Good day, and welcome to the Bioventus Inc. Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] 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..

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

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. And 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.

And 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. And 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 in 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 of our portfolio, 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 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.

And 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. All right. 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. With respect to 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 signal injection therapy.

And we expect that our strong volume growth, combined with improving price dynamics will accelerate revenue as the headwinds from the past year 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.

And 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 2 years.

The second focus area, improving our operational efficiency and boosting our future profitability through better prioritization, greater organizational efficiency and reductions in our operational expenditures.

Regarding prioritization, 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. And now we'll start to reallocate our resources to maximize the return on our investments. With respect to organizational efficiency, we're a diverse company that has evolved through several acquisitions.

And 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 so that it's easier for our customers to do business with us and so that we can devote more of our energy to generating profitable growth.

With this in mind, improving our organizational efficiency is a key priority.

And 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 drop these savings to our bottom line to accelerate our margin expansion.

As mentioned, 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 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.

With respect to 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. 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 is below four turns by year-end. All right. That concludes my remarks about my initial impressions and our priorities for the year. Before turning it over to Mark, let me just - and he's going to dive deeper into our financials.

Let me just say again how excited I am to be leading Bioventus, while significant work remains encouraged by our ability to address last year's headwinds and improve our financial results and liquidity.

And now 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..

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.

Additionally, 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% higher compared to the prior year. Adjusting for the divestiture of our Wound business, revenue growth increased 14% when compared to the prior year.

In addition, adjusted EBITDA of $22 million increased $5 million when compared to the prior year. The increase was driven by the increase in revenue. Across Pain Treatments revenue growth accelerated as sales increased 23% compared to the prior year as we maintained 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, which provided a favorable comparison. Revenue for the fourth quarter finished above our expectations due to higher volume, along with 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, there has been no change in our expectations from last quarter's earnings calls.

We anticipate some headwinds or at least the first half of the year, but expect to see sequential improvement as we move throughout the year. Overall, we see 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.

Growth was bolstered from higher than adjusted anticipated generator sales at the end of the year. Additionally, bone graft substitutes grew high single digits as volume from the new distributor relationships added in the previous two quarters ramped ahead of our expectations.

In addition, the structural changes to our BGS selling efforts announced last quarter to drive dedicated focus on ultrasonics and BGS helped to 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 from the recent feedback from customers who refer to our ultrasonics portfolio as revolutionary, when Rob and I spent time in the field earlier this year. Additionally, given the recent changes in BGS, we feel the business is poised to return to more 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 4 percentage points.

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 it is expected to maintain double-digit growth in 2024.

Growth was impacted by prior year comparison for above normal volume as back orders were filled for products and 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 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, which 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 in 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. Now for a brief recap of our full year results.

Net sales of $512 million were even compared to 2022. Organic sales increased 4%, while adjusting for the impact of our Wound divesture. For the year, adjusted EBITDA totaled $89 million, which represented 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 price for the year in our HA franchise. Adjusted operating income for the year totaled $81 million compared to $51 million in 2022. Lower operating expenses from our focus throughout the year on reducing spending and benefits from our restructuring drove the increase.

Now turning to the balance sheet and cash flow statement. We ended the quarter with $37 million of cash on hand and $395 million of debt outstanding. 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. Finally, 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.

And 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 we maintain spending discipline. Operator, please open the line for questions..

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

Good morning, guys. Congrats on the results. Pretty impressive results relative to expectations, certainly, and welcome, Rob. Maybe the first one for you.

As you kind of looked at opportunities, what kind of sealed the deal for Bioventus, particularly with kind of the situation that we're in now, kind of you being able to kind of continue this turnaround that certainly started and showed up in Q4 results? Maybe kind of go into a little bit more color there..

Thanks, Chase. Looking forward to meeting you. There were a few factors. I touched on them upfront. But 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 who understand our value.

When I'm out in the field with Mark, it's not just that our customers understand the benefits of our technology for their patients and for them, but also the reasons behind it that I didn't get a real feel for until after I joined, but I was familiar with the technology before.

And that combination of the market segments we're in, the technology and the favorable share positions really spoke to the potential of the company. And then when talking to the Board and the management team, it was clear to me that some of the headwinds that the company had faced were temporary.

And with the right focus, particularly with commercial execution and operational excellence that there was potential, significant potential to drive shareholder value. So those are some of the reasons that made it a really attractive move for me Chase..

Yes, makes sense. Maybe digging in a little bit more on Pain.

On the DUROLANE side, growth on a volume perspective continues to be pretty strong year-over-year in our checks [ph] As we start to see ASPs improve sequentially, kind of talk through kind of the drivers of above market volume growth and kind of being able to have that above-market volume growth off of some pretty tough comps from a volume growth perspective in 2023?.

Yes, Chase, this is Mark. Appreciate the question. You again talk about DUROLANE. I mean, we take the first three quarters to really continue the momentum into 4Q for the clinical differentiation that we have in that product. I think also the market is moving to the single injection.

And so we're favorable there with our clinical differentiation as the market moves. And as we've talked about before as well, we have a really strong contract position with several UnitedHealth with Aetna and Cigna. Some of these contracts have come into play in 2023 that drove a lot of the growth and it will be a comparison for us in 2024.

But the strong contract position that we have is really driving a lot of the volume growth. But what we're also executing really well on with our sales team is the pull-through around those contracts.

So we got the contracts in place and really the sales team really want to give a shout out to them, and they're really doing a great job of executing around these contracts and pulling in the other volume, more profitable volume around the contracts that are really having us hit that.

And we expect that to continue into 2024 and with us pull-through is much more profitable..

And then maybe how should we think about volume growth for GELSYN this year, as you kind of talked about, there is that kind of headwind as things continue to transition to single-injection products.

And then just lastly for Rob, if we think about the kind of that transition that we kind of talked about last quarter, bringing bone graft substitutes back to distributors largely, at least that being the focus.

Rob, do you think that, that's - Q4 results kind of prove that, that's kind of the right structure of the sales force, ultrasonics to the internal field reps and kind of leveraging relationships from distributors on the bone graft side and maybe harvesting more modest synergies between the two?.

Yes. Chase I'll take the first one on GELSYN. I think that we continue to expect to drive growth in 2024 on GELSYN as well. The market is moving. The DUROLANE which is -- where we have a favorable contract position, but that doesn't mean that GELSYN is going to decline. I think we're positioned well with that.

Obviously, it's a low price point, but we're continuing to have success in driving volume there as well..

Yes. And Chase, on the bone graft substitute side, our volume accelerated ahead of our expectations and in part, that's due to the change that we made and reduction in distributor turnover. So we feel good about that change. And over time, we're going to scale the Surgical Solutions business with the structure that we put in place..

Great. Thanks for the questions. And again, congrats on the great quarter..

Thanks, Chase..

The next question comes from Robbie Marcus with JPMorgan. Please go ahead..

Hi. This is actually Lilly on for Robbie. Thanks for taking the question. Maybe just on guidance. Revenue and EBITDA guidance came in better than what the Street was thinking, but EPS fell short.

So can you talk about any dynamics below the line that might be driving that shortfall? And if there's any specific headwinds or tailwinds we should be keeping in mind as we think about forecasting EPS this year?.

Yes. I think we feel good about our revenue growth. I think coming out of fourth quarter into first quarter, looking forward to return to focusing on growing the top line and the bottom in 2024. If you look at the bottom end of our guidance, it's roughly 4% growth to the top end, roughly 7%.

And from an EBITDA perspective, as we told you in our third quarter call, we're not expecting a significant increase in EBITDA in 2024, mainly just back to the 2-year recovery that we've talked about.

But over the long term, certainly expect to try to focus on and expect to be driving the bottom line faster than the top line as we continue to work through 2024..

Got it. That's helpful. And then just maybe as a follow-up to that, I think gross margin has seen some fluctuation and headwinds from some of these reimbursement challenges. So how should we be thinking about margins progressing from here and what headwinds and tailwinds should we be keeping in mind as we update our models? Thanks..

Yes. If you look at our gross margin from 2023 to 2024, we expect it to be even year-to-year, so don't expect a significant change. If you look at fourth quarter specifically, we had a write-off that impacted the fourth quarter margin.

That is really a onetime write-off that was related to our ultrasonics portfolio and really a product transition where we evaluated the old inventory that we had and the potential disruption for customers that we wanted to avoid and looked at the excess inventory and took a onetime write-off in 4Q that should not repeat.

But from an overall '23 to '24, we don't expect any significant changes in margin..

Great. Thanks so much..

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

Hi everyone. Congrats on a great quarter. Just let's start with Pain treatment, impressive growth in the Q4.

In 2024, do you expect most of the growth to really be driven by DUROLANE, do you expect growth in all three product lines to really drive that mid- to high single-digit growth?.

Thanks, Caitlin, appreciate the question. Again, we are the only company out there with a full portfolio of the 1, 3 and 5 injections.

We feel really good about the clinical differentiation that we have in DUROLANE and certainly growth percentage-wise, DUROLANE will definitely lead the way, but we will continue to expect GELSYN to grow, as we talked about earlier. And SUPARTZ is a great story.

And that - we haven't had great expectations with that, I'd say, over the last few years, but it continues to outperform our expectations. So we would look to that to be a low single-digit grower.

So the portfolio really led by DUROLANE back to the great contract positions we have in the market and with the execution on pulling through volume by our sales team, which we're really proud of. We expect that to continue into 2024. But the whole portfolio, we definitely would expect to grow volume-wise.

And as we mentioned in the prepared remarks about having some pricing headwinds related to CMS from a year-to-year perspective in the first half of the year, but expect that, that will sequentially improve as we go through 2024..

Got it. Okay. And then just turning to EXOGEN. You noted continued improvement in the U.S. in the Q4. How did EXOGEN perform globally in Q4? And then what are your growth expectations in 2024 for both U.S.

and OUS?.

Yes. When we -- EXOGEN is a significant opportunity for us. I think we've been disappointed over the last few years where we have had that product declining and has started to return back to at least being even in a slightly positive growth in fourth quarter.

But we look at this product over the long term, really look at it from a low single-digit grower. The team has spent a lot of time.

You know, management team, myself, Rob early on and the leaders of that organization really getting into this business and trying to figure out how we're going to increase this and maintain and sustain the growth that we've started. I mean this is another situation.

Rob and I went into the field and I spent some time with some sales reps as well and really learned a lot about the details of this with some of our sales reps.

And so when we look into the future, again, we're confident that we can return this back to small single-digit growth, and it's a great product and a lot of positive feedback from the physicians in the field..

And Caitlin, I'll just echo what Mark said. I mean as you probably know, fantastic proven technology, has excellent brand recognition. And just like Mark said, the customer feedback during our visits has been extremely positive.

So we're bringing back the appropriate level of focus to the business and now we're going to address some operational inefficiencies along the way in order to return the business to growth..

Great. Thank you..

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

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

Thanks for joining our call today, and have a good day..

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