Earnings Call Transcript - BVS Q4 2023

Operator, Operator

Good day, and welcome to the Bioventus Inc. Fourth Quarter 2023 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Dave Crawford, Vice President, Investor Relations. Please go ahead.

Dave Crawford, Vice President, Investor Relations

Thanks, Betsy, and good morning, everyone, and thanks for joining us. It is my pleasure to welcome you to the Bioventus 2023 fourth quarter earnings conference call. With me this morning are Rob Claypoole, CEO; and Mark Singleton, Senior Vice President and CFO. Rob will begin his remarks with his initial impressions and learning since joining as CEO and then lay out our priorities for 2024. Mark will provide detail on our fourth quarter and full year results and outline our 2024 financial guidance, we will finish the call with Q&A. The presentation for today's call is available on the Investors section of our website. But 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. 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 as 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 Investors section of our website. Now I will turn the call over to Rob.

Rob Claypoole, CEO

Thanks, Dave. Good morning, everyone, and thank you for your continued interest in Bioventus. I'm honored to be part of the Bioventus team and lead an outstanding company focused on helping patients recover and lead active lives. I'd like to start by thanking Tony Bihl for his leadership and spearheading Bioventus's progress in overcoming significant challenges and setting a foundation upon which we can build. Tony and I have had an exceptionally smooth, I'd even say, world-class transition, and I'm grateful to him for that. As Dave mentioned, I'd like to first share my impressions and early learnings from my first two months as CEO and then discuss our top priorities for 2024. Over the past two months, I've had the opportunity to meet with many team members from around the globe at our different locations, participate in each of our national sales meetings, visit customers in person for our surgical HA and Exogen businesses, and engage in one-on-one conversations with key opinion leaders and patients virtually for P&S and rehab. With each meeting, I've listened, probed, and learned firsthand about our current position in the market, our challenges, and the future potential of our diverse business. This early in-depth engagement with our employees and customers has provided me with the following perspective. Bioventus is well positioned in large market segments with excellent technology and a talented team who is eager to accelerate the company's growth and profitability across each of our businesses. I'm not sure I share this perspective with you casually or loosely. I've had the privilege of leading various therapeutic categories within medtech with several leading companies over the past 20 years, and this experience has provided me with a strong foundation to evaluate the opportunities for Bioventus. Consider this, we hold a leadership position across roughly two thirds of our product portfolio, while in the remaining one third, we are growing faster than the market, and we are in markets with favorable demographic tailwinds enabling sustained growth. In addition, we've started to improve our business processes, and we've built momentum throughout 2023 as we exceeded our financial objectives. Mark will tell you all about that in a few minutes. This combination of healthy market dynamics, progress with our business fundamentals, and exceeding our objectives is providing our team with the energy and the confidence to further advance our business. With all this in mind, when I decided to join the company, it was because of Bioventus' diverse market-leading portfolio and the prospect to create significant shareholder value, and I feel even stronger about the potential of Bioventus today than I did two months ago. There are so many challenges for us to tackle, but we will approach every day with a continuous improvement mindset, and we cannot wait to show everyone what Bioventus can and will achieve. Please allow me to transition and highlight the three areas we will prioritize in 2024. First, accelerating our revenue growth; second, improving our operational efficiency and boosting our future profitability; and third, improving our cash flow and liquidity position. Let me provide further context on these three areas. First, as we have discussed in the past, 2024 will be the second year of our planned turnaround with a focus on accelerating revenue growth across our business, fueled by increasing growth across our HA and Surgical Solutions businesses, along with continued above-market growth in our International segment. Across each business, we are going to focus on improving our basic commercial fundamentals to drive stronger execution. Regarding our HA business, we expect volume growth to remain above market as we leverage the clinical differentiation of DUROLANE along with the shift from multiple injection therapy to single injection therapy. We expect that our strong volume growth, combined with improving price dynamics, will accelerate revenue as the headwinds from the past year and a half subside throughout the year. Regarding Surgical Solutions, we see growth accelerating for this business as well. We expect the market-leading technology of our ultrasonic platform to continue to produce double-digit growth. Meanwhile, the work done by the team to strengthen our bone graft substitutes business enabled us to return to above-market growth in the fourth quarter, which we expect to maintain in 2024. We have a tremendous opportunity to build our International business with expected strong double-digit growth. So overall, our financial plan calls for a meaningful increase in our revenue growth compared to the last two years. The second focus area is improving our operational efficiency and boosting our future profitability through better prioritization, greater organizational efficiency, and reductions in our operational expenditures. With many different growth opportunities in front of us, it's important for us to be very disciplined in prioritizing and funding initiatives that deliver sustainable value to our shareholders. Over the past two months, we've made progress with driving more disciplined strategic focus and reducing our top business priorities. We will start to reallocate our resources to maximize the return on our investments. With respect to organizational efficiency, we are a diverse company that has evolved through several acquisitions. While our organization demonstrates fantastic teamwork daily, it's clear we have a significant opportunity to better integrate our business processes across functions and locations to streamline our work and drive speed, making it easier for our customers to do business with us and allowing us to devote more of our energy to generating profitable growth. With this in mind, improving our organizational efficiency is a key priority. Regarding our operational expenditures, the team captured material savings last year, and we'll continue to examine areas where we can reduce our expenses to either invest in more productive initiatives or to drive these savings to our bottom line to accelerate our margin expansion. Our third major focus area is improving our cash flow and liquidity position. This year, driving improved cash flow is a metric my leadership team and I have included as part of our incentive compensation. We expect to see a material change in our operating cash flow this year by lowering costs related to our acquisition integrations and debt restructuring. We also plan to drive a reduction in inventories in the second half of the year to further augment our cash flow. Regarding our liquidity position, we reduced our leverage over this past year by more than a full turn of EBITDA, but it remains above our target range. A recent amendment to our term loan was an important step in providing flexibility through next year. Our improved cash generation enables us to reduce our debt throughout the year, with the expectation that our leverage will be below four turns by year-end. That concludes my remarks about my initial impressions and our priorities for the year. Before turning it over to Mark, let me just emphasize how excited I am to be leading Bioventus. Significant work remains, but I am encouraged by our ability to address last year's headwinds and improve our financial results and liquidity. Over the coming quarters, we will focus on steadily improving our business fundamentals and our performance as we work to build your confidence in Bioventus. Now I'll turn the call over to Mark.

Mark Singleton, Senior Vice President and CFO

Thanks, Rob, and good morning, everyone. Let me start by saying I am proud of our entire organization for the significant improvement across our commercial business and functions. Not only have we solidified our financial position by driving a sizable growth in our adjusted EBITDA through a reduction in our cost structure, which enabled us to remove our going concern disclosure, but we have delivered enhancements to our internal control environment and have remediated our material weaknesses. The visibility into our business and coordination across our teams have significantly advanced, enabling us to have confidence as we execute our financial plan for 2024. Moving forward, we must consistently approach our business with a continuous improvement mindset to drive further efficiency across Bioventus. Now turning to our results for the fourth quarter. Revenue of $135 million came in above our expectations and represented growth of 8% compared to the prior year. Adjusting for the divestiture of our Wound business, revenue growth increased 14% year-over-year. Additionally, adjusted EBITDA of $22 million increased $5 million compared to the prior year, driven by the increase in revenue. Across Pain Treatments, revenue growth accelerated as sales increased 23% compared to the prior year due to our strong double-digit volume growth driven by DUROLANE. Unit volumes were higher for both SUPARTZ and GELSYN as well. We saw favorable pricing driven by last year's catch-up in rebates, providing a favorable comparison. Revenue for the fourth quarter finished above our expectations due to higher volume and lower rebate accruals. Looking ahead, we expect to sustain above-market volume growth given the clinical advantage of DUROLANE combined with the continued shift to a single injection therapy. From a pricing standpoint, we have not changed our expectations from last quarter's earnings calls. We anticipate some headwinds in the first half of the year but expect sequential improvement throughout 2024. Overall, we expect revenue growth in 2024 to be mid- to high single digits. In Surgical Solutions, revenue growth accelerated as we grew 12%, and ultrasonics maintained double-digit growth, bolstered from higher than anticipated generator sales at the end of the year. Additionally, bone graft substitutes grew high single digits as volume from new distributor relationships added in the previous two quarters ramped ahead of our expectations. The structural changes to our BGS selling efforts announced last quarter to drive a dedicated focus on ultrasonics and BGS helped minimize distributor turnover. Moving forward, we remain excited by the momentum in ultrasonics, giving our leading technology a small market share. This view was reinforced by recent feedback from customers who refer to our ultrasonics portfolio as revolutionary. Given recent changes in BGS, we feel the business is poised to return to consistent growth in 2024. Combined, we expect our Surgical Solutions business to grow between high single to double digits in 2024. Shifting to Restorative Therapies, sales fell 16%, driven by the impact of our Wound business divestiture, which accounted for 20 percentage points of the decline. On an organic basis, Restorative Therapies increased by 4%. Growth was driven by Exogen, where we continue to see improved stabilization as revenue in the U.S. maintained sequential growth. Excluding the impact of our Wound divestiture, we anticipate low single-digit growth in 2024 for Restorative Therapies. Finally, as we previewed on our earnings call last quarter, our International segment fell 4% with constant currency growth down 6%. For the year, our International segment grew 10% and is expected to maintain double-digit growth in 2024. Growth was impacted by prior year comparisons for above-normal volume as back orders were filled for products in advanced rehabilitation. Partially offsetting this headwind was continued strength across our Surgical Solutions business. Moving down the income statement, adjusted gross margin of 71% increased by 20 basis points compared to the prior year. Gross margin came in below our expectations due to transitory inventory write-offs. Overall, adjusted total operating expenses were at a similar level compared to the prior year. The expense reductions resulting from our restructuring and Wound business divestiture were offset by higher commissions related to revenue growth this year and employee incentives that were not accrued in the prior year. Now turning to our bottom-line financial metrics. Adjusted operating income increased to $20 million from $13 million the prior year, while adjusted net income totaled $6 million compared to a loss of $6 million a year ago. Adjusted earnings per share were $0.07 for the quarter compared to a loss of $0.02 in the prior year. For a brief recap of our full-year results, net sales of $512 million were even compared to 2022. Organic sales increased 4%, adjusting for the impact of our Wound divestiture. For the year, adjusted EBITDA totaled $89 million, representing a 30% increase compared to the prior year. Adjusted gross margin for the year was 74% compared to 75% a year ago. Our 2023 adjusted gross margin reflects the impact of lower average selling prices for our HA franchise. Adjusted operating income totaled $81 million, compared to $51 million in 2022. Lower operating expenses from our focus on reducing spending and benefits from our restructuring drove the increase. Turning to the balance sheet and cash flow statement, we ended the quarter with $37 million of cash on hand and $395 million of outstanding debt. We had $15 million drawn on our revolving credit facility at the end of the fourth quarter. Operating cash flow represented an inflow of $10 million, as higher net income drove the improvement compared to the prior year. From a liquidity perspective, our adjusted EBITDA for 2023 exceeded our expectations, and we are well within compliance with our leverage and interest coverage covenants at the end of the fourth quarter. Additionally, we recently engaged our banking partners and amended our credit agreement to provide additional headroom in our leverage and interest coverage covenants through the third quarter of 2025 without impacting the spread of our term loan. As we project forward, we anticipate cash flow in 2024 to be significantly higher than 2023 and allow us to pay the amortization on our term loan. With the reduction in debt, we forecast our net leverage to be below four times by the end of the year. Finally, let me lay out our 2024 financial guidance. Based on current trends in our business, we expect net sales to be in a range of $520 million to $535 million. For the year, we expect adjusted EBITDA to be between $89 million and $94 million. Our guidance for adjusted earnings per share is expected to be $0.12 to $0.20. Similar to prior years, we expect our first-quarter revenue and adjusted EBITDA to be the lowest for the year, and the fourth quarter to be the highest for the year, with the second and third quarters looking fairly similar. Contributing to the acceleration of EBITDA and earnings throughout the year will be a fairly consistent level of operating expenses each quarter. In closing, the execution of our business plan in the past year has significantly strengthened our liquidity position. With our improved processes and controls, our visibility into our business has increased, leading to what we believe will be improved predictability as we start the New Year. We plan to enhance our revenue growth and cash flow while maintaining spending discipline.

Operator, Operator

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

Chase Knickerbocker, Analyst

Good morning, guys. Congrats on the results. Pretty impressive relative to expectations, certainly, and welcome, Rob. Maybe the first one for you. As you looked at opportunities, what sealed the deal for Bioventus, particularly with the situation we're in now, and your ability to continue this turnaround that showed up in Q4 results? Can you go into a little more detail?

Rob Claypoole, CEO

Thanks, Chase. Looking forward to meeting you. There were a few factors. I touched on them upfront. As I was looking at different opportunities, Bioventus is in large growing market segments. We have excellent world-class technology and favorable share positions. Customers understand our value. When I'm out in the field with Mark, it's clear our customers not only understand the benefits of our technology for their patients and themselves but also the reasons behind it. That combination of market segments, technology, and favorable share positions really spoke to the potential of the company. When I spoke with the Board and the management team, it was clear that some of the headwinds the company faced were temporary. With the right focus, particularly on commercial execution and operational excellence, there's significant potential to drive shareholder value. Those are some of the reasons that made it a really attractive move for me.

Chase Knickerbocker, Analyst

Yes, that makes sense. Maybe digging in a little on Pain. On the DUROLANE side, growth continues to be pretty strong year-over-year in our checks. As we see ASPs improve sequentially, can you talk through the drivers of above-market volume growth?

Mark Singleton, Senior Vice President and CFO

Yes, Chase, this is Mark. I appreciate the question. You mentioned DUROLANE. We've worked to sustain the momentum into Q4 through the clinical differentiation in that product. The market is moving to the single injection model, and we're favorable there with our clinical differentiation. Additionally, we have a strong contract position with several major providers. Some of these contracts came into play in 2023, driving a lot of the growth, and that will be a factor for us in 2024. Our sales team is doing an excellent job executing around these contracts and bringing in more profitable volume, and we expect that to continue into 2024.

Chase Knickerbocker, Analyst

How should we think about volume growth for GELSYN this year, given the headwinds as things transition to single-injection products?

Mark Singleton, Senior Vice President and CFO

We continue to expect growth in 2024 for GELSYN. While there is a shift towards DUROLANE, we have positioned ourselves well. It is a lower price point, but we are achieving success in driving volume there as well.

Chase Knickerbocker, Analyst

Regarding the transition we talked about last quarter, bringing bone graft substitutes back to distributors, what do you think about the structure of the sales force?

Rob Claypoole, CEO

Our volume accelerated ahead of expectations due to the change we made and the reduction in distributor turnover. We're optimistic about this change.

Chase Knickerbocker, Analyst

Great. Thanks for the questions and congrats on the great quarter.

Rob Claypoole, CEO

Thanks, Chase.

Lilly, Analyst

Thanks for taking the question. Regarding guidance, revenue and EBITDA came in better than expected, but EPS fell short. Can you talk about any dynamics that might be driving that shortfall?

Mark Singleton, Senior Vice President and CFO

We feel good about our revenue growth. As we head into 2024, our focus will be on both the top and bottom lines. The bottom end of our guidance is about 4% growth to the top end, roughly 7%. And from an EBITDA perspective, we're not expecting a significant increase in 2024, mainly returning to the two-year recovery we've discussed.

Lilly, Analyst

That's helpful. As a follow-up, can you provide insight on margin progression and any headwinds or tailwinds we should consider?

Mark Singleton, Senior Vice President and CFO

From 2023 to 2024, we expect margins to be even year-to-year without significant change. In Q4, we had a write-off related to our Ultrasonics portfolio that impacted margins but should not repeat next year. So overall, we don't expect significant changes in margin between 2023 and 2024.

Lilly, Analyst

Great. Thanks so much.

Caitlin Cronin, Analyst

Hi everyone. Congrats on a great quarter. Do you expect growth in 2024 to be driven mainly by DUROLANE, or do you expect all three product lines to contribute?

Mark Singleton, Senior Vice President and CFO

We're the only company with a full portfolio of 1, 3, and 5 injections. DUROLANE will lead the way in growth percentage-wise, but we also expect GELSYN to grow. SUPARTZ has been a surprise performer, continuing to outperform expectations. Overall, we expect volume growth from the entire portfolio in 2024.

Caitlin Cronin, Analyst

Turning to EXOGEN, how did it perform globally in Q4, and what are your growth expectations for both U.S. and OUS in 2024?

Mark Singleton, Senior Vice President and CFO

EXOGEN presents a significant opportunity for us. It had been declining, but we see a return to growth in Q4 and project it as a low single-digit grower long-term. We’re bringing back the appropriate level of focus to the business and addressing operational inefficiencies.

Rob Claypoole, CEO

As Mark said, it's proven technology with excellent brand recognition. Customer feedback during our field visits has been extremely positive. We will return to growth by addressing operational efficiencies.

Caitlin Cronin, Analyst

Great. Thank you.

Operator, Operator

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

Rob Claypoole, CEO

Thanks, Betsy, and thanks again, everyone, for your interest in Bioventus. We drove significant improvement across our business in 2023. We look to build on our momentum with stronger execution as we focus on accelerating revenue growth and cash flow and on creating shareholder value. Thanks for joining our call today, and have a good day.

Operator, Operator

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