ELMD - Electromed Inc. (ELMD) Q1 2023 Earnings Call Transcript

Electromed, Inc. (ELMD)

Q1 2023 Earnings Conference Call

November 8, 2022 05:00 PM ET

Company Participants

Mike Cavanaugh - IR

Kathleen Skarvan - CEO & President

Michelle Wirtz - Interim CFO

Conference Call Participants

Presentation

Operator

Hello, and welcome to the Electromed Fiscal First Quarter 2023 Earnings 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 Mike Cavanaugh. Please go ahead.

Mike Cavanaugh

Good afternoon, and thank you for joining the Electromed earnings call. Earlier today, Electromed Inc. released financial results for the first fiscal quarter of 2023. The quarter ended September 30, 2022. The release is currently available on the company's website at www.smartvest.com. Joining me on the call today is Kathleen Skarvan, President and Chief Executive Officer; and Michelle Wirtz, Interim Chief Financial Officer.

Before we get started, I'd like to remind everyone that some of these 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 those 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 information.

I will now turn the call over to Kathleen Skarvan, President and CEO of Electromed.

Kathleen Skarvan

Thank you, Mike, and thank you to everyone joining the call today. Our fiscal first quarter strengthened our conviction that our strategic growth initiatives continue to bear fruit and will place us on an accelerated growth trajectory. We grew our top line year-over-year 7% and continued to generate operating profits through strong efforts by our team, but we are not immune to the evolving macroeconomic environment and inflationary pressures that many med tech companies are experiencing.

We are focused on addressing the opportunities to mitigate these risks to continue to execute on our strategic growth initiatives. As a reminder, these key pillars to grow our market share are expand our sales force in targeted geographies with high potential to 48 direct reps, launch our next-generation SmartVest device with innovative features that will appeal to patients, expand SmartVest brand awareness through direct-to-consumer and physician marketing and further develop and promulgate the body of bronchiectasis clinical evidence to increase physician adoption of the SmartVest system.

Our approvals and revenue were negatively impacted by the lingering impacts of the COVID-19 pandemic on the supply chain. We were though encouraged as the team achieved multiple key operational milestones during the quarter, and we continued to generate operating profits, while investing in the business to support tapping into the large underpenetrated HFCWO market.

We historically experienced declines in referral and approvals in fiscal quarter one, although, I would note that referrals were higher compared to the first three quarters of fiscal 2022, higher year-over-year and we achieved an increase in referrals per sales rep demonstrating improved productivity. We expect overall productivity to improve during the fiscal year as newer sales reps ramp their activity. Despite the solid referral volume, a disruption with one of our electronic suppliers meant that we simply didn't have enough devices to ship.

With strong efforts of our team, we were able to fulfill 97% of planned shipments in the fiscal quarter and now have a steady supply restored that we expect will minimize fiscal year revenue impact. Over the past two plus years, we've been managing the supply chain issues and specifically electronics supply effectively, but it did finally catch up to us in the case of one supplier.

On the topic of our sales force expansion, a key pillar for growth, I'd like to provide a more detailed update. Chris Holland, our Chief Commercial Officer has done a remarkable job overseeing the effective headcount growth and improved productivity of the sales team. Growth is always something that needs to be handled judiciously and we have continued to find excellent candidates in a challenging hiring environment.

Overall, home care revenue productivity per rep was $890,000 on an annualized basis, well within our targeted $850,000 to $950,000 range, and we expect to see that number improve as the newer reps become fully embedded in their sales territories. Our percent of tenured-to-new reps was 65% to 36% at the end of the quarter and provides added context on the fluctuation quarterly. We ended the quarter with 44 sales reps and expect to reach our increased goal of 48 reps in fiscal second quarter.

Turning to our operating performance. I want to provide additional context on the significant uptick in operating expenses during the quarter, largely due to non-recurring and annual expenses and inflationary pressures. Q1 annual expenses that won't recur in the remaining year included expenses associated with our annual sales meeting and there were onetime legal expenses.

To address the inflationary pressures, we are taking steps to mitigate the increases which added approximately 10% to 15% to travel and entertainment expenses in the quarter. Taking all those factors into account, we expect that OpEx will be at more normalized levels through the remaining fiscal year. We are also pleased to have submitted the 510(k) application to the FDA for a next-gen SmartVest.

We are eagerly anticipating the FDA's response and hope to receive clearance in calendar 2022. We are ready to launch the limited market release as soon as clearance communication is received. Another key pillar for growth is to generate further data supporting the positive outcomes using HFCWO therapy and the SmartVest system as treatment for bronchiectasis, which we hope will also serve to raise awareness with physicians and key opinion leaders who are active in the airway clearance space. We've completed enrollment and data analysis of our quality of life outcome study with both COPD and bronchiectasis patients, expecting to submit for publication in early 2023.

Secondly, our multicenter prospective bronchiectasis outcome study to further demonstrate the clinical benefits of SmartVest System has picked up in enrollment over 35% of the expected 100 patients. We have now engaged two additional sites to improve enrollment slowed according to physicians due to a general trend on other observational studies since the pandemic of patients' concerns with face-to-face follow on visits. To further drive referrals and grow revenue, we continue to make a strong push in direct-to-consumer efforts as well as marketing targeted at physicians who can potentially prescribe the SmartVest to their patients who need it.

Turning to our cash position. It is important to emphasize that fiscal first quarter is historically and again this quarter, our highest period of cash utilization. Additionally, we repurchased $145,000 worth of stock in the quarter, which we believe was a good use of cash, while the stock was at favorable valuations during the quarter. With the non-recurring and annual expense business cycle now behind us in this fiscal year, it is important to note that we expect our cash balance to build throughout the year.

To close my prepared remarks, I'd like to welcome Brad Nagel as our incoming Chief Financial Officer. Brad has over 15 years of strategic planning and leadership experience with Fortune 500 companies, most recently at Medtronic. He will formally take the role on November 14, and we are so pleased to have someone with his proven strategic planning and team building success at a pivotal time at Electromed. I would also like to thank Michelle Wirtz once again for stepping into the interim CFO role and capably handling this strategic role while we found a permanent replacement.

With that, I'd like to hand over the call to Michelle for a review of our financials.

Michelle Wirtz

Thank you, Kathleen. Net revenues for the quarter were $10.7 million, a 7% increase over the same period in the prior year. Home care revenue for the quarter was $9.6 million, a year-over-year increase of 4% from the same period in the prior year, primarily due to increases in both referrals and approvals, and we also benefited from a Medicare allowable rate increase that took effect on January 1, 2022. The increase in referrals was primarily due to an increase in direct sales representatives. This was slightly offset by a temporary interruption in supply chain in September of 2022.

Home care distributor revenue for the quarter was $554,000, a year-over-year increase of 255% from the same period in the prior year. The revenue increase was primarily due to demand from one of our key distribution partners.

Gross profit for the quarter increased to $8.3 million or 78% of net revenues from $7.7 million, or 77% of net revenues in the same period in the prior year. The increase in gross profit dollars and percentage for the quarter was primarily due to increased revenue and operational efficiencies related to shipping.

Historically, we have occasionally experienced variability in our sales and gross profit due to payer mix as well as changes in clinic access or patient flow due to COVID-19 related issues. Future sales and gross profit may experience similar quarter-to-quarter fluctuations in fiscal 2023.

Selling, general and administrative, or SG&A expenses for the quarter were $8 million, representing an increase of $1.2 million, or 17.7% compared to the same period in the prior year. Approximately half of this increase included legal fees and annual sales meeting expenses that are not expected to occur in the remaining quarters. The remaining SG&A increase includes additional headcount in our sales and reimbursement department, representing our investments in revenue growth.

Operating income for the quarter was $44,000 compared to $547,000 from the same period in the prior year. The decrease was driven by the increase in SG&A related expenses, offset by the 7% revenue growth compared to the same period in the prior year.

R&D expenses for the quarter were $298,000 representing a 21% decrease from the same period in the prior year. The decrease was primarily due to reduced professional consulting costs associated with our next-generation platform development activities. R&D expenses were 2.8% of revenue in the first quarter of fiscal 2022 compared to 3.8% of revenue for the same period in the prior year.

We expect R&D spending to be between 2% and 3% of revenue during fiscal 2023 as we look to finalize our development and product testing work in preparation for an anticipated Q2 next-generation product launch.

Net income for the quarter was $81,000 compared to $439,000 for the same period in the prior year. Net cash used in the quarter was $2.2 million. Of this amount, $1.7 million was used in operating activities, primarily payments of annual incentive compensation and an increase in inventory. $256,000 was used in investing activities, primarily investments related to our ERP implementation and other equipment. And $205,000 was used in financing activities, mostly a result of our share repurchase program.

Our cash receipt collection remained strong. The quarter ended September 30, 2022 had a record cash receipt collection, building upon our prior record set in the previous quarters. As of September 30, 2022 Electromed had $6 million in cash, $21 million in accounts receivable and no debt for our working capital of $27 million and shareholders' equity of $34 million.

With that, we'd like to move to the Q&A portion of the call. Operator, please open the call to questions.

Question-and-Answer Session

Operator

Of course, we will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Kyle Bauser with Lake Street Capital Markets. Please go ahead.

Unidentified Participant

Hey, guys. This is Jake (ph) on here for Kyle. Thanks for taking the questions. I just have a few questions for you guys to get started. Has there been any changes to the estimate of overall HFCWO market growth? I believe last quarter, it was estimated to be around 5% annually. Can you elaborate on that?

Kathleen Skarvan

Absolutely. Hi, Jake. How are you doing today? Yes, we would continue to believe that, that is in our best estimate. The growth for the overall industry is approximately 5% on an annualized basis. So yeah, you think about our growth and even though it was stunted a bit by the supply chain issue. Our demand is strong and we were able to, even with that situation, exceed the growth of the industry.

Unidentified Participant

Awesome. Thanks for elaborating. So do you guys anticipate needing to update the target range for home care revenue per rep once the next-gen SmartVest comes to market?

Kathleen Skarvan

At this time, that range is based on the more related to that ratio of tenured versus new reps. And until we have a little more -- a few months of building on the new rep experience, we don't plan to change that. If we would see ourselves exceeding it over the next two, three quarters, we would review that. But at this time, I think we're in the right range at the $850,000 to $950,000.

Unidentified Participant

Awesome. Thank you. And for your sales reps, has compensation changed at all? And have you revised the comp structure or anticipate changing it?

Kathleen Skarvan

So annually, we do a review of our comp structure overall, particularly, looking at that incentive plan, assuring that the sales incentive lines up with our strategic growth expectations. And so that went into effect July 1. Would I say though that overall comp, we've seen inflationary pressures? Absolutely, I would say for our sales reps, that's primarily on their base pay.

Typically, our base pay is around -- to incentive is around a 70%, 30% ratio. That ratio still is approximately in the ballpark of what we're expecting. But we would -- are continuing to watch it carefully. We, though, are concentrated first on hiring the highest caliber experience of employees. And with that often comes some of that salary inflation. But we review our salaries on an ongoing basis and believe that we're attracting the right quality candidate with the incentive plan and comp plan that we have at this time.

Unidentified Participant

Yeah. That makes a lot of sense. I got one more question for you guys here. Can you talk about what steps need to occur for HFCWO therapy to get included into the society guidelines?

Kathleen Skarvan

Yeah. That's a terrific question, Jake. In talking with a number of physicians, particularly those on our Advisory Board as well as those that are part of the bronchiectasis registry sites throughout the United States, we do believe that there is work that is going on right now to develop draft for U.S. guidelines for treating bronchiectasis.

We are not privy to what those details are, but that's based on the growing evidence that is being published for HFCWO and those positive outcomes for bronchiectasis, that's why we're focused on continuing our clinical road map and continuing our studies so that we can add to that body of evidence, so that airway clearance is included as a guideline or a treatment protocol as well as, at some point, assuring that HFCWO is part of that airway clearance and treatment guidelines. So that's really what we know so far and we'll keep everyone updated if we learn new information around guidelines.

Unidentified Participant

Awesome, that’s all from me. Thanks for answering the questions.

Kathleen Skarvan

Thank you, Jake.

Operator

That is all the time we have for questions. And this concludes our question-and-answer session. I would like to turn the conference back over to Kathleen Skarvan for any closing remarks.

Kathleen Skarvan

Thank you very much for joining us today and for your interest in Electromed. Our employees continue to execute at a high level and we look forward to updating you on our progress as our team continues to advance our strategic plans. If you would like to schedule a follow-up call, please reach out to our Investor Relations partners at ICR Westwicke. Thank you.

Operator

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

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