Q1 2022 Vapotherm Inc Earnings Call
And through the end of the first quarter. We believe the customers we won during Covid and especially the gold accounts have performed on par with comparable pre COVID-19 customers.
That is important because it all Goldman accounts before the same during COVID-19.
Gives us confidence they will continue to perform similarly, as COVID-19 subsides and respiratory sensus patterns begin to normalize.
You know who follow vapor therm are aware of our one hospital, one day or one eight <unk> strategy, which Smith educate our customers on the full capabilities of our technology to help patients through all four care areas of their hospital that we serve today.
Regardless of whether the patients are hypoxic COVID-19 patients or hyper kapnick like COPD patients.
When we're in <unk> conversations with hospitals, we're focused on educating them on a couple of key factors.
First the benefits of our technology on both hypoxic patients and hyper Catholic patients.
Second how our technology can be used in the four key areas that we serve today the.
The emergency department or the.
The adult intensive care unit or AIC U the neonatal intensive care unit or NICU.
In the pediatric intensive care unit or pick your.
We believe this play works well historically around two thirds of our capital equipment sales came from existing customers as they expand their use into new care areas and treat new patient symptoms like hypercalcemia and COPD patients.
Looking at the chart in the center of the Slide you can see the more care areas, we treat that.
<unk> accounts revenue.
This data is exciting it shows us there's a large opportunity within our U S customers to go deeper and wider to drive revenue growth without needing to add more customers.
Within our gold accounts, 71% are only using our technology in one or two care areas, we made huge room to expand and get all units turning at or above historical levels.
It's also important to note the more care areas they use us in <unk>.
The turn rates are.
Beyond the four carriers highlighted here, we will be expanding into additional care areas within the hospital.
Ideally patient census would be less correlated to the typical seasonal respiratory centers expansion into one of these carriers will drive recurring revenue growth, while potentially reducing the seasonality in that quarter respiratory business.
I hope you could see from the detailed data we just reviewed why I'm confident in our ability to return to historical churn rates.
During the simple math, assuming our plan works the 35000 units in the global installed base yield 800000, disposables per year or $90 million in recurring revenue.
It is important to note how sensitive our disposables revenue is to even small changes in turn rates. For example for each 0.1 increase in the monthly turn rate, we generate $5 million and incremental disposables revenue.
Now I want to share with you why I believe it's possible for us to possibly exceed our historical turn rates.
What are you looking at on this slide.
Historically U S quarterly disposables turn rate for different groups of customers.
<unk> hospitals that use our technology in the emergency Department, which is the Blue line on the graph have higher turn rates and hospitals that do not which is the gray line. We've seen this consistently over a number of years and it will continue to be a focus as part of our one <unk> strategy and our new account strategy.
Winning is expanding of the EDI accounts is an important part of our plan as over 50% of all hospital admissions come through the EDI.
Second during the summer of 2020, we noted a small group of accounts that had significantly higher turn rates.
In 2019 pre COVID-19.
That all the other accounts, we engaged an artificial intelligence consulting firm to analyze these accounts to understand the customer journey that led to such high churn rates.
There was significant and multiple signal in the datasets that identify the specific customer journey.
From this one <unk> was refined and optimized to help customers along the same path.
For obvious competitive reasons, we're not going to lay out the entire journey, but use on hypercapnia and on general care floors with two very important elements.
Which is exactly what <unk> and.
In our <unk> two <unk> launch are all aimed at.
What do you think of our history that I don't think is fully appreciated is our proven ability to drive higher asps to product innovation.
On both capital and disposables in both the U S and internationally, we've seen substantial increases in asps over the past six years as we have shown the value we bring to customers and patients alike.
Best in class Med Tech companies, we have consistently increased average selling prices by delivering more clinical and economic value of our new products.
As we look ahead, we expect to drive higher capital and disposable Asps.
As we introduce new higher value products and services like the upcoming <unk> launch.
Product development roadmap is designed to create a digitally enabled care ecosystem to deliver breakthrough patient outcomes at a lower total cost throughout the care continuum.
Next generation HPT to launch will be critical and exciting for US later this year.
With its internal lower <unk> enables us to access the 50% of all U S Hospital beds on general care, Florida that don't have medical error in the room.
As we observe there are high turn a project using our high velocity therapy technology in the general care floor areas was associated with higher turn rates.
With our large installed base strong field teams around the world well understood clinical efficacy pipeline of new products and demonstrated the ability to deliver to our customers and patients no matter what.
We've created a strong foundation that has seen tremendous growth over the past two years.
The growth is just one piece of the puzzle we need to fuel that growth of capital, we have while driving to profitability as quickly as possible.
That is exactly what we plan to do.
Before I turn the call over to John and having walk you through how we intend to do this I wanted to address the revenue covenant in our new debt facility.
The covenants based on hitting a trailing six month revenue milestone beginning in July and reported at the end of August in light of lower than expected revenue in March we could face a challenging first revenue milestone.
However, we can still achieve our revenue milestone of respiratory distress hospitalizations return to normal levels.
We're in full compliance today and are routinely communicating progress with our lender. We've also worked successfully with this lender in my last company during the 2008 financial crisis and I'm confident we'll do so again.
With that I'd like to turn the call over to John .
Thanks, Joe as Joe mentioned, our plan is to take this business from where we are today and drive it to adjusted EBITDA profitability part of that Formula includes driving predictable 20% revenue growth.
Part of that focuses on how we manage our cost structure in a post COVID-19 world.
Starting with cost of goods sold and.
As you May recall, the business had negative gross margins when Joe and I joined in 2012.
We put a three pronged plan in place to improve gross margins every year, one increased asps through the introduction of new products that offer higher clinical and economic value to reduce direct material and labor costs and three drive increased volume through our fixed overhead base through.
Through disciplined execution of this play we drove gross margin to 50% in 2020.
Just as we saw volatility on a topline during COVID-19, we experienced similar impacts on our gross margins with COVID-19, causing huge spikes in demand for capital and disposables as hospitals thought to navigate through a pandemic and care for our record numbers of patients. We made the strategic decision to do whatever it took to deliver for our customers or to <unk>.
One it was the right thing to do and to we knew this was going to be a once in a lifetime opportunity to win large numbers of big new customers, who would end up being super valuable for years to come.
In order to meet all customer needs. We took a number of non traditional actions that worked but resulted in roughly 10 percentage points of temporary gross margin erosion, primarily caused by two factors.
First we saw unprecedented material and labor costs for.
For example, we expedited parts into our facility at Big Markups design.
<unk> designed a new role stand with a local partner when facing back order went from a one shift operation to a $24 seven shop using temporary resources.
R&D personnel to support supply chain and keep the production lines running and when direct labor can be found in new Hampshire brought people in from Oklahoma.
To meet demand during the Delta and Omicron surges, we eat incent people from various parts of the company such as marketing to build product in a clean room.
The customer goodwill, we have seen from our ability to meet every customer need is inspiring.
Second and third quarter of 2021, we moved a portion of our disposable manufacturing to a contract manufacturing partner in Mexico, which would lower our manufacturing costs in the long term and at a lot of capacity with no incremental fixed costs to meet the huge demand in the event of additional surges. However.
However in the short term gross margins were hurt by this move which required significant onetime startup costs, which are running through cost of goods sold from 2022.
These factors are short term and one time.
Importantly, we believe that the goodwill we earned with all our new and existing customers by delivering throughout the pandemic when others could not will pay off long term and was worth a temporary impact to gross margin.
As we exit the pandemic, our gross margin improvement plan is running well.
Once we burn through the higher cost inventory, we will see the benefits of lower cost disposables and capital leading to an expected 60% gross margin by late 2023 early 2024 with a clear pathway to 70%.
To help accomplish this we are moving all our remaining manufacturing from New Hampshire to Mexico by the end of 2022.
Although we intend to continue the disposables contract manufacturing partnership we established in 2021, our plan for the remainder of our products is to establish our own manufacturing plant likely in the Tijuana area and to staff and operate the plant ourselves.
We have announced the move to affected employees in New Hampshire.
While this move will incur significant startup cost the lower costs associated with our Mexico plant will be a key part of our plan to increase gross margins to 60% by late 2023 early 2024, and mitigate the risk of higher U S inflation in a tight labor market in new Hampshire for the foreseeable future.
Beyond cost of goods sold we're making high growth investments, while returning overall cash spend closer to pre COVID-19 levels on our path to profitability.
As you can see from the graph prior to 2020, we had a predictable and disciplined approach to cash opex to drive growth Covid required us to temporarily increase cash opex to support our customers and our employees.
We encourage significant over plan compensation for both our field and corporate based personnel due to over plan revenue.
We've reduced over planned worldwide Commission expense as a percentage of revenue as we leveraged over planned commission rates in 2021.
Corporate bonus plans, including executive leadership have always been capped these.
These onetime costs are expected to normalize in 2022 and beyond.
The outset of Covid R&D teams will redeploy to support the supply chain and keep the production lines running to ensure we hit our new product development time lines. Despite the R&D team focused on meeting every customer need we outsourced a lot of this development to outside firms.
More expensive than doing the work in house, we felt it was critical to have important new products ready to launch once COVID-19 move beyond the pandemic phase. We expect these new products will drive growth and share expansion for years to come.
And you can see on the graph opex flattened in 2021 and will decrease as we exit 2022 due to the return of an app plant compensation structure, and bringing R&D back in house.
Going forward, we are planning for a less volatile environment in which we can execute on our opex initiatives to return our cost structure to normal, including a return of <unk> compensation.
Right sizing our facilities footprint post moved to Mexico, and bringing RMB back in house.
Bringing this all together, we have a pathway to profitability driven by the execution of our long term financial and operating strategy.
As Joe mentioned, we view 2022 is a transition year with a positive impact in revenue growth and cost structure <unk> expected to be seen in 2023 and beyond.
For 2022, we now expect revenue in the range of $81 million to $86 million we.
<unk> gross margins in the range of 34% to 36% with a material step up expected in 2023 and beyond as we move past the onetime cost in our inventory.
We expect to reduce our inventory balance by more than 50% by the end of 2023 as we've returned to historical inventory turns of approximately four times per year.
This reduction in inventory will return over $20 million of cash back to the balance sheet.
We expect total GAAP operating expenses, including depreciation amortization and stock based compensation expense of $99 million to $102 million in 2022 with a material step down expected in 2023.
We currently expect cash operating expenses, excluding depreciation amortization and stock based compensation expense in the range of $86 million to $88 million in 2022 with a material step down expected in 2023.
Now I'm going to hand, it back to our CEO , Joe Army to wrap up before we take questions.
Thanks, John .
Closing, let me recap a plan for the remainder of 2022 and 2023.
First we will drive 20% revenue growth by getting disposable turn rates back to historical levels by expanding usage in the four care areas in our gold accounts using <unk>.
Educating all accounts on use with hyper catheter patients.
Developing new care areas and launching important new products like HPT to point out, especially the general care for us.
Second we will improve gross margins to 60% by late 2023 early 2024.
By spinning up a world class back to stable low cost Mexico <unk>.
Executing on our three pronged plan and burning off expenses inventory caused by massive onetime costs incurred during COVID-19 to meet every customer need.
Third we will normalize our cost structure to pre COVID-19 levels, while investing aggressively in future growth drivers, especially HPT home and the digital opportunities.
This three point plan executed by the very best team in the medical technology space will drive us to profitability.
This is truly a unique business made up of best in class people has done amazing things together, especially in meeting every customer need during the pandemic.
I want to thank each and every one of them for their dedication and commitment to our customers patients to each other.
Now on to profitability.
I'd like to open it up for questions now.
Thank you speakers participants we will now begin the question and answer session.
To ask a question over the phone you May press the star key followed by the number one.
To withdraw your request you May press the pound key.
Again, Thats star one to ask a question.
<unk> to withdraw your request.
Speakers. Your first question is from the line of Margaret Kaczor of William Blair. Your line is now open.
Hi, everyone. This is Brandon on for Margaret Thanks for taking my question and thanks for the extensive overview slide deck.
Extremely helpful. Because you guys are kind of evolving and hopefully stabilizing a little bit post COVID-19 now.
First question I just wanted to focus on there is a lot of really encouraging information here on the gold accounts and just.
Kind of curious how do you keep going deeper into these accounts. Joe you had highlighted that theres a lot of accounts that you're only being used in one or two care areas. What's the strategy here to kind of get them into the third and fourth bearing area to kind of get that higher ring.
Disposable turn.
Brandon Thanks, very much for the questions. Good morning. So one <unk> is the play that we use for driving into the new care areas that we operate there.
So literally we use a combination of speakers bureaus, a lot of different education.
Opportunities, but it's really having our field team in those accounts executing on what each Wendy and educating in new core areas that in fact expand for scores.
Quite frankly, we're really measuring where we're really focused on really.
Less interested right now in opening that new gold accounts and are very focused on continuing to run <unk> to expand those goals because I think as you can see that the amount of money to be made by simply expanding from one carrier to or from two carriers to three is quite substantial.
Got it and then.
Maybe wondering if I could follow up if I could interrupt one second one other thing I would think it would be important to note in there.
Is the turn rates.
You go from one care area.
Your turn rates about one.
One eight you go to two carriers and it goes up you go to three carriers. It goes up even more so the more care area as you go into the.
The higher the overall turn rate is on that rig count we think that's a very interesting and promising phenomena.
Yes, absolutely.
And then as you kind of get through Covid now hopefully you can get a little more on the offensive there.
And then just.
<unk>.
Obviously theres been a lot of volatility that we've seen in the slides and obviously through the operating metrics in terms of capital and disposable.
Any color you can kind of give us your long term guidance, assuming internally you guys had some different kinds of models to get to 20% growth over the next couple of years.
How should we be thinking about capital as it kind of normalize that some kind of a pre COVID-19 level are you assuming more disposable turn rates in that guide that long term guidance in line with pre Covid are elevated so anything around those would be helpful. As well. Thank you.
Yes, Hi, Brian It's John Thanks for the question today, So when we take a look at our revenue long term long term revenue guidance one of the things. We're looking at in terms of capital as we expect our capital contribution to be more in that 20% of total revenue range and return on recurring revenue to the 70, 75%.
Level and service comprising the rest so as we think about the near term.
The goal would be to get our turn rates back up to the historical churn rates over the four to six quarters to go execute on our <unk> plan in particular in those bold accounts, where we have the higher turn rates and.
And especially with four core area accounts, and then as well.
Longer term as our new product pipeline begins to come to fruition, we expect that to be a key contributor to top line revenue growth as well.
Thank you.
Next question is from the line of Maria <unk> from <unk>. Your line is now open.
Hi, Good afternoon, Joe and John This is Sam on for Murray, Thanks for taking the questions.
John .
You just mentioned that I was going to ask on timing of turn rates, maybe normalizing just mentioned the 46 quarters.
After co it ends.
Is that still the right way to think about it and are we at that stage at this point, maybe that backlog starting it seems like 2023 is really weird.
<unk>.
Things start to meaningfully improve.
Yes, Sam this is John .
I think thats the right way to think about it I think now with <unk> largely behind US It gives our field team and uninterrupted opportunity to go in and run our <unk> program.
In particular in those larger gold accounts and to go drive deeper into those accounts and expand them on care.
Era to the next so that's going to be I think from a cost perspective, I think that's right.
As we continue to grow and expand that.
Four to six quarters puts us to your point in the mid 2023 timeframe. So.
That's about the right timing and at that same time, we also have the opportunity to have our HPT to point out come out here in a more full market release.
It will be coming out.
Later, this year, which will the.
The sales team will be able to use that along with the <unk> program to continue to drive topline growth.
Great really appreciate the color there John and then maybe on the <unk>.
To point out I guess, how material revenue contribution could that be maybe starting in 2023.
This is Joe.
An interesting question I'll tell you that our previous experience with our precision flow plus launch which was the last time, we came out with a new capital platform that.
There was significantly less technology upgrade in the precision flow plus which.
<unk>.
A significant increase in your ASP.
And we also saw a pretty significant uptake in net new accounts or expansions, but something that we really hadn't expected was we also saw fleet upgrades. So.
We sort of look at this one as being interesting in that regard in it.
At that time I was not crazy about fleet upgrades I wanted people to go open up new accounts, let's expand the installed base, but.
Installed base of 35000 units, let's remember half of those were pre COVID-19. So I think there's probably some opportunity around that too.
Great. Thanks, so much.
Next question is from the line of Bill <unk> Canaccord. Your line is now open.
Okay.
My questions.
Sure.
So in your remarks.
Yes.
The elephant in the room is just the debt outstanding on the covenants.
Breaches of covenants I think he has laid out a path forward here.
What do you think is the likelihood that a breach.
Associate those covenants within the next six to 12 months.
Well I don't think I want to put a.
Probability too early because the level of uncertainty around are we going to return to somewhat normal.
Rates in the normal census rates here in the next.
Three months, but I will tell you that.
If there is a bump in the road, it's not going to be a big bump, but its not going to be a long book.
No.
Jumping up and down about it we've taken it seriously we're communicated effectively but we're also.
This is not something that we view as a.
Catastrophic situation.
Okay great.
That's helpful and then.
Yes.
Is that what are the key.
Clear on this you're saying that it's cash flow positive.
Or earnings positive as we get into 2023.
And kind of when in 2043.
Yes.
Yes, Bill this is John so from a profitability.
Perspective, we're looking at adjusted EBITDA profitability and that will be late in 2023.
It will allow us to grow into our top line as well as have all the pieces in place with regards to our gross margin expansion and to have our normalized cost structure in place. So that will take us to the tail end of 2023.
Great. Thanks for taking my calls.
That concludes our question and answer session for today I'd now like to turn the call back over to Joe Army for any closing remarks.
Thanks, very much Rob. Thank you all very much for joining us today.
Really appreciate you trusting us with your capital it means an awful lot to us and we look forward to updating you on our next call.
Good day.
This concludes today's conference call. Thank you all for joining you may now disconnect.
Okay.
[music].
Okay.