Feb 18, 2020 (Thomson StreetEvents) -- Edited Transcript of Electromed Inc earnings conference call or presentation Wednesday, February 12, 2020 at 1:30:00pm GMT

Electromed, Inc. - CFO, Principal Accounting Officer & Financial Controller

* Kathleen S. Skarvan

Electromed, Inc. - CEO, President & Director

The Equity Group, Inc. - VP

Greetings, and welcome to the Electromed, Inc. Second Quarter Fiscal 2020 Fiscal Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Kalle Ahl of The Equity Group. Please go ahead.

Kalle J. Ahl, The Equity Group, Inc. - VP [2]

Thank you, Kevin, and good morning, everyone. Electromed's second quarter fiscal 2020 financial results were released yesterday after the market closed. A copy of the earnings release can be found on the Investor Relations section of the company's website at http://www.smartvest.com.

As a matter of formality, I need to remind you that some of the statements that management will make on this call are considered forward-looking statements, including statements about the company's future operating and financial results and plans. Such statements are subject to risks and uncertainties that could cause actual performance or achievements to be materially different from those projected. Any such statements represent management's expectations as of today's date.

You should not place undue reliance on these forward-looking statements, and the company does not undertake any obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise. Please refer to the company's SEC filings for further guidance on this matter.

Joining us from Electromed this morning are Ms. Kathleen Skarvan, President and Chief Executive Officer; and Mr. Jeremy Brock, Chief Financial Officer. Kathleen will begin with some opening remarks, after which Jeremy will present a summary of the company's second quarter fiscal 2020 financial results, and then we'll open the call for questions.

Now it's my pleasure to turn it over to Kathleen.

Kathleen S. Skarvan, Electromed, Inc. - CEO, President & Director [3]

Thank you, Kalle. Good morning, everyone, and thank you for joining us to discuss Electromed's second quarter financial results.

We delivered another strong bottom line performance in the second quarter, as our net income for the period nearly tripled to $1.2 million compared to $381,000 in the same period last year, driven by 7 -- driven by 6.7% revenue growth and substantial operating margin improvement.

Starting with our home care business, net revenue increased 4.6% year-over-year despite some open sales territories, which we are in the process of filling, and despite having approximately 10 fewer direct sales employees in the field compared to the prior year period, contributing to the flat referral growth. At quarter end, our field sales employees totaled 40, of which 34 were direct sales compared to 52 at the end of the second quarter of fiscal 2019, of which 44 were direct sales. Our plan remains to peak at approximately 38 direct sales reps in fiscal 2020.

Our home care revenue growth this quarter was moderated by some pockets of weakness in our Central territory in November, but we were pleased to see referrals in this region and throughout the country steadily rebound in December and January.

In the quarter, we benefited from a higher average selling price per device due to payer mix, and importantly, from improved sales force productivity, driven by strong performance from our longer-tenured sales reps. We produced approximately $938,000 of annualized home care revenue per direct field sales employee, well ahead of the comparable figure of $687,000 for the second quarter of fiscal 2019 and above our target range of between $750,000 and $850,000. We remain confident about meeting or exceeding our target productivity levels for the full fiscal year.

Our growth strategies are focused on increasing referrals in adult pulmonology, or specifically, those with bronchiectasis; enhancing patient and provider support to provide best-in-class customer care; expanding and promulgating the body of clinical evidence to increase utilization of SmartVest for patients with bronchiectasis; continuing to develop innovative device features; and growing institutional market share to support home care growth.

Specifically, expanding the body of clinical evidence to increase utilization of SmartVest for bronchiectasis patients to drive home care revenue growth, we expect to launch our new study as further validation of the first of its kind independent study published last year in BMC Pulmonary Medicine, which concluded that early initiation of therapy with SmartVest decreases severe exacerbations, reduces antibiotic use and stabilizes lung function for bronchiectasis patients.

In particular, we have begun enrollment this month on a prospective multisite bronchiectasis outcome study using SmartVest as an algorithm of care. The study will follow patients over a 1-year period, tracking their lung function, hospitalizations and antibiotic use, and compare these same metrics taken prior to employing an algorithm of care, including SmartVest.

This quarter, we plan to launch our enhanced SmartVest Connect patient user experience, the Bluetooth-enabled mobile applications. The SmartVest Connect mobile applications will allow our patients to more seamlessly connect with their SmartVest therapy and offer new capabilities designed for mobile, including setting personal therapy reminders and real-time therapy monitoring.

Our institutional business logged another strong performance, with revenue up approximately 23% compared to last year's second quarter, driven primarily by higher average selling price. Moreover, we believe our institutional reflects -- results reflect our intensified strategic focus on the hospital call point, combined with stronger relationships with the integrated delivery networks, better sales training and our first-rate SmartVest device.

As a reminder, growth in our institutional business should augment our home care revenue as the high-frequency chest wall oscillation, or HFCWO, brand used in the hospital is often the default brand described when discharging a patient.

Lastly, this quarter, we reported home care distributor revenue of approximately $131,000. To reiterate, we intend for our direct sales channel to remain our primary sales channel. We recently hired a regional sales manager who will manage our Western region direct sales reps and lead the development and execution of the home care distributor channel in the Western United States. We believe the home care distributor channel is complementary to our core business, particularly in those areas of the country where our SmartVest brand is under-recognized and we see opportunities for accelerating growth on a supplemental basis.

Shifting to the bottom line. We achieved strong second quarter net income of approximately $1.2 million or $0.14 per diluted share, underscored by significant operating margin improvement to 18.3%. Higher revenue, higher gross margin and lower SG&A expenses all contributed to these results.

For the remainder of the fiscal year, we anticipate higher operating expenses as we bring our total direct sales staff count to our previously disclosed target level of 38, increase our R&D spend to 2% to 4% of revenue for our next-generation product and incur additional costs on clinical studies designed to educate physicians on SmartVest value, in improving quality of life and outcomes for noncystic fibrosis bronchiectasis patients.

Notwithstanding these incremental investments, we continue to expect that our revenue growth will outpace expense growth in fiscal 2020, leading to operating improvement for the year. Furthermore, we expect to achieve our target sales productivity levels and low double-digit revenue growth in the long term.

Underpinning our enthusiasm for growth is the large, expanding and underpenetrated bronchiectasis market, where we feel our SmartVest system makes a real difference in improving patient quality of life. We follow up with our patients and providers on a regular basis and feedback -- and the feedback and testimonials we receive speak volumes about our value proposition.

For example, Pamela shared with us, "I cannot speak highly enough of the company and the positive improvements to my health and day-to-day life. Their generosity with me moved me to tears, and I am not a crier. So in a nutshell, call them. My life improved significantly with this machine. The SmartVest has kept me out of the hospital as well."

And Shirley shared, "Lung problems have been with me for about 30 years. It has steadily gotten worse. I've had to miss work as well as been hospitalized. I saw SmartVest and bronchiectasis and immediately went to the website to read about it. Liked what I read. I immediately made an appointment with my doctor to see if I would benefit. I did qualify. After that initial treatment, I was able to go grocery shopping without using oxygen. Wow. Each day I use it, I get better results. When I went to pulmonary rehab, the respiratory therapist said my lungs did not sound like she thought they would, very little noise. I said it was from my SmartVest. I have used it for about 30 days now, and everything I'm coughing up is clear."

We are extremely proud of the number of patients we have helped to breathe easier and live longer, and our team is motivated by the fact that we have the opportunity to help even more patients with SmartVest therapy.

In closing, we wrapped up a strong first half and remain excited about our future. Noncystic fibrosis bronchiectasis represents a significant and growing market opportunity, conservatively estimated at more than 4 million individuals in the United States.

For those of you who may be new to the Electromed story, we believe that approximately 630,000 people with a bronchiectasis diagnosis could benefit from HFCWO therapy, and only an estimated 70,000 patients in the Medicare population have been treated with a device like SmartVest today. The growing body of clinical evidence, combined with the powerful patient testimonials that we routinely hear, support the use of our SmartVest system as a standard of care among individuals with bronchiectasis.

With that, I will now turn it over to Jeremy for a more detailed discussion of our financial results.

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Jeremy T. Brock, Electromed, Inc. - CFO, Principal Accounting Officer & Financial Controller [4]

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Thank you, Kathleen. Good morning, everyone.

As Kathleen shared, our net revenue in the second quarter of fiscal 2020 increased 6.7% to $8.5 million from $8 million in the second quarter of fiscal 2019, driven by growth in our home care revenue. Home care revenue increased 4.6% to $7.7 million primarily due to higher average allowable based on payer mix as compared to the prior year and improved productivity of our direct sales force.

Institutional revenue increased 22.8% from -- to $494,000 from $402,000 in the prior year period. And international revenue, which isn't a strategic growth area for Electromed, totaled approximately $253,000 compared to $280,000 in the prior year period. Although quarter-to-quarter sales variability can be expected due to the nature of our business, we anticipate long-term, low double-digit revenue growth as we execute our organic growth strategy.

Gross profit increased 10.1% to $6.7 million or 78.1% of net revenue in the second quarter of fiscal 2020 from $6.1 million or 75.7% of net revenue in the second quarter of fiscal 2019. The increase in gross profit resulted primarily from the increase in home care revenue, and the increase in gross profit as a percentage of net revenue was driven by a higher average allowable based on payer mix as compared to the prior year.

The average selling price per device was at the high end of our historical range this quarter and could moderate depending on mix. We expect our long-term gross margins will continue to range in the mid- to high 70s.

Operating expenses, which include SG&A as well as R&D expenses, totaled $5.1 million or 59.8% of revenue in the second quarter of fiscal 2020 compared to $5.4 million or 67.2% of revenue in the same period of the prior year.

SG&A expenses decreased 3.6% to $5 million in the second quarter of fiscal 2020 from $5.1 million in the prior year primarily due to lower payroll and compensation expenses due to a lower number of employees in sales and administrative roles.

R&D expenses decreased to $143,000 in the second quarter of fiscal 2020 from $238,000 in the second quarter of fiscal 2019. We do expect R&D expenses to increase in the second half of the fiscal year with higher investment in new product development.

Operating income increased to $1.6 million in the second quarter of fiscal 2020 from $675,000 in the second quarter of 2019. Net income before income tax expense totaled $1.6 million in the second fiscal quarter of 2020 compared to $692,000 in the prior year quarter.

In the quarter, income tax expense totaled $419,000 compared to $311,000 in the same period of the prior year. And our effective tax rate in the second quarter of fiscal 2020 was 26.1% compared to 45% in the prior year period.

Our current year effective tax rate in the quarter benefited by 0.9% related to stock options that were exercised during the period, while the prior year rate was negatively impacted by 16.9% primarily related to unexercised, fully vested stock options that expired in November of 2018.

Our net income totaled $1.2 million or $0.14 per diluted share in the second quarter of fiscal 2020 compared to $381,000 or $0.04 per diluted share in the prior year period.

Now moving to the balance sheet and operating cash flow. Our balance sheet at December 31, 2019, included cash and cash equivalents of $9.2 million, no long-term debt, working capital of $23.3 million and shareholders' equity of $28.5 million. Cash flow from operations in the second quarter of fiscal 2020 totaled $1.4 million compared to $518,000 in the second quarter of fiscal 2019.

We are pleased to be debt-free and well positioned to continue strengthening our balance sheet to support Electromed's long-term growth strategies. Shortly, we will begin our annual strategic planning cycle and review of our long-term corporate strategy and operations plan. That plan will also lead to an in-depth discussion about leveraging our cash to maximize shareholder value. To the extent there are changes in our strategy, we will keep our shareholders updated.

Finally, for those of you who will be attending BTIG's MedTech, Life Science and Diagnostic Tools Conference in Utah, we will be participating on March 19 and 20, and we -- hopefully, we'll see some of you there.

Overall, we remain focused and confident in the direction of the business. And this concludes our prepared remarks. Operator, please start the Q&A portion of the call.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today is coming from Kyle Bauser from Dougherty & Company.

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Kyle Royal Bauser, Dougherty & Company LLC, Research Division - Senior Research Analyst [2]

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So you mentioned the larger prospective study, which began enrolling, which is great. How big is this trial? And based on the previous UAB study, when do you think you could finish enrolling for this?

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Kathleen S. Skarvan, Electromed, Inc. - CEO, President & Director [3]

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Thanks for the question, Kyle. So this is going to be a multisite study. We're expecting upward of 100 patients to enroll. And then once those patients are enrolled, we'll be following them for a 12-month time period. So depending on the length of the enrollment, once we reach that 100 patients, then following them for 12 months. So I think we're thinking long-term here, this could be 2 to 3 years before we may see those results. Although it could be sooner. I just can't predict it precisely due to the time frame that it may take to enroll these patients.

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Kyle Royal Bauser, Dougherty & Company LLC, Research Division - Senior Research Analyst [4]

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Sure. Okay. Got it. And the press release implies investment in multiple studies. So I guess beyond this prospective study, can you outline anything else that's in the works?

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Kathleen S. Skarvan, Electromed, Inc. - CEO, President & Director [5]

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Well, I think one of the key studies that we're going to be thinking through and evaluating will be one on economics. And the prospective study that is underway currently would be a great springboard for an economic study on health care utilization. So how do we share with health care organizations, payers. How using SmartVest for people with bronchiectasis can benefit them as well from an economic standpoint, in addition to benefiting patient. There are also other databases that we can access for some of that economic data as well. So that would be, in general, one of the areas we're thinking about.

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Kyle Royal Bauser, Dougherty & Company LLC, Research Division - Senior Research Analyst [6]

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Okay. That's helpful. And you added 2 reps in the quarter and will -- have plans to peak at another 4 after that at 38. I know you want to layer on the reps at a pace that allows you to hit that productivity goal, but when do you expect you can hit that peak number and have a full sales force with all the territories filled? And how are you approaching this addition differently than in the past?

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Kathleen S. Skarvan, Electromed, Inc. - CEO, President & Director [7]

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So our plans for reaching the 38 would be in the second half of the year, but I think that, realistically, that should be this quarter. That's our plan. And then we'll, of course, start planning for our next year. As Jeremy mentioned, we're in our -- we'll be kicking off our operations and strategic planning process, and that'll start planning for the next year, in what that expansion might look like. But certainly, the peak should be here in this quarter.

And by the way, just to add a little color, we've been very pleased with the quality of our hires. And I think with Bud's leadership and the experience that our sales recruiter has with understanding our culture, understanding our market, understanding the profile of the sales rep that can be most successful with this product and in this market, that we've been quite pleased.

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Kyle Royal Bauser, Dougherty & Company LLC, Research Division - Senior Research Analyst [8]

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Okay. And it looks like the Medicare bucket was really strong again in the quarter. Can you talk about some of the dynamics here? I mean was this a function of faster reimbursement turnaround or just a bolus of patients coming in from that 65-plus age population?

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Jeremy T. Brock, Electromed, Inc. - CFO, Principal Accounting Officer & Financial Controller [9]

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Yes. So what we're seeing as we continue to grow and focus on bronchiectasis is a larger number are in that 65-plus bucket. So we're seeing a lot of those patients end up with having Medicare and supplements to cover their co-pays and the allowable. So we are seeing a benefit from that. To the extent that continues, we do expect to see the benefit from that from a ASP standpoint as well as that then also helps the gross margin as well. But there is variability quarter-to-quarter and we may see that in future quarters, but we will also benefit from that.

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Kyle Royal Bauser, Dougherty & Company LLC, Research Division - Senior Research Analyst [10]

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Okay. And then just 2 quick ones. So your cash position continues to grow here, and I know you've been talking about wanting to allocate that for growth opportunities. But at $9 million or $1 per share, just wondering how you're thinking about cash allocation in the future here.

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Kathleen S. Skarvan, Electromed, Inc. - CEO, President & Director [11]

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Edited Transcript of ELMD earnings conference call or presentation 12-Feb-20 1:30pm GMT - Yahoo Finance