Good day, and welcome to the Bioventus Third Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Dave Crawford. Please go ahead..

Thank you, Danielle, and good morning, everyone, and thanks for joining us. It is my pleasure to welcome you to the Bioventus 2024 third 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 continued progress. And Mark will provide detail of our third quarter results and discuss our updated 2024 financial guidance. We will finish the call with Q&A. A presentation for today's call is available on the Investors section of our website, bioventus.com.

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.

As such factors may be updated from time to time in the company's other filings made with the SEC. You are cautioned not to place undue reliance on 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.

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 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 at bioventus.com. Now, I’ll turn the call over to Rob..

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

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

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

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.

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. 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 BoneScalpel as the standard of care.

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.

Longer term, we plan to augment our growth by penetrating neurosurgery and general surgery while also expanding internationally. We're excited about our potential to drive sustained double digit ultrasonics growth in the years ahead.

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 Durolane, our single injection HA therapy.

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

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.

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.

Given our renewed focus and investments in additional commercial resources, medical education and product enhancements, we expect Exogen to grow annually by low to mid single digits in the years ahead. Next, I'd like to provide a brief update on the status of our advanced rehabilitation business divestiture that we discussed last quarter.

At the beginning of October, we announced an agreement to sell the business for $25 million with potential earn-outs totaling up to $20 million. We believe this divestiture will allow us to further strengthen our focus and execution within our core portfolio while also enhancing our liquidity.

At this time we expect the transaction to close near the end of this year or early next year. Now I'll shift to our second focus area, boosting profitability. With our peer-leading gross margin and our accelerated revenue growth, adjusted EBITDA of $24 million increased by $2 million versus the prior year.

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

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 reallocate or reduce operational expenditures well either 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. 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.

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. That concludes my update on our three priorities.

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..

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. Now turning to our results for the third quarter, revenue of $139 million increased 15% compared to the prior year.

We maintained strong momentum across all three businesses with double digit growth in both pain treatments and surgical solutions for the fourth consecutive quarter. In addition, adjusted EBITDA of over $24 million increased $2 million and represented an 8% increase compared to the prior year.

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.

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.

Through the diligent work of our product supply team, we have secured additional capacity within our BGS supply chain to meet future growth.

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 as we manage shortages in our supply chain.

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

Shifting to restorative therapies, sales grew 6% driven by accelerated growth from Exogen. We remain optimistic about our ability to drive consistent growth going forward through our demonstrated improvement in sales force execution and the impact of additional resources to assist our sales team.

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

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. 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. Adjusted earnings per share were $0.06 for the quarter. Shifting to the balance sheet and cash flow 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. 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 a revolver as we repay the borrowing with current cash on hand and free cash flow generated in the fourth quarter. Operating cash flow represented an inflow of $10 million despite the payment of more than $9 million during the quarter to settle our shareholder litigation.

Even with this payment, we generated double digit cash flow from operations for the second consecutive quarter. We forecast double digit cash from operations to continue for the fourth quarter and expect a significant increase in 2025.

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. Consistent with our messaging last quarter, we are confident in our ability to reduce our net leverage to below 3 times during 2025.

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

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 expected revenue growth of nearly 13% growth for the full year. Second, for the year, we now expect adjusted earnings per share to be between $0.40 and $0.42.

This represents a $0.02 increase compared to the midpoint of our prior guidance of $0.36 to $0.42. 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.

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. Operator, please open the line for questions..

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

Good morning. Thanks for taking the questions and congrats on a strong Q3 here. 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 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? 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..

Hi, 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 and Q4 with significant collections for that business.

And then second, then you alluded to this but slower BGS growth because we slowed our onboarding of new distributor agents several weeks ago when we had supply changes. And we're seeing a temporary emphasize -- temporary lag effect in ramping them back up.

But that said, we feel very good about our continued momentum across the business in Q4 and in line with our guidance, we're looking forward to driving approximately 13% top line growth for the year, 1.5x that on the bottom line and 150 basis point margin improvement for the year.

So Mark, anything to add?.

No. 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, really strong revenue growth and managing the bottom line growing greater than the top line..

Great, thanks. And then maybe just one more on kind of Q4 when it comes to pain, you had said kind of low double digits and surgical back of the napkin mask that implies kind of either low double digit, high single digit in pain.

How should we think about this? Are we going to start to see some price benefit in Q4? 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 one of your leading competitors out there kind of calling out some headwinds in the market? Thanks..

Yes, we feel good about our pain business continuing the momentum in Q4. If you look at really focused on driving volume growth, we look at our Q3 results. We had a little bit of a price tailwind not significant, where we expect those dynamics to continue in the Q4.

We feel good about the position we have with our contracts, the differentiation we have in Durolane. 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 performance year to date..

Great. And then just kind of last for me. If we think about -- start to think about 2025 taking this growth rate from Q4, how are you guys thinking about 2025 too early of a question here, but on a top line basis you've given some color on EBITDA as far as margin expansion.

Any color you're willing to give us kind of how you're thinking about 2025 as you enter the year from what it implies in Q4? Thanks..

And Chase, I'll start and again invite Mark to chime in, but we won't be giving 2025 guidance at this time of course. But overall, I'd say, we feel like we're just getting started with the business.

In 2025, we have multiple growth drivers and while the comps will get harder, that's what we expected and we also expect to continue our positive momentum into next year. So again I'll keep at high level, but consistent with what we've said before. We expect to 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. With HA again consistent with what we've said. We expect to continue above market growth in HA, and Exogen low to mid single digit growth as I've mentioned.

So that combination with 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 we're reaffirming our intention to deliver above 100 basis points in EBITDA improvement again next year and in the years ahead.

And then on top of all of that we'll see 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..

Yes, nothing to add for me. Really excited about our finish in 2024 and looking forward to 2025..

Great, thanks guys..

You're welcome..

The next question comes from Robbie Marcus of J.P. Morgan. Please go ahead..

Oh, great. Thanks for taking the questions and congrats on a nice 3Q. Maybe first one, just to follow up, you talked about some of the [indiscernible] 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 or second half type of growth disparity in 2025?.

Hi, Robby. This is Rob. I'll start and turn it over to Mark. Yes. 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.

Really the only one is from a BGS standpoint, making sure that we -- as I mentioned, we have 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, feel very good across the business about our momentum heading into next year.

Mark, anything to add there?.

Nothing to add..

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

You can expect it to resolve by Q2..

Okay. And then maybe as a follow up you talked about in the prepared remarks getting net leverage down to 3x by the end of 2025. Maybe just remind us of any upcoming debt payments or milestones and the pathway to getting to 3x in the ultimate target leverage. Thanks a lot..

Yes, I think. Thanks, Robbie. Just from an overall leverage perspective, really just continued execution in the business. We talked about the cash flow acceleration that we expect in 2025, I mean, continuing to grow EBITDA. We're going to pay down the revolver in 4Q and the acceleration and things that we've seen in 2023 is good.

We have a quarterly amortization and debt repayment with our overachievement on EBITDA.

So really just continued execution on driving our business in 2025, as kind of Rob talked about earlier, and 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 the expanding our margin by 100 basis points..

Great, I appreciate it. Thanks a lot..

Thanks, Robbie..

[Operator Instructions] The next question comes from Caitlin Cronin from Canaccord Genuity. Please go ahead..

Great. Thanks for taking my questions and congrats on the quarter. So for pain 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 U.S.

will work to establish stronger market access and work to stabilize sales in the U.S. OA pain products for that company.

So any concerns there over renewed focus by them?.

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 -- there's no concerns.

I mean what you're hearing externally is a reflection of what we conveyed to all of you throughout this year. I mean, we have very strong clinical differentiation. We've dedicated -- the largest dedicated sales force, we have strong payer contracts and 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 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 strength and our momentum..

Got it. No, that's helpful. And then just thoughts on the other ultrasonic bone cutting tools in the market that were recently launched and how ultrasonics really compares.

And any more color on the innovation you noted coming to this product line?.

Yes, I'll start. It's -- overall in that category we're early in the going here and that's what's so exciting about it. We have world-class technology and tremendous momentum with the business, but we're just scratching the surface and plenty of opportunity for us to expand organically and that includes through additional innovation in the space.

I won't go into detail on what that is, but it's one of the hidden gems with Bioventus is that we have a very strong R&D team for this business and for the most part they've been -- 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.

So we'll be sure to update you on some of that innovation when the time comes..

Got it. Awesome.

And then just any expectations for the OUS business going forward into next year?.

Yes, I feel really good about it. 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, 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..

Thanks so much..

Thank you..

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

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..

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