Vapotherm Inc (VAPO) 2022 Q4 法說會逐字稿

Good afternoon, and welcome to Vapotherm's fourth-quarter 2022 financial results conference call. (Operator Instructions)

And this call is being recorded. (Operator Instructions)

It is now my pleasure to turn today's conference over to Mark Klausner with ICR Westwicke. Sir, you may begin.

Good afternoon, and thank you for joining us for the Vapotherm fourth-quarter 2022 financial results conference call. Joining us on today's call are Vapotherm's President and Chief Executive Officer, Joe Army; and its Senior Vice President and Chief Financial Officer, John Landry. This call is being webcast live and recorded. A replay of the event will be available following the call on our website. To access the webcast, please visit the Events link in the IR section of our website, vapotherm.com.

Before we begin, I would like to remind everyone that our remarks and responses to your questions today may contain forward-looking statements. These statements 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 those identified in the risk factors section of our annual report filed on Form 10-K for the year ended December 31, 2022, which will be filed today, and then any subsequent filings with the SEC.

Such risk factors may be updated from time to time in our filings with the SEC, which are publicly available on our website. We undertake no obligation to publicly update or revise our forward-looking statements as a result of new information, future events, or otherwise, unless required by law.

This call will also include references to certain financial measures that are not calculated in accordance with generally accepted accounting principles or GAAP. We generally refer to these as non-GAAP financial measures. Reconciliations of the historical 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.

With that, it's my pleasure to turn the call over to Vapotherm's President and Chief Executive Officer, Joe Army.

Thanks, Mark, and thank you all for joining us. On today's call, I will review the steps we took in 2022 to set us up for success in 2023 and beyond, and John will review our fourth-quarter financial performance and discuss our 2023 guidance. I will then tell you the actions we will take to achieve our guidance and drive predictable profitable growth in the future.

As a result of COVID during 2020 and 2021, we doubled our worldwide installed base and doubled the number of our gold accounts, which are the top 1,000 US hospitals in terms of respiratory discharges. After two years of COVID volatility, it was difficult to predict what 2022 would look like. As COVID transitioned from a lower respiratory disease to an upper respiratory disease, COVID-related hospitalizations decreased dramatically. At the same time, we saw reduced revenue. Our expenditures to meet all customer needs had left us with lower gross margins, an unsustainable operating cost structure and a capital-constrained balance sheet.

Throughout 2022, we addressed these issues and devoted considerable effort to derisking the business and setting us up for success in 2023. One of our key focus areas throughout the year has been to return to predictable disposable revenue growth as it represents the majority of our revenue and carries the highest gross margin.

We've done this by focusing on our gold accounts. In these accounts, we've been expanding into additional care areas and delivering high-quality medical education and training. As a result of these efforts, we've seen US disposable turn rates, which represent disposables sold per month per box, steadily recover.

In the fourth quarter, we had 70% of our pre-COVID three-year historical average due, in part, to flu arriving earlier than usual. Our fourth-quarter US disposable turn rate of 70% was up from 42% in the second quarter and 60% in the third quarter.

We're also executing on the launch of the HVT 2.0. This next-generation platform represents a major upgrade over our Precision Flow Plus. First, it incorporates a built-in blower, which allows it to be used in areas of the hospital that don't have wall air. And second, it makes it easier to transport patients between care areas. It's also easier to use and, therefore, requires less training time. There has been a lot of interest in this product since launch, and we're beginning to see a number of customers replace their existing fleets with these newer devices.

During the quarter, we continued our efforts to improve gross margins. I'm pleased to report that our new Vapo Mex facility is certified. All our production lines have been moved and validated. Importantly, all of our cost assumptions are intact, and we are building product and putting it into inventory. We will begin to see the impact of these lower cost products as we work through the high-cost inventory that we built during COVID to meet all customer needs.

Another key area of focus in 2022 was our balance sheet. Our balance sheet is now in good shape, and we have improved our financial flexibility. We recently completed a $23 million equity raise and expect that $17 million of inventory presently on the balance sheet will convert to cash by the end of 2024. We also restructured the SLR debt facility to reset our 2023 financial covenants, reduce our minimum cash covenant, and add the ability, at our election, to pick a portion of our 2023 interest expense, saving cash expenditures of potentially up to $9 million.

Between the additional cash from our recent equity raise, the conversion of inventory to cash, the ability to pick our interest payments, our reductions in operating expenses, and the gross margin improvements we expect from our relocation of manufacturing to Mexico, we believe we have the necessary capital to get us to adjusted EBITDA positive by the end of this year.

During 2022, we also focused heavily on reducing cash operating expenses to pre-COVID levels, or $63 million in 2019. Cash operating expenses decreased by approximately $17.2 million in 2022 versus 2021, with the stage set to deliver pre-COVID level cash operating expenses in 2023 of $60 million to $62 million.

During the year, we rightsized our worldwide commercial organization, stopped commercial investments in Vapotherm Access and RespirCare, brought R&D back in-house, and won a grant from the Singaporean government to offset a portion of our new R&D efforts in our newly established R&D center.

I will now turn the call over to John who will review the financial results for the quarter.

Thanks, Joe. Worldwide revenue in the fourth quarter was $18.7 million. Revenue came in ahead of our expectations as the flu season started earlier than normal, which increased disposables revenue. US revenue was $15.5 million; international revenue was $3.1 million. The growth in US revenue was driven by an increase in turn rates back to 70% of the pre-COVID, three-year historical average for the fourth quarter. International revenue was driven by two of our direct markets, the UK and Germany.

Gross margin was 27.5% in the quarter, ahead of our guidance of 16% to 18% as some of the Mexico costs moved into the first quarter, and we benefited from a higher mix of US disposable revenue. Excluding the onetime costs related to the Mexico move and inventory reserves, gross margin would have been 37%.

Non-GAAP operating expenses, excluding impairments and loss on disposal of property and equipment, were $21 million in the fourth quarter, down from $22.3 million in the third quarter. Non-GAAP cash operating expenses were $18 million in the fourth quarter, at the high end of our guidance range due to higher commission expense related to higher revenue. Cash operating expenses have decreased sequentially every quarter, and we have completed most of the actions necessary to return to pre-COVID levels.

We ended the quarter with $15.7 million of cash, down from $28.9 million at the end of the third quarter. Net cash burn in the quarter, after adjusting for $1.2 million of ATM proceeds, was approximately $13 million which is approximately 50% less than the average from the previous three quarters.

As Joe mentioned, we raised $23 million through a private placement, which closed a few weeks ago. Taking into account the private placement, our pro forma cash as of year-end 2022 would have been $36.5 million, assuming net proceeds of $20.8 million. We continue to believe we will convert approximately $17 million of our remaining inventory balance into cash by the end of 2024, and we're making progress on this initiative.

Inventory at the end of the quarter was $33 million, down from a peak of $38.4 million in the second quarter of 2022. In addition, as part of our debt amendment, we added a PIK, or a payment-in-kind feature, to our debt facility for calendar year 2023. With the recent amendment we signed, this PIK feature allows us to elect to add up to $9 million in annual interest payments to the debt balance and reduce our cash burn in 2023. We believe that these actions, in conjunction with improving gross margins and reduced cash operating expenses, provide us with the capital necessary to fund the business to cash flow positive.

Turning to guidance. For the full year 2023, we continue to expect revenue of $77 million to $79 million, a growth rate of 15% to 18%. We estimate that 75% of this revenue will be US revenue and the remainder international. We anticipate that 75% of revenue will come from disposable revenue and that the remainder will come from capital and service.

Our expectations assume that the US disposable turn rate will average 66% of the pre-COVID level for the full year, starting the year at high 50s, low 60s, and then ending the year in the low 70s. We expect that the first quarter of 2023 will be the last quarter of difficult year-over-year comparisons for us as the first quarter of 2022 represented the last quarter in which there were significant COVID-related hospitalizations that increased customer demand.

We expect gross margin for the full-year 2023 to be in the range of 48% to 50%, unchanged from our prior guidance. We expect gross margin to be in the low to mid 40s in the first half of the year and low 50s in the second half of the year. We expect that GAAP operating expenses will be $76 million to $78 million, and that non-GAAP cash operating expenses will be $60 million to $62 million for the full year.

As a reminder, the first quarter is typically the highest quarter for operating expenses due to the timing of various programs like our national sales meeting. We expect to exit the year with non-GAAP quarterly cash operating expenses of approximately $15 million.

With that, I would like to turn the call back over to Joe.

Thanks, John. 2023 is all about driving predictable revenue growth, continuing our gross margin improvement plan, and maintaining operating expenses at pre-COVID levels while investing prudently in future growth drivers. Based on these actions, we believe we can end 2023 at adjusted EBITDA positive.

There are some key actions we will take to drive revenue growth in 2023 and beyond. First, we'll continue our focus on gold accounts as we drive turn rates to pre-COVID averages. Our sales team will focus on expanding into new care areas within each gold account. We're also going to continue to drive medical education with a specific focus on hypercapnia. Hypercapnia is not sensitive to flu, RSV, and COVID admissions. So increasing our utilization in this area will reduce the impact of seasonality on our business and increase overall turn rates.

We're also going to execute on the HVT 2.0 opportunity, particularly the replacement cycle in our 500 gold accounts. The field team has done an excellent job launching the HVT 2.0, and I'm excited to see what they'll accomplish in 2023. I would also note that the HVT 2.0 and its related disposables have higher ASPs than our legacy products, given the higher clinical utility they provide by ease of use and reduced training requirements. These higher ASPs will help drive revenue growth.

On the gross margin front, most of the significant structural changes have been made. Our relocation to Mexico is complete. And now we're going to return to executing our gross margin improvement plan, including ASP uplift, direct material and labor cost reductions, and greater overhead cost absorption.

From an operating expense standpoint, we believe we have taken the steps necessary to return non-GAAP cash operating expenses to pre-COVID levels. Now we will create operating leverage while we continue to invest prudently in new products and technology and clinical support for future growth.

We accomplished a lot in 2022, which has set us up to execute in 2023 and be well positioned to be adjusted EBITDA positive by year end. I'd like to thank our team for all their hard work in executing on our path to profitability initiatives, which we launched in early 2022 in response to a rapidly changing environment.

We're excited about the opportunities in front of us. We appreciate your support of Vapotherm and look forward to updating you on our next quarterly call. I will now open the call for questions.

(Operator Instructions) Bill Plovanic, Canaccord Genuity.

Zachary Day on for Bill Plovanic. My first question is you'd mentioned inventory converting it to cash by the end of this year. Is there a specific cadence for that that you can mention? Will it be sort of even throughout the year or heavier in certain quarters?

Hi, Zachary. This is John. I can take that. From a cadence perspective, we'd expect it to be fairly consistent over the course of the year. So roughly equivalent reductions on a quarterly basis.

And the other point there, Zachary, is we have that cash burn reduction, will happen over the next couple of years. Of that, approximately 60% of that will take place in 2023, and the remaining 40% will take place in 2024.

Great. Thank you for that. My second question is: what interest rate expense should we model for 2023 and beyond? Will that be impacted by the PIK that you can do on your deal or anything like that?

Sure, Zach. Zachary, I can take that as well. From a modeling perspective, [you've got to] plan on 14% interest rate for 2023. A lot of it will depend on what the fed rates change over the course of the year as variable debt. So to plan on in the 14%-ish range for 2023.

Great. Thank you very much.

Marie Thibault, BTIG.

Hey, good afternoon, Joe and John. This is Sam Eiber on for Marie. Thanks for taking the questions here. Maybe I can start on the revenue guidance, and I appreciate the commentary on the outlook on mix and US versus international. But maybe in terms of cadence, how should we think about the year progressing in terms of utilization picking back up to pre-COVID levels and also taking into account seasonality for the business?

Hi, Sam. It's John. I can take this question here. In terms of seasonality, as we think about the business from a quarterly cadence perspective, we think generally, it will probably revert back to the sort of 2017 to 2019 pre-COVID years' experience. On -- in that particular timeframe, our quarterly cadence was sort of in the 25%-ish contribution in Q1, kind of in the 23%, 22% range for Qs 2 and 3, and then wrapping up in the year with the high 20s to round out the full year to get back to 100%. So as we look at 2023, that's how we're thinking about it from a cadence perspective as well.

Okay. Really helpful. And then maybe I can ask my follow-up here on HVT 2.0. You mentioned the opportunity to replace the existing fleet in the 500 gold accounts. I guess is there also an opportunity to expand the customer installed base as they also expand into new care areas as well?

Hey, Sam. This is Joe. I think I can take that one if you want. There's absolutely opportunity to expand into new care areas, and we've already been seeing that with hospitals that have replaced their fleet and then subsequently expanded their fleet. So we're pretty excited about HVT 2.0 launch.

There are capital equipment headwinds out there, as I'm sure you've heard in other calls. But we see that really not playing out as much on the smaller orders. I think on the larger orders, the whole system conversions are taking a little bit more time as we work our way through it. But there's absolutely room for expansion, and we've been seeing it.

Understood. Thanks for taking the questions.

There are no further questions at this time. I will now turn the call back over to Mr. Joe Army for closing remarks.

Thank you for joining us on today's call, and we look forward to updating you again next quarter. Have a nice evening.

This concludes today's call. You may now disconnect.