Q3 2024 Bioventus Inc Earnings Call

Good day and welcome to the Battle of Ventus 3rd quarter, 2024 earnings conference call. Outbreakers' events will be in a listen-only mode. Should you need assistance? Please take the on-calfest specialists by pressing the star key follow-up as you are.

Aftric City presentation, there will be an opportunity to ask questions.

2 ASCII questions, you may press star then 1 on your touch 10 phone.

2 of Dreyer questions, please press star then too. Please note the event is being recorded. I would now like to turn the conference over to Dave Crawford, please go ahead.

Dave Crawford: Thanks Danielle, and good morning to everyone. Infection joining us, the design pleasure to welcome you to the development of this 2024 third quarter per year in Scottford's call. Would be this morning our wonderful President CEO and Mark Singleton Senior Vice President CFO.

Dave Crawford: Wubble again in his remarks within update on our 2024 priorities and our continued progress. Mark will provide detailed, our third quarter results in discuss our updated 2024 financial guidance.

Dave Crawford: We will finish the call with Q&A. The presentation for today's call is available on the investor's section of our website Bioventus.com

Dave Crawford: Before we begin, I would like to remind everyone that our remarks today contain four 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.

Dave Crawford: including Item 1A, Risk Factors of the Company's Form 10-K for the year ended December 31, 2023.

Dave Crawford: As such, factors may be updated from time to time in the company's other filings made with the SEC.

Dave Crawford: You are cautioned not to place undue reliance upon any forward-looking statements which speak only as of the date made. Although it may voluntarily do so from time to time, the company undertakes no commitment to update or revise forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable securities laws.

Dave Crawford: 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.

Dave Crawford: We generally refer to these as non-GAAP or Adjusted Financial Measures.

Dave Crawford: Important disclosures about the definitions and reconciliations of those non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP.

Speaker Change: are available in the earnings press release on the investor section of our website at BioVentus.com. Now, I'll turn the call over to Rob.

Rob: Thank you Dave. Good morning everyone and thanks for joining our call today. As a result of strong execution by our BioVentus team across all functions and geographies, we delivered another strong quarter and we look forward to completing a successful and transformational 2024.

Dave Crawford: We believe our diverse portfolio, growth strategy, and improved execution position us to sustain our momentum and deliver above-market revenue growth, margin expansion, and cash flow acceleration in the years ahead.

Dave Crawford: Let's take a look at our performance across the three priorities I introduced at the start of the year.

Dave Crawford: accelerating revenue growth, improving profitability, and enhancing our liquidity position.

Dave Crawford: With respect to our first priority, accelerating revenue growth, we delivered growth of 15% in the third quarter. This marks the fourth straight quarter of double-digit organic revenue growth.

Dave Crawford: Given the strong execution across all of our businesses, we are pleased to raise our revenue guidance for the full year to the high end of our previous expectations.

Dave Crawford: I'll share just a few highlights regarding our revenue.

Dave Crawford: Starting with surgical solutions, we accelerated our double-digit growth in the third quarter across both ultrasonics and bone graft substitutes.

Dave Crawford: With respect to ultrasonics, our selling strategy continues to gain momentum as the number of generators sold exceeded our expectations, and we saw the highest year-over-year growth for our disposable blades for the year.

Dave Crawford: As we have mentioned in the past, we are in the early stages of penetrating the roughly $1 billion market opportunity across spine, neuro, and general surgery.

Dave Crawford: Today, our focus, our strategic focus, remains on spine surgery as we seek to scale the business and drive significant growth by establishing nexus and bone scalpel as the standard of care.

Dave Crawford: To this end, we are making strategic investments to build awareness about the benefits of ultrasonic surgery versus current practices, increase medical education and commercial effectiveness, and enhance our portfolio with line extensions.

Dave Crawford: Longer term, we plan to augment our growth by penetrating neurosurgery and general surgery, while also expanding internationally.

Dave Crawford: We're excited about our potential to drive sustained double-digit or ultrasonic growth in the years ahead.

Dave Crawford: With respect to our HA business for knee osteoarthritis, the team once again delivered double-digit growth in the third quarter, led by significant demand for Duralane, our single-injection HA therapy.

Dave Crawford: Throughout this year, we have concentrated on enhancing the collaboration between our corporate accounts team and our field sales team to augment our commercial execution with large IDN and regional customers.

Dave Crawford: Our intense focus is helping us expand our footprint and secure new accounts as we continue to gain market share.

Dave Crawford: Looking forward, we are confident in our ability to drive sustained above-market growth with our clinical differentiation, dedicated commercial team, robust private payer coverage, and opportunities for geographic expansion.

Dave Crawford: Moving to Exogen, we have fully transitioned from stabilizing the business to establishing it as a growth business in our portfolio with our very dedicated and patient-focused team.

Dave Crawford: Given our renewed focus and investment in additional commercial resources, medical education, and product enhancements, we expect Exigen to grow annually by low to mid-single digits in the years ahead.

Dave Crawford: Next, I'd like to provide a brief update on the status of our advanced rehabilitation business divestiture that we discussed last quarter.

Dave Crawford: At the beginning of October, we announced an agreement to sell the business for $25 million, with potential earnouts totaling up to $20 million.

Dave Crawford: We believe this divestiture will allow us to further strengthen our focus and execution within our portfolio, while also enhancing our liquidity.

Dave Crawford: At this time, we expect the transaction to close near the end of this year or early next year.

Dave Crawford: Now I'll shift to our second focus area, Boosting Profitability.

Dave Crawford: With our peer-leading gross margin and our accelerated revenue growth, adjusted EBITDA of $24 million increased by $2 million versus the prior year.

Dave Crawford: For the year, we have delivered nearly 150 basis points of adjusted EBITDA margin improvement.

Dave Crawford: Going forward, we remain committed to growing the bottom line faster than our top line and, as previously mentioned, we are committed to expanding our adjusted EBITDA margin by at least 100 basis points annually.

Dave Crawford: We believe this level of annual margin improvement is sustainable as we capitalize on our revenue acceleration, preserve our high gross margin profile with supply chain improvements, and

Dave Crawford: and reallocate or reduce operational expenditures to either invest in higher ROI initiatives or drop the savings to the bottom line.

Dave Crawford: And now I'll turn to our third major focus area, improving our liquidity position.

Dave Crawford: I'm pleased to say that we generated positive cash flow from the operations in the third quarter, increased our cash position, and further reduced our net leverage ratio to approximately 3.5 turns.

Dave Crawford: Next year, we expect a material acceleration in our cash flow as we plan to reduce one-time cash costs, decrease inventory, and lower our interest expense, providing further improvements in our overall financial position.

Dave Crawford: That concludes my update on our three priorities.

Dave Crawford: I'm confident that the work taking place across our organization to improve our fundamentals, drive above-market growth, enhance profitability, and strengthen our liquidity position will continue to advance our business and create significant shareholder value. Now I'll turn the call over to Mark.

Mark: Thank you, Rob, and good morning everyone. Let me begin by saying that I am encouraged by our results to date and the progress of our teams throughout our business to deliver on our goals and objectives.

Mark: Now turning to our results for the third quarter, revenue of 139 million dollars increased 15% compared to the prior year. We maintain strong momentum across all three businesses with double-digit growth in both pain treatments and surgical solutions for the fourth consecutive quarter.

Mark: In addition, adjusted EBITDA of over $24 million, increased $2 million, and represented an 8% increase compared to the prior year.

Mark: Year-to-date adjusted EBITDA is up 21% compared to the prior year. Adjusted gross margin of 75% was comparable to last year, down 10 basis points.

Dave Crawford: Looking more closely at our revenue performance for the quarter, Surgical Solutions revenue accelerated by 18% as both ultrasonics and bone graft substitutes continue to generate double-digit growth, a trend we expect to continue in the fourth quarter.

Dave Crawford: Through the diligent work of our product supply team,

Dave Crawford: We have secured additional capacity within our BGS supply chain to meet future growth.

Dave Crawford: However, we expect a short-term slowdown in the growth in our BGS business due to the actions taken earlier in the year to delay adding new distributors and exiting some relationships with smaller distributors that's remained in shortages in our supply chain.

Dave Crawford: We do not anticipate this impact to be long term, and with enhancements made to our supply chain, we are working to quickly onboard new distributors.

Dave Crawford: In pain treatments, revenue increased 18% compared to the prior year, driven by Duralane's brand recognition and clinical differentiation, along with the strength of our team's commercial execution.

Dave Crawford: Shifting to restorative therapies, sales grew 6%, driven by accelerated growth from exogen.

Dave Crawford: We remain optimistic about our ability to drive consistent growth going forward through our demonstrated improvement in Salesforce execution and the impact of additional resources to assist our sales team.

Dave Crawford: Finally, our international segment grew 10% compared to the prior year, driven by derailing and partial recovery of delayed shipments in our ultrasonics business that we discussed last quarter.

Dave Crawford: Moving down the income statement, adjusted total operating expenses rose in line with our expectations by nearly $13 million compared to the prior year from a combination of a return to normalized spending and increased investments in strategic growth areas.

Dave Crawford: Now turning to our bottom line financial metrics. Adjusted operating income increased 2% to $21 million from $20 million in the prior year. Adjusted net income totaled $5 million, up 10% compared to the prior year.

Dave Crawford: Adjusted earnings per share were $0.06 for the quarter.

Dave Crawford: Shifting to the balance sheet and capsule of statement, we ended the quarter with $43 million of cash on hand, an increase of $11 million for the quarter, and $384 million of debt outstanding.

Dave Crawford: We add $15 million drawn on our revolving credit facility at the end of the third quarter. Our expectation is to end the year with a zero balance drawn on our revolver as we repay the borrowing with current cash on hand and free cash flow generated in the fourth quarter.

Dave Crawford: Operating cash flow represented an inflow of ten million dollars despite the payment of more than nine million dollars during the quarter to settle our shareholder litigation.

Dave Crawford: Even with this payment, we generated double-digit cash flow from operations for the second consecutive quarter.

Dave Crawford: We forecast double-digit cash from operations to continue for the fourth quarter and expect a significant increase in 2025.

Dave Crawford: We continue to lower our net leverage ratio, and from a liquidity perspective, we remain well within compliance with our net leverage and interest coverage covenants.

Dave Crawford: Consistent with our messaging last quarter, we are confident in our ability to reduce our net leverage to below three times during 2025.

Dave Crawford: Finally, let me provide an update for the two areas of our 2024 financial guidance that we are increasing.

Dave Crawford: First, based on the team's solid execution of our commercial plan, we now expect net sales to be in the range of $562 million to $567 million.

Dave Crawford: This represents a $2.5 million increase in the midpoint compared to our prior guidance of $557 million to $567 million. From an organic perspective, the midpoint of the guidance range reflected

Dave Crawford: Expected revenue growth of nearly 13% growth for the full year.

Dave Crawford: Second, for the year, we now expect adjusted earnings per share to be between 40 cents and 42 cents. This represents a two-cent increase compared to the midpoint of our prior guidance of 36 cents to 42 cents.

Dave Crawford: With respect to our 2024 guidance for adjusted EBITDA, it is unchanged and remains between $104 million and $107 million. The midpoint of our guidance reflects expected adjusted EBITDA growth of over 19% for the full year.

Dave Crawford: In closing, we are focused on finishing the year strong and finalizing our plan for 2025 to further enhance our revenue, increase profitability, and drive improved cash flow.

Dave Crawford: Operator, please open the line for questions.

Speaker Change: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys.

Speaker Change: If at any time your question has been addressed and you would like to withdraw your question, please press star then 2.

Speaker Change: The first question comes from Chase Knickerbocker from Craig Hallam. Please go ahead.

Chase Knickerbocker: Good morning. Thanks for taking the questions and congrats on a strong Q3 here.

Chase Knickerbocker: I just wanted to start on 2024 guidance though. It implies a 7% kind of growth rate for the overall business in Q4, doesn't kind of flow through that beat in Q3.

Speaker Change: on either revenue or EBITDA. Kind of a little bit more color on how we should think about this. Is there seasonality in the business that we kind of hadn't thought about?

Speaker Change: or anything in the business you would call out kind of outside of that kind of surgical headwind that you called out in your prepared remarks in Q4. Thanks.

Speaker Change: Hey Chase, this is Rob. I'll start, and I invite Mark to chime in. Thanks for the question. We'll see lower growth in Q4 driven mainly by two factors. First is unfavorable comps from a year ago, especially with Exogen where we had some one-time favorability in Q4 with significant collections for that business.

Speaker Change: And then second, then you alluded to this, but slower BGS growth because

Speaker Change: We slowed our onboarding of new distributor agents several weeks ago when we had supply changes and we're seeing a temporary, I'm sorry, temporary lag effect in ramping them back up, but, you know, that said, we feel very good about our continued momentum across the business in Q4 and in line with our guidance.

Speaker Change: We're looking forward to driving approximately 13% top-line growth for the year, 1.5x that on the...

Speaker Change: 1.5 times out on the bottom line and 150 basis point margin improvement for the year or so. Mark, anything to add?

Mark: Thanks Rob, nothing to add. I agree we're really happy with where we're at from a 4Q, full-year guidance perspective as Rob said, you know really strong revenue growth and managing the bottom line, growing greater than the top line.

Speaker Change: Great, thanks. And then maybe just one more on kind of Q4 when it comes to pain.

Speaker Change: Thank you for tuning in.

Speaker Change: You know, you had said kind of low double digits in surgical, you know, back of the napkin math. That implies kind of, you know, low double digit, high single digit in pain.

Speaker Change: How should we think about this? Are we going to start to see some price benefit in Q4?

Speaker Change: And then, is this just kind of tougher comps from Q4 pain last year? Just kind of how should we think about the pain business in Q4, particularly when you have, you know, one of your leading competitors out there kind of calling out some headwinds in the market. Thanks.

Speaker Change: Yeah, we feel good about our paint business continuing the momentum in Q4.

Speaker Change: You know, if you look at really focused on driving volume growth, if you look at our Q3 results, you know, we had a little bit of a price tailwind, not significant.

Speaker Change: or, you know, we expect those dynamics to...

Speaker Change: continue and thank you for you know we feel good about the

Speaker Change: The position we have with our contracts, the differentiation we have in DuraLane, and as the market continues to move towards the single injection, we feel very well positioned against our competition that's in the market and don't really see any significant changes in Q4 versus our.

Fortman: Fortman Chardonnay.

Fortman Chardonnay: Great, and then just kind of last for me, if we think about, you know, start to kind of think about 2025, you know, kind of taking this kind of growth rate from Q4,

Fortman: You know, how are you guys kind of thinking about 2025, kind of too early of a question here, but kind of on a top line basis, you've kind of given some color on EBITDA as far as margin expansion. Any color you're willing to give is kind of how you're thinking about 2025 as you kind of enter the year from kind of what it implies in Q4. Thanks.

Speaker Change: Chase, I'll start and again invite Mark to chime in.

Speaker Change: You know, we won't be giving 2025 guidance at this time, of course, but overall, I think, you know, we feel like we're just getting started with the business. In 2025, we have...

Speaker Change: Multiple growth drivers, and while the comps will get harder, that's what we expected, and we also expect to continue our positive momentum.

Speaker Change: into next year. So, again, I'll keep it high level, but consistent with what we've said before, we expect to

Speaker Change: drive double-digit growth in ultrasonics. BGS may slow slightly compared to the double-digits that we've seen this year until we onboard new distributors.

Speaker Change: With HA, again consistent with what was said, we

Speaker Change: We expect to continue above-market growth in NHA and exogen low to mid-single-digit growth, as I've mentioned. So that combination, you know, with our...

Speaker Change: our peer-leading gross margin and really a disciplined allocation of resources across our business. That strong revenue growth converts, as you mentioned there, it converts to EBITDA expansion, which is why

Speaker Change: we're reaffirming our intention to deliver above 100 basis points and even to improvement again next year and in the years ahead and and then on top of all of that we'll see

Speaker Change: A very nice improvement in cash flow due to several factors, including our improved working capital. So that's a very exciting combination for us, and we're looking forward to 2025 and beyond.

Speaker Change: Yeah, nothing to add for me, really excited about finishing 24 and looking forward to 2025.

Speaker Change: Great. Thanks, guys.

Speaker Change: The next question comes from Robbie Marcus from J.P. Morgan. Please go ahead.

Robbie Marcus: Oh, great. Thanks for taking the questions and congrats on a nice 3Q.

Robbie Marcus: Maybe first one, just to follow up, you talked about some of the...

Robbie Marcus: I'll call them transitory issues in fourth quarter. How should we think about that bleeding into the beginning of 2025? And will this cause any sort of first half, first second half type of growth disparity in 2025?

Robbie Marcus: Hey Robbie, this is Rob. I'll start and turn it over to Mark. Yeah, so we feel really good about our momentum into Q4 and into 2025 as well. In terms of any of the factors that I mentioned for Q4 that could carry into 2025,

Robbie Marcus: Really the only one is from a BGS standpoint making sure that we

Robbie Marcus: As I mentioned, we have a temporary lag effect and need to ramp that back up as we go into next year. So the start may be a little bit softer, but besides that, feel very good across the business about our momentum heading into next year.

Speaker Change: Mark, anything to add there? Nothing to add.

Speaker Change: So is this something we should expect in BGS that's resolved by 2Q or could it go on longer than that?

Speaker Change: Now you can expect it to resolve by Q2.

Speaker Change: And then maybe as a follow-up, you talked about, in the prepared remarks, getting net leverage down to three times by the end of 2025. Maybe just remind us of any upcoming

Speaker Change: debt payments or milestones and, you know, the pathway to getting to three times in the ultimate target leverage. Thanks a lot.

Speaker Change: Yeah, thanks Robbie. Just from an overall leverage perspective, you know, it really just continued execution in the business. You know, we talked about the cash flow acceleration that we expect in 2025. I mean, you know, continuing to...

Robbie Marcus: to grow EBITDA, you know, we're going to pay down, you know, the revolver and the N4Q and the acceleration and things that we've seen and

Robbie Marcus: in 2023 is good, you know, we have a...

Robbie Marcus: quarterly amortization and debt repayment with our overachievement on EBITDA. So really just continued execution on driving our business in 2025, as Rob talked about earlier.

Robbie Marcus: Seeing interest come down, seeing the debt come down as we repay some of that and just look to flow that through with our strong EBITDA performance and back to expanding our margin by 100 basis points.

Speaker Change: Great. I appreciate it. Thanks a lot.

Speaker Change: Thanks, Robbie.

Speaker Change: Great. Thanks for taking my questions and congrats on the quarter. So.

Speaker Change: For Penn Treatments, it seems like you guys are really taking share. Any concerns over your competitor that Chase mentioned earlier, really refocusing on its HA business with other divestitures? And it's also noting that its distribution partner in the US will work to establish stronger market access and work to stabilize sales.

Speaker Change: in the US OIP products for that company. So any concerns there over renewed focus by them?

Speaker Change: Hi, Caitlin. It's Rob. Let me start. You were a little bit muffled there at the end, but I think it was about, given what we're hearing externally in the HA category from competitors, is there any concerns on our side? And so I'll start, let me know if I answer your question fully. But no, there's no concerns. What you're hearing externally is a reflection of what we conveyed to all of you throughout this year.

Speaker Change: Very strong clinical differentiation. We've dedicated the largest dedicated sales force

Speaker Change: That is a very strong combination. And we're also focused on and seeing traction with improving our commercial execution with larger accounts. So all of that's consistent with what we've...

Speaker Change: shared with you. And as a result of that combination, we've been driving significant volume gains and we've always expected that the pressure from competitors will increase in the coming years. That's what happens when you're leading. So even though the comps get harder, we feel good about our ability to continue to grow above market given our strengths and our momentum.

Speaker Change: Got it, that's helpful. And then just thoughts on, you know, the other ultrasonic bone cutting tools in the market that, you know, were recently launched and how ultrasonics really compares and any more color on the innovation you noted coming to this product line.

Speaker Change: Yeah, I'll start. You know, it's overall in that category, we're early in the going here, and that's what's so exciting about it. You know, we have world-class technology.

Speaker Change: and tremendous momentum with the business but we're just scratching the surface.

Speaker Change: Plenty of opportunity for us to expand organically, and that includes through

Speaker Change: through additional innovation in the space. I won't go into detail on what that is, but

Speaker Change: It's one of the hidden gems with Biobentus is that we have a very strong R&D team for this business. And for the most part, they haven't been leveraged over the last couple of years. So that's one of the areas we'll be investing more in the business is from an R&D standpoint.

Speaker Change: We'll be sure to update you on some of that innovation when the time comes.

Speaker Change: Awesome. And then just, you know, any expectations for the OUS business, you know, going forward into next year?

Speaker Change: Yeah, I feel really good about it. You know, I've mentioned a couple of times that I think we have tremendous potential for the international business. There's probably more foundational work that's required than I realized when I first joined the company. But that said,

Speaker Change: I'm familiar with scaling international businesses and I remain very optimistic about the growth potential of our international business in the years ahead. So we'll be talking about that again throughout 2025 as we build and scale that business and make it a more significant contributor to the overall BioVentus growth profile.

Speaker Change: Thanks so much.

Speaker Change: Thank you.

Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to Rob Claypoole for closing remarks.

Rob Claypoole: All right, thanks everyone for your interest in BioVentus. We delivered a strong performance across our business in the third quarter and look forward to building on our momentum across our three priorities of accelerating revenue growth, improving profitability, and enhancing our liquidity position to create significant shareholder value. Have a good day.

Speaker Change: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.