Full Year 2022 Somnomed Ltd Earnings Call Sydney Aug 23, 2022 (Thomson StreetEvents) -- Edited Transcript of SomnoMed Ltd earnings conference call or presentation Tuesday, August 23, 2022 at 3:00:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Hervé Fiévet SomnoMed Limited - Global CFO * Neil Verdal-Austin SomnoMed Limited - Global CEO, MD & Director ================================================================================ Conference Call Participants ================================================================================ * Melissa Benson Wilsons Advisory and Stockbroking Limited, Research Division - Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (technical difficulty) and welcome to SomnoMed Limited FY '22 Results Conference Call. (Operator Instructions) There will be a presentation followed by a question-and-answer session. (Operator Instructions) I would now like to hand the conference over to Mr. Neil Verdal-Austin, CEO. Please go ahead. -------------------------------------------------------------------------------- Neil Verdal-Austin, SomnoMed Limited - Global CEO, MD & Director [2] -------------------------------------------------------------------------------- Thank you, Rachel. Good afternoon, ladies and gentlemen. Welcome to SomnoMed's webcast and investor presentation of the FY '22 results. And thank you very much for your time today. FY '22 certainly remained a challenge from a COVID perspective, not only for SomnoMed, of course, but for everyone around the world. We are now, hopefully, towards the end of this global pandemic and have now probably entered into a sort of a managed phase of this, but have also now, unfortunately, entered another period of uncertainty around the global economic climate, adding supply chain issues, inflationary pressures and rising costs to the running of businesses around the world. But having said that, SomnoMed, I'm pleased to say, has really managed through this fiscal year extremely well. So if we can start after the usual disclaimer and agenda slide, it gives me great pleasure to start at Slide 5, our FY '22 highlights. And here, we can see 3 distinct highlights that we want to call out. Firstly, on revenues, $72.6 million and up 16%. We reached our guidance just above our guidance and up 17% in constant currency. Impressive results really from both North America and Europe and especially in Q4 of FY '22. EBITDA, we were $1.3 million and again above guidance, which was breakeven. Very pleased with the gross margin we make from oral appliances. Our product range maintained at the 70% level. Within our business, costs are very well managed within the context of even COVID and the current economic situation, and the investment of EBITDA this year, FY '22 was aligned with the technology projects for the future success of the company. From a cash perspective, we ended on $15.6 million, again, well managed throughout the year with purposeful allocations against the technology projects that are now well underway and a new debt line secured now for an additional net $11 million for the company. So moving to Slide 6, the strategic and operational highlights. You can see those -- there listed for your own reading. But I really want to call out the patient-centric multidisciplinary approach we still have at SomnoMed. SomnoMed is more than just an oral appliance treatment company. We focused a lot of our investments on the sales and marketing, and you'll see that, in the P&L, led to -- when Hervé covers that slide. Reimbursement foundations continue. We develop those reimbursement foundations within most jurisdictions that we operate in, a key underpinning success of the company so far. We also focus on medical education. It remains a cornerstone, again, of what we do, in all of our markets is to bring together the awareness of oral appliances in both medical and the dental sides of our market. Our comfort liner, again, it's a key product differentiation that sets our product range apart from others in the industry in terms of superior product quality and comfort. And of course, the new technologies and Rest Assure, addresses one of the major barriers to adoption, which is, again, one of the highlights that we have achieved in developing in FY '22. On Slide 7, we talk about the digital manufacturing excellence we have at SomnoMed. We are passionate about our digital manufacturing and engineering excellence that supports our digitally milled device growth opportunity while also continuously improving our quality capabilities within manufacturing. Our team comprises now of technicians and engineers, and medical device quality experts that focus on first-time-fit experience; retention and the prediction of retention, does the device remain where it's supposed to be seated; and also focused on automation, automating those processes to bring out efficiencies and productivity within the investment of digital manufacturing. All of these are key parameters and measures that are constantly worked on with great results for both our customers and our patients. On to the vision and the market opportunity slides, Slide 9. Our vision is clear. We are a patient-centric organization. We care about the treatment of those patients who suffer from obstructive sleep apnea. And our mission is equally clear. We aim to do that in a multidisciplinary approach by engaging with all parties necessary to achieve that vision. And we list some of those clearly in that mission statement. SomnoMed, again, is more than just a supplier of an oral appliance treatment solution. We bring 2 very different groups of clinical specialists together for the OSA treatment in the best interest of mild to moderate patients. Moving to Slide 10. It shows us that the OSA market is not only large and the disease affects many people globally, of course. But it's also progressive and it does not get better. It's remained or left untreated. The classifications of severity normally drives the treatment options that are given to patients, whether you're mild, moderate or severe. And we have a significant opportunity in even only the mild and moderate category, as you can see from one of those spheres, if you like, that give you a flavor of that 900 million opportunity that there is. To meet this, SomnoMed as a company has always had a global footprint in mind. And from the start has been instrumental in developing and building the oral appliance industry within the sleep community for over 15 years now. Our reach is unparalleled across 28 countries and now having treated 715,000 patients globally. We remain the global leader that patients choose for their oral appliance obstructive sleep apnea treatment. The next section is the financial information slide, and let me hand over now to Hervé Fiévet, our CFO, to cover these for you. Thank you, Hervé. -------------------------------------------------------------------------------- Hervé Fiévet, SomnoMed Limited - Global CFO [3] -------------------------------------------------------------------------------- Thank you, Neil, and good afternoon, ladies and gentlemen. To introduce the financial review, Slide 12 gives us an overview of the group's revenue growth by half and full year. While the first half was subdued due to a resurgence of COVID in Europe during Q2 and therefore, delivering only 10% growth versus PCP, the second half finally showed the true momentum of the underlying business with a nominal growth of 21%. This resulted in a growth of 16% for FY '22 versus PCP of $72.6 million, which, as Neil mentioned previously, was driven equally by both our key regions. Now Slide 13, which details this revenue growth by region, shows that in spite of APAC being impacted by the succession of lockdowns in ANZ, albeit still ending with an improvement in H2 to deliver a plus 1% for the year over PCP, the North American region did really justice to its investments in the medical referral channel to deliver a 33% growth for the year, of which a very satisfactory plus 42% in the second half. As for Europe, after COVID impacted underwhelming first half at plus 5%, the region demonstrated its true strength to deliver a 15% growth for the year, supported by both its developed and investment countries as well as the impetus of reimbursement in Germany. Moving now to Slide 14, that -- it has the margin and EBITDA. The highlight really was the ability of the group to maintain its gross margin percentage in spite of the impacts of COVID, global supply disruptions and inflationary pressures. Here, the company showed its capacity to convert the sales increase into margins that support the investment in marketing resources, R&D, systems and teams, which, in turn, underpin the upcoming in-build device technology. This led to an EBITDA, as we mentioned, proudly about year-end guidance by $1.3 million. Slide 15. So Slide 15 focuses on the $4 million increase in regional sales and marketing spend, which underlines the investment in sales and marketing teams and resources focused on medical channel as well as the $3 million increase in head office resources around R&D skills, AI and a range of new engineering talent as well as system licenses to pave the way for Rest Assure. The sales and marketing investments are in all 3 regions and are focused on market penetration with expanding sales team, medical marketing capabilities and business development. Last but not least, on Slide 16, the balance sheet and cash flow show the ability of the group to generate a positive operating cash flow from the positive EBITDA, which resulted from a good balance of investment versus delivery of growth. Also, in line with the guidance, after a capital expenditure of just under $8 million in Rest Assure, a suite of connected systems to support it as well as milling machine and drawing its EUR 3 million facility with HSBC, the group ended the half year with a cash bank of $15.6 million. This, in addition to securing a net $11 million in July 2022, confirms a stronger balance sheet and the ability of the group to finance its ambitions, which Neil will now expand upon. Thank you. Back to you. -------------------------------------------------------------------------------- Neil Verdal-Austin, SomnoMed Limited - Global CEO, MD & Director [4] -------------------------------------------------------------------------------- Thank you, Hervé. Thank you for covering those slides. The next few slides really showcase the new technology, Rest Assure, announced earlier this year. So on Slide 18, you can see SomnoMed has attempted to address one of the full opportunities in the space, a space of a critical missing component, which, in our view, was in-build sensors, in-build sensor technology, delivering objective, overnight treatment data and therefore, bringing true transformational innovation to this company. This transformational technology investment commenced in FY '20 and is progressing so far according to plan. SomnoMed also announced this technology at World Sleep '22 in Rome of March '22. And as a company, have always, again, been more than just an oral appliance treatment company and will always might be ever more so. SomnoMed now brings to the industry a connected smart device and product ecosystem that will drive further acceptance and adoption of oral appliances to the greater OSA market where proof actual data of SomnoMed's long-term effective therapy model will now be delivered. This Slide 18 shows you how this technology will work and how the smart product ecosystem starts to function as an integrated and automated technology platform. We have miniature sensors in the upper of the device, recording information during sleep time. When the patient wakes up and puts the device into the docking station, Bluetooth is activated, and that information begins to upload through the patient's phone into the cloud. Once completed with algorithms, that information is then sent to the patient's app on their phone and then both to the sleep physician and dentist portal for their review. So this technology lifts SomnoMed into a whole new category of oral appliance treatment solutions, unique and on our own and redefines how the industry will view oral appliances in the future. On Slide 19, we show the completed 2 patient studies that we've done so far. One is to derive the algorithm, which is meaning from the NOX home sleep test back to the Rest Assure technology. And the other, a validation of that efficacy algorithm, which in essence, shows what the derivation study has. And now the second study, now completed and as promised, shows the reverse of that. Unfortunately, we still wait confirmation from the investigators as to the second study results, but algorithms that measure both sleep position and adherence as well as sleep time still require optimization on the second patient validation study. And again, on Slide 20, we've shown this to you before, but just to reconfirm the time lines we envisage over FY '23 now. We've delivered those in FY '22. And all the work in the next 4 months really culminates in the submissions to the regulatory authorities after which we wait for the necessary approvals to be able to commercially launch as anticipated in FY '23. So now to the future. The next slide under future outlook, show SomnoMed is well positioned for the opportunity that we've just described and the Rest assure, and has a very clear idea on the future horizons that will require investment for the company's future growth. And on Slide 22, we've built a very strong foundational platform over the years that underpins the next steps for future growth. SomnoMed is worlds apart from this industry when it comes to the systematic building of a long-term credible medical device company, which will now enter its next phase of growth. No one else has built upon these critical pillars or building blocks on which SomnoMed stands today. Slide 23, shows the key foundational cornerstone, which is our clinical research. We believe that this research has to be well-powered, externally conducted, third-party managed, have robust protocols and be, of course, clinically relevant, hopefully, in multicenter studies where possible and also conducted by leading industry investigators. Our pipeline addresses the barriers to COAT and oral appliance adoption and constantly clinically validates our devices' comfort, quality, compliance and efficacy. SomnoMed's future trials listed here are to be conducted at some of the world's leading medical institutions and addressing key medical issues aimed at improving efficacy and adherence of our oral appliances in the treatment of OSA patients. Slide 24, again, shows the aim of this company, which is to grow the oral appliance sector within the sleep treatment industry. We need to grow the share that oral appliances currently have within the total number of positively diagnosed OSA patients worldwide. Today, that's around 8% to 10% in most countries and is not representative of the true patient choice potential and long-term treatment compliance that is successful in oral appliances today. SomnoMed's plan, and this has been openly communicated for some time now, is to grow that sector such that a far greater number of patients are treated for their OSA and that they remain in treatment. Too many, in our opinion, are offered CPAP, irrespective of severity, and simply cannot tolerate the treatment long term. This is a long-term disease that comes with very severe comorbidities, if left untreated. And as such, compliance is more critical to the equation than efficacy when looking at long-term effective treatment solutions, and that is exactly what SomnoMed is focused on. The next slide, Slide 25 shows the outlook that we have for this business and to do this and to maintain an oral appliance market category leadership, we'll deploy the financial framework strategy, as noted in previous presentations. We purposely invest EBITDA into future horizons to accelerate the future growth and market penetration, and that's exactly what SomnoMed is doing. This outlook slide clarifies that view and the year ahead and into an aspirational block of FY '26. So it outlines the guidance for FY '23. And on the revenue side, this will be at least 20% revenue growth. On the EBITDA side, at least a $2 million EBITDA. And just to give some clarity on cash, a CapEx investment of $7 million, of which approximately $3 million is invested in the technology of Rest Assure. The key focus initiatives and objectives revolve around our medical initiative program, expanding our sales and marketing teams and building a long-term, sustainable medical device company. We've also included for the first time an indication of where we're headed. We include a new section, the FY '26 aspiration that provides a sense of our medium-term financial goals listed in that block. Over 1.5 million patients treated at greater than 20% CAGR revenue growth over the time to around circa $150 million revenues, stable product gross margins and a target EBITDA margin of 10% or greater of the total revenues to circa $15 million. And as I said, at last year's webcast, our investment in Rest Assure will herald a new chapter in our business, a new era for the company and the industry. We are almost, almost there. Thank you for your patience, and thank you for your continued support as I continue to update you over the progress of FY '23 through notifications and quarterly releases as we go through the year. Thank you, ladies and gentlemen, for your attention today. I know that time is poor in a release week of note in the markets this week. SomnoMed has an incredible vision, talented, engaged and passionate people and a distinct competitive advantage, best-in-class products as well as a global footprint with a purpose-driven investment plan for the future. We're very, very excited about the journey ahead. This ends the FY '22 results presentation. Thank you for your time and you listening to us this afternoon. We will now move to questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from Melissa Benson with Wilsons. -------------------------------------------------------------------------------- Melissa Benson, Wilsons Advisory and Stockbroking Limited, Research Division - Research Analyst [2] -------------------------------------------------------------------------------- I just had a few questions, firstly, on the outlook and the guidance that you've provided for FY '23. So I guess, first, if we could start on the revenue growth guidance of 20%. Is there a particular region that you think this growth is coming from? Is it recent Germany reimbursement in Europe? Or do you see it more broadly across all jurisdictions? -------------------------------------------------------------------------------- Neil Verdal-Austin, SomnoMed Limited - Global CEO, MD & Director [3] -------------------------------------------------------------------------------- Yes. Great. Thanks, Melissa. Thanks for the question. I think broadly, it's across all regions as we're developing this medical initiative phase in our business. It's really taking some momentum now. I think the main contributors will be North America and Europe. And out of North America and Europe, we're expecting more (inaudible) North America out of those 2 to contribute to that growth. And equally so, Europe's trajectory looks tremendous for the next 3 to 4 years, I would say. And equally so, in APAC, we're making headway on this exact medical initiative with sleep physicians referring more and more patients to our network of dentists. -------------------------------------------------------------------------------- Melissa Benson, Wilsons Advisory and Stockbroking Limited, Research Division - Research Analyst [4] -------------------------------------------------------------------------------- Okay. That's helpful. And then I guess while we're on the topic of reimbursement in Germany. Like how big should we think of the opportunity size in Germany versus some of your established kind of markets in Europe, like in the Nordic region? Is it a similar size? Is it much larger? -------------------------------------------------------------------------------- Neil Verdal-Austin, SomnoMed Limited - Global CEO, MD & Director [5] -------------------------------------------------------------------------------- No, Germany would be much larger. There's no doubt about that in our minds. And so the opportunity for now, this awareness to build the reimbursement that's now in place and the acceptance of oral appliances across a broader range of sleep clinics and sleep physicians who work in the hospitals in Germany, should give us a much bigger opportunity in the future than any of the Nordic countries and/or the Netherlands, for example, where we've been successful in the past. -------------------------------------------------------------------------------- Melissa Benson, Wilsons Advisory and Stockbroking Limited, Research Division - Research Analyst [6] -------------------------------------------------------------------------------- Okay. Got it. And just another question, I guess, on the FY '23 guidance. You called out $7 million in CapEx with $3 million of that being for Rest Assure. So that balance of $4 million, is that kind of just manufacturing scale up in general? Or is some of that also manufacturing scale up for different aspects of what the residual products may need? -------------------------------------------------------------------------------- Neil Verdal-Austin, SomnoMed Limited - Global CEO, MD & Director [7] -------------------------------------------------------------------------------- So I would break it down as follows. Obviously, the $3 million is the Rest Assure technology investment. I would say, increased capacity and growth capacity that we need is about $1.5 million. Maintenance and replacement and refurbishment of equipment is about $1.2 million. And the rest are R&D specific projects and regional CapEx of about $1.3 million to make up the $7 million. -------------------------------------------------------------------------------- Melissa Benson, Wilsons Advisory and Stockbroking Limited, Research Division - Research Analyst [8] -------------------------------------------------------------------------------- Okay. That's very helpful. And I think maybe the final question for me, and I'll hop back in the line. Is this around the FY '23 trading you've seen thus far? I mean it is only just on almost 2 months. You obviously came out of a very strong kind of fourth quarter. Are you seeing kind of similar trajectory in Europe and the U.S. as you did in that fourth quarter still? -------------------------------------------------------------------------------- Neil Verdal-Austin, SomnoMed Limited - Global CEO, MD & Director [9] -------------------------------------------------------------------------------- We are seeing the same momentum and trends along the FY '23 guidance at this stage. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- (Operator Instructions) The next question comes from [Michael Wu], a private investor. -------------------------------------------------------------------------------- Unidentified Participant, [11] -------------------------------------------------------------------------------- Question. You've previously mentioned that ongoing, it's probably going to be a bit easier to grow in Europe because of the reimbursement situation. But you're seeing a lot of growth recently in North America. Would you be able to run through on why there's some change in trajectory there? -------------------------------------------------------------------------------- Neil Verdal-Austin, SomnoMed Limited - Global CEO, MD & Director [12] -------------------------------------------------------------------------------- Yes. I think the plans that we've put in place in terms of this great -- the thing we talk about all the time is medical initiative. The momentum of that is really now starting to take hold in North America, [Michael]. I think the teams that we've put in place, the business development teams you put in place, the account senior account managers, they have a structure, a layered structure, if you like, on sales into the North American region. And I think the collaborations and partnerships with medical communities is starting to happen, where we're seeing an increased referral rates of mild and moderate patients to our already established dental networks that are starting to take hold. We measure and track that every month, and that's principally one of the reasons we see North America growing the way it is. But also, at the same time, we have to call out the CPAP recall that, unfortunately, Philips had to make. And I think that's taking its toll as well. ResMed are able to fulfill probably half, I think they've said before, 50% to 60% of that pipe. And the rest is -- I'm not sure what's happening with some of those patients, unfortunately. But some, I think, are now being directed to oral plant, which helps our growth as well. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- There are no further questions at this time. That does conclude the conference for today. Thank you for participating. You may now disconnect.