then I'll turn the call over to Greg Schulte, our CFO. First, a couple of financial items.
Our operating cash flow for 2018 was $11.4 million versus a historic average of about $7 million to $8 million and an increase of about 47% over 2017. Our EBITDA came in just short of the $14 million target, largely attributed to upfront costs of responding to the elastomeric opportunity that developed last year in the fourth quarter.
The good news is, if that investment should contribute to our growth in the first half of this year. The InfuSystem Mobile rollout is going well as we continue to set a standard for patient safety.
The feedback and adoption both teaching hospitals and private practice has been excellent. I will also speak about some growth opportunities that we have in front of us in a few minutes.
But first, Greg will review the prior year and quarter financials. Greg?
Greg Schulte
Thank you, Rich. I am very pleased to report on the highlights of our strong 2018 financial performance.
As Rich mentioned, our cash flows from operating activities were $11.4 million for the year ended December 31, 2018, up $3.7 million, or 47.6% from the same period of 2017, primarily due to price -- profitability, after certain adjustments to reconcile net loss to cash provided by operating activities of $2.8 million and net working capital improvement of $0.9 million. In 2018, we were also able to repurchase stock totaling $10.4 million, approximately 14.6% of the outstanding shares at December 31, 2017.
Net revenues for the quarter and year ended December 31, 2018, was $17.6 million to $67.1 million, respectively, up 7% and 5.5% decrease, respectively, from the same prior year periods. Prior to the effect of adopting Accounting Standards Codification topic 606, revenue from contracts with customers, this would have represented a net increase of $0.2 million or 1% increase and $2.4 million or 3.3% increase, respectively, from the same prior year periods.
Net loss for the quarter and year ended December 31, 2018, was $0.3 million and $1.1 million, respectively, a 98.5% and 94.7% decrease, respectively, from the net loss for the same prior year periods. Adjusted EBITDA and non-GAAP financial measure for the quarter and year ended December 31, 2018, was $3.7 million and $13.8 million, respectively, an increase of 12.5% and 17.7%, respectively, from the same prior year periods, and representing 21.3% and 20.5% of net revenues, respectively.
Additionally, we also recently completed the fifth amendment to our credit agreement with JPMorgan Chase, which will allow us to finance our expected growth primarily through internal cash flow and give us the flexibility we need to respond quickly to opportunities in the marketplace. I will now turn the call back to Rich.
Rich Dilorio
Thanks, Greg. Now I'd like to give you an update on the growth opportunities in the oncology market.
First, an update on the elastomerics. Last fall, one of the largest manufactures of elastomerics for oncology was not allowed to ship into the United States.
That's still the case, and we don't see any indication that, that will change in the short term. The good news for InfuSystem is that we've won just shy of $2 million in annual revenue that should contribute to our growth starting in the first half of this year.
The second update, as you may have seen in our recent press release, is that our largest competitor has decided to change its offering in oncology, so what does that mean for InfuSystem? We have an opportunity to pick up significant market which will lead to material and sustained growth that's expected to show up in the second half of this year.
It also means our costs will be seen mostly in Q2 as we begin hiring and investing in infrastructure to support that anticipated growth. I realized our long-term investors have heard this story before, that the higher spending today will lead to growth in the future, but this is a different InfuSystem.
Over the last 1.5 years, we've repeatedly communicated that our priority was on pursuing operating efficiencies and improving cash flows, and I believe, we've delivered. Those are still our priorities and we will continue to improve in those cases.
But this year, we see a very significant opportunity at our doorstep and InfuSystem will invest in that opportunity not because we think it's a good word or a good story to tell, but because the opportunity is real. By the middle of the year, we hope to have more visibility, which will allow us to update and likely increase our revenue and EBITDA forecast that currently stands at $74 million and $16 million, respectively.
With that, I'm happy to answer any questions.
Operator
We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Douglas Weiss of DSW Investment.
Please go ahead.
Douglas Weiss
Thanks good morning. Congrats on turning things around over the year.
Could you talk a little bit more on -- regarding the competitor? I guess I missed that.
Could you kind of talk to give a little more detail on what's happening there?
Rich Dilorio
Sure. So the only competitor that was still in the oncology market that was offering the third-party payer service.
So where the pumps are provided to the customer and we bill on the patient's behalf to their insurance company. There's only 1 real competitor left in the market, they decided to get out of that service.
So they're going to have a different offering to the marketplace. We don't think the market is really going to trend that way.
So the feeling is that most of those customers that they had are going to come to our side.
Douglas Weiss
So what are they replacing the insure business with?
Rich Dilorio
They're going to go with just a pump rental. They can -- they'll sell pumps if the customer wants to buy them.
And there's certainly customers in the marketplace to do that, but the market share of that is very small, single digits.
Douglas Weiss
Right. The customer will have to pay -- carry the full brunt of the cost as opposed to getting insurance.
Rich Dilorio
Exactly.
Douglas Weiss
Okay. And how large of a revenue opportunity do you think that is?
Rich Dilorio
So we're not sure yet. We know that they're smaller than we are, but it's certainly in the millions of dollars.
A lot of it's going to depend on how much of the market comes InfuSystem versus taking the rental or pump purchase model. We think it's significant.
And we'll see -- it'll be a material increase in our revenue by the end of this year.
Douglas Weiss
Any idea why they decided to do that?
Rich Dilorio
No. I don't want to speak from them necessarily.
But we do own the market, I think InfuSystem Mobile has put a lot of pressure in the marketplace. And I don't think that they really wanted to invest to try to compete directly on the third-party payer model.
Douglas Weiss
Okay. And I guess last quarter, you had talked about the exit of the disposable manufacturer.
I guess it -- maybe it's taking a little longer for those sales to show up in that revenue, is that accurate? Or maybe I just miss understood in terms of the timing.
Rich Dilorio
So I think the timing is what we expected. So it really happened in like the last week or 2 in September, so effectively in Q4.
And it takes us a good 3 to 6 months to start to see revenue from new customers. So we should definitely see it in the first quarter and definitely in the second quarter of this year start to show up.
But you're right, it didn't really have any impact in Q4.
Douglas Weiss
And historically, there had been a certain amount of seasonality, where Q1 was kind of below point and I guess also the high point for bad debt. Is that still true or is that less true today?
Rich Dilorio
Yes, I would say it's probably true. I don't see why it would change necessarily versus the historic numbers.
Douglas Weiss
Okay. And bad debt, there's -- a lot of has happened in terms of you restructuring all your contracts.
Does that have an ongoing impact on your collections going forward?
Greg Schulte
Yes, there is Greg. We do see a benefit from our contracts and we have a very aggressive team out there getting new contracts everyday.
We do fight, I believe, the headwind of the planned designed changes to existing agreements that are beyond our control, obviously, if deductibles and copays increase, and I think that's -- we all -- I don't think the bad debt necessarily reflects the efforts we make to constantly renew contracts, but it's a daily battle we fight to make sure that we're staying ahead of any planned design changes with or without contracts we're adding.
Douglas Weiss
I mean, I guess my recollection is that historically, you've had a -- your collections are -- my sense is pretty close to 100% from your -- from insurance, or maybe not 100%, but they're high from insurance. But patient pay is really low, it has been my sense historically.
Is that -- do you even have a patient pay component now?
Greg Schulte
We do have a patient pay component. You're right, it is in the single digits of our overall pay, and it's -- and again, it's where the bad debt is generated from -- it's from the patient pay.
Douglas Weiss
So you're right. So on $70 million of revenue, a few million is patient pay and that's the bulk of the bad debt.
Is that sort of how to think of it?
Greg Schulte
Yes, that would be basically time adjusted.
Douglas Weiss
Okay, okay. I mean do you have a guess at sort of what bad debt would be over a full year at this point?
Greg Schulte
I think we look at it and it'll be more comprehensive in the 10-K. But I think the bad debt was, for 2018, was just over $6 million.
When we say single digits, we're on by our total gross revenue, so that's why it's a sort of higher than the numbers, but yes, it's about $6 million bad debt for the year.
Douglas Weiss
And you think that's kind of a good go-forward number?
Greg Schulte
It's -- we definitely are working on bringing it down, but that's -- like I said, it's -- there's pluses and minuses there or any of that, it's settled in that area.
Douglas Weiss
Okay. You didn't talk about the pain business this quarter.
Is that still -- are you still optimistic there? Is there still growth there?
Greg Schulte
Yes. So we still see great potential on the pain side.
Being part of trying to help with this opioid crisis is certainly something we're going to continue to do. We just still don't break it out, maybe in a year or 2 we will.
But at this point, without breaking it out, there's not a lot to go through.
Douglas Weiss
Okay. On CNS.
When CNS decided they weren't going to reimburse, that was kind of a quick arbitrary process, at least it seemed that way from the outside. And the company is going to appeal that and the industry was going to appeal it.
And my sense was, there wasn't a lot of optimism in terms of CMS' willingness to reconsider that decision. But I wonder if anything has changed over the last year given how sort of arbitrary that decision seemed at the time?
Rich Dilorio
Yes, so not much has changed. We're moving forward as though nothing will change in the short term or long term.
Again, you never know. Arbitrary is a pretty good word.
It could switch back, but we're not expecting it to.
Douglas Weiss
Okay. So there's really nothing in the works there at this point?
Rich Dilorio
No, not really.
Douglas Weiss
Okay. Let's see, I guess just couple of quick modeling questions.
So I think you guys did a good job on the expense front. Yes, how much sort of operating leverage do you see as you bring on additional revenue?
Is that going to be -- will that improve your margins? Do you get higher margins on that incremental dollar revenue?
Greg Schulte
On a gross margin basis, the third-party payer is -- has a strong gross margin and gross profit. And we expect operating leverage from an SG&A point of view, as we -- as the business normalizes.
But we expect that the expenses that are ahead of the business. For 2019, our goal is to maintain our SG&A percentage -- as a percentage of revenues where it was in '18.
But on a normalized basis, we definitely expect the operating leverage to improve from that point of view.
Douglas Weiss
So a big investment in '19, but that could -- you would see more of a margin pick up in '20 theoretically?
Greg Schulte
Exactly.
Douglas Weiss
Okay. And you didn't put balance sheet data, what -- could you say what the net debt was at the end of the year?
Greg Schulte
We can -- let me pull that. We -- yes, we are really talking, obviously, it's within the financial statements.
Obviously, in fact, here. We haven't really been talking to the net debt for last couple of quarters, so we didn't include it.
But that'll be included. I don't want to do the math quick here.
So -- but it's definitely -- we're operating at a leverage ratio we're very comfortable with at this point.
Douglas Weiss
Okay. I mean, it's -- I guess embedded in that question is just -- is the goal to sort of maintain leverage at the current rate?
And if that's the case, what is the plan for a free cash flow for 2019?
Greg Schulte
Well, it would be part of the Chase agreement. We -- would it happen and part of our covenants in the past is, in order to meet some of our covenants, we would -- it kind of restricted our ability to use our operating cash flow to invest our pump fleet in other investments.
So a big part of the Chase agreement was allowing us to use up to $7 million of our cash flow versus putting on the bank and borrowing more -- first putting in the book to borrow more money, allowing us to spend that on the pump. So we expect we will not -- we expect to not need to have any debt for our investments in foreseeable future.
And we will have, obviously, our payment as required under it. So we will -- our debt -- we expect our leverage ratios to improve during the year and we look at that as flexibility for future opportunities.
Douglas Weiss
For future opportunities, meaning additional investments in equipment or M&A?
Greg Schulte
What do you think?
Rich Dilorio
Yes, it's all dependent on the opportunity. So it could be in equipment, if there we see a growth opportunity that makes sense, additional stock buybacks, anything that we could use our cash flow for.
Just depends on the opportunity that presents itself.
Douglas Weiss
I mean, is there any M&A at this point? Is there anything that would plausibly be of interest?
Rich Dilorio
There's always interest. There's nothing in the next couple of months that's coming.
But that's certainly an opportunity that if something presents itself and we have the cash to do it, we'll go do it.
Douglas Weiss
Okay. Okay, well appreciate all the answers.
And congrats on a good year.
Rich Dilorio
Thanks Doug.
Operator
Our next question comes from Michael Potter of Monarch Capital Group.
Michael Potter
Hey guys. Congratulations on a very good year.
And looks like there are good forecast for 2019. Just have a couple of quick follow-up questions.
Rich, what's the fleet size currently?
Rich Dilorio
Total fleet for the company is in the ballpark of about 70,000 devices.
Michael Potter
70,000. And then how does that compare to year-end 2017?
Rich Dilorio
It's up. I don't have the number up on top of my head, but a few thousand pumps.
Michael Potter
Okay, okay. Just a few thousand pumps.
And do you anticipate with the opportunities between elastomeric and this other competitor, that we're going have to increase our pump fleet? The size of our pump fleet?
Rich Dilorio
Yes. There's no question we'll have to add pumps to the fleet.
Michael Potter
Any idea to what degree?
Rich Dilorio
No, I mean, a lot of it's going to depend on how much we pick up from a customer standpoint, and then how much we can squeeze out if we improve our utilization as well. So it's not an apples-to-apples.
For every patient we don't necessarily need a pump, if we can find a pump somewhere else and redeploy it. So it's kind of hard to put a number on it right now.
Greg Schulte
So we had to make some of those investments at end of 2018 as well.
Michael Potter
Got you. And so we already started making some -- increasing our investments in fleet size in anticipation of the additional revenue?
Rich Dilorio
Yes. So not just the current opportunity, but the elastomerics that into Q3 and Q4, we had to -- those customers are up and running.
So we've got to add some pumps back in '18.
Michael Potter
Okay. But that's just a couple of million dollars of anticipated additional revenue?
Rich Dilorio
Correct.
Michael Potter
Okay. What is the CapEx budget for 2019?
Rich Dilorio
So our maintenance CapEx is around a couple of million dollars, which is pretty typical for us. What -- we're going to need an addition, it's going to be completely dependent on the market and the growth opportunity, it varies year-to-year.
Michael Potter
Okay. And we don't need to make any additional infrastructure investments at this point?
Rich Dilorio
Infrastructure as far as people and
Michael Potter
People, offices, things along those lines, systems.
Rich Dilorio
Yes, absolutely, couple of things going on this year. Our lease is up in our Madison Heights headquarters.
So we are moving to a new location. So there's some investment there that you'll see this year.
And then on the people side, we will be adding people to support this growth from these changes in the oncology market. Again, we're going to add it when we need to.
We're not going to go out and just spend the money all upfront, we'll add as we go. But yes, we'll definitely be adding some people.
Michael Potter
Okay, okay. Terrific.
I'll get back in to the queue. Thanks for the updates.
Rich Dilorio
Thank you.
Operator
[Operator Instructions] And our next question will come from Jason Stan of Clayton. Please go ahead.
Jason Stankowski
Hey, guys. Can you hear me?
Rich Dilorio
Yes, Jason.
Jason Stankowski
Okay. I just had a question on framing the payoff for some of these investments.
Just I know that it matters how many people you convert and how many people take the other options with the other competitor. But do you have a sense of -- you say, $1 million or $2 million, is it a $5 million opportunity-ish, if you clean the slate and got everybody?
Or is it a $2 million if you do that and $1 million if you do a good job? Like, do you have any sense of the kind of industry knowledge that -- what you're at least fighting for and for helping us frame it a little better than $1 million or $2 million?
Rich Dilorio
Yes, it's a definitely bigger than $1 million or $2 million. I mean, it's a material to our company.
They're smaller than we are, but not small by any means. So it's north of the $4 million, $5 million range, but smaller than our oncology business for sure.
Somewhere in between there where we'll fall.
Jason Stankowski
Okay. So it could be a $7 million -- a $5 million to $7 million business for them and you're conservatively -- hopefully conservatively framing it as, you think you should be able to get $1 million to $2 million just by doing a good job and going after the clients.
Is that a fair way to frame it?
Rich Dilorio
So the $2 million is on the elastomeric side. On the competitive side, it's a lot bigger that.
I mean, I think we should -- yes, they're bigger than $5 million a year.
Jason Stankowski
Yes, that's what I thought. So the elastomeric is already happening, you invested some for that in Q4, and we should start seeing that roll through revenue as we right now, I guess in the first quarter and then ramp up, and that's an annualized $1 million to $2 million?
Rich Dilorio
Yes. So it's just about $2 million, just shy of $2 million.
You'll see some of that in Q1, but it should be fully up and running in Q2.
Jason Stankowski
Okay. And so then the much larger -- which I understand that, I guess, the much larger opportunity, what's the -- have you framed at all or thought about what you're going after there?
Is that a $15 million to $25 million business for them? And it's a real big investment this year to try to capture that or some portion of it?
Rich Dilorio
So it's going to be a decent-sized investment. The good news is, the economies of scale that we already have are going to help is quite a bit.
So we don't need to go build up our billing and collections team and sales team, we can just add some incremental people to do that. So there's certainly an investment.
And you'll see some of that in Q1 -- just a little bit in Q1, a decent amount in Q2 when we start to ramp up. The good news is because we already have people in shares, we can ramp up in waves as we see the business come our way, so we don't have to go out and really, really spend too much ahead of time.
As we see the customers commit and come onboard, we can ramp up our team and infrastructure as we need to. But it's definitely in the millions of dollars from an opportunity standpoint.
Jason Stankowski
Right. In the high single digits, just if you get a good conversion?
Rich Dilorio
That's a decent spot place to start.
Jason Stankowski
Okay. And then you just ramp it as the quarters come in and you get what you get?
Okay. Well, great job, it seems like a pretty exciting opportunity throughout this year to add some value and kind of a step function.
Do you think the conversion -- the new level from that bigger competitor leaving the market, do you think that's a 1-year process to find out kind of how many people you're going to get to shakeout? Or would that happen over a couple of years based on how they fire customers or not and that type of stuff?
Rich Dilorio
Yes, I would say it'll take place in '19 and '20, by middle to end of '20, we should be in pretty good shape. But it'll come in waves for sure.
I mean, there'll be people that jump over right away and some people that just take longer to do it. So it's a year to 2-year process.
Jason Stankowski
Okay, great. Good jobs, guys.
Keep putting up some good numbers and look forward to seeing how the investments pay-off in capturing this additional market share.
Rich Dilorio
Great, thanks, Jason.
Operator
Our next question comes from Jon Abodeely of XLCR Capital. Please go ahead.
Jon Abodeely
Hi gentlemen. Could you just comment, Rich, about InfuSystem Mobile?
And if you give us some anecdotes in the marketplace and how it's affecting the patient satisfaction?
Rich Dilorio
Yes. So generally speaking, it's going great.
The teaching institutions, although they move slowly in general to implement these things, love the idea, they love the implementation, implementations have gone great. Patients that have -- so if you think about our core and patients, we have a lot of patients that a month ago didn't have InfuSystem Mobile and now they do because it's been launched in that clinic.
The feedback has been great from the patient that they feel more comfortable that there's somebody kind of watching them for lack of a better term and making sure that their treatment is going right, going correctly. So yes, anecdotally, we hear some tremendous feedback, not just from the clinic that they feel more comfortable that someone's monitoring their patient, but from the patients themselves.
Jon Abodeely
And do you believe this is going to result in a significant competitive advantage, Rich?
Rich Dilorio
No question about it. Yes, I mean, this is something that's completely changed the oncology market and it'll take a long time for anybody to respond to it.
Jon Abodeely
Yeah, thanks a lot. Appreciate the color.
Rich Dilorio
Alright. Thanks John.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Rich Dilorio for any closing remarks.
Rich Dilorio
Thank you. First, I want to thank the team for their efforts over the last 18 months.
I know that they've done a great job in the past and they will do so moving forward as well. I want to thank all the listeners for joining.
This is an exciting time at InfuSystem, and I'm really looking forward to future calls and sharing our progress. This is an exciting time and it should be a great year.
Thank you.
Operator
The conference has now concluded. Thank you for attending today's presentation.
You may now disconnect.