Earnings Call Transcript - RMTI Q3 2024

Heather Hunter, Senior Vice President, Chief Corporate Affairs Officer

Good morning and thank you for joining us for this update on Rockwell Medical. Joining me on today's conference call are Dr. Strobeck, Rockwell Medical's President and Chief Executive Officer; and Jesse Neri, Rockwell Medical's Senior Vice President of Finance. Before we begin, I would like to remind you that this conference call will contain forward-looking statements about Rockwell Medical within the meaning of the federal securities laws, including but not limited to, the types of statements identified forward-looking in our annual report on Form 10-K and our subsequent periodic reports filed with the SEC. These statements are subject to risks and uncertainties that could cause actual results to differ. Please note that these forward-looking statements reflect our opinions and expectations only as of today. Except as required by law, we specifically disclaim any obligation to update or revise these forward-looking statements in light of new information or future events. Factors that could cause actual results or outcomes to differ materially from those in or implied by such forward-looking statements are discussed in greater detail in our periodic reports filed with the SEC. Rockwell Medical's quarterly report on Form 10-Q for the third quarter of 2024 provides a full analysis of the company's business strategy as well as the company's financial and operational results for the three and nine months ended September 30, 2024. The reconciliation of non-GAAP measures we discuss on today’s call can also be found in today's press release. Our Form 10-Q and other reports filed with the SEC along with today's press release, our updated investor presentation, and a replay of today's conference call and webcast can be found on Rockwell Medical's website under the Investors Section. Now, I would like to turn the conference call over to Rockwell Medical's President and CEO, Dr. Mark Strobeck.

Mark Strobeck, President and CEO

Thank you, Heather. Good morning and thank you for joining us today for Rockwell Medical's third quarter 2024 earnings conference call and webcast. First, I'm going to review our third quarter results then provide you with a preview of what we expect in the fourth quarter and then our outlook on 2025. We are pleased to share with you that for a second consecutive quarter, we achieved profitability on a cash flow and adjusted EBITDA basis. Additionally, for the third quarter 2024, we achieved the highest quarterly concentrate product sales, the highest quarterly gross profit and the highest quarterly gross margin in Rockwell's history. Revenue for the third quarter was positively impacted by consistent sales from our current customers as well as our largest customer making a special large order of premium products during the quarter. Our largest customer is expected to continue to make those purchases into the fourth quarter of 2024. The increase in gross profit was due to higher gross margin on our current business, coupled with the special large order of premium-priced products from our largest customer. This, in turn, led to an increase in our gross margin for the third quarter and profitability on the cash flow and adjusted EBITDA basis. As a result of the third quarter of 2024 being our second consecutive quarter of positive cash flow, we are now eligible to extend the interest-only period of our loan and security agreement with Innovatus from 30 months which has an amortization date of August 1, 2026, to 36 months which has an amortization date of February 1, 2027. We intend to take advantage of this extension. During the third quarter of 2024, we entered into a multimillion dollar distribution agreement with Nipro Medical Corporation. Under the terms of the agreement, we will continue to supply Nipro with our liquid and dry acid and bicarbonate hemodialysis concentrates for which Nipro has the right to distribute our products outside of the United States. The two-year agreement has an option to extend for an additional one-year period and includes product purchasing minimums of $5 million for the first year and incremental increases each subsequent year. As we noted in our last earnings call, we expanded our concentrates product portfolio to include a convenience pack that will help Rockwell Medical expand our presence in the at-home market. Subsequently, we announced a product purchase agreement with a leading at-home and acute care dialysis equipment manufacturer in the United States. Under the terms of the agreement, we will supply this customer with our liquid assets and liquid bicarbonate, both of which will be packaged in either our four per case packaging for larger dialysis settings or two per case packaging for smaller acute care and at-home settings. Rockwell Medical also renewed its supply agreement with Aqua dialysis. As part of the renewal, we expanded our distribution to all Texas-based Aqua dialysis clinics, supplying them with our liquid and dry acid and bicarbonate hemodialysis concentrates and other associated hemodialysis products. Now, turning our attention to the fourth quarter of 2024, we project that our revenue will be between $23 million and $25 million. Our gross margin will be in line with previous quarters and we will be profitable on an adjusted EBITDA basis. As a result, we have increased our 2024 guidance for net sales to between $98 million and $101 million, gross profit to between $15 million and $17 million; gross margin to between 16% and 18% and adjusted EBITDA to between $4 million and $5 million. These targets represent significant improvement over what we initially guided at the beginning of this year. In addition, we have significantly bolstered our cash position, more than doubling it from where our cash position was at the end of the first quarter 2024. These accomplishments and revised projections are a direct result of our team's hard work and dedication to deliver against the goals and objectives we set over two years ago which include focusing on growing Rockwell's revenue-generating business, driving profitability for our overall business and achieving profitability in 2024. We’re continually assessing our strategic priorities and capital structure, managing cash, reducing our debt and placing Rockwell Medical on firmer, stronger, more stable financial footing. Every member of our organization has been instrumental in turning Rockwell Medical around, helping to rebuild shareholder value and, in turn, positively impacting more patients with end-stage kidney disease. 2024 will reflect the best performance this company has had in 25-plus years of its history. As we look towards 2025, we expect to encounter a shift in our customer makeup as we move away from less profitable business to focus on more profitable growth opportunities. The first of these changes will come from the relationship with our largest customer. During the third quarter, we received confirmation that our largest customer will extend their product purchase agreement with Rockwell through the end of 2025, during which product pricing will be increased. This customer has indicated to us that it expects volumes to decline during this extended period as they work to diversify their supplier base. We are actively working with this customer in an effort to focus their volume reduction on products that we believe are least profitable for Rockwell. Currently, we believe that our largest customer’s net sales in 2025 will decline between $31 million and $38 million, depending on the final volume forecast for 2025, which we expect to receive on or by December 15. Although our top line revenue will be negatively impacted in the short term, we believe we will still see improvements on an EBITDA basis in 2025. And this is before any new customer contracts, product purchase agreements, distribution agreements, new product opportunities or potential acquisitions are put in place. While this revised forecast downward is certainly disappointing, we have always known that we have a significant portion of our revenue with a single customer which presented a risk to Rockwell. We have been working incredibly hard to mitigate that risk by adding new customers and growing our top line beyond our largest customer. We are working to replace this top line revenue with opportunities that we believe will be more profitable to Rockwell in 2025 and beyond. Let me walk you through some of the activities we are currently pursuing. We are in the process of negotiating a large multiyear supply agreement with the world's largest leading provider of dialysis products and services and hope to be able to announce the execution of this agreement later this month. We are in the final stages of contract negotiations to add two new complementary hemodialysis products to our portfolio in 2025. We have new customer contracts under review that we expect to announce shortly. Finally, we have several acquisition opportunities we are currently evaluating that would add new capabilities and products to our portfolio. Because of all the changes we have made here at Rockwell over the last two-plus years, the change in our largest customer's forecast, while a short-term setback doesn't impact the strong foundation that we've built. We have a number of exciting opportunities we are working on that we believe will continue to support a profitable growing business going forward.

Jesse Neri, Senior Vice President of Finance

Thank you, Mark and good morning, everyone. For the three and nine months ended September 30, 2024, I will present the financials for the comparable periods in 2023 with and without the deferred revenue recognition in Q1 and Q3 of 2023 related to the termination of the Baxter and Wanbang distribution agreements, respectively. This continues to offer us the opportunity to more accurately present the progress we have made and continue to make, specifically within our hemodialysis concentrate segment. Net sales for the third quarter of 2024 were $28.3 million, our highest quarterly concentrate product revenue to date. This represents a 19% increase over net sales of $23.8 million from the same period in 2023. Excluding deferred revenue, net sales for the third quarter of 2024 increased 31% over $21.6 million for the third quarter of 2023. This increase was driven by a large special order of premium-priced products by a large customer. Net sales for the nine months ended September 30, 2024, were $76.8 million. Excluding deferred revenue, this represents a 33% increase over the same period in 2023. Gross profit for Q3 2024 was $6.2 million which represents a 183% increase over gross profit of $2.2 million for the same period in 2023. Excluding the impact of deferred revenue recognition, gross profit for the third quarter increased 464% over $1.1 million for the same period in 2023, driven by a special large order of premium-priced products by our largest customer as well as increased sales and price increases to existing customers. Gross profit for the nine months ended September 30, 2024, was $13.9 million. Excluding deferred revenue, this represents an increase of 342% over the same period in 2023. Gross margin for the third quarter of 2024 was 22% and a significant improvement from 9% or 5% excluding deferred revenue for the same period in 2023. Gross margin for the nine months ended September 30, 2024, was 18%. Excluding deferred revenue, this represents an increase of 13 percentage points from 5% for the same period in 2023. Net income for the third quarter of 2024 was $1.7 million compared to a net loss of $1.9 million for the same period in 2023. Excluding deferred revenue, net income for the third quarter of 2024 represents a $4.6 million improvement over a net loss of $3 million for the same period in 2023. Net income for the nine months ended September 30, 2024, was $300,000 which represents an improvement of $7.2 million over a net loss of $6.9 million for the same period in 2023. Excluding deferred revenue, net income for the nine months ended September 30, 2024, improved by almost $10 million over a net loss of $9.6 million for the same period in 2023. Adjusted EBITDA for the third quarter was a positive $2.8 million compared with a negative adjusted EBITDA of $1.2 million for the same period in 2023. Adjusted EBITDA for the nine months ended September 30, 2024, was a positive $3.8 million compared with a negative adjusted EBITDA of $4.4 million for the same period in 2023. Excluding deferred revenue, adjusted EBITDA for the nine months ended September 30, 2024, increased by $9.7 million over the same period in 2023. Cash, cash equivalents and investments available for sale at September 30, 2024, was $18.3 million compared to $11.9 million at June 30, 2024. Once again, the combination of increased sales and greater gross margins led to cash flow from operations of $4.3 million for the third quarter.

Mark Strobeck, President and CEO

Thank you, Jesse. Operator, please open the phone lines for any questions.

Anthony Vendetti, Analyst

Mark, I was curious about the decrease in orders for 2025 from this customer. Given that you have time to prepare, can the rise in at-home dialysis orders help offset this? Additionally, how are you looking to diversify within your core customer base? Does this create more opportunities, or are you actively seeking new customers now that you have increased supply capabilities?

Mark Strobeck, President and CEO

Yes. Thanks, Anthony, for the question. To address your first point, absolutely. I think we continue to see and continue to believe that the at-home dialysis market is expanding and we are working with all of the providers that tap into that emerging treatment path. So I think there's absolutely an opportunity for us to continue to grow within that as that market expands with our products. And the convenience pack which we've just recently introduced; it may seem like a small change to our existing portfolio but is incredibly meaningful when you think about what a patient at home has to do to not only store the materials needed for the dialysis process but then what they physically have to manage in terms of listing materials and putting it into the machine. So while it may seem like a small change, it's actually going to be quite meaningful and has been quite meaningful for the at-home market. So I think absolutely, that's an area for us to grow. As I said, this change is something that I think for us, we always knew what the possibility was, and so we wanted to prepare ourselves for that. The first place, obviously, is an expansion of the relationship with the largest dialysis provider on the planet in an effort to support making up that revenue change. Secondly, for us, we have an incredibly stable foundational business that we're now looking to expand beyond just concentrate. Product opportunities, I think, will be key for us in 2025 to continually help fill that gap with higher margin-based opportunities. It doesn't help us to keep supplying products to a very large organization, from which we don't make much profit. And I think the point I was making was that even when you consider that decline in top line, this business remains profitable on an adjusted EBITDA basis, which gives you a sense that it isn't contributing much to the margin we see here. So for us, it's all about adding more and developing more of our core business in a much more profitable fashion. And that's where our goals and objectives are going to be through 2025. As I said, we recognize this will have a short-term impact on the top line, but we're excited, and the team is excited about the opportunities that we're pursuing that we hope to announce in the next couple of weeks.

Anthony Vendetti, Analyst

Okay. And then just as a follow-up to that, in terms of the impact, obviously, you've quantified the revenue impact and it will have less of an impact because of the lower margin component of it on your EBITDA. Have you been able to? Or are you still working on what that impact will be to the EBITDA line in terms of either or to the EBITDA margin? Any color around that? And then based on the lower revenue footprint, is there any costs that you're able to take out temporarily as you look to either add new products or new innovation to your current product mix? And then I'll hop back in the queue.

Mark Strobeck, President and CEO

Yes. No, thanks, Anthony. So yes, let me address each piece of that. Right now, we’ve taken a very conservative look at the business. As I said, all of the numbers that we put forward really don't include or incorporate any new items that we're in the process of closing right now. So with that conservative outlook, we believe gross margin percentage for the business will continue to rise as we go forward into 2025. We're maintaining that positive trend through the efficiencies we’re creating here in the organization and also, obviously, by removing products that are currently dragging on that gross margin. So from a gross margin perspective, we expect it to keep increasing. We are working on determining the final impact on our EBITDA for next year. However, at the moment, all of our models indicate that the business is going to be profitable. We just don't know yet how profitable, and that may come from some tweaks we make from a cost perspective in our underlying infrastructure. We'll put out our 2025 guidance at the beginning of the year, which will clearly indicate what that is. But I can assure you, from our perspective, we will be a profitable entity on an adjusted EBITDA basis going forward.

Unidentified Analyst, Analyst

This is Jade for Ram, and congrats on the earnings. So could you tell me how the Western expansion is going and when you expect to fully deploy in the territory?

Mark Strobeck, President and CEO

Yes. So on a practical level, we've continued to increase the number of customers that we have in the West and are continuing to enhance our presence there. We are in discussions right now with a potential opportunity that could provide us with a permanent position in the West. We hope to be able to say more about that in the coming weeks.

Unidentified Analyst, Analyst

Great. And a follow-up to that, more locationally based. So you've mentioned a lot as we move into 2025 that you're planning that you can't really say anything but is there anything that you can mention regarding value-driving via ex-U.S. territories during 2025?

Mark Strobeck, President and CEO

Yes. So that too is an area that continues to be a good opportunity for us. As you note from the press release, we signed this quarter an extension and enhancement of our relationship with Nipro Medical which helps put our products into the international market. In addition, we are also in the final stages of bidding on multiple contracts in different international locations and seeking those tenders for product, which again, we feel like we're in a really good position to do based on our existing international business. And so again, we hope to have more to say about that here in the coming weeks. Thank you. Before we close, I'd like to take a moment to thank our team members for all their hard work they do every day to provide dialysis clinics and the patients they serve with the highest quality products supported by the best customer service in the industry. Our team members at every level within our organization are the nucleus of our success. We have developed and continue to build upon a core expertise in manufacturing and delivering hemodialysis concentrates. It is because of this dedication and passion that Rockwell Medical was named a Fortune Best Workplace in manufacturing and production in 2024. We have a reputation for reliability, quality, and excellent customer service. When patient outcomes are critical, customers and, in turn, patients can depend on Rockwell Medical to deliver. We continue to focus on optimization, automation, and streamlining our operations to drive sustainable profitability and shareholder value. We look forward to sharing more with you on our next earnings call. Thank you for your time today.

Operator, Operator

This concludes today's conference call and webcast. You may now disconnect.