Q3 2023 Bioventus Inc Earnings Call

Thank you for standing by my name is Dustin and I always be your conference. Operator today. This time I'd like to welcome everyone to buy Ventas, Inc. Third quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remark.

There will be a question and answer session if you'd like to ask a question. During this time simply players star followed by the number one on your telephone keypad.

If you'd like to withdraw your question again, Please press star one.

At this time I'd like to turn the call over to Mr. Dave Crawford Vice President of Investor Relations. Sir you May begin your conference.

Thanks, Dustin and good morning, everyone and thanks for joining US is my pleasure to welcome you to the bio Rad as 2023 third quarter earnings Conference call with me. This morning are Tony <unk>, CEO, and Mark Singleton Senior Vice President and CFO.

Tony will begin his remarks with an update on our business and outlook for the remainder of the year followed by a review of the quarter Mark will offer further detail on our third quarter results and discuss the update to our 2023 financial guidance.

We will finish the call with Q&A.

A presentation for today's call is available on the investors section of our web site <unk> Dot com.

Before we begin I would like to remind everyone that our remarks today contain forward looking statements that are based on the current expectations of management and involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated.

Including the risks and uncertainties described in the company's filings with the SEC, including item one a risk factors of the company's Form 10-K for the year ended December 31, 2022, as well as subsequent forms 10-Q, and other company's filings made with the SEC.

You are cautioned not to place undue reliance upon any forward looking statements, which speak only as the date made although it may voluntarily do so from time to time the company undertakes no commitment to update or revise the forward looking statements.

Whether as a result of new information future events or otherwise, except as required by applicable securities laws.

This call will also include references to certain financial measures that are not calculated in accordance with U S generally accepted accounting principles or GAAP.

We generally refer to these non-GAAP or adjusted financial measures.

Important disclosures about and definitions and reconciliations of those non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in the earnings press release on the Investor Relations portion of our website at <unk> Dot Com and now I'll turn the call over to Tony.

Thanks, David and good morning, everyone and thank you for your continued interest in <unk>.

Begin by saying that I am again encouraged by the strength of our results for the quarter as we delivered earnings ahead of our expectations for a third consecutive quarter raised our annual financial guidance.

The highlight for US was a return to growth for our business one quarter ahead of schedule.

Our resilient employees, who worked diligently to address last year's challenges and made measurable progress in improving our execution delivering on our commitments and enhancing our business controls and processes.

Before discussing the quarter's performance I want to take a moment to reflect on the recent progress made to solidify our financial metrics. We believe successfully delivering on our financial plan. This year will position us to deliver future improvement in revenue growth profitability and predictability.

As I mentioned in the past, we will not reverse last year's headwinds until we rebuild our balance sheet earn back stakeholders trust and regain credibility with our investors with a couple of quarters of strong performance with that said I believe we have achieved substantial progress to solidify our financial position and maximize the long term opportunities for <unk>.

As we begin to gradually increase our attention to future growth drivers.

During the quarter, we demonstrated several positive indicators of our future success, including one with continued financial discipline to reduce spending and enhance operating margin.

Two as I mentioned earlier, we saw a return to growth for our <unk> business, including continued double digit unit volume gains.

And three we achieved double digit growth across key long term revenue drivers and our ultrasonics business and across our international segment.

As we begin planning for next year, we remain focused on investing and prioritizing areas of our business, where we believe we can deliver sustainable profitable growth. We believe the steps. We are taking will result in enhanced growth and increased visibility to our key business drivers.

While less visible we've begun to show signs of improvement and stabilizing our organization.

My leadership team and I are encouraged by the results of our recent employee engagement survey as we look to continually strengthen our culture.

From a headline perspective, we saw an improvement in our employee engagement scores, which is important given the challenges we placed on our teams over the past two years.

As a positive sign of engagement, 85% of our employees participated in the survey well above industry benchmarks and they provided over 1400 comments, we're committed to work together create a culture that is inclusive engaged and empowered as we deliver on our promises to our customers employees shareholders and the communities where we operate.

Our impressive performance. So far this year has reinforced my confidence in our ability to reduce leverage and to enhance our revenue and earnings growth opportunities as we maintain focus on cost control.

We participate in large growing markets and provide innovative differentiated products for our patients across each segment of our business by all that does is either a market leader or growth leader.

Now, let me turn to the third quarter results for the quarter revenue of $121 million declined 6% compared to the same period a year ago. However, when considering the impact of our wound business divestiture growth was even compared to the prior year more.

More importantly, our adjusted EBITDA of $22 million was above our expectations due in part to stringent control of our expenses and the significant improvement in our accounts receivable collections over the course of the year, which enabled us to have a favorable adjustment to our bad debt reserves.

Year to date, adjusted EBITDA has increased more than $15 million, representing a 30% increase.

Across pain treatments as I highlighted earlier, we saw a significant double digit gain in volume for <unk> as we continued to take market share with our clinically differentiated offerings.

Overall volumes were also higher for Julson News reports.

While we continue to be impacted by the decline in our average selling price for drilling the jolson that headwind has steadily steadily declined on a sequential basis.

As we mentioned previously we expected the average selling price for <unk> to increase sequentially in the fourth quarter CMS.

CMS published pricing for dual lane in mid September and it showed the asps for drilling was increasing for the fourth quarter as we predicted.

However, we do anticipate a temporary sequential decline in pricing for drilling in the first quarter 2024. After the first quarter, we expect to see CMS pricing rising sequentially for the rest of the year.

Due to a higher percentage of contracted volume for Johnson. The average selling price has continued to decline sequentially. We continue to expect that by mid 2024, we will see asps for julson begin to rise sequentially as well.

While the move to ESP combined with higher than anticipated prior payor private payer contracted volumes presented meaningful headwinds to our <unk> business. We are now returning our overall AJ portfolio to growth, we believe market growth combined with an increase in market share and improving pricing dynamic will enable mid single.

High single digit growth in the coming year.

Now turning to surgical solutions in the third quarter, our ultrasonics portfolio grew at its highest double digit rate of the year.

The momentum to continue into next year.

We believe our leading technology and small market share provide a strong backdrop for continued market penetration and growth across ultrasonics.

Limiting the overall growth for surgical solutions was the slower than anticipated recovery in our bone graft substitute business.

Up.

On a sequential number of new distributors and accounts the ramp up in sales volume trailed our expectations.

Beginning in the fourth quarter, we've implemented structural change to our surgical solution selling effort, which we believe will improve growth and eliminate potential channel overlap. Our direct sales team will now focus on ultrasonics as primary target and our distributors focus on bone graft substitutes as their primary target. We believe this increased attention will help limit any further.

Distributor churn and bone graft substitutes.

Driving improved efficiency in our recent account conversions.

Within restorative therapies organic revenue declined double digits, when removing the impact of our wound business divestiture.

Revenue growth in advanced rehabilitation was impacted by accelerated placements of vector weight bearing systems in the second quarter X.

X gene revenue fell slightly compared to prior year, but revenue increased sequentially in the U S and reflect the improving trend we're experiencing across the business as we continue to re engage with physicians after our sales force realignment last year.

Finally, our international segment grew 18% with constant currency growth of 16%.

Growth was driven by strength across our surgical solutions business.

While international growth is expected to temporarily slow in the fourth quarter due to challenging comparisons to prior year period, we anticipate maintaining double digit growth for our international segment in 2024.

Finally, I am pleased with our ability to address last year's headwinds and achieve meaningful improvement in our financial results and liquidity.

We've improved the predictability of our <unk> business and demonstrated the ability to manage through complex changes while more work remains our resolve is steadfast in executing our business plan and prioritizing those areas. We believe are most meaningful and driving increased profitability, improving our balance sheet and enhancing our operational efficiencies and internal controls.

As we work to restore your comprehensive bio vendors.

Now I'll turn the call over to Mark.

Thanks, Tony and good morning, everyone.

Let me start by saying that I am delighted with the sizable improvement in our leverage so far this year.

As well as the reduction in our cost structure and improvements in our internal control environment.

Without the entire organization, our teams have executed well against our financial objectives in.

In addition, the predictability of our business has significantly improved enabling us to have confidence in raising our financial guidance and increased visibility as we plan for 2024.

Now turning to our results for the third quarter revenue was $121 million, which was a 6% lower compared to the prior year.

Adjusting for the divestiture of our wound business revenue growth was even when compared to the prior year.

In addition, adjusted EBITDA of $22 million was also even compared to prior year adjusted EBITDA from continuing operations lower operating expenses from our focus on reducing spending and benefits from our restructuring initiated at the start of the year were offset from lower gross profit due to the reduction in revenue.

Across pain treatments revenue returned to growth as sales increased 3% compared to the prior year as we continued our strong double digit volume growth across <unk>, which more than offset the continued pricing pressure.

Due to the move from whack to Asps.

As a result of its continued momentum and significant share gain from its clinical differentiation drilling now makes up nearly two thirds of our revenue.

Meanwhile, as we previewed.

Last quarter volume increase for jellison compared to last year, although overall revenue was down slightly as pricing headwind similar to <unk> and remained.

As we look to close out the year, we expect to see growth across our AIA platform continued to accelerate for the fourth quarter and.

In surgical solutions, we grew 7% ultrasonics maintained strong double digit growth, but slower than expected recovery in bone graft substitutes impacted overall growth.

We expect fourth quarter growth to be below trend given the slight delay in the acceleration of our bone graft substitute franchise that Tony mentioned.

Overall, we remain excited about the continued momentum in ultrasonics and long term prospects for it to be a major driver of our future revenue growth.

Finally, restorative therapy sales fell 28% in part by the impact of our wound business divestiture, which accounted for 15 percentage points of the decline.

On an organic basis restorative therapies declined 13 percentage points driven by significant reductions in our advanced rehabilitation business.

This reduction was partially due to the impact of accelerated sales in the second quarter due to customer demand that we highlighted on our previous earnings call.

In addition, prior year revenue was higher than normal due to the recovery from earlier in the year supply chain disruptions.

We anticipate a return to growth for advanced rehabilitation in the fourth quarter sales.

Sales for estrogen for the quarter were down low single digits as we continue to see improved stabilization as revenue in the U S for oxygen continued to grow sequentially.

Moving down the income statement adjusted gross margin of 75% increased 30 basis points compared to the prior year.

Overall, adjusted total operating expenses were almost $9 million compared to the prior year. The reduction in expense resulted from benefits of our restructuring and wound business divestiture combined with spending discipline across general and administrative expenses.

Client and overall operating expenses was minimized by a significant reduction in our accrual for management incentives for the prior year.

Now turning to our bottom line financial metrics adjusted EBITDA of $22 million was even with the $22 million for continuing operations earned in the prior year.

Adjusted operating income increased to $20 million from $17 million in the prior year, while adjusted net income totaled $5 million compared to $11 million a year ago.

Adjusted earnings per share were <unk> <unk> for the quarter compared to 18%.

In the prior year now.

Now turning to the balance sheet and cash flow statements. We ended the quarter with $27 million of cash on hand and $395 million.

Debt outstanding we had $15 million drawn on our revolving credit facility at the end of the third quarter.

Operating cash flow represented an outflow of $8 million for the quarter due to a negotiated delay in payment of rebate claims to private payers since the first quarter. These medical rebate payments, where the last calculated under WAC pricing with higher rebate rates and will come down going forward.

Forecast to return to positive operating cash flow in the fourth quarter as working capital normalizes.

From a liquidity perspective.

Our adjusted EBITDA for the year remains ahead of our expectations and we are well within the compliance with our leverage and interest coverage covenants at the end of the third quarter.

Finally, let me review, our 2023 guidance, which has been updated to reflect the performance of our business in the third quarter and our fourth quarter expectations. We now expect 2023 revenue to be $498 million to $505 million an increase in the midpoint from our previous guidance of 490 million.

<unk>.

$505 million.

Our guidance for adjusted EBITDA is now expected to be $84 million to $87 million, an increase from our previous guidance of $75 million.

$80 million.

Finally, our guidance for adjusted earnings per share is now expected to be a loss of 12 to a loss of <unk>.

An improvement from our previous guidance of a loss of 24 SaaS to a loss of <unk> 20.

In closing the execution of our business plan for three straight quarters, and it has enhanced our liquidity position and with our improved processes and controls our visibility into the business has increased leading to what we believe will be improved predictability.

As we close out the year, we plan to remain steadfast in improving our financial performance through increased revenue and disciplined expense management.

Operator, please open the line for questions.

Thank you.

This time I would like to remind everyone that in order to ask a question. Please press star one on your telephone keypad.

Pause for just a minute to compile the Q&A roster.

Okay.

And your first question comes from the line of Chase Knickerbocker from Craig Hallum.

Sir your line is open.

Hey, guys congrats on the progress and thanks for taking the questions.

First from me I, just wanted to understand I guess the.

The decrease in <unk>.

Expenses year over year, we kind of look on that year over year basis can you just walk me through the delta of that $10 million Delta on SG&A as far as how much of it.

From lower sales how much of it's from savings from the wound Divesture and then how much is from other restructuring activities.

Yeah. Thanks, Jason for the question. This is mark when we look year over year expenses, our expenses first start with.

The expenses are really down more than what you see if you remember last year, Let me turn I mentioned this in my prepared remarks, but we had a big reduction for management incentives in the third quarter last year and the $8 million range. So that was withdrawn out of our expenses. If you normalize out of re down even further but this just gets into our <unk>.

<unk> discipline in expense areas of reducing sales that we initiated in the beginning of the year. So overall, we see.

<unk> continued discipline in expense and really the only onetime item I would say that we had in there was a.

Progress that we made on our accounts receivable bad debt. It was a credit to our P&L of roughly $2 million.

But overall, we feel good about where we're headed with expense.

Got it and then I just want to make sure I understand that <unk> kind of ESP impact again in first quarter can you just walk me through kind of the moving pieces, there I'm sorry, I missed it.

Yes.

As we said in our prepared remarks, and I know back to being more predictable. We did say that the ASP is going to increase in fourth quarter and that's what we that's what we've seen and we've gotten a lot better at understanding our processes around this in a lot better handle that has improved our predictability and visibility and of this from a CMS perspective. This is a.

Really complicated formula I'd say as far as the calculating the CMS and there is a lot of factors that go into it one of those factors that was unique that we saw in third quarter was one of our major distributors reduced their inventory days on hand that they carry a berlin and some of our other HR products and buy them drawing that down.

That has an impact on our first quarter ASP, but we're confident that it will bounce back in second quarter and beyond to continue to increase sequentially. So we view this as a temporary reduction in <unk> and would see that to continue to increase over sequentially over 2024.

Got it and I mean, we can see kind of the volume increase in the background for Daryl and and it's been it's been quite impressive and how do you think about kind of holding on to some of that volume growth as your ESP does start to improve I guess ask it another way what kind of part of that volume growth has been driven by kind of lower acquisition cost.

For customers.

Versus other kind of moving pieces there.

Yes, I'd say through the through the first three quarters were very pleased with the with the growth that we've seen in our portfolio.

<unk> in perspective.

Specifically continues to grow double digits and expect that to continue into 2024, and we will see prices kind of sequentially increase as we as we've talked about but again its a clinically differentiated product I don't see.

As the prices start to increase as we go through 2024, we don't see that changing our ability to continue to grow the product is the clinical differentiation differentiation will be there our strong position with the payers that we've talked about before we will continue to be there and our sales team will continue to execute at the same levels that they have been so we see this.

Continuing into 2024, as we said in the script.

From a mid to high single digit growth in 2024.

Yes, and then just last for me I want to make sure I understand kind of the moving pieces and surgical so we kind of shifted to other distributors did maybe some of those customers not come back as quickly as we thought on the bone graft side, and then kind of when could we get back to kind of double digits growth in surgical and is that just driven by kind of recovery with those customers that.

We're going to get back or kind of just growth within those new distributors that you've kind of passed off your airbag too.

Yes, Thanks, Jason Tony Let me take this one.

First of all as I mentioned in my comments, we did do some changes in the structure.

Our surgical sales force surgical solutions and the key thing here is our focus as we re establish that salesforce with the acquisition of <unk> was focus on execution, we knew which our distributors were selling the bone graft product and our direct salespeople were selling new ultrasonic product and we had them overlapping a bit as they were trying to demonstrate.

The opportunity for some synergies I think we found that there was perhaps some little bit of an overlap in the channel and so we've decided to move forward with our distributors. Our primary driver of bone graft and we believe that we'll stabilize that team.

We're focusing our efforts of a very direct group of people, who will manage that group as they have in the past. So we're we're sort of going back to the future. There if we will have a little bit.

The good news is we're going to maintain some synergy here because those distributors are also I've also been effective in selling ultrasonic products in fact, theyre, probably selling more than 10 or 15% of our total ultrasonics by their great relationship standing in surgery with the spine surgeon. So so we think bifurcation that salesforce back to where they were but still allowing them to have.

Opportunistically, reaching over but they don't have sales quarters and theyre not going to have what we believe was a developing channel conflict.

Whats going to happen in bone graft I think we've been we've been driving growth with new product the new fibers in globals.

Allografts.

And those have been.

Big driver of our growth, that's probably going to stabilize a little bit, it's probably going to settle and so we'll be we'll be continuing to see growth from that but the question is when that will be sort of moderating more to high single digit growth rather than double digits. So I think we're going to continue to monitor carefully.

We're continuing to look at new product ideas, but right now we're feeling we're feeling positive about these changes and it is going to be a couple of quarters before you see all the benefit of it.

Great. Thanks for the question and congrats again on the progress.

Thank you.

The next question comes from the line of Robbie Marcus from JP Morgan.

Line is open.

Hi, This is actually <unk> on for Robbie Thanks for taking the questions.

This year has had some challenges, but it seems like you've made some.

Good progress stabilizing some of these trends.

And I know, it's still early but as you look out to 2024, how do you think about your ability to drive overall revenue growth next year, and what sort of headwind tailwind should we be keeping in mind.

Yes, we look at look into 2024.

We expect to return to growth and we're going through our plan in 2024 as a team right now and looking for solid growth in that in 2024, as we talked about a J. We look to have mid to high single digit growth and so as prices stabilize and we expect the volume to continue to grow we also.

The team's done a really good job on.

Improving our processes around the predictability of our total business, but also in <unk> and that will help us have confidence in managing that and we'll also continued our disciplined expense trends in the culture that we've developed in 2023.

But I think starting in Q4, and we look into 2024, we're going to start to look at investments that are going to drive return the business back to growth and we've talked about having solid growth in 2024. So we'll start to look at some commercial investments starting in Q4 with our sales team as well as R&D investments that will help drive the growth.

Over the long term so both of those will be investments that we would make is when we look at 2024 off of the guidance numbers that we're providing we would expect to see <unk>.

Smaller than expected increase in EBITDA, we expect to increase it but it's not going to be maybe as much as what you would expect with the growth that will drive just because of some of the investments we're putting back to drive growth in 2024 and beyond.

Great that's really helpful.

And how do you think about where the portfolio stands today.

Are there still any divestitures potentially on the table and where does M&A fit into the equation as you think about continuing to drive growth and innovation.

Thanks, so much.

I believe Tony Bill, Let me take that one first of all yes, M&A is probably not in the near term on our on our horizon I think our focus is to digest.

Lot of great products, and a lot of great processes that we have in our current portfolio. So that's what we're focused on and I think for the foreseeable future at least for the next year or so youll continue to see us focus there.

I think that.

From a standpoint of whether we're looking at our portfolio. Yes, we're constantly looking at it those activities are ongoing nothing new to report here today, but have confidence that we are evaluating where can we make investment to fund future sustainable profitable growth.

And continue to focus on those businesses.

And we'll continue forward with our evaluations of what belongs in the portfolio of what May change, but right now we're very very focused on driving what we have in our portfolio.

We feel comfortable that we don't have anything that we were forced to do we have.

Good cash generation for the business as we have in market, but we will continue to evaluate.

Great. Thank you.

Thank you again, if you'd like to ask a question. Please press star one on your telephone keypad.

Next question is coming from the line of Bill <unk> from Canaccord.

Your line is open.

Yes, Thanks, My question's been answered thanks.

That there are no further questions at this time I'd like now to turn the call over back to our CEO Tony deal.

Well thanks, everyone for your interest in bio Ventas, we continued to generate significant improvement in our financial position through strong execution of our business plan.

Our increased visibility into our business provides us with confidence in our ability to raise our revenue and earnings commitments for the year.

And our leadership team and I lead a dedicated team of employees that are focused on our mission and stakeholder value creation. Thanks again.

This now concludes today's conference call. Thank you for joining you may now disconnect.