Bioventus Inc. (NASDAQ:BVS) Q1 2024 Earnings Call Transcript May 7, 2024

Bioventus Inc. beats earnings expectations. Reported EPS is $0.07, expectations were $-0.05. Bioventus Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and welcome to the Bioventus first-quarter 2024 earnings conference call. [Operator Instructions]. I would now like to hand the call over to Dave Crawford, Vice President of Investor Relations. Please go ahead.

Dave Crawford: Thank you, Andrea, and good morning, everyone, and thanks for joining us. It is my pleasure to welcome you to the Bioventus 2024 first-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 in our business. Mark will provide detail of our first-quarter results and discuss our updated 2024 financial guidance. We will finish the call with Q&A. Our presentation for today's call is available on the investors section of our website, bioventus.com. 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, including Item 1A, Risk Factors of the company's Form 10-K for the year ended December 31, 2023.

And as 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 on any forward-looking statements, which speak only as of the date that they were 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 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 US generally accepted accounting principles or GAAP. We generally refer to these non-GAAP or adjusted financial measures.

Important disclosures about 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. Now, I'll turn the call over to Rob.

Robert Claypoole: Thanks, Dave. Good morning, everyone, and thank you for joining our call this morning. We're off to a very strong start to the year, and our Bioventus team is driving significant improvements across our business. During our last call I introduced the three priorities were focused on: Accelerating revenue growth, improving profitability and enhancing our liquidity position. I'd like to begin today by reviewing our progress. With respect to our first priority, accelerating revenue growth, we delivered 15% organic revenue growth in Q1 after removing the impact of our own divestiture. Our team generated this strong performance through a better strategic focus and disciplined execution of the plan that we established at the beginning of this year.

Let me share a few of the highlights. Respect to our HA business, the material impact from the reimbursement change is behind us. And we delivered double-digit growth in Q1, which was propelled by significant volume growth in DUROLANE, our single-injection therapy. DUROLANE now accounts for over two-thirds of our total HA revenue. And we believe we have a platform for sustained growth with this clinically differentiated therapy for several reasons. First, the market continues to shift from multi-injection therapies to single-injection, which is why it's the fastest growing segment of the HA market with projected annual growth in the mid-single digits. Next, the awareness and recognition of DUROLANE's compelling clinical differentiation is spreading, which is why more clinicians and patients are making it their preferred choice.

Positive impact from this market growth and clinical differentiation is augmented by the fact that Bioventus now has the most preferred payer coverage in the US in the single-injection market, thanks to our team's successful contracting strategy. Bioventus also has the largest fully dedicated HA commercial team in the US. And our team is doing a great job shifting their time and efforts to target larger accounts, which is producing early gains. All of these volume growth drivers will be supported by continued sequential price increases that we expect will ramp up during the second half of this year. And we currently only have about a 25% market share in the single-injection market, which further enables us to grow our HA business well above market over the next few years.

As a result of this powerful combination and our expectations for the remainder of the year, we anticipate HA revenue growth in 2024 to be high single digits to double digits, which is an increase from what we previously shared. Regarding surgical solutions, we also accelerated to double-digit growth across both ultrasonics and bone graft substitutes in the first quarter. Let's talk about ultrasonics first. I'm encouraged by our progress with our Q1 performance, but even more excited about our long-term potential with this business. Our unique technology provides surgeons with more control and versatility while saving them valuable time, which is why we believe our technology can become the standard of care. Meanwhile, our bone graft substitutes team is strengthening our commercial execution with both existing and new distributors, which resulted in above-market growth in Q1.

As a result of our momentum with both ultrasonics and BGS businesses, we now expect double-digit growth across surgical solutions in 2024. And with respect to our international segment, Q1 growth was below our expectations due to the timing of some shipments. While the team is focused on driving more consistent quarterly results in the short term, we remain very optimistic regarding the long-term growth potential of this business. And I'll tell you, Mark and I were in Europe a few weeks ago to dive into the business, collaborate with our team on our growth priorities, meet with customers. And our visit confirmed for us that our international business possesses significant untapped potential, which is why we expect strong and sustainable double-digit growth as we build out our international presence with a targeted focus on products and geographies that will generate the highest ROI.

Now, I'll shift to our second focus area, boosting profitability. I'll start by highlighting that we have a very healthy peer-leading gross margin in the mid 70s. The reason I mention this is because one, our first priority of accelerating revenue growth is combined with the gross margin in the 70s, paves the way for sustained increases in our EBITDA and operating margin. As a result of our Q1 revenue acceleration and healthy gross margin, we drove over a 300 basis point increase in our adjusted EBITDA margin. And as mentioned during our last call, revenue growth is not our only tool to improve our profitability. We will continuously explore areas where we can reduce costs over the coming months and years to either invest in more productive initiatives with a higher ROI or to drop the savings to our bottom line to further accelerate our margin expansion.

And now, I'll turn to our third major focus area, improving our liquidity position. We reduced our net leverage ratio to below four times at the end of Q1 because of our increase in adjusted EBITDA. The reduction in net leverage to below four times was significantly ahead of our prior expectation of achieving this target by the end of 2024. We will stay focused on this priority as we expect to continue to steadily pay down our debt in the quarters ahead. And we are committed to reducing our net leverage ratio to around three times as we exit 2025. That concludes my update on our three priorities. Before turning it over to Mark to dive deeper into our financials, I want to emphasize that although we have significant work ahead of us, I'm excited about the excellent teamwork that's taking place across our organization to advance our business.

We are improving our fundamentals every single day in many areas, ranging from better sales operations to enhance our customer experience, to a more disciplined supply chain and inventory management to support our growth and improve our future cash flow, to dispassionate and closely track to resource reallocation based on our priorities. Moving forward, my leadership team and I will be laser focused on consistently delivering strong results quarter after quarter and year after year across each of our three priority areas. And as we continue to accelerate revenue growth, boost our operating margin and generate increased free cash flow, we expect our valuation multiple to align with our peers, which will translate into significant shareholder value creation.

I'll turn the call over to Mark.

Mark Singleton: Thanks, Rob, and good morning, everyone. Let me start by saying that I'm excited about the momentum exhibited throughout our business. The robust execution by our commercial organization drove meaningful revenue and EBITDA growth. Meanwhile, our corporate teams made tangible progress on improving our processes. As we move forward, we look to consistently approach our business with a continuous improvement mindset to enhance our performance and drive further efficiency across Bioventus. Now, turning to our results for the quarter, revenue of $129 million represented growth of 9% compared to the prior year. Both our HA and Surgical Solutions businesses performed better than our expectations. Adjusting for the divestiture of our Wound business, organic revenue increased 15%.

In addition, adjusted EBITDA of $23 million increased $6 million and represented a 33% increase compared to the prior year. The increase was driven by higher revenue and improvement in our gross margin. Adjusted gross margin of 76% increased 190 basis points compared to the prior year. This was a result of favorable revenue mix given strong growth from the higher margin, HA and Surgical Solutions businesses and the impact from the divestiture of the lower-margin Wound business. Looking more closely at our revenue performance for the quarter across pain treatments, revenue growth accelerated 22% compared to the prior year as we maintained our double-digit volume growth, primarily driven by DUROLANE. As expected, we saw a sequential increase of price and expect this trend to continue throughout the year.

As Rob mentioned, our strong execution is expected to drive growth above our earlier expectations for the year. In Surgical Solutions, revenue growth accelerated to 16% as both ultrasonics and BGS generated double-digit growth. With our recent growth acceleration in Surgical Solutions, we are monitoring our supply chain closely. And despite some recent shortages, we currently do not anticipate a meaningful impact in our projected growth. Shifting to restorative therapies, sales fell 16%, driven by the impact of our Wound business divestiture, which accounted for 19 percentage points of the decline. On an organic basis, restorative therapies increased 3 percentage points, driven by EXOGEN through our efforts to improve salesforce execution and processing reimbursement claims more efficiently.

Finally, our international segment grew 1% compared to the prior year, and was even with the prior year when factoring in constant currency. Growth was driven by DUROLANE, but was offset by the timing of shipments for ultrasonics at the end of the quarter that are now expected to be recognized in the remaining three quarters. Moving down the income statement, adjusted total operating expenses rose nearly $4 million compared to the prior year. The increase primarily resulted from an increase in sales commissions due to revenue growth and improved employee retention, which was partially offset by savings from our Wound business divestiture. Now, turning to our bottom line financial metrics. Adjusted operating income increased 49% to $20 million from $14 million in the prior year, while our adjusted operating margin of 15.5% advanced 410 basis points compared to 11.4% in the prior year period.

Adjusted net income totaled $5 million, and adjusted earnings per share were $0.07 for the quarter. This compares to a loss of $16 million or a loss of $0.26 per share in the prior year. The increased in adjusted EPS was driven by increased profitability in the current year and the impact of a non-cash valuation allowance against deferred tax assets resulting from the impairment of our divested Wound business. Now, turning to the balance sheet and cash flow statement. We ended the quarter with $25 million of cash on hand and $391 million of debt outstanding. We had $15 million drawn on our revolving credit facility at the end of the first quarter. As Rob mentioned, we drove our net leverage ratio below four times at the end of the quarter. 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 increase in EBITDA in 2024, we are now focused on reducing our net leverage ratio to around three times as we exit 2025. As planned, operating cash flow represented an outflow of $6 million due to the expected outflows related to employee annual bonus payments, most of our annual insurance costs and the timing of contractual inventory purchases. These three outflows totaled over $13 million for the first quarter and are not expected to reoccur this year. Absent these outflows, operating cash flow would have been positive. Consequently, we expect cash from operations to accelerate in Q2 throughout the remainder of the year. And our cash generation for 2024 is forecasted to be sufficient to meet the amortization requirements for our term loan.

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 $535 million to $550 million. This represents a $15 million increase compared to our prior guidance of $520 million to $535 million. For the year, we expect adjusted EBITDA to now be between $94 million and $99 million. This represents a $5 million increase compared to our prior guidance of $89 million to $94 million. Finally, our guidance for adjusted earnings per share is now expected to be $0.25 to $0.33. This represents a $0.13 increase compared to our prior guidance of $0.12 to $0.20. There are two factors driving the increase in EPS guidance.

First, our increased expectations for higher EBITDA. And second, a reduction in our expectations for equity compensation for employees. In closing, our robust execution has generated a strong start to the year. And we look to further enhance our revenue and adjusted EBITDA growth and drive improved cash flow through the remainder of the year. Operator, please open the line for questions.

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