Q3 2022 Vapotherm Inc Earnings Call
Intended to rightsize, our cost structure, while allowing us to continue to invest in future growth drivers.
Slide three offers a good summary of our PDP plan, which consists of four elements.
First driving 20% revenue growth.
We expect revenue growth will be achieved through five levers, including one introducing higher clinical value products, such as the HPT to point out.
Two leveraging our one <unk> strategy to drive disposable turn rates to pre COVID-19 levels.
Three consistent disposable ASP uplifts.
For expanding into new core care areas and five our long term product roadmap, which will introduce additional high growth products to our respiratory care offerings. We.
We are seeing clear signs that disposables revenue are turning the corner as evidenced by churn rates and our gold accounts progressing towards pre COVID-19 levels.
Second.
Improving gross margins to 60%.
We expect to exit <unk> 2023, with 60% gross margins through a combination of our move to Mexico.
Due to lower labor and operating costs and higher asps, resulting from new product launches.
Our gross margin improvement plan is on track and we remain confident we can achieve 60% plus gross margins.
Third returning cash operating expenses to pre COVID-19 levels.
While not visible on the <unk> income statement, we've already completed the majority of our cost saving initiatives, including the right sizing of our commercial organization and facilities reducing.
Reducing commercial investments in vapor and access and respite care and.
And transitioning R&D in house via the establishment of our new R&D facility in Singapore.
Reducing these expenses required difficult decisions, but we believe our plan for significantly reduced operating expenses is on track and creates a clear path to profitability.
Fourth improving our financial flexibility.
We made significant progress on this in the third quarter, which John will discuss shortly.
Before we go into additional detail on the progress, we're making on our PDP plan.
I will provide a brief update on our financial performance in the third quarter and the current macro environment.
In the third quarter revenue was below our expectations largely due to international revenue as these markets continue to digest, the large amount of capital equipments sold through Covid and to a lesser extent slightly lower U S disposables revenue.
I would note that we are seeing some important trends in the business that give us confidence moving into the fourth quarter of this transitional year.
Many of you probably have seen the news stories and the so called Triple Demick.
That could occur this fall and winter RSV flu and Covid are widely spread at the same time and result in higher than normal hospitalizations.
Given the rise in RSV cases in the U S. We have seen an increase in our weekly U S. Disposables revenues since late September with the week ending October 28, being the highest we've seen since early January in the midst of the omicron search.
We're encouraged by the sequential increases in our monthly disposable turn rate in comparison to their pre COVID-19 levels.
From April through September .
Our full year 2022, and 2023 revenue guidance assumes light flu and RSV seasons, and no impact from Covid.
Turning to slide four as we've told you in the past one metric we watch carefully our disposable turn rates, which we define as the number of disposables purchased per month per installed device.
With the dramatic increase in our installed base after the peak of Covid, our turn rates dropped as the number of disposables. We sold was divided over a much larger installed base.
What we had hoped to see particularly in our gold accounts, our turn rates beginning to return to pre COVID-19 levels.
When that happens or trends in that direction, we know the installed base and our biggest accounts is becoming increasingly productive.
So we watched this number carefully.
Exiting Q3, we would like to turn rates, we are seeing in our gold accounts, which are now at approximately 75% of the three year average pre COVID-19 levels for the comparative period.
Been trending upwards each month since April on.
On a seasonally adjusted basis.
We're also seeing encouraging trends in our silver and bronze accounts.
Not only does this tell us our devices are still actively being used on patients, but because this occurs against the backdrop of lower COVID-19 and flu hospitalizations. It also tells US our devices are likely being used more and more on hyper Catholic patients.
These trends strongly suggest our <unk> program aimed at educating clinicians in gold accounts on the efficacy of our devices in treating all forms of respiratory distress is working.
Our field team will remain focused on executing our one <unk> strategy, primarily in gold accounts, which are among the top one.
Hospitals in the U S in terms of the number of respiratory discharged.
Gold accounts have the highest patient volume.
Highly replicable and often have multiple key opinion leaders.
Gold accounts also represent a significant growth opportunity for us for both capital and disposables as presently we are only in one to two care areas in 70% of these accounts.
COVID-19 flu in COPD are not the only conditions, which can cause severe respiratory distress.
Shock for example, often requires respiratory intervention.
As a result, we plan to extend our <unk> program in 2023 to increase awareness of the efficacy of our devices in addressing the respiratory distress associated with Chuck.
It is important to reiterate that the more care areas were used in the higher our churn rates have been and we expect will be in the future.
We believe we have an excellent underlying business with unique effective products and a strong product pipeline.
With the PDP initiatives, we are pursuing we're confident we can achieve our goals of sustainable 20% year over year revenue growth.
60% gross margins and the return of cash operating expenses to pre COVID-19 levels, leading to adjusted EBITDA positive and a stronger balance sheet.
Our CFO John Landry will now take you through the remaining elements of our PDP progress and discuss our financial guidance.
Thanks, Joe.
Now turning to slide five.
Shall aspect of our PDP initiative is our plan to achieve 60% gross margins.
Third quarter gross margin was 13, 8% due to higher than normal inventory reserves and write offs due to our transition from the precision flow HPT to point out and lower than anticipated demand and production levels.
Excluding higher than normal inventory reserves and write offs or gross margin would have been 29, 5%.
Although it will take a few more quarters to begin seeing meaningful gross margin improvement in the quarterly income statement our plan remains on track.
Slide five illustrates the key drivers that will allow us to achieve our 60%.
Margin goal.
The most impactful is that plan to relocate our manufacturing operations to Mexico, where we can benefit from lower labor and overhead cost structures.
I am pleased to report that this project remains on track and is nearly complete.
We have leased a state of the art manufacturing facility in Tijuana engaged a general contractor to perform the fit out which is expected to be completed this month hired seven employees and relocated some existing employees to manage production and HR at the new facility.
There are always hiccups and undertaking a project of this magnitude having built this into our planning and it should be to our people that we have progressed this far.
Significant issues.
Another driver of gross margin improvement as our exit from our <unk> access and rest of the Kerr operations, both of which negatively impacted gross margin we.
We made the tough decision to exit these businesses as it was a necessary step on our path to profitability, which is presently a primary focus.
While we expect to exit these businesses and <unk>, we will however use that they put them access technology to develop digital capabilities for our home device.
The last important driver of our 60% gross margin plan is higher average selling prices for both capital and disposables, we have seen substantial increases in average selling prices worldwide over the last six years as we have consistently delivered more clinical and economic value to customers via our new products as.
As we look ahead, we expect to drive higher capital and disposable Asps.
As we introduce new higher value products and services.
While it is early we like what we've seen with the HPT to point out launch in the U S.
The standard HPT to point out capital unit offering his comparably priced to the fully accessorized legacy precision flow units, along with the <unk> transfer unit.
In addition, the HPT to point out a disposable patient cartridges for DPC are optimized for a premium pro soft tenuous.
Resulting in both an ASP increase on the HPT to point out and TPC and a higher mix of Postop cannulize, resulting in higher disposable asps.
The HPT to point out capital unit and disposals have been added to our GPO contracts and we are tracking to our targeted asps.
Which are an important element of our gross margin improvement plan.
Turning to slide six.
It is not fully evident in our <unk> income statement, we made excellent progress in reducing cash operating expenses to pre COVID-19 levels during the quarter.
non-GAAP cash operating expenses and <unk> were $19 5 million.
A $2 $2 million, a sequential decline from <unk> paid $4 $8 million declined from <unk>.
During the quarter, we have taken important steps, including the right sizing of our commercial organization to focus on a golden silver accounts shrinking our facilities footprint in light of the planned relocation substantial operations in Mexico.
Sitting debate with them access and respiratory care businesses, and bringing our R&D operation back in house and relocating it to Singapore to take advantage of a highly skilled workforce and government technology subsidy.
We signed a letter of offer to lease R&D space in Singapore, and higher non engineers led by a senior engineer, who has worked with our chief Technology officer in the past.
Our challenge is to aggressively move expenses, while continuing to invest in future growth drivers. This is a delicate balance and we are pleased with our progress to date.
Now turning to slide seven.
Final PDP element I'll touch on is improving our balance sheet and a floating ourselves greater financial flexibility by restructuring our debt and decreasing our inventory to pre COVID-19 levels.
During the quarter, we successfully renegotiated our 2022 revenue covenants, which modified minimum revenue required for the remainder of the year.
As part of this amendment, our lender added a minimum liquidity covenant, which requires us to maintain a cash balance of greater than $20 million.
There are several initiatives to drive down inventory across the board as we are currently turning our inventory at one time per year we.
We have had experience turning our inventory four times per year and our plan is to get back to that turn level, which we returned $20 million of cash back to the balance sheet.
While we believe we can execute on this plan the exact timing of the conversion of inventory into cash is not easy to forecast.
Given the new minimum liquidity covenant and challenge of forecasting the timing of converting inventory into cash.
Currently evaluating options to add additional capital to the balance sheet.
Now turning to slide eight.
We continue to believe that we have a clear pathway to adjusted EBITDA positive by late 'twenty three driven by the execution of our PDP plan.
In 2022 is a transition year and we will only see the positive impacts on revenue growth gross margin expansion and our streamlined cost structure beginning in 2023.
Based on our third quarter and year to date results. We are providing revised 2022 guidance, which you can see in the left hand column of the table.
For 2022, we now expect revenue in the range of <unk> $64 million to $66 million. This is a reduction from our previous range of $76 million to $81 million, primarily due to third quarter results and near term headwinds in the form of longer worldwide capital equipment sales cycles.
And the elimination of revenue from data access and the rest of the care beginning in <unk>.
This guidance implies fourth quarter revenue of $16 million to $18 million, which would be our largest quarter since first quarter, which was impacted by COVID-19 and assumes a <unk> U S. Disposable turn rates of 60% of the pre Covid three year average, which is consistent with our <unk> results.
In <unk>, we expect disposables revenue will account for 70% to 75% of total revenue and 25% to 30% will come from capital in service revenue. We also expect that the U S will drive 80% of the worldwide revenue totaled $2 <unk>.
For 2023, we expect revenue of $77 million to $79 million, which reflects 20% year over year growth.
Our 2023 revenue guidance assumes a full year U S disposable turn rates of approximately 66% of the pre COVID-19 three year average, which is what we exited <unk> with and continue to see through October.
We expect U S capital unit sales to be near the low end of our three year pre COVID-19 historical average and assume they will be primarily driven by replacement of older precision flow units based on historical experience and expansions into existing accounts.
We expect gross margins in the range of 22% to 24% in fiscal 'twenty two.
Our implied gross margin guidance for <unk> of 16% to 18% includes significant one time charges, we will incur with the move of operations in Mexico, We expect to expense all Mexico startup costs in <unk>.
For 2023, we expect gross margins of 48% to 50% as the one time costs and set up our Mexico manufacturing operation and higher than normal inventory reserves and write offs due to the HPT to point out a launch behind us manufacturing.
Manufacturing labor rates in Mexico are 75% loss rate in Hampshire.
Overhead cost returned to 2019 levels.
Lastly, we expect to benefit from an increase in asps due to HPT to point out and a shift in mix to new products. We.
We expect total GAAP operating expenses, excluding impairment charges of $94 million to $96 million. In 2022. This implies <unk> operating expenses of $20 million to $22 million, a $2 million sequential decrease from <unk> at the midpoint of the range for.
For 2023, we expect GAAP operating expenses, excluding impairment charges of $76 million to $78 million.
We now expect non-GAAP cash opex to be in the range of $83 million to $85 million. In 2022. This implies <unk> non-GAAP cash opex of $16 million to $18 million, a $2 5 million sequential decrease from <unk> at the midpoint of the range.
For 2023, we expect non-GAAP cash opex of 60% to $62 million non-GAAP cash opex, excluding impairment charges loss on disposal of property and equipment stock based compensation severance accruals depreciation and amortization and a change in the fair value contingent consideration.
And 2023, we expect to grow revenue, 20% per year and improve gross margins by 200 to 300 basis points per year.
With that I would now like to turn the call back to Joe.
Thanks, John .
In closing, let me recap our 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 <unk> areas and our gold accounts using <unk>.
Educating all accounts on use with hyper cabinet patients expanding into shock.
And launching important new products like <unk>, two point around especially into the general care for us.
Second we will improve gross margins to 60% by late fourth quarter of 2023.
By spinning up a world class factory and a low cost Mexico.
Executing our three pronged gross margin improvement plan.
Hurting RFP expensive inventory cars by mess with onetime costs incurred during COVID-19 to meet every customer need.
Third we have normalized our cost structure to pre COVID-19 levels, while continuing to invest 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.
Lastly, by renegotiating, our debt covenants and working to convert inventory into cash we're stabilizing our balance sheet, which will allow us to continue to support our plan to drive to profitability.
As John mentioned above we are also evaluating our options for added capital to the balance sheet.
I want to thank each and every one of my teammates for their dedication and commitment to our customers patients and each other.
Now I'd like to open the line for questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
And your first question comes from the line of Margaret Kaiser from William Blair. Your line is open.
Hey, guys. This is Matt bouley on for Margaret today. Thanks for taking our question I wanted to start on Q4 guidance maybe in <unk>.
Just what's all assume Theyre, obviously can appreciate thank you.
We're assuming.
The light flu season, as well as no COVID-19 or not but can you talk about what you're seeing or.
Maybe the RSV levels that you've been seeing so far in the disposables and just kind of parse out for us.
Yes.
Sure Maggie this is John so from a guidance perspective for the fourth quarter.
We modeled in light Blue and light RSV seasons for the fourth quarter, we haven't factored in any COVID-19.
Into the fourth quarter, so our assumption from a U S. Disposable turn rate perspective in regards to the recovery rate versus our pre COVID-19 three year historical average, we're targeting a 60% recovery rate and that's assumed in our guidance for the fourth quarter with regard to U S disposables.
We haven't seen.
Similar impact with regard to flu or.
RSV and other markets in Europe , So right now it's largely a U S.
U S issue with regards to like flu and RSV seasons.
Okay got it thanks, and then just as we're starting to think about 'twenty. Obviously can appreciate that you guys are.
In 'twenty, but can you kind of walk us through what.
The team did not with the execution of <unk> and as you improve gold account utilization I know you guys reference what youre expecting for your disposable rate for the full year, but if you can just kind of walk us through.
Kind of what you're expecting throughout the year that'd be great. Thanks.
Hey, Maggie this is Jeremy I'll take that one so really how are we going to keep driving towards how are we going to drive 20% growth in 2023 and beyond.
So in the next year, we expect a recovery in the U S disposable turn rates to drive growth over 2022, even if we see only modest improvements in the fiscal 'twenty three rate versus our third quarter 'twenty two rate of 60%.
Yes.
Second we expect that that launch of <unk>, two point or what's going to drive capital demand back to pre COVID-19 levels. After a year of absorbing all of their equipment purchased during COVID-19.
So we expect this to happen by replacement in existing accounts or expansions in existing accounts and that's that's what we're seeing.
And the increasing of fees that go with it.
This ability to treat patients in areas of the hospital. They don't have piped in there and remember 50% of all hospital beds in the United States don't have piped in there.
The other thing around it is the ease of use is turning out to be pretty important for fully staffed our key departments.
We've locked in higher asps to contracting with our critical GPO and our tiered pricing model the last.
Lastly, we see a shift in mix to higher clinical preference products, such as the <unk> disposable patient circuit.
As well as our profile of cannula globally.
The oxygen assist module in Europe , driving higher Asps in the international markets that we're going direct in two new EU markets, Spain, and Belgium. This year, which we also expect to drive revenue growth.
And then 2024 and beyond we're going to drive it by pulling the same levers, we'll be launching a home product, which really greatly increases that Tam by three exercisable hospital market.
And our goal is making that home device easy to use including the hte digital capabilities.
It's going to be able to connect to our <unk> cloud solution.
And that drives the longitudinal look at a patient's baseline we have a lot of levers to drive that growth.
Got it thanks, so much.
And again, if you would like to ask a question Press Star then the number one on your telephone keypad.
Next question comes from the line of Jason Bednar from Piper Sandler Your line is open.
Okay.
Hey, Joe Hey, John Thanks for taking the questions.
Maybe I'll pick up a little bit on on the prior question, there, but focusing maybe on the capital side. Just wondering if you can help help us out elaborate on what youre seeing with the the capital sales cycle right now is one.
Really an outright delaying purchasing.
Potential customers, saying, they're waiting until 2023 or later.
Are you seeing smaller orders then that you once thought we're going to be larger really just I guess trying to understand what youre seeing and hearing again regarding that U S and international capital environment, what kind of visibility you have to improving from here.
Yes, Hi, Jason This is Joe again.
You're going to deal.
Yes, I can start this one you can fill in as well Joe So in regard to the capital sales cycle, what we're seeing Jason both in U S and.
In international markets.
As some of the markets we saw some turmoil in the markets.
Third quarter.
Threatened recession interest rate hikes continue and talk of interest rate hikes going into next year, which increase the customer's cost of borrowing we saw hospitals start to slow down the approval process, especially for larger deals and in some cases, even smaller deals, especially in the respiratory space given the amount of equipment that they purchased more.
<unk> X.
Expectation is that stabilized and returned to more normal respiratory capex purchasing patterns, which is how we've been thinking about it and we modeled in our.
Forecast for next year and guidance for next year.
We believe that's achievable given the much larger installed base, we have the opportunity to expand further deeper and wider into the gold accounts.
In the U S as well as the international markets, but I think what we're seeing near term is.
Capital demand is resulting in longer sales cycles, I think the receptivity to our HPT <unk> product has been and continues to be very positive I think from the macroeconomic landscape. It's slowed up the process that that both here in the U S and abroad.
Okay, and maybe a clarifying question for Joe on that topic.
If I heard you right. It sounds like you expect capital to grow next year I just want to confirm that that's your baseline assumption for 2023, as we think about the build up to that 20% growth that youre looking for next year.
Yes, that's right Jason Yes, we do expect it to grow over 2022.
I think from our perspective.
Thought about.
What our pre Covid three years to go average was before.
Contemplated in terms of unit sales or the lower end of that range.
From a pre COVID-19 perspective and.
Given the fact that we had a much larger installed base a larger.
Large installed base of older precision flow units going into this product launch that we had when we launched our precision flow plus back in 2017 versus the classic there's a natural replacement cycle to these and we believe that based on our historical the placement rates of that equipment.
Plus our ability to go deeper and wider in a much larger footprint of accounts across the U S that will provide us the opportunity to grow our capital equipment revenue over this year and more commensurate with pre COVID-19 levels, both in the U S and in the international marketplace.
Okay.
Jason This is Jeremy one of the interesting thing we're seeing is we.
Offered a trade in program to help rationalize fleets, both our equipment as well as competitive equipment.
Okay.
Turning to price at this point, we're really not seeing the hospitals are taking up the HQ2 point or they're using it to really expand their fleets.
We won an order in this week for 30 plus units from a hospital system.
In the southern part of United States, and I really thought we would see a trading there and they were very clear that they are actually using it to expand their fleet. So thats a little surprising to us.
Okay.
Okay. That's helpful. Good color Joe.
Maybe one more for me just as we think about it again in 2023.
With that 20% growth to your debt.
What changed within the absolute numbers, obviously changed so we're building off of a smaller base than maybe where the where we were when we last saw some some longer term guidance from you but.
But the margin targets aren't significantly different there were lower but not significantly lower.
So are the margin targets you have out there just not as overly revenue dependent as maybe at least myself thought they might have been.
And then you can just.
Maybe just remind us im sorry, if I missed it.
Everything is coming together next year capital growth versus disposables growth to get to that 20%.
Sure, Yes, Jason so starting with the last piece as we think about our capital equipment revenue next year.
Both of those we think are disposed of recurring revenue is going to be kind of in that ZIP code of 75% of the total revenue.
Year over year, so 75% of total revenues without drive nice growth there as well as on the cap equipment side, a return to sort of the 25 ish percent level as well. So we will see growth in both of them.
From a growth driver perspective.
A little more growth driven from capital and given the lower base that we had here in 2020.
<unk>.
As we recover that side. So that's the sort of the split there when you speak about gross margins I think we've made nice progress on the gross margin improvement pathway here.
By spinning up operations in Mexico.
Facility perspective hiring perspective.
Thing is we're identifying.
The team that we need there.
On target from a costing perspective so.
As we have gone forward, we've tried to.
Reduce the overhead burden as a part of the total cost of good pool, so that way we don't have.
As much of it being volume dependent going forward and it's more tied to.
The drivers of revenue as opposed to.
Volume plays on overhead. So we've made nice progress in that regard and had a plan in place to drive our overhead spend back to a pre COVID-19 levels, which will help.
Reduce the overhead content as a percent of revenue going forward.
Minimizes the impact of volume on gross margin improvement.
Okay, I think I, followed all of that maybe we'll follow up offline.
Some other questions there. Thank you.
Youre welcome.
And there are no further questions I will now turn the call back over to Joe Army <unk>, President and CEO for some final closing remarks.
Thank you all very much for listening in on the call today, and we look forward to coming back to you with our fourth quarter results in the next three months.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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