Earnings Call: Q4 2021

Aug 24, 2021

Greetings, and welcome to the Electromed Inc. 4th Quarter Fiscal 2021 Financial Results Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kalle Ahl of Equity Group. Thank you, Mr. Ahl. You may begin. Thank you, Diego, and good afternoon, everyone. Electromed's 4th quarter fiscal 2021 financial results were released today after the market A copy of the earnings release can be found in the Investor Relations section of the company's website at www.smartvest.com. As a reminder, 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 afternoon are Kathleen Scarvin, President and Chief Executive Officer and Mike McCourt, Chief Financial Officer. Kathleen will begin with some opening remarks, after which Mike will present a summary of the company's financial results. Then we'll open the call for questions. Now it's my pleasure to turn the call over to Kathleen. Thank you, Kelly. Good afternoon, everyone, and thank you for joining us. On today's call, I will recap our key accomplishments during fiscal 2021, introduce our long range capital allocation and strategic growth plan and review the primary reasons we remain highly optimistic about the non cystic fibrosis bronchiectasis market and our ability to create enhanced and sustainable value for shareholders over the long term. Our fiscal 2021 financial results for both the full year and quarter 4 were exceptional with double digit revenue growth and strong cash flows. Among the past year's successes, we maintained profitability while making investments in strategic initiatives to position Electromed for enhanced future growth. Increased investment in new commercial team headcount, including marketing and clinical field support to better support our existing and new direct field sales representatives. During the past year, we further deployed funds into direct to consumer and digital marketing programs, which are providing us with a new stream of leads, referrals and revenue. Increased spending in research and development to advance our next generation product. For patients, we believe this device will be easier to use, lighter and maintain our differentiated comfort inherent in our current SQL SmartVest therapy. For Electromed, this device is expected to have a lower cost structure given the composition of raw materials that will be used in its manufacturing. We expect to launch the next generation product during the first half of fiscal twenty twenty three, by which point our R and D expenses should return to normalized levels in the range of 2% to 3% of sales. We also implemented a new revenue cycle management system that will improve operational efficiencies and provide enhanced business analytics. We made investments in strategic market analytics and commercial planning, which provided valuable information that has helped strengthen our growth strategies for the sales team expansion, clinical study opportunities and identifying new market development strategies. Finally, we continue to invest in clinical studies, including a prospective multicenter bronchiectasis outcome study, utilizing SmartVest that is now approximately 25% enrolled after a several month pause during the pandemic. We are also enrolling a post surveillance study with chronic Structive pulmonary disease and bronchiectasis patients prescribe SmartVest, utilizing quality of life questionnaires to measure outcomes prior to therapy and at 2 intervals following initiation of the therapy. We are planning to launch additional studies later in fiscal 2022. We are confident that these strategic investments will drive profitable revenue growth and enhance shareholder value creation. In addition to strategic investments, our new repurchase program underscores our go forward confidence. During the quarter, we bought back approximately $1,100,000 of our common stock under our new $3,000,000 share repurchase program. Turning to our financial highlights. In the Q4, we achieved year over year revenue growth of 37.7 percent driven by 33 0.6% increase in home care revenue and 90.6% increase in institutional revenue, reflecting improved clinic and hospital access for our sales reps, particularly strong lead generation among existing prescribers of SmartVest And tremendous sales force productivity. In fact, annualized home care revenue per representative was approximately 800 and $84,000 for the full year and $906,000 for the 4th quarter, both exceeding our target range of $750,000 to $850,000 Our sales team is benefiting from improved onboarding, training, target account planning, sales leadership coaching and accountability measures. We're making meaningful progress in executing our strategy of adding new prescribing physicians to our base, while going deeper among existing prescribers. Also during the quarter, we generated approximately 700 $65,100,000 in operating cash flow, while using approximately $1,100,000 of cash to repurchase shares under our recently authorized share repurchase program. For the full year, we achieved year over year revenue growth of 10.1%, driven by 12 point 5% increase in home care revenue, delivered continued profitability while investing in key strategic initiatives and generated approximately $3,100,000 in operating cash flow. Our robust cash flow generation and Strong year end balance sheet included $11,900,000 of cash and no debt, position us well to execute on our long range capital allocation and strategic growth plan. Key priorities for allocation of our capital include Continued reinvestment in Electromed's market expansion, technology differentiation, sales force footprint and continued repurchase of Electromed's shares on an opportunistic basis. Regarding investment in Electromed's market expansion and product differentiation, our long range strategic growth plan for fiscal 2022 and beyond encompasses The following key pillars: expanding our sales force and sales territories investing in prescriber targeting tools Growing our direct to consumer and digital marketing programs as well as Electromed's brand awareness, driving operational excellence and system enhancements, expanding the body of clinical evidence to increase the adoption of SmartVest and developing innovative device features that appeal to a broader range of patients. Additionally, we will continue to explore and execute initiatives to further develop the HFCWO market so that more physicians Treat bronchiectasis with our proven therapy. Related to sales force and territory expansion, we are targeting 43 total direct sales reps By early October, up from 37 as of June 30, 2021. Indeed, we added 3 new direct Sales representatives, 3 of the 4 expansion territories and 1 new regional manager in July 2021. Given the success of our improved recruiting profile, revamped onboarding and training procedures, strong sales force productivity and lower turnover, We are confident that expanding our sales force will drive value. Our planned sales team expansion will incorporate metrics to measure and manage new sales reps to maximize our return on investment. These include annualized home care revenue, Contribution margin and number of competitive account wins. Typically, it takes the new sales representative 6 months to reach full productivity in established territories and 9 to 18 months in expansion territories. Therefore, a blended target productivity range of $750,000 to $850,000 of home care revenue Our sales rep continues to be in our view an appropriate near term appropriate in the near term as we grow the team to account for the time to ramp up Full productivity during onboarding. We will provide additional information on future sales team expansions with successful execution of these expansion territories. We are investing in targeting tools to identify geographical areas where high percentages of physicians are diagnosing bronchiectasis and or prescribing HFCWO devices. Based on that initial analysis, we have identified attractive opportunities to expand into new territories in our Western, Northeastern and Southeastern regions. We have 43 existing territories and are evaluating Expanding into those into additional new territories again later in fiscal 2022. We are closely monitoring sales force productivity and increase headcount accordingly as we expand to ensure profitable growth. By raising Awareness of bronchiectasis, educating prospective patients and caregivers and referring them to pulmonologists with a focus on bronchiectasis care, We intend to continue driving meaningful home care revenue growth through direct to consumer marketing. We believe direct to consumer marketing will provide an efficient an effective approach to reach more patients that could benefit from HFCWO technology. In the category of driving operational In making system enhancements, we are planning for an ERP software implementation in fiscal 2022 designed to create more efficient and scalable operational processes, while enhancing the quality of business analytics. We also intend to institute a premier customer service and internal account management model that is scalable and that provides an exceptional experience to patients, providers and internal customers. Through this model, we believe we can improve the time to convert and approval to an approved referral. We believe our organic growth strategy Focused on unpenetrated bronchiectasis market, our differentiated therapy SmartVest and world class service will support our long term goal of double digit revenue growth and improved operating margins. In addition to prioritizing the allocation of capital to our organic growth initiatives, We intend to periodically evaluate and opportunistically pursue share repurchase on an ongoing basis. On this note, in the Q4 of fiscal 2021, we established the new $3,000,000 share repurchase program under which we repurchased approximately $1,100,000 of common stock, demonstrating our confidence in ElectraMed's meaningful upside potential and our ability to capture the significant growing non cystic fibrosis bronchiectasis market opportunity. We believe approximately 630,000 people with bronchiectasis diagnosis could benefit from HFCWO therapy. Yet only an estimated 77,000 patients in the Medicare population are currently being treated with a device like SmartVest. When it comes to customer support, clinician support, we believe Electromed is second to none. We have a multi year track record of double digit organic revenue growth, high gross margins in the 70% range, Robust operating cash flow, consistent profitability and a strong balance sheet, all testament to our We look forward to capitalizing on the significant opportunities provided by this growing market and generating enhanced long term value to our shareholders. I applaud the entire Electromed team for demonstrating resilience in the face of many challenges caused by the COVID-nineteen pandemic. In response to dampened face to face interaction industry wide among clinicians and patients, we accelerated our virtual sales efforts and generated awareness of the Centers for Medicare and Medicaid System Waiver that improves patient access for SmartVest airway clearance devices to our non commercial Medicare population by waiving certain requirements that burden the patient and physician with additional face to face visits and healthcare utilization. As the year has progressed and nationwide deployment of vaccines rolled out, we have observed an upward trend in physician office reopenings and greater clinician activity. Our team has executed a hybrid virtual and in person sales approach to great success. As you can see the results, our home care referrals in both fiscal quarter 4 and fiscal 2021 exceeded pre pandemic levels. Above all, throughout our efforts this year, we upheld measures to protect health, safety and well-being of our teammates, clinicians and patients, And we are incredibly proud of our team's work. With that, I will turn it over to Mike for a more detailed discussion of our financial results. Thank you, Kathleen, and good afternoon, everyone. Our net revenue in the Q4 of fiscal 2021 increased 37.7 percent to $9,500,000 from $6,900,000 in the Q4 of fiscal 2020, driven primarily by higher home care and institutional revenue. Home care revenue increased 33 6% to $85,000,000 primarily due to an increase in referrals approval reflecting greater patient clinic visits and face to face access for sales representatives compared to the prior year fiscal quarter during which we experienced more substantial COVID-nineteen driven limitations. At quarter end, our field sales employees totaled 46 of which 37 were direct sales compared to 44 at the end of the Q4 of fiscal 2020, of which 37 were direct sales. Annualized home care revenue in the Q4 was $906,000 per direct field sales rep above our target productivity range of $750,000 to 850,000 Institutional revenue increased 90.6 percent to $520,000 primarily due to an increase in the volume of devices and garments sold as hospitals return to more normal purchasing activity. Distributor revenue totaled $130,000 during the Q4 of fiscal 2021 compared to $14,000 in the comparable prior year period. International revenue, which is not a strategic growth area for Electromed totaled approximately $361,000 during the Q4 of fiscal 2021 compared to $262,000 in the prior year period. Quarter to quarter sales variability can be expected due to the nature of our business and potential fluctuations associated with the impact of the pandemic. As Kathleen mentioned, however, we're very encouraged by the fact that home care referrals for the full year and Q4 fiscal 2021 exceeded pre pandemic levels. Gross profit increased 24 percent to $6,900,000 or 73.2 percent of net revenue and Q4 fiscal year 2021 from $5,600,000 or 81.3 percent of net revenue in Q4 fiscal 2020. The increase in gross profit dollars resulted primarily from the increase in home care revenue. The decrease in gross profit as a percentage of net revenue was driven by higher warranty costs related to the inclusion of new components in the warranty reserve, costs associated with the discontinuation of our SV-two thousand one hundred device in the United States, A lower mix of home care revenue as compared to the prior year period and some limited product input cost increases. We expect that our longer term gross margins will be in the mid to high 70% range. Selling, general and administrative expenses in the Q4 of fiscal 2021 increased year over year by $1,200,000 to $6,000,000 The increase in SG and A spending was primarily due to increased investments in sales and marketing headcount, Higher compensation costs related to stronger revenue performance and increased direct to consumer marketing. As a percentage of revenue, SG and A expenses were 62.9 percent in Q4 of fiscal year 2021 compared to 69.7% in the same period of the prior year. Research and development expenses totaled $326,000 in the Q4 of fiscal 2021 or 3.4 percent of revenue, reflecting our continued investment in our next generation device at a rate consistent with past recent quarters. Operating income totaled $700,000 compared to $1,300,000 in the Q4 of fiscal 2020. The prior year period included $900,000 Government stimulus from the Provider Relief Fund Established Under the CARES Act, which was intended to offset losses in revenue and expenses that Medicare fee for service providers incurred due to the impacts of COVID-nineteen. The decline in operating income for the Q4 of fiscal 2021 was driven primarily by increased strategic investments in SG and A, partially offset by higher gross margin dollars resulting from the stronger home care revenue performance. Net income before income tax expense totaled $600,000 in the Q4 of fiscal 2021 compared to $1,300,000 in the prior year. In the quarter, income tax expense was $250,000 compared to an income tax benefit of $9,000 in the same period of the prior year. The prior year period included a discrete tax benefit of $343,000 that was recognized as a result of the exercise of outstanding stock options. Our net income totaled $399,000 or $0.04 per diluted share in the Q4 of fiscal 2021 compared to $1,300,000 or $0.15 per diluted share in the prior year period. Briefly summarizing our results for the fiscal year ended June 30, 2021. Revenue grew 10.1 percent to $35,800,000 from $32,500,000 in fiscal 2020 driven by 12.5% increase in home care revenue and a 30.9% increase in distributor revenue which more than offset a 22.6% decrease in institutional revenue and an 8.4% decline in international revenue. Gross margins were 76.4% compared to 77.6% in the prior fiscal year, While net income was approximately $2,400,000 or $0.27 per diluted share compared to $4,200,000 or $0.47 per diluted share in fiscal 2020. Now moving to the balance sheet and operating cash flow. Our balance sheet as of June 30, 2021 included cash of $11,900,000 Accounts receivable was $17,000,000 no debt, working capital of $27,100,000 and shareholders' equity of 32,400,000 Operating cash flow in the Q4 of fiscal 2021 totaled $765,000 compared to $1,300,000 in Q4 of fiscal year 2020. Our cash balance increased $1,400,000 during fiscal year 2021 benefiting from $3,100,000 in operating cash flow and a $1,000,000 Reduction in our inventory balance as we reduced excess inventory intentionally built during the COVID-nineteen pandemic, partially offset by a $3,400,000 net increase in accounts Receivable and contract assets. The increase in accounts receivable was primarily due to an increase in the Medicare portion of our Home Care business, which has a 13 month payment cycle. The Medicare portion of our HomeCare is a high quality accounts receivable and we expect this revenue to convert to future cash flow at similar ratios as prior period. This concludes our prepared remarks. Operator, please start the Q and A portion of the call. Thank you. We will now be conducting our question and answer session. Our first question comes from Kyle Bauser with Collier Securities. Please state your question. Great. Thank you. Good evening and thanks for all the updates today. So maybe I'll start on SG and A line item. So it looks like you finished the quarter with 37 direct reps, Flat with last year, but 43 is the goal. I know it's a tough labor market out there, but just kind of wondering What's been the gating factor to bring on new reps? And do you have any leads on the incremental 6 that you're hoping to bring on by October? Hi, Kyle. Thanks for the question. And so you're We're targeting 43 expansion territories and those have already been put in place. And in fact, 3 of those 4 territories filled during July and that 4th individual has already started. And then we did add a regional manager. So now we have Six regions in the country that will help us to manage that expansion. So, we did Experience turnover, which we believed was normal in the Q4. You can see that overall, Our FTEs were up around 7% for the year, and it just happened that a couple of those reps left during the Q4. And so We do have 5 openings right now. They are one of those, as I said, is I'm sorry, that was due to turnover here in In the Q4, our recruiting efforts are going well. We only opened those RECs in mid July. And so we're progressing. Usually That can take anywhere from 6 weeks or so to get those people recruited, interviewed and on board with the notices that they have to give. And so That's why we expect by end of September, early October to be in that fully staffed 43 reps. Got it. That's helpful. Appreciate that. And I know part of the new initiative is To continue to grow top line sales and take market share and grow adoption within the market in general. So with the number of direct reps flat with a year ago and SG and A up about 20%, I'm just kind of thinking about profitability and where we might find some levers in the business for margin Expansion. And perhaps the new goal is just to grow the top line and to command a growth multiple. Just kind of curious How we should think about kind of a priority, whether it's top line growth or profitability? So definitely, we consider this to be That opportunity to continue using the initiatives we've been putting in place and will this year for top line growth. We will remain profitable And our expectations on profitability will be likely from a margin percentage similar to what you've seen this past year. Although Through operational excellence internally, we have some we have initiatives going on that we believe can Provide improvement that will impact our revenue as well as efficiencies in the business That will help offset some of those additional costs in the sales and marketing area. We have opportunity as an example to improve our conversion of referrals to approvals and that can help from an operational efficiencies. So those As well as our revenue cycle management will help with that. Mike, you may have some additional comments on that. I think that's The right way I would think about it going forward. I think just to your reference on the 20% comment, Kyle, there's a couple of big changes from where we were at the end of the year last year with some of the COVID Related impacts, right. I mean we had a furlough going on at the end of last year. Our sales team had basically come to 0. Commissions were much lower. Management bonus was much lower. There's a lot of different reasons that we were in such a big increase year over year. That was a bit abnormally lower. But to your point, we continue to invest in making strategic investments during the year. Our investment in Q4 of this year was basically flat or just slightly down even though what we had in Q3. And as Kathleen said, we'll be smart about it going forward when we're making strategic investments, but still maintaining a certain level of profitability as well. But it isn't it's another investment year for us and we believe that's important so that we can realize that market share growth, but also the sales expansion. And sales expansion is going to require investment in clinical studies as an example. That makes a lot of sense. You certainly have The capital to be able to do that as well. Just a couple more here. So I know you plan on growing Faster than the home care HFCWO market. How fast is the market growing? And then how are you winning share from competitors? Is The customer service, the benefits of SmartVest that you can highlight, any color here would be great. Absolutely. So how fast is the market growing? We know from studies conducted And published I think in the 2014, 2015 range that the bronchiectasis Claims for Medicare patients were growing anywhere from 8% to 9% annually. That's bronchiectasis diagnosis claims. When it comes to HFCWO growth, it's a bit challenging to understand that. It could be. We just don't have a good number on that. And so often we use the bronchiectasis patients as a default In that 8% to 9%. But it's more challenging to get the HFCWO year over year claims on an annual basis. As far as how we're differentiating in the market, we differentiate in 2 ways. It starts with our device And our device is engineered for greater ability for a patient to take deep breaths When they're using their device and therefore relates to feeling a more comfortable therapy. And we are able to I approved that in an engineered study that we published a few years ago. And our sales group takes our device out and They have physicians try it on and feel the difference. And we have many, testimonials from patients sharing that same information. We also have the want to continue to differentiate with our next generation, Making it as simple to use, easy to use and as light as possible since our patients want portability, They want to be able to take it on trips and that's exactly what we're emphasizing on our next generation product also. And then the second way is really around service. Our clinicians want us to be an extension of their office. They want to trust that when they write a referral To us that we're going to treat that patient just as they would want that patient to be treated and that we're responsive and that we're able to Help them with any questions, any concerns and be able to train them on their therapy so that they will realize That quality of life improvement. And I would add a third and that is that we do have The greatest number of published studies on bronchiectasis outcomes and those positive outcomes with our product and we do Certainly use those studies as a differentiator with those physicians from a market share standpoint. That's great. I appreciate it. And then just lastly, following the recent slate of highly qualified Board Nominees from Summers Value Partners. Just wondering if you have any initial comments on that. And can you talk a little bit about the timing for voting and How that will play out over the next several weeks? Thank you. Yes. Thank you for the question and I can appreciate That you might ask that question, Kyle. So members of the Electromed Board and the management team have been engaged in And ongoing dialogue with SUMR's value partners and the Board will consider their director nominees with a focus always On serving the best interest of all Electromed shareholders. And we will be providing more information on the shareholder meeting in the future. Our next question comes from James Turwilliger with Northland Securities. Please state your question. Yes. Can you hear me? Hi, James. Yes, we can. Fantastic. First of all, congratulations on a nice quarter, especially on that top line revenue. That's a very nice Robust number and lots of information in the call. So at the beginning of the call, you talked about the next generate if I got it correctly, and that's a big if on my part, You talked about the next generation product in the first half of twenty twenty three. So is that correct? And at the same time, you said that I thought you said Cost of goods sold would be lower. So do I have that or at least trending down. Could you expand on Do I have that correct? And could you expand on what you meant by the COGS sliding lower? Thank you for the question, James. And you heard us Correctly. We plan to introduce, of course, we have FDA clearance for this device. And with FDA Clearance then we plan to launch this device in the first half of our fiscal twenty twenty three. And yes, based on the bill of materials in this new design, We have estimated that we will have a lower cost of goods sold. Mike, do you want to add anything else So that or you think we got it? Yes. No, I mean, I think it's like an example of, it's not cost cutting, it's designing cost out right in a way. And it's been what 6, 7 years, I wasn't around for it. 6, 7 years since we launched our last product. So there's a lot of opportunity to make this significantly better for patient and significantly more cost Effective for us and so we're really excited about the potential of this for both margin as well as on the revenue side. No. So I've got 3 questions that derive from that. And again, that's fantastic that you can engineer and save costs in the healthcare system. So one, you said this already has FDA approval. No, we still will have to I was sorry for any confusion, but I just wanted to say that we will launch it dependent on FDA clearance. And that's a 510, correct? It is a 510, James. You are correct. Okay. And then some of the last two questions on this are, you said once you launch this device and technically Did I get this correct? Normalized R and D after launch should kind of trend down to 2% to 3%? And is there any pricing trends When you launch this device that is price stable, does price increase slightly, decrease slightly, anything on pricing and then On that R and D, normalized R and D is 2% to 3%. Correct. 2% to 3% is what we would expect Our rate to be once we get the next gen device launched early next year. And in terms of pricing, James, it shouldn't have any impact, right. We're really subject to reimbursement Codes and changes and so it shouldn't have any substantial impact on that. Okay. And reimbursement stay, I mean sometimes of course you get a cut. So on the balance sheet and you talked about this, but this was one of my questions as soon as I saw the release, dollars 17,000,000 on the accounts receivable, but you said Did you give a percentage how much of that is Medicare? Then you said Medicare has a 13 month payment cycle. So is most of that Medicare and of course that's a high quality payer? Yes, it is. I would say, let's go look. I'd say over probably 60% or more of that is Medicare. I think what I was Perring to there is that if you look at the mix of our revenue over the last year compared to what it had been historically, more of that's coming from Medicare, less from like institutional, international business and And just have a longer payment cycle for Medicare, but as you said, it's extremely high quality AR. And I think that will start to normalize a little bit. We'll still continue to see growth in that anytime you're growing in a business that has a longer payment cycle as we do. You're going to see some AR growth as our revenue continues to grow. But I don't think it will grow at the same rate as it did this year just because I think our mix of Medicare will normalize a bit. No, absolutely. And you've got to grow. So I mean, no, it's a good problem to have. I'd rather see that going up and down even though I And the cash flow implications. My last question is, I've heard some things, some rumors and I don't want to go into them here. And I don't know if you do either, so this Probably a tough one. In terms of what's happening with the competitive front, you've got some large competitors. While you're a complete pure play with outstanding technology, are you is there anything you can talk about that's what's happening out there From your competition. So we always do take our competition very seriously. And we do understand that we're competing against large organizations with deep pockets. On the other hand, that can be an opportunity as well since we are focused only on HFCWO. It is where we put all of our investment, all of our service related enhancements And all of our R and D as well. And so I have not heard anything recently that has concerned me from a competitive standpoint. We do run into the competitors, as you can imagine, in our clinics and the hospital systems, but haven't heard anything right now that is concerning. And I believe with our growth initiatives and our balance sheet that we have, we're in a really great position to continue to take share And continue to go deeper into the clinics that we have. And with our clinical studies, I think there's an opportunity to expand this market. All right. I'm going to jump back in queue. What I heard was actually very positive for you. It was more of a distraction to the other your competition due to their size. But Either way, keep up the good work. You're doing a good job growing the business. Take care. Thank you. Thank you, James. Thank you. And that concludes today's question and answer session. I'll turn it back to Kathleen Scarvin for closing remarks. Thank you. Thank you all for participating on the call this afternoon. We will be participating in the Colliers Institutional Investor Virtual Conference on September 9, and will remain accessible for 1 on 1 calls. Please reach out to our Investor Relations firm Equity Group if you are interested in We look forward to reporting back to you in November when we will release our Q1 fiscal 2022 financial results. Have a good evening and stay safe. Thank you. This concludes today's conference. All parties may disconnect. Have a great day.