Covalon Technologies Ltd

XTSX:COV

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen, and welcome to Covalon's Q1 Fiscal 2025 Conference Call and Webcast. My name is Ludy, and I will be your conference operator today. As a reminder, today's conference is being recorded. [Operator Instructions]

At this time, I would like to turn the conference over to Mr. Brent Ashton, Chief Executive Officer; and Ms. Katie Martinovich, Interim Chief Financial Officer. Please go ahead, Mr. Ashton and Ms. Martinovich.

[Brent Ashton, executive]

Thanks, Ludy, and good morning to all of you on the call today. We really appreciate you connecting in Katie Martinovich, our Interim Chief Financial Officer, has joined me on the call here. And Saleha Assadzada from Covalon is also helping to coordinate the conference call and the webcast today. Saleha will now provide us with some instructions.

[Saleha Assadzada, executive]

Thank you, Brent. Good morning, everyone. My name is Saleha Assadzada, and I am the Executive Assistant to Covalon's Chief Executive Officer. I would like to thank everyone for taking the time this morning to attend our conference call. Before we begin the discussion, I would like to remind participants that this call and webcast are covered by Covalon's safe harbor statement. Please read the safe harbor statement on this slide.

I will now turn the call back over to Brent Ashton, Covalon's Chief Executive Officer.

[Brent Ashton, executive]

Okay. Thanks so much, Saleha. Great to be able to speak with all of you today. During today's call, I'll be discussing the following. First, I'm going to start with a story about Jessika, a patient with a really challenging medical condition whose life was changed and very positively impacted by Covalon's great technology. Second, I'm going to walk you through our Q1 fiscal year 2025 financials as well as some achievements and highlights that we'd like to share with you.

Third, I'll go a little deeper into actions that we've taken and will be taking to advance our commercial efforts and drive accelerated growth for Covalon. I'm really, really excited for the opportunities here. Fourth, I'll cover any potential will wrap up and cover any potential questions that you may have. We will prioritize the questions via the web innervates -- interface, sorry. So as we're going along here, please feel free to take your questions in.

So next slide. So really starting where, for us, it all begins, right, with the patient side of things. So I'd like to introduce you here to Jessika. Jessika was a firefighter medic. So really no stranger to health care. She has a medical condition that required a catheter to be inserted into her body in order to receive life-saving nutrition. This is known as parenteral nutrition. And every year, there are several hundred thousand patients like Jessika that rely on this medical intervention. With the IV line interbody known as a Hickman catheter and the need to secure that Hickman to her body, Jessika had suffered from numerous complications, including bloodstream infections and allergies and irritation to the adhesives from her more standard IV securement dressing.

These reactions were actually severe enough to put our central line at risk, which was a requirement for her to receive that life-saving nutrition. So finding a technology that accomplish the job of securing her IV line while also protecting against infection and without damaging her skin or causing pain was an absolute must for Jessika. And when she was introduced to Covalon IV Clear, it was a total game changer. It ultimately saved your skin, allowed her to avoid further infections and ultimately really help her maintain for life-saving access to nutrition and it went a long way towards improving her overall quality of life.

More and more patients like Jessika every day are relying on innovative products like Covalon, IV Clear or CovaClear when the 50-year-old plus standard of care with traditional acrylate adhesives doesn't work for their needs. The clinicians that treat these patients are increasingly relying on Covalon IV dressings with our patented gentle to skin, silicone adhesive technology to help their patients avoid the serious complications that can often result from the traditional standard of care.

Jessika is an amazing remarkable person who has overcome so much. She has a letter challenges slower down, and she actually advocates tirelessly for patients through her work with the Ole Foundation and that foundation educates patients and families that rely on parenteral nutrition. Covalon firmly believes that it's not just patients like Jessika who deserve to have dressings that prevent this skin trauma pain and infections. But really all patients regardless of their age or condition should not be needlessly forced to endure that skin trauma that pain, those complications in order to receive their medical treatment.

One day, this will become the gold standard, and Covalon is extremely proud to lead this change in improving health care outcomes. So with that as a backdrop to our purpose and our motivation, we'll now switch gears and talk about Q1. Today, we're reporting our fourth consecutive quarter of strong year-on-year growth and positive net income and EBITDA, really a function of strong work across all our team members to accelerate the company. Year-on-year revenue was strong at a little over $8 million, which works out to about 75% growth over a year ago, and we now delivered 4 straight quarters with more than $7 million of revenue.

And in fact, it's the first time in Covalon's history that we've achieved 4 straight quarters with more than $7 million in revenue. We had solid adjusted EBITDA growth over the prior year at $1.5 million, and that was a $2.9 million improvement over a year ago. And then looking at that adjusted EBITDA over a slightly longer time frame, our trailing 12 months came in at $7.8 million which is almost $12 million more than the preceding 12 months that ended December 31, 2023.

So a significant step-up in profitability for the company. And then shifting to some strategic and operational highlights. In the past 2 weeks, we've been very fortunate to be named as both a TSX Ventures Exchange, top 50 company as well as an OTCQX Best 50 company, recognizing our outstanding performance in 2024. And great recognition for Covalon and the work we have done and really a huge thank you to all of our investors on the call today for your strong support as we've turned Covalon around here in the past year.

We also received word from the U.S. Patent and Trade Office that our latest patent application for our VALGuard product has been accepted. This new patent fully encompasses all the features of the current product, and we expect it will be published in the next 2 to 3 months. And then keeping with the VALGuard theme, very exciting news on the commercial front. We recently secured system-wide approval for use of VALGuard at one of the largest integrated delivery networks or IDNs for short, in the U.S. This health system has more than 50 individual hospitals under its wings, and this approval is key to enable deeper penetration of the system. We'll cover this in more detail in a few minutes.

So going a little deeper on some key financial metrics. Looking at the growth piece, our primary area of focus and the lion's share of our revenue is our U.S. medical consumables business. And here, we posted $7 million of revenue, which was a 74% increase from a year ago. Strong year-on-year growth from both pieces here, the U.S. Advanced Wound Care business, our collagen business as well as the U.S. Vascular Access and Surgical business. That's the business that has our VALGuard product as well as the Covalon IV Clear that we talked about with Jessika. So we've been very consistent in our investor messaging that we have visibility to a very significant multiyear growth opportunity at Covalon, but that the growth isn't going to be completely linear. And so even though our Q1 revenue was a significant increase over the prior year, it was a sequential quarter-on-quarter decline, and that was connected to a slight sequential slowdown in our U.S. Advanced Wound Care business due to some normalization in channel inventory.

We do expect this slowdown to reverse in the second half of fiscal 2025, and that's supported by conversations and forecasts that we've received from our customers. It is worth noting here that we did see strong sequential quarter-on-quarter growth in our U.S. Vascular Access and surgical consumables business, which was up more than 20% versus Q4 2024, and we still see -- we see strong signs of continued growth acceleration there.

With the revenue growth overall, gross profit also grew at a similar rate of about 75% compared to a year ago. Our gross margin for the quarter was 61.2%, which is in line with our performance from the past several quarters. Operating expenses at $3.7 million were down quite a bit from a year ago, largely attributable to the restructuring that we did on the sales and marketing front a year's time ago. And it was slightly below where they've been in the past several quarters, demonstrating a really strong judicious use of the company's spending investments.

Our EPS clocked in at $0.04 per share, which is up $0.07 from a year ago and continuing our trend, 4 straight quarters of positive EPS after 9 straight quarters with negative earnings per share. And wrapping up with cash, another strong quarter of cash generation. We ended with $17.5 million in cash, more than double where we were at a year ago and about $750,000 more than 3 months ago. We continue to have 0 debt, so a very strong balance sheet.

And moving to the next slide. We want to continue to provide visibility and transparency to our U.S. Vascular Access and Surgical consumables business, which is an important area of growth focus for Covalon, and it's the business that we have the greatest end-to-end control over. We continue to be a strong partner to the best of the best children's hospitals in the U.S., demonstrated by 8 out of those top 10 best hospitals, partnering and trusting Covalon to help them deliver the best possible patient outcomes. Broadening out our focus, though, to include all hospitals, children's, acute care, adult hospitals, et cetera, with our significant focus on this business and 3 key priorities.

With the new fiscal year here, for the first 2 metrics you see, we take a look at our top 50 customers from last fiscal year, so from 2024. And then against that comparison set, our first priority is to retain all the business that we fought really hard to win. done, 100% retention of all 50. Second priority is to grow those accounts, either by adding new products that they weren't previously purchasing or by growing the volume of existing products in the account. Here, solid performance of almost 40% growth over a year ago. So well above the overall market growth rate here in the mid-single digits.

Third priority, add new. And here, we added more than 20 new hospitals to our roster in Q1, which is a really good start to the year. For context, in all of last year, we added 66 new hospital customers. So through 3 months this year, we're already about 1/3 of the way to surpassing our strong 2024 additions. And then transitioning to the third part that I told you, I'd walk you through today. Last quarter, I showed this slide and talked at a high level around some of the actions we are taking to advance the company on these 4 fronts. This quarter, I'd like to go a little deeper around the commercial advancement side of things. And in future quarters, we'll go deeper into the other areas.

So these elements represent -- that you see on the screen here represent a number of key actions and efforts that will be key to our commercial success in 2025 and beyond. We've initiated work on all 4 of these. The top row are further along and have already yielded wins and benefits. The bottom 2 are a little more early stage, and we have high expectations for those as well. So first, around the expansion to IDN level selling. We've had a lot of growth in our U.S. Vascular Access and Surgical business. In 2024, we grew this at more than 40%. And historically, we've achieved that strong growth largely on a stand-alone hospital basis, one hospital at a time. But as we drive this business to scale, we need to advance from individual hospitals to be able to engage and win at the integrated delivery network level, IDN level.

These are large health systems with dozens of individual hospitals under their ownership. And this requires a different selling model, different skills, different messaging and higher-level relationships. And as I alluded to earlier, we've actually secured our first win on this front with VALGuard being approved for system-wide usage at one of the top 5 IDNs in the U.S. We also have VALGuard, IV Clear and SurgiClear products under trial and consideration for similar approvals at 2 other large IDNs. These system-wide approvals don't guarantee you the business at the individual hospitals that form the IDN, but it's a huge key enabler to success at each of them. It opens doors and accelerates the sales process.

Shifting gears to our partnership with relevant scientific organizations and their annual meetings. These are groups like the Association for Vascular Access and the Association for Pediatric Hematology/Oncology Nurses and those types of associations. Over the past year, we've seen strong success at these meetings. Numerically, in 2024, we generated more than double the leads at these events compared to 2023. But what I also think is important about these meetings are the quality of the conversations that you're able to have.

Our team and I always love to meet with customers at their facility, absolutely the best way to get a 360-degree view of the world that our customers live in. But our customers, their nurses, their doctors, infection preventionists, they're incredibly busy treating patients and dealing with the dozens of emergencies that pop up each day. So those conversations can be a little rushed or a little scattered.

At these scientific meetings, our customers don't have to worry about the minute-to-minute stresses with their patients, and so the conversations can go a little deeper. On top of this, our engagement with these associations also is going a little deeper and very exciting things on that front. The third piece here is around expanding AI-driven content and engagement. So Covalon is leveraging AI-powered tools and other novel technologies to generate and personalize content and optimize customer engagement. The technology here is evolving so quickly, and there are so many different ways that AI and other technologies can and are helping us accelerate our growth and reach customers with greater efficiencies.

We see really strong potential use for these advanced technologies, and we're actively working to accelerate our work in this area. And last but not least, we've been developing a gentle-to-skin demand generation campaign to increase the adoption of our life-changing silicone adhesive-based technologies. These are -- one of the ones was what we covered upfront here with Jessika on IV Clear. One focused element of this campaign is to highlight the challenges associated with the typical standard of care, these acrylate adhesives for vulnerable patients with fragile skin or allergies and then beyond to broader patient populations and really direct customers and whatnot to our gentler silicone-based solutions as the superior choice.

Bottom line, as I said before, at Covalon, we don't think anyone should have to incur unnecessary pain or suffering when undergoing medical procedures. So hopefully, this gives you a little more depth of what we're doing on the commercial side to drive increased demand for our amazing solutions.

So to wrap up today's call so that we can take some questions, a quick summary. Covalon is making a huge difference in the lives of patients, helped, of course, by the clinicians who are choosing to use our life-saving and life-changing products. 2025 is off to an exciting start, strong growth elements as well as a growing list of recent accomplishments and highlights that strengthen our company. And we have high confidence that the efforts we're executing on the commercial side and beyond are going to yield really strong outcomes for this company and allow us to realize the multiyear growth opportunity in front of us. And with that, we'll now transition to Q&A.

[Brent Ashton, executive]

[Operator Instructions] Our first question, and I'll apologize in advance if I don't pronounce people's names correctly here, but we have Steve [indiscernible]. And Steve's question is, will the company consider stock repurchases again in the future? And then will the company list on a U.S. exchange?

And so at a high level, I'd say that our cash position gives us some really good flexibility as we explore various avenues for accelerating growth, whether organically or through M&A. It's also allowing us to make investments in CapEx to reduce our manufacturing costs. To your question on the stock repurchase, that could be a use of cash. At this point, we don't have any committed plans for share buybacks. We do really like the flexibility that our strong balance sheet, over $17 million in cash and no debt, that strong balance sheet affords us.

And then on the U.S. exchange question, yes, I mean, that's something that could be done in the future at this point, no committed plans to do so. So thanks, Steve.

The next question is from Duane McMullen. Congratulations on your success in continuing to execute the strategy. You now have over $17 million in cash and with positive cash flow, this will continue to grow. What do you plan to do with this large and growing amount of cash?

Great question. And kind of to the lead in here, we -- I think that was just answered right now. Nothing really to add there.

Next question is from Arnold Shell. Revenue is not just down from last quarter. It's the lowest revenue of the last 4 quarters and seems to be stuck at $8 million to $9 million. Why is that?

This is the last quarter that you can compare to the previous regime. Going forward, it looks like the key figures will be at best flat from the previous year. Yes. So on the revenue side, I think you're correct. We've talked about kind of the sequential slowdown. And from a revenue standpoint, we're just really excited about the future and the efforts we're taking on both the commercial front that I highlighted today. When we think about these businesses, I think it's worth noting that over the last 3 years, these businesses have had really strong growth rates. Both the collagen business and the U.S. Vascular Access and surgical consumables business have had 3-year CAGRs in excess of -- I think it's in excess of 30%. So for sure, it's been strong. We have a lot of committed plans in how we're going to grow the company. We highlighted some of those today. But we've also said that, that growth is not going to be linear. And so while we do see that multiyear journey of strong growth outcomes, that's where we're at today and where we're growing to. So I hope that answers the question.

And we'll move to -- we have a question from Jerome Uzoziri around capitalizing on the opportunity to buy back shares, particularly while the company is profitable, cash generative, debt-free.

And per the previous answer, certainly a consideration for the future, but we do really like that flexibility that comes from having a super strong balance sheet that could be -- is being used to devote CapEx, could be used for M&A or other purposes. But yes, the share buyback continues to be an option.

I'm going to take a pause here to kind of scroll through and take a drink. So just give me 15 seconds here.

So the next question is from Alpha Capital. As Covalon continues to add more hospitals, 66 last year and 21 so far this year, do you see an increase in sales per hospital?

And I'd say the question -- a couple of things there. Overall, yes, right? When we first lay in a hospital, that tends to be a certain amount of revenue. And then our goal for the metrics we've shared with you is to expand that, grow that existing base. So over time, we absolutely do see an increase in sales per hospital.

The next question is from Arnold Shell, and that is, what's our exposure on tariffs?

And so on the tariff side of things, for sure, it's a very hot topic, and we're continuing to monitor. We do have a playbook that we're executing. So I guess the best way to answer this would be, at this time, the extent of our exposure does remain a little uncertain because the tariffs and their scope are still evolving. We stand by the comment we made last quarter that if the full extent of the reported 25% across-the-board tariff is implemented, we would see just a couple of hundred basis points of cost of goods sold impact here in our fiscal year 2025.

And that assumes no mitigation. We've already taken some steps to kind of prevent against supply chain disruption and potential price inflation on raw materials. So we've expanded our safety stocks. And then there's a lot of mitigation steps we could take as well if those tariffs do come to bear.

And then our last question here that I see is from [ Zach Terese ]. Can you please speak to your subleases in the Seattle facility and the latest developments? I'll make a comment, and then I'll defer to Katie because I think she has more of the specifics. But yes, we did have a couple of subleases in the Seattle facility. Unfortunately, one of those dropped. And so we had to -- and we put a note of that in our financial statements. Katie, do you want to jump in and provide a little more clarity?

[Katie Martinovich, executive]

Yes. Thank you, Brent. So we have been working hard. We've actually engaged with our broker again, and they are actually currently working to find another sublease so that we can continue to sublease the facility and the portion that we are not using. We still do have one sublease. And that is there until the end of the lease -- or term of lease, which is April 2026.

[Brent Ashton, executive]

Thanks, Katie. That is all the questions I show, I don't know, wait a second. I'll hit the refresh button, see if that changes anything. Yes. That's all the questions I show. I don't know if the operator sees any other ones. But I guess, at this point, if there's any questions that people would like to voice in via the conference call. We'd be happy to take those now as well.

[Operator]

[Operator Instructions] We do have our first question coming from the line of Andre Uddin with Research Capital.

[Andre Uddin, analyst]

As you get more familiar with your business, can you discuss if you're starting to see a seasonal pattern? Like if you look at Q1, it used to be a weaker quarter and now it was stronger than we expected. Maybe you could just talk a little bit about that?

[Brent Ashton, executive]

Yes. Thanks so much, Andre. It's a great question. When I think of seasonality, I think that really comes into play more when you've got a business that's historically growing kind of at or below the market growth rate. So if you got like a 5% growth business, well, then you'll probably see a little seasonality in the U.S. due to the high deductible health insurance plan. So tends to be a little more demand towards the back half of the year, a little less demand at the front half. But when you've got businesses that are growing 30%, 40% or 50% each year, like our -- both of our U.S. medical consumables businesses, the collagen business historically over the last 3 years, obviously, as we noted, that when we're seeing a little bit of inventory rebalancing.

But the U.S. vascular access and surgical consumables business continues to show that strong growth there. It kind of comes out in the wash a little bit more. So yes, in the businesses that we're the most direct in, we do see more patients in the ICU around flu season and whatnot. But to be honest, it really doesn't show up in the analytics just because we're growing that business so quickly.

[Andre Uddin, analyst]

Okay. And just could you also just provide a little bit more clarity in terms of the collagen channel inventory in terms of what's happening there? And a little bit more than what was in the release?

[Brent Ashton, executive]

Yes, for sure. So in a high-growth environment, right, it can be tricky for our partners to accurately predict future demand. Like is it going to be 50% growth or 75% growth over the year prior. And obviously, that being a big part of our U.S. business, you can see we had some really strong growth last year. And so it's very different than a business that kind of similar to the last question, very different than a business that grows at like market growth rates of 5%. So inevitably, there's going to be periods where too much was ordered and you have excess inventory the needs to bleed off. And there'll be some periods where not enough was ordered, which can lead to temporary back orders or lost business. And a lot of the time, the latter can lead to the former and that's the case here.

So we do have through conversations and forecasts. We know that we have confidence from those that the second half of our fiscal year here will be stronger with that business than the first half. And then really, it's full court, it's our job to work with our partners to do everything we can to accelerate the sellout and create even more demand for our amazing product there. So working with them on that.

[Andre Uddin, analyst]

Okay. That's great. And just one last one I had. [ Listen ] you added 21 new hospitals this quarter, which is quite significant. Do you expect that trend to continue for the rest of the year? And how do you see hospital base acquisitions going?

[Brent Ashton, executive]

Yes. I mean we have -- we certainly have high expectations for that to continue to grow. We added 66 hospitals last year, off to a good start this year. If you do the math, right, Q4 was a little softer on that. I think we added 6 or 7 in Q4. And so it can bounce around. And some of it is just around timing. We put a lot of effort here in Q1 to -- we have a sales pipeline. And so we put a lot of effort in to really get those late-stage pipeline hospitals across the finish line. in Q1. And so yes, we have high expectations, but it can bounce up -- number can bounce around a little bit just based on timing and whatnot.

We'll play off the exciting win last night. That was a good hat-trick of questions from you. So thank you.

[Operator]

[Operator Instructions] Your next question comes from the line of [ Dave Kebler ].

[Unknown Analyst]

Just wondering if you can give an update on the coating business.

[Brent Ashton, executive]

Yes. Yes. So on that front, we -- as we talked about last quarter, right, we don't see that as a strong part of our future business. And so we are looking at different ways to monetize the asset there and the know-how. Nothing to report on today. But it is an area that we are working with a partner on and trying to see a conclusion to that pathway forward. But nothing to report on today.

[Unknown Analyst]

And last question. How do you -- where do you see the company going? Are you going to be a high-growth company? Or are you just going to be a steady growth company, maybe eventually buying back shares or even potentially paying a dividend?

[Brent Ashton, executive]

Yes. I mean we kind of talked about the share buyback and the dividend would be another use of the cash. We have high expectations for the growth of the company. And that's really the laser focus of what we're doing right now. We think across the primary areas of focus around the U.S. collagen, and the U.S. Vascular Access and Surgical consumables business, that there's a ton of opportunities. We'll talk at the Annual General Meeting about some of the clinical tailwinds that we think can really boost our business and some things we're doing to ride those wins to success.

And so yes, we have very high expectations on our growth. As we said, it's a multiyear journey. It's not going to be completely linear, but we're very excited for the future opportunity there.

Moving, we had a question come in online as well. So this is Don Angelo Volpe. And his question is, can you provide some additional color on steps available to the company to help mitigate the impact of tariffs?

And so I can tell you kind of what we've done and then some other things that remain options. To mitigate potential disruptions, we've increased our purchased goods safety stock in some key areas to ensure supply continuity and pricing stability. This helps us kind of manage lead times effectively and avoid unexpected shortages. We haven't seen that, but this strikes me as if the tariffs come in and we see various ordering patterns it could create some kind of supply chain effects across all industries actually. And so we're fortunate we've got a strong balance sheet. And so we've increased kind of safety stock on our key supplies. We're certainly balancing this approach carefully to avoid excess carrying costs. We're also remaining agile in our kind of procurement plans. We're producing at a higher rate to make sure that we export product into the U.S. in a timely manner.

And those are some of the things we've done. There's other things that are kind of in the playbook if the tariffs do materialize. We do have options around pricing and whatnot, and we'll see how kind of the market reacts there and look to see what the right path forward is. So I hope that helps Don Angelo. That's the last -- still the last of the online received questions. Any other questions from the phone line?

[Operator]

Yes. And we don't have any further questions at this time. You may continue.

[Brent Ashton, executive]

Perfect. Well, listen, I really appreciate the questions from this group. I really hope each of you have a great rest of your day here and a plug for our next time to communicate, it will be around the Annual General Meeting. And we'll be providing, as I said, a little more color on some of the things that we're really excited about and look forward to seeing you then. So with that, have a great day. Happy Friday, and I hope everyone enjoys your weekend.

[Operator]

Thank you. And ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.