Earnings Call Transcript - BVS Q2 2024

Operator, Operator

Good day, and welcome to the Bioventus Second Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Dave Crawford, Vice President of Investor Relations. Please go ahead.

David Crawford, Vice President of Investor Relations

Thanks, Danielle, and good morning, everyone, and thanks for joining us. It is my pleasure to welcome you to the Bioventus 2024 Second Quarter Earnings Conference Call. With me this morning are Rob Claypoole, President and CEO; and Mark Singleton, Senior Vice President and CFO. Rob will begin his remarks with an update on our 2024 priorities and our business, and Mark will provide detail of our second quarter results and discuss our updated 2024 financial guidance. We'll finish the call with Q&A. A presentation for today's call is available on the Investors section of our website, bioventus.com. But before I begin, I would like to remind everyone that our remarks today contain forward-looking statements that are based on 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 Securities and Exchange Commission, including Items 1A, Risk Factors, of the company's Form 10-K for the year ended December 31, 2023, and such factors may be updated from time to time in the company's other filings made with the Securities and Exchange Commission. 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 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 the U.S. Generally Accepted Accounting Principles, or GAAP. We refer to these as non-GAAP or adjusted financial measures. 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 are available in the earnings press release on the Investor Relations portion of our website at bioventus.com. And now I'll turn the call over to Rob.

Rob Claypoole, President and CEO

Thank you, Dave. Good morning, everyone, and thanks for joining our call today. We're off to an excellent start to 2024 thanks to the efforts of our Bioventus team across all functions and geographies. At the beginning of this year, we established new strategic priorities and aggressive goals for our team, and they have responded very well with their strong customer focus, agility, and execution, along with a continuous improvement mindset to produce favorable results for the first half of the year. While I'm encouraged by our clear progress this year, I'm even more enthused about the potential of our business for long-term growth and margin enhancement in the years ahead. Let's take a look at our performance across the three priorities I introduced at the start of the year: accelerating revenue growth, improving profitability, and enhancing our liquidity position. With respect to our first priority, accelerating revenue growth, we delivered organic revenue growth of 14% in the second quarter when removing the impact of our Wound Business divestiture. This marks the third straight quarter of double-digit organic growth, and because of our first half performance and expected momentum continuing into the second half, we now anticipate delivering double-digit organic growth for the full year. I'll share just a few highlights regarding our revenue. Starting with Surgical Solutions, we accelerated our double-digit growth in the second quarter with a strong performance in both Ultrasonics and Bone Graft Substitutes. With respect to Ultrasonics, our team once again doubled the number of generators sold compared to the prior year, which is a leading indicator for expected acceleration of our disposable portfolio. Moving forward, we believe we have an incredible opportunity to invest and create transformational growth in multiple ways, including building our base in the spine market, penetrating high-potential growth segments, including neurosurgery, and by investing in new geographies. We're looking forward to leveraging this powerful combination to drive sustained double-digit growth in the years ahead. Simultaneously, our Bone Graft Substitutes team continued to strengthen our commercial execution and growth with both existing and new distributors to further our market share gains. We also continue to advance innovation within our BGS portfolio with the recent FDA clearance for OSTEOAMP Cannula, unlocking new opportunities for future growth in minimally invasive surgery in the spine segment. With respect to our HA business for osteoarthritis, the team delivered double-digit growth again in the second quarter propelled by significant demand for Durolane, our single-injection therapy. We have a solid platform for sustained growth in HA with our clinical differentiation, dedicated commercial team, strength of our private payer coverage, and significant opportunities for geographic expansion. Moving along, after years of decline, we grew our Exogen business for the third straight quarter, and we expect mid-single-digit growth for the year. Keep in mind that this business previously generated over $100 million in annual revenue, but a lack of prioritization led to a significant decline. Now our team has returned the business to growth, and with their focus on the fundamentals such as medical education, product enhancements, and commercial execution, we have the potential to grow this business back over $100 million. The improved performance of our Exogen business is one of the clear indications that we have new momentum at Bioventus. Next, I'd like to briefly mention that we have made the strategic decision to divest our Advanced Rehabilitation business. We are highlighting this today and in our 10-Q because we may sign an agreement during the third quarter. This prudent decision reflects our deep respect for our advanced rehabilitation team, our customers, and the many patients who benefit from this life-changing technology. Our goal is for the business to be positioned in an environment that enables the higher focus and prioritization it deserves. This potential divestiture will also allow Bioventus to better focus on execution within our core businesses, continue accelerating our revenue, and enhance our liquidity. Now I'll shift to our second focus area, boosting profitability. With our peer-leading gross margin and our accelerated revenue growth, we significantly increased our adjusted EBITDA and operating margin. Adjusted EBITDA for the quarter was its highest to date at over $34 million, and we drove a 224 basis point increase in our adjusted EBITDA margin compared to the prior year. We now have an opportunity to invest selectively in high-potential areas to drive long-term profitable growth, including areas like R&D, medical education, commercial productivity, and our supply chain in the second half of the year. Even with these increased investments, we will continue to grow the bottom line faster than our top line, and we project our overall 2024 adjusted EBITDA margin to expand by more than 100 basis points compared to the prior year. We believe this level of annual margin improvement is sustainable as we capitalize on revenue acceleration, preserve our high gross margins with supply chain improvements and reallocate or reduce operational expenditures to invest in higher ROI initiatives or drop the savings to the bottom line. And now I'll turn to our third major focus area, improving our liquidity position. We further reduced our net leverage ratio at the end of the second quarter with the increase in adjusted EBITDA and reduction in debt. Equally important, I want to highlight the significant increase in cash flow for the quarter. We are encouraged by the faster-than-anticipated reduction in our leverage ratio, and we will remain very focused on this priority moving forward. Given our progress, we're confident we can reduce our net leverage ratio to below 3x before we exit 2025. That concludes my update on our 3 priorities. Before turning it over to Mark to dive deeper into our financials, I'll mention that, since joining Bioventus just 7 months ago, I've had the opportunity to continuously engage with many employees, customers, and shareholders. I want to take a moment to express my appreciation to all of our stakeholders. With your help, we're transforming Bioventus, and I'm confident that the work taking place across our organization to improve our fundamentals and unlock new long-term growth will advance our business and create significant shareholder value. Now I'll turn the call over to Mark.

Mark Singleton, Senior Vice President and CFO

Thanks, Rob, and good morning, everyone. Let me begin by saying that I am encouraged by the sustained improvement exhibited throughout our business over the past several quarters, and we are well-positioned to enhance our growth, profitability, and cash flow for the remainder of the year and into the future. Now, turning to our results for the second quarter, revenue of $151 million increased 10% compared to the prior year. Adjusting for the divestiture of our Wound Business, organic revenue advanced 14%. We maintained our momentum across all 3 of our businesses as we achieved results ahead of our expectations. In addition, adjusted EBITDA of over $34 million increased $6 million and represented a 22% increase compared to the prior year. Year-to-date, adjusted EBITDA is up 27% compared to the prior year. The increase in the second quarter was driven by higher revenue and gross margin expansion. Adjusted gross margin of 76% improved 180 basis points compared to the prior year. This is a result of favorable revenue mix given robust growth from the higher-margin HA and Surgical Solutions businesses, lower private payer rebates for our HA business, and the impact from the divestiture of the lower-margin Wound Business. Looking more closely at our revenue performance for the quarter, Surgical Solutions revenue accelerated by 16% as both Ultrasonics and BGS continue to generate double-digit growth. Through the diligent work of our product supply and commercial teams, we successfully navigated the recent supply challenge and drove growth above our expectations. As we move into the second half, we are steadily increasing supply and continue to enhance our sales planning and operations processes. In Pain Treatments, revenue increased 17% compared to the prior year as we maintained double-digit growth for the third consecutive quarter driven by Durolane's brand recognition and the strength of our team's commercial execution. In addition, revenue was enhanced by a few million dollars from favorable mix shift lowering our private payer rebates. We expect to maintain our strong execution in the second half and now project driving double-digit growth for the year. Shifting to Restorative Therapies, sales fell 9% driven by the impact of our wound business divestiture, which accounted for 14 percentage points of the decline. On an organic basis, Restorative Therapies increased 5 percentage points, driven by Exogen. We are encouraged by Exogen's turnaround resulting from our efforts to improve the sales force execution and the impact of additional resources to assist our sales team. Finally, our International segment grew 4% compared to the prior year, driven by Durolane. We expect growth to accelerate for the remainder of the year as we recover from delayed shipments for Ultrasonics earlier this year, along with sustained double-digit growth for Durolane. Moving down the income statement, adjusted total operating expenses were nearly $10 million compared to the prior year. The increase was primarily related to higher sales commissions from revenue growth and higher employee compensation from increased headcount. Now, turning to our bottom-line financial metrics, adjusted operating income increased 12% to $31 million from $28 million in the prior year while our adjusted operating margin of 21% increased 40 basis points compared to the prior year period. Adjusted net income totaled $15 million, up 37% compared to the prior year. Adjusted earnings per share were $0.19 for the quarter, ahead of our expectations. Now, turning to the balance sheet and cash flow statement, we ended the quarter with $32 million of cash on hand and $383 million of debt outstanding, an $8 million reduction for the quarter. We had $15 million drawn on our revolving credit facility at the end of the second quarter. As Rob mentioned, we saw a significant sequential increase in cash flow this quarter. Operating cash flow represented an inflow of $15 million. We further reduced our net leverage ratio, and from a liquidity perspective, we remain well within compliance with our net leverage and interest coverage covenants. With our expected reduction in debt and an increase in EBITDA over the remainder of 2024 and into 2025, we now expect our net leverage ratio to be below 3x before exiting 2025. Finally, given the accelerated momentum in our business and increased expectations, let me update our 2024 financial guidance. Based on our team's solid execution of our business plan, we now expect net sales to be in the range of $557 million to $567 million. This represents a $19.5 million increase in the midpoint compared to our prior guidance of $535 million to $550 million. From an organic growth perspective, the midpoint of the guidance range reflects an expected revenue growth of 10% in the second half of the year and over 12% growth for the full year. For the year, we expect adjusted EBITDA to now be between $104 million and $107 million. This represents a $9 million increase in the midpoint compared to our prior guidance of $94 million to $99 million. The midpoint of our guidance reflects expected adjusted EBITDA growth of 10% in the second half of the year and over 19% growth for the full year. Finally, our guidance for adjusted earnings per share is now expected to be $0.36 to $0.42. This represents a $0.10 increase compared to the midpoint of our prior guidance of $0.25 to $0.33. In closing, we are excited about our performance through the first half of the year and will remain diligent in our efforts to further enhance our revenue, adjusted EBITDA growth, and drive improved cash flow.

Operator, Operator

We will now begin the question-and-answer session. The first question comes from Chase Knickerbocker from Craig-Hallum. Please go ahead.

Chase Knickerbocker, Analyst

Congrats on another really nice quarter here. Maybe, Rob, just to start, what did you see, I guess, since the May update kind of in the recent quarter that led to the decision to divest restorative? The team historically has been pretty consistent that that is a nice kind of bottom line business, had never really committed to whether or not to divest. Kind of talk to me about what you saw kind of in the last quarter that kind of led to this decision? Thanks.

Rob Claypoole, President and CEO

Thanks, Chase, for the question. I'll start, Chase, by just saying I have a lot of respect for this business and for the team and for the many patients who benefit from the life-changing technology. One of the harder things to do is to divest a business or choose to divest a business that you respect so much, but it's the right thing to do for our stakeholders. When we made this decision, it was with that in mind because our goal is to put the business in an environment that enables the higher focus it deserves. The decision was really driven by this business being fantastic, having amazing technology, and more potential than it's realizing today. At the same time, the potential divestiture allows Bioventus to better focus on execution within our core businesses where we have so much potential and to continue accelerating our profitable revenue growth. As you know, it also enhances our liquidity. So that's really what drove the decision, Chase.

Mark Singleton, Senior Vice President and CFO

Yes, Chase, this is Mark. I'll just add, from an overall financial perspective, that's really immaterial. I mean, that actually is a lower-growth business, a lower margin, but overall, I'd say immaterial to the financials, but it does obviously reduce our debt levels.

Chase Knickerbocker, Analyst

Makes sense. Got it. Maybe just shifting to Pain, a lot better than I think anyone had expected. Can you help me a little bit with the drivers as far as kind of year-over-year? Was it mainly driven by volume? Did we start to see a fairly meaningful pricing benefit? Just kind of walk me through the drivers of the really strong organic growth number there.

Mark Singleton, Senior Vice President and CFO

Yes, Chase, thanks. This is really continued strong execution from our teams, and the sales team has done a great job of selling around all the contract positions that we have, obviously with Durolane being clinically differentiated. So I think it's really a continuation of what we've talked about for the last three quarters. We're starting to get into new areas like the VA and executing a lot better in the IDNs and being a lot more targeted with that. The sales team has really done a great job over the first two quarters of selling around the contracts, and the market's continuing to expand with a number of lives and opportunities. But we talked about price a lot; 2Q is mainly driven by all volumes, which is the primary driver of this growth. So we feel really good about our performance there and heading into the second half where we talked about continuing to see double-digit growth for that business.

Chase Knickerbocker, Analyst

Got it. And then just lastly on Surgical and then a quick gross margin question, it's tough to peel apart kind of BGS versus Ultrasonics, but BGS continues to really outperform certainly market growth rates. Can you just speak to, is this just a continuation of kind of the distributor model being the right go-to-market strategy here and just got a lot of distributors who are excited about OSTEOAMP? And then just on gross margins, Mark, I know we talked about last quarter about margins going back to the mid-70s. Is this a product mix that we should expect going forward, or are we expecting to keep the same kind of commentary as last quarter? Thanks.

Mark Singleton, Senior Vice President and CFO

Yes. I'll get to BGS last. I'll take the margin question first. From a margin perspective, again, peer-leading gross margins are really a great asset for our company. You can see the leverage that we drove in 2Q with that driving double-digit revenue growth. From a second half perspective, we really benefited in the first half from a really strong mix in Surgical Solutions and our HA business, which are both really high-margin businesses where we saw growth. In the second half, we'll see a slightly lower margin than the first half as we start to get our International business back to the level of growth that we expect, which will bring the margin down a little bit compared to the first half. From a BGS perspective, again, a really good story overall in Surgical Solutions. Ultrasonics, as Rob mentioned in our prepared remarks, continues to perform. We doubled the number of generators that we sold last year, which is the leading indicator for disposables that are going to come, so we saw strong performance in Ultrasonics. In terms of BGS performance, we're seeing a lot better performance from our legacy distributors, and our sales team has done a great job of execution. Additionally, we did a really strong job of adding new distributors in the second half of last year. So it's really a combination of the legacy distributors showing better performance and the groundwork that the team laid in the back half of last year. I truly feel good about that as a growth driver in 2024 and beyond. Our share there is low, and there is still a lot of opportunity in front of us.

Operator, Operator

The next question comes from Robbie Marcus from JPMorgan.

Lily, Analyst

This is actually Lily on for Robbie. Thanks for taking the question, and congrats on the good quarter. You raised the top line by more than you beat. So can you talk through how you're thinking about the back half of the year and where that incremental upside is coming from?

Rob Claypoole, President and CEO

Sure. This is Rob. I'll make a general comment about the back half of the year, and then Mark can chime in. We had this really strong first half of the year, and for the back half, we feel good about driving double-digit growth, both top line and bottom line. What this means for the full year is not just growing double digits, both top and bottom, but actually growing the bottom line nearly 2x the top line. So with that, I'll let Mark talk a little more about the details there.

Mark Singleton, Senior Vice President and CFO

Yes, we feel good about it. I mean, double-digit growth in the back half of the year, while it's slightly less than what we saw in the first half, still reflects a strong execution. From an overall revenue perspective, it's in line with the seasonality we've historically seen after removing some one-time benefits around some private payer dynamics. We believe this gives us visibility to maintain double-digit growth, which is very healthy. From a bottom-line perspective, we're still growing double digits while also investing back into the business in medical education, strengthening our commercial execution, and starting to put money into R&D as well. If you think about where this business has been over the last 12 to 18 months, we've starved it and haven't been able to make these key investments. We believe these investments are going to help us in the back half and set us up for a really strong start in 2025, fueling growth drivers in our International business and continuing to accelerate our Ultrasonics growth. So we feel good about our guidance for the second half and look forward to executing on it.

Rob Claypoole, President and CEO

And Lily, this is Rob again. I'll just chime in. I think you've mentioned what will contribute to it from a business standpoint. In the first half of the year, we had broad-based overachievement across our business, and we expect very strong performance across the business again for the second half.

Lily, Analyst

Got it. That's helpful. And then just following up on that, similarly, you put up really good EPS and adjusted EBITDA results, but I think guidance implies a step down over the back half of the year on the bottom line and on margins. So is that just conservatism, or are there other dynamics that we should be thinking about in 3Q and 4Q? Thank you.

Mark Singleton, Senior Vice President and CFO

I guess I'll just reiterate, if you look in the second half, we are, even with the step down you're referring to, from an absolute perspective, we're still growing our bottom-line EBITDA 10%, double-digits. So we're growing revenue 10% at the midpoint of our guidance and growing EBITDA by 10% at the midpoint of our guidance. The step down really comes from the key investments that we've talked about and starting to take a disciplined approach in those investments. We have been very disciplined over the last 18 months from an organizational perspective, managing our expenses really well, as our results speak for themselves with that. But we have to start looking at strategic investments that are going to drive medium- and long-term growth in R&D, medical education, and commercial execution. So from a step-down perspective, that's really what's driving it. Again, through the first half of the year, we've grown our revenue by 14% to 15% and grown our bottom line by 28%. We're going to start to strategically implement some of that money in a disciplined way to ensure a consolidated ROI on these investments in the second half, which will drive growth in the back half and in the long term.

Caitlin Cronin, Analyst

Rob and Mark, it's John on for Caitlin. Congrats on the quarter. And thanks for taking our question. I just want to start on the hyaluronic acid business. The sales force, can you talk about any continued progress made here as you look to target larger accounts? Have you been taking share as other players have deemphasized their sales organization in the segment?

Rob Claypoole, President and CEO

I'll start off, John. Thanks for the comment and also the question. We continue to see success with our HA portfolio, particularly Durolane, which is performing above market growth, taking share from others. A source of that growth is through the larger accounts we previously mentioned and that you just touched on there. We feel really good about this. The clinical differentiation of Durolane in our overall portfolio is being recognized on an increasing basis. Our dedicated commercial team lives and breathes this business every day, very focused on it, and that's driving our success above market, enabling better short-term results and setting us up for long-term success.

Caitlin Cronin, Analyst

Great. And just any update on TalisMann and the peripheral nerve business?

Rob Claypoole, President and CEO

Yes. We mentioned previously that we're really excited about the technology. We don't expect any significant impact from TalisMann this year as it's still going through the FDA clearance. Once we have additional information, not just on that but also on the launch ahead, we'll include it in our earnings call or in separate conversations. Overall, with the P&S business we have across Bioventus, we see a great mix of areas where we can grow above market and also grow the overall category with our technology and our approach within P&S with TalisMann. We have both the opportunity to take share and grow the overall category. So stay tuned, and we'll tell you more about that in the coming quarters.

Operator, Operator

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

Rob Claypoole, President and CEO

All right. Thanks, everyone, for your interest in Bioventus. As you know, we delivered significant improvements across our business in the second quarter, and we look forward to building on our momentum across our 3 priorities of accelerating revenue growth, improving profitability, and enhancing our liquidity position to create significant shareholder value. Thanks, and have a good day.

Operator, Operator

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