Mar 19, 2020
Operator
Good morning. And welcome to the InfuSystem Holdings, Inc.
Fourth Quarter Fiscal Year 2019 Financial Results Conference Call. All participants will be in a listen-only mode.
[Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Joe Dorame from Lytham Partners.
Please go ahead.
Joe Dorame
Thank you, Anita. Good morning, and thank you for joining us today to review the financial results of InfuSystem Holdings, Inc.
for the fourth quarter and full year 2019 ended December 31, 2019. With us today on the call representing the Company are Rich DiIorio, President and Chief Executive Officer; and Barry Steele, newly appointed Chief Financial Officer.
After the conclusion of today’s prepared remarks, we will open the call for a question-and-answers 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 in documents filed by the Company with the Securities and Exchange Commission, including the annual report on Form 10-K for the year ended December 31, 2018.
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 DiIorio, President and Chief Executive Officer of InfuSystem.
Rich?
Rich DiIorio
Thanks, Joe. And good morning and welcome to our fourth quarter and full-year 2019 earnings call.
In light of the significant disruptions related to the coronavirus pandemic, I thank you all for taking the time this morning to join us. I hope you and your families are safe and remain healthy, as we all find ways to get through this unprecedented event.
Turning to our 2019 financial performance. I'm extremely pleased with the progress achieved in 2019, as we delivered record revenue of $81 million, and our team successfully executed on our strategic plan that drove both revenue and increased our profitability.
The strength of our platform and model generated revenue growth of 24% in Q4 and 21% for the full year. Adjusted EBITDA grew 38% and 31% in the fourth quarter and full year, respectively.
Our disciplined approach to managing growth and improved operational efficiencies throughout the Company is delivering solid results with adjusted EBITDA margins of 24% and 22% in the fourth quarter and full year 2019, and an increase of net cash flow provided by operations of 30% for the year. We continue making substantial progress towards achieving our goal of 25% adjusted EBITDA margins.
We have modified our segment reporting to improve visibility into the operations of our two business platforms: Integrated Therapy Services, ITS; and Durable Medical Equipment Services, DME. Our ITS segment features are high-margin turnkey services and is compromised (sic) comprised of our therapies in oncology, pain management and negative pressure wound therapy.
The ITS platform utilizes our third-party payor model where we seek to be paid by the patient's medical insurance provider. In addition to providing equipment, we provide clinical support, biomedical services and handle most logistic issues.
Our DME platform is comprised of direct rentals, pump and consumable sales and biomedical services. DME Services is a high-turn lower margin business where we take a concierge approach, focusing on opportunities, delivering higher relative margins and strong return on assets.
DME utilizes our direct payor model where we seek to be paid by the healthcare providers directly. For full year 2019, the ITS segment accounted for 64% of net revenues with a gross margin of 71.5% and the DME segment accounted for 36% of net revenues with a gross margin of 33.9%.
Our oncology team made great progress in capturing market share during the year, as evidenced by our 29% year-over-year growth in oncology. The exits from the market of the leading elastomeric pump provider, as well as our largest direct competitor contribute to our market share gains.
For the year, our payor contracts increased 15% to nearly 675 payors, and we now have more than 2,000 business relationships with outpatient oncology clinics in North America. Pain management continues to gain traction with solid growth for the year.
Our team continues to have large acute care hospitals to a growing customer list. The estimated market for post-surgical peripheral nerve block for pain management therapy is approximately $200 million annually.
Revenue in 2019 doubled versus the prior year, and we believe similar growth is possible in 2020. We have begun the year with a significant addition to the ITS platform, which we believe will be a game-changer moving forward.
We have partnered with Cardinal Health in negative pressure wound therapy, which has an addressable annual market in home health care estimated to be $600 million. I believe Cardinal's device partnered with our ITS platform will be a powerful combination as we enter this new market.
This partnership, demonstrates unique capabilities and significant potential of our ITS platform. We expect a significant contribution from negative pressure in the coming years is setting a stage for future growth as was expand into therapies within both platforms.
And with that, I would like to welcome Barry Steele, our new Chief Financial Officer to provide a review of our financial results.
Barry Steele
Thank you, Rich. And thank you for inviting me to join the incredible team here you built at InfuSystem.
After only a few days on the job, the qualities that attracted me to the opportunity are very visible, namely the customer-centric company culture, a strong platform for robust growth and most importantly, and mutually [ph] and supportive results oriented team spirit. The fourth quarter represented a strong finish to a record year for the Company.
A combination of top-line growth, improved margin and strong cash flow has strengthen the Company's financial position, increased our ability to fund future growth and put us in a strong position to manage through any impacts in the current health crisis. Starting with the top-line.
Net revenues for the 2019 fourth quarter of $21.7 million represented an increase of $4.1 million or 24% over the prior year fourth quarter. The Integrated Therapy Services segment was the greatest contributor to this growth, having increased by $3.7 million or 34%, topping a respectable increase in Durable Medical Equipment Services of $491,000 or 7%.
Integrated Therapy Services benefited from favorable dynamics in the competitive landscape, continued penetration in pain management and from an increased number of third-party payor customers. The Durable Medical Equipment Services segment net revenue growth was led by increased sales of infusion pumps.
Higher revenues translated into both higher adjusted gross -- adjusted EBITDA, which increased by $4.1 million or 24% to $21.7 million during the quarter and a higher adjusted EBITDA margin, which grew to 24.9% during the current quarter, compared to 21.3% in the prior year, driven by both the favorable margin mix, fixed cost coverage and operating expense leverage. On a year-to-date basis, we had a big improvement in operating cash flow, which totaled $13.9 million for 2019 and represented an increase of $3.2 million or 30% over the full year of 2018.
This favorable cash flow along with net borrowing mainly from our bank facility totaling $4.6 million supported net capital expenditures of $19.6 million. Capital expenditures were primarily comprised of increases in our infusion pump fleet, which increased our revenue generating capacity.
Our financial position also improved during the year. As of December 31, 2019, our ratio of funded debt to adjusted EBITDA decreased to 2.1 times versus 2.45 times at the end of 2018.
Our total available liquidity, which totaled $20.9 million as of December 31st, consisted of $2.6 million of cash, $9.9 million in availability on a revolving line of credit, and $8.4 million available under an open capital expenditure facility, an amount that is believed to be sufficient to find our current growth plans and our operating needs. With that, I'll turn it back to Rich.
Rich DiIorio
Thanks, Barry. We have previously communicated 2020 targets of $89 million plus in revenue, $22 million plus in adjusted EBITDA and $16.5 million of cash from operations.
It is far too early to know what impact the coronavirus will have on our business. But to-date, the impact has been minimal and we are actively engaged in business continuity preparations designed to keep our operations up and running.
We cannot however know what disruptions might occur within the U.S. healthcare system and what additional steps we might need to take.
Although it's still early, there are a couple of things we do know. We do know that our DME services platform and particularly the direct rental business generally sees increased customer demand during years with higher than normal flu conditions, and we will do our utmost to be responsive to requests that come in while maintaining our readiness on the ITS platform.
We know we will need to continue developing and executing workarounds and our normal business processes as some clinics and hospitals restrict non-essential personnel from entering their facilities. We also know the amount of elective surgeries will decrease as hospitals reserve all of their resources for handling COVID-19 cases.
While we know there'll be more challenges ahead, we don't believe our core oncology service and life-saving treatments it facilitates is likely to be dramatically impacted. Still, we don't know and it's too early to know if circumstances would allow us to support our numbers moving forward.
Our current focus is on making sure our team is safe, and providing uninterrupted service to our patients and customers. We are concerned about and preparing for things that we can control.
To that end, we have temporarily added to our pump fleet and prepositioned devices to allow us to deploy pumps into either platform at a moment's notice. We have proactively shipped reserve quantities of supplies to our most at-risk customers, and a significant part of our workforce has been working from home since last week.
We have provided additional personal protective equipment for our operations team. And each day, we take further steps and lay in additional plans for dealing with future potential disruptions.
Moving forward, I have complete confidence in the management team that we've built over the last couple years will enable us to manage our growth, improve operational efficiencies, and expand into new ITS and DME therapies, while delivering industry-leading customer service. As we grow our existing therapies and pursue new opportunities, we will leverage our infrastructure to drive increased efficiencies and higher net operating returns.
The success of InfuSystem is and always has been due to the hard work of the most dedicated team I've ever had the pleasure of working with. They're the reason why we provide an industry-leading service to our patients and partners, and I greatly appreciate their ongoing efforts.
And with that being said, I'm happy to answer any questions.
Operator
We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Brooks O'Neil with Lake Street Capital.
Please go ahead.
Brooks O'Neil
Thank you, and good morning. I have a couple of questions.
I was hoping, Rich, you might just talk a little bit about whether you expect to see ongoing benefit in the oncology business from the two sort of unusual factors that contributed so much to growth in 2019?
Rich DiIorio
Sure. So, we definitely will.
There's still some customers and some market share that we're going to gain this year, without a doubt. And there's also a lot of customers that although we had them sign on at the end of last year, the revenue really doesn't come in until later.
So, we should see that revenue coming in into 2020, in addition to the market share gains that we believe will still get.
Brooks O'Neil
Great. And then secondly, obviously you're having tremendous success in the pain business.
If I was listening correctly, you expect continued strong growth in that business. Can you just describe what you think are the factors that are driving that growth now?
Rich DiIorio
Sure. So, in 2019, the business doubled.
We expect it to double again in 2020. I think, what's driving the growth is that the service that the pain management team has built over the last four or five years has really been perfected.
They've done a phenomenal job at taking our ITS platform concept and tweaking a little bit for that market specifically, and now they're able to go after competitive accounts where the service just blows away anything that's in the market. It is without a doubt, the gold standard from a service standpoint in that market at a competitive price.
And the services they are offering to hospitals and the doctors specifically, the information and data we're able to gather on patients, the patient care itself is really just second to none. And ultimately, that's why we're winning accounts.
And the team is doing a phenomenal job getting some market share in that therapy.
Brooks O'Neil
Great. I just want to follow on with that a little bit.
And I apologize. You know I'm relatively new to the story here.
But, could you just describe what you see as the core element of your ITS platform and why you think it's so leverageable as you think about additional markets, obviously like the negative pressure wound care market.
Rich DiIorio
Sure. So, the ITS platform at its core is really a service wrapped around a device.
So, that device can be an infusion pump, it can be a negative pressure vacuum, it can be a ventilator, a compression device. It really doesn't matter.
It's almost device agnostic. And the service that's wrapped around is everything from biomedical services to clean, maintained and provide maintenance on the devices and to repair them.
Our clinical support team that truly sets the gold standard from a telephone support standpoint; our third-party payer contracts, so the 650 agreements we have in places, allows us to leverage those within the ITS platform. So, when you wrap all that around the device, it's really unique and that most distribution companies, most manufacturers, they're really good at getting the device from their dock to the loading dock of their customer, which is usually the clinic or the hospital.
We do that as well because we have to. But, once you go from there to the patient's home is really where that ITS platform kicks in.
So, with negative pressure, just like oncology and pain management, the patient goes home. We triage problems over the phone.
We get the device back, we clean it, maintain it. We're able to bill their insurance company on their behalf.
So, when you wrap all that around, that device, that's really kind of the secret sauce that InfuSystem has and what’s unique and why Cardinal came to us, as good and great as they are in all things that they do, this clinic to the patient's home is really a difficult thing to manage. And we spent 33 years figuring it out and perfecting it with our oncology platform to start and with pain management over the last four or five years and now negative pressure.
Brooks O'Neil
Great. That's very helpful.
I'll just ask one more and then I'll step out. Can you describe -- obviously, you've described the negative pressure wound market as a very large market, $600 million.
Can you put, in any perspective, the contribution you think that can make to you in terms of revenue and maybe profitability, and why you see it as such a big opportunity? Thanks a lot.
Rich DiIorio
Yes. Thanks, Brooks.
So, it's still a little bit early to see exactly -- to be able to see the future and exactly what the revenue will be. We've had the conversations with our partner about it.
The market is $600 million and it doesn't take a big percentage of the market to really change things for us from a revenue perspective. 5% is an additional $30 million in revenue for an $80 million Company.
It's significant. It's still kind of early, but what we see so far is that team is out there, and they're winning accounts.
And we put our first patient on actually last week. So, we're starting to onboard more and more patients every day.
We're seeing some success from a competitive standpoint in the market. And I think it's going -- it'll have a little contribution at the end of this year.
But, similar oncology, it takes a while for the revenue to hit after you sign on accounts and sign on patients. But we really expect it to take off in 2021 and beyond.
So, as we get more visibility into the numbers and we see the uptick in market share gains, we'll share those with you when we have.
Brooks O'Neil
Great. I think I have one more quick question.
If I understand it correctly is that you think you can add on this negative pressure business with relatively minor additional personnel and expense. Could you just describe that briefly as well?
Rich DiIorio
Sure. So, because of the infrastructure we have built, our revenue cycle team is there and robust.
Our clinical team, our biomed team, we think we can gain some market share in negative pressure and add a sales rep, maybe a couple of people in the backend. But, we don't really have to beef up our clinical team or a biomed team significantly right now; as more revenue pours in, we will.
But we have such a foundation that's so scalable on the ITS platform, that's where we gain leverage. If we went out and got $50 million in negative pressure tomorrow, we wouldn't have to go and hire 300 people.
The number of people we'd have to add would be minimal and that's really where we get our leverage.
Operator
The next question comes from Douglas Weiss with DSW Investment. Please go ahead.
Douglas Weiss
Could you just talk a little bit more about COVID-19? And if you're doing anything differently, are you building up additional cash just in case there's a period where you are non-operational?
Thanks.
Rich DiIorio
Yes. So, the team has done a phenomenal job in the last couple weeks.
This kind of came out of left field. We really responded well.
We have implemented a lot of things, not just to make sure our business is running, but first and foremost, to keep our team safe. So, we were able to get about 85% of our office workforce to work from home with laptops and systems, and that is up and running.
Our operations team, internally warehouse and biomed, who are really critical to our business and providing the service to our customers and ultimately, our patients, they're donning PP&E, we have distancing requirements, the operations team and really the entire leadership team has really responded well, and we're doing everything we can. As far as building up cash, we're going to make sure that we're not foolhardy here with money and just kind of watch things.
But as I said in my statements, so far, we've seen no disruption to our business. We haven't seen the lack of patients or customers closing.
Quarter-to-date, we're right on track from where we -- what we thought we would do. So, as of yesterday, March 18th, everything was going according to plan.
We don't know what tomorrow will bring. We don't know what today -- this afternoon will bring, but we've planned for everything.
We will be dynamic and the team absolutely has the capability. We're small and nimble enough to be dynamic and adjust to anything that's thrown at us.
But, we really have a great plan in place to manage pretty much anything that could happen, and we're prepared. Worst case scenario, we'll see what happens.
I don't want to speculate on what may or may not happen. But, I do know that we're going to control what we can control, and we're prepared for anything.
And we'll see what happens.
Douglas Weiss
How much liquidity do you have if you needed it?
Barry Steele
Yes. I said in my remarks is that our liquidity is a little over $20 million, coming from our revolving line of credit, our cash.
That’s what it was at end of the year. It’s about the same now, and a capital equipment line.
Douglas Weiss
That's not including the capital equipment line?
Barry Steele
That includes the capital equipment line.
Douglas Weiss
That includes the capital equipment?
Barry Steele
Yes. It's about $8 million in the capital equipment line we have available.
Douglas Weiss
So, $12 million plus an $8 million in capital equipment line?
Barry Steele
Yes. But, we haven't used that capital equipment line for -- so, we have some room on it, it’s just for our existing expenditures that we have already made.
Douglas Weiss
Okay, got it. All right, thanks.
Rich DiIorio
Thanks, Doug.
Operator
The next question comes from Aaron Warwick with ES Capital. [Ph] Please go ahead.
Unidentified Analyst
Hey, guys. Nice quarter, impressive year.
I think, you kind of answered my first question in your responses already. It looks like you were on track for the previous guidance.
I understand you being hesitant to fully reaffirm that with the situation with COVID-19. But, I did want to ask about that.
It sounds like potentially have some things in place to mitigate any damage you might see on the ITS side from that with the durable medical equipment. Is that accurate, you might have some opportunities there?
Rich DiIorio
Yes, sure. On the DME side, if you think of the flu is a virus too, right?
Every year there are flu seasons. We see an uptick in rentals on that side of the business.
Hospitals and home infusion companies, they just see greater demand. They don't necessarily want to buy the devices early and sit on them for nine months a year.
So, they'll come to us and rent them for three to six months. So, we have seen a little bit of that already kicked in as hospitals and states and local agencies start to gear-up for what may happen.
So, we definitely see some upside there. I don't think it's multiple millions of dollars, but there is definitely some upside there.
Unidentified Analyst
Okay. Thank you.
Then talking a little bit more about Cardinal Health. That's impressive partner there.
But, what do you see there in terms of leveraging their network to expand beyond negative pressure?
Rich DiIorio
Yes. So, right now, obviously negative pressure is officially launched.
We have our patients on, like I mentioned, and it's starting to grow every day. I think that there is -- we right now are exploring multiple opportunities to layer in additional therapies in the either platform, DME or ITS, and that's -- whether it's through a partnership, an acquisition, there's all kinds of different options out there.
We would love to partner with Cardinal or any company of their size and stature for sure. But there's multiple options out there for us.
And if it happens to be Cardinal, that's fantastic. If it's somebody else, then we're going to make that decision based off of where we can gain leverage, where we can generate significant revenue and capture market share, and gain some operating leverage as well.
Unidentified Analyst
Sure. Makes sense.
As well on that side with Cardinal, you mentioned before, you mentioned even today that they had approached you and now you're saying that you are already getting some of the patients started. I'm assuming there must be some, what I would call, low-hanging fruit there, since they approached you.
Is that kind of what you're seeing that they're geared up and ready to go on that front?
Rich DiIorio
Yes. So, there are some patients I think and -- not patients but the customers and clinics that are ready to go between, the InfuSystem relationships in hospitals as well as the Cardinal relationships.
We're going to leverage those. And there will be some low-hanging fruit to kick us off.
And then, we'll see how it goes once we get through that portion. But yes, we're getting patients on pretty quick because the low-hanging fruit.
Unidentified Analyst
Final question, you guys -- pretty well, like 24.8% or 24.9% on adjusted EBITDA for the quarter. You said before about the 25% being your goal.
It looks like that could increase significantly, given the leverage you’ve got on the ITS side, expanding now into the -- with Cardinal and so forth. What do you guys think in there?
Rich DiIorio
Yes. So, there's definitely an opportunity to grow those margins, especially if we add therapies in the ITS platform.
DME is a little bit lower margin. So that if we grow on that side and that outpaces the ITS side, it'll -- it won't -- it'll slow down a little bit.
If most of the majority of the growth, like with negative pressure on the next therapies we layer in, are in ITS, sure, we absolutely expect the margins to expand as we gain leverage.
Operator
[Operator instructions] The next question comes from Rimmy Malhotra with Nicoya Capital. [Ph] Please go ahead.
Unidentified Analyst
So, previously, you've talked about the unit economics on infusion pumps. And if I remember correctly, sort of nine months on a revenue basis is the payback and then, if I'm understanding it correctly, an infusion pump cost about $1,500.
So, I wondering if -- one, reaffirm or correct my understanding of that; and if you could maybe expand and share what the unit economics are on the negative pressure device?
Rich DiIorio
Sure. So, on the on the pump side, especially in oncology and pain, the pumps -- you're right, $1,500 is probably a good average, there's some that are little more, some a little less, depending on the device.
The payback is around seven or eight months on most devices, sometimes six, depending on the pump. On the negative pressure side, the device is more expensive, the device is basically double a pump, but the reimbursement we expect to be about double.
So, again, we just put our first patient on last week. So, it's going take a while for us to see what the reimbursement is.
But, we expect those devices to pay themselves off in five to six months, because the reimbursement is much higher than a pump reimbursement.
Unidentified Analyst
Fantastic. And is it the same model that you ultimately or initially by the device you carried on your balance sheet?
And so that’s the first part of that question. And then, second is, my understanding is, if you maintain infusion pumps, the effective useful life of the pump is 10 to 15 years.
What is the projected useful life of negative pressure device?
Rich DiIorio
Yes. So, useful life is a little bit less.
We need a little more experience to kind of learn for ourselves where it will be. I don't think it'll be 10 plus years, but it'll be long enough that the pump -- or the vacuum will do just what a pump does and effectively turn into an ATM machine down the road for us.
We just don't have our own experience yet. And I hate to say what a manufacturer tells us because -- but would expect with our biomed team and their just extraordinary capabilities to keep devices running, repair them, clean them, maintain them, that will get quite a few years on each devices.
And Rimmy, I forgot, what was the first part of that question?
Unidentified Analyst
Similar to infusion pumps, you will buy these and these will be on your balance sheet versus Cardinal.
Rich DiIorio
Yes, exact same model. We're going to buy them from Cardinal.
They'll sit on our balance sheet and they'll be our devices.
Unidentified Analyst
And then, on cash for next year. So, you guys are producing a good amount of cash.
And this year, they largely went to expanding the pump fleet and capturing that market share, and that's all things we want to do. So, over the next year, as we buy these pumps, infusion pumps and pressure devices, do you have some sort of -- like, is all of the cash from operations going to get consumed in that?
Some sort of guidance -- I hate to use that word, but some sort of roadmap rather to how uses of cash generation over the next year?
Rich DiIorio
Sure. So, as you guys have seen in '18, we were really aggressive on the buyback front because that was the best use of the cash.
In '19, you're absolutely right. We invested in the fleet to fuel the growth for 2019 and even into 2020.
I think, this year, we do expect obviously to grow. So, there will be some cash used for that.
If negative pressure takes off, that's probably where the rest of the money will go, and I hope that's the case. We also are looking at with everything going on in the market and our current stock price that -- our buybacks right now because we believe we’re still undervalued because of the circumstances outside of our control.
Is that something that we want to invest in? Sure, we're going to look at that.
Probably we're going to wait till the COVID-19 stuff, we can kind of side of that. And I think the good news is the team has really, really positioned us well that we come out of it, the other side of this, the world we currently live in.
I think we're going to be a much stronger company and a much tighter team. And I think that'll allow us to do different things.
But, on the other side of that when we know what we know at that point. We're going to look at buy backs.
We'll look at fueling negative pressure in addition to pain management growth and buying devices. If there's small acquisitions, we want to make.
So, I don't think anything's off the table, but if I had to guess, it would be stock buybacks and fueling growth for negative pressures where most of the cash is going.
Unidentified Analyst
I’d wholeheartedly agree with that, and I would echo holding cash until there's clarity on how this plays out. And then, I'm sure you will have multiple options to play.
That's it for me. Thank you, guys.
Rich DiIorio
All right. Thanks, Rimmy.
Operator
There appears to be no further questions. This concludes our question-and-answer session.
I'd like to turn the conference back over to Richard DiIorio for any closing remarks.
Rich DiIorio
Thank you. During this extraordinary time, we will continue to adapt our operations for the health and wellbeing of our employees, our patients and our partners.
We are taking every necessary steps to do everything we can to continue to protect the safety of our patients and minimize treatment disruption. I want to thank you for participating on today’s call.
And I look forward to talking with you again when we report our 2020 first quarter results. I hope you and your families remain safe during these challenging times.
And thank you and have a great day.