SomnoMed Limited (SOM) Earnings Call Transcript & Summary

Thank you for standing by and welcome to the SomnoMed 2020 Full Year Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Neil Verdal-Austin, CEO. Please go ahead.

Well, good morning, everybody, and thank you for listening to our investor presentation to cover results fiscal year '20. To start with, treatment-focused and technology-driven is our working management that drives all that we do at SomnoMed. This will be explained as we work through the presentation this morning. On Slide 4 is the agenda for the presentation, and the first of these is contained by a FY '20 summary. SomnoMed's core revenues were $57 million for the year and only 3% less than prior year despite Q4 being less than 46% to prior year, normally our biggest quarter, but due to the COVID-19 pandemic. The EBITDA of $4.7 million and only 5% off to our prior year's underlying EBITDA was an outstanding result considering what SomnoMed had endured. Regionally, North America, the revenue was growing to the 9 months to March was 24% up. But unfortunately, finished fiscal year '20 ending at 3%, but still a positive result given the quarter 4 result due to COVID-19. Europe's revenue grew for the 9 months to March at plus 9%, ending at negative 6%, and APAC was growing through the 9 months to March at 2%, but ending fiscal year '20 at negative 6%. Part of the summary was a successful acceptance and adoption of our new digital SomnoDent Avant. The apnea software provided connectivity network between dentists and medical practitioners. This was refined and tested during this time. And our medical initiative was implemented in North America, providing a key future strategic pathway for that region. I think most importantly, we have a united and committed executive leadership team and staff on a global front, and we finished the year with cash on hand at [ $13 ] million. Slide 8 details the COVID-19 impact and what we did in response to that. And as you know, we responded fairly quickly to ensure the financial safety of this company. We raised $15.5 million to protect the business and implemented cost-saving measures, maximized cash collections and built various business scenarios with assumptions to make sure that we determined the appropriate cash flows for the business during this time. Staff safety was paramount, and we did everything we could to make sure that our staff was safe if they had to come in to work. Paramount for me was a constant, open and transparent and very honest communication with our organization throughout this process. And while we rebased and fully supported our global manufacturing capabilities, we also stayed in contact virtually with our customers to make sure that they did not feel left out. We launched a webinar education series, and that was both on the medical and the dental front of our business. Just a reminder on Slide 10, our vision and mission, which is critical to understand is that SomnoMed will become a leader in the treatment of patients. Patients come first, those that are suffering from obstructive sleep apnea, by advancing the acceptance and adoption of our treatment, using all of our partnerships, medical and dental, patients and insurers to make sure that we achieve that. On Slide 11, we talk about obstructive sleep apnea. That's what SomnoMed really treats. Obstructive sleep apnea is a disorder that occurs when a person's breathing is interrupted during sleep. And it's measured with what's called an AHI, an apnea-hypopnea index. And it's an interruption or a port in breathing for at least 10 seconds per hour. Nontreatment of this, which is really the key thing to understand, does lead to more severe comorbidities, which is not good for any patient. Slide 12 talks about the market opportunity. So the OSA market, as we've seen in many publications, indicates around 1.36 billion patients suffering from this chronic disease globally. There's a split on the graph on the left between moderate and severe patients versus mild patients. We have an incredible opportunity within a very, very large market to be able to at least appeal as a second-line option to CPAP for patients who need their comfort and treatment. The right-hand graph outlines the COAT or what we call the Continuous Open Airway Therapy market or oral appliance market. It's an underpenetrated part of the OSA market globally. And as you can see from that graph, even in 2 jurisdictions where it's almost a 50-50 market to CPAP, reimbursement, medical and dental, working together and an early acceptance within the medical community and trenches that adoption, much earlier for oral appliances. So Slide 13. So CPAP dominates the market, as we've seen, but the problem with that is the compliance of CPAP. It is a highly efficacious treatment, but with a low compliance rate. And many research articles over many, many years, all talk about that and emphasize the same thing. Compliance is a major issue for CPAP, full stop. In this particular publication, we can see that 50% of patients don't use CPAP after 6 months. I think, more importantly, is Slide 14, the second dilemma for CPAP, and that is the patients require treatment all night, every night. If there's any message that I leave you with today, it's this message: the comparison of CPAP and oral appliances needs to be done on what SomnoMed has built in terms of what we called an effectiveness equation stimulation. It compares CPAP and oral appliances over a complete night's sleep. It's really important from our perspective that if you're going to talk about an effective treatment, you have to look at both efficacy and compliance. The 2 together is an effective treatment. A patient must remain in treatment. It's no good having a patient only in treatment for part of the night. And we have built what we call this effectiveness equation simulator with the backing and the behavior behind on all of the clinical results that we have, including the Philips study of 2013, for an example, that in this particular graph shows the apneic events, the apneas that a patient might have over a full night CPAP versus a SomnoDent. It's a measure of efficacy and compliance. And this equation is a tool that we now use to market ourselves and the sector of oral appliances to the medical community and sleep physicians. On Slide 15, we talk about SomnoMed core strengths. These core strengths have been built over many, many years across all of the critical aspects that are important to both medical and the dental sector, all the way from design and innovation through manufacturing, which is now not only traditional but digital, into sales and marketing with a strong brand and a global footprint into the service and support aspects where we are best in class. Our competitive advantage is clear on Slide 16. Firstly, with strong clinical research that supports the therapy. I cannot emphasize enough that the science needs to be well constructed, strong protocols written, the results need to be well powered so that outcomes become meaningful. Everybody in our sector, in our industry should be doing the same. Our design and innovation really talks to the proprietary soft line of materials that we have and a unique patient-to-titration methodology in the SumnoDent Avant product. We're investing and growing an extensive sales and distribution footprint across both channels that we operate in, both medical and dental. And I think a competitive advantage for me is the passionate global team that we've built, made stronger possibly through the COVID-19 experience. Slide 17 speaks of what we believe to be the patient's preferred alternative. SomnoMed's digitally manufactured oral appliance, the SumnoDent Avant. Its outstanding acceptance and sales within the U.S.A., Canada, followed by Europe and APAC, the resurgence of the sales following COVID-19, really speaks to its features, comfortable -- comfort equals compliance and its clinical effectiveness. At this stage, I'd like to hand over to Hervé Fiévet, our CFO, to cover the financial information of the results of fiscal year '20. Thank you, Hervé.

Thank you very much, Neil. So Slide 19. This slide about SomnoMed core revenue shows us the strong growth we had pre-COVID-19 quarter after quarter until Q3 that started to be affected by the latter. Then Q4 may show minus 46%, but we have seen the same trend continue on a positive trajectory from a low of minus 73% in April to only minus 14% in June. We finished the year better than we expected at minus 3% versus PCP. On Slide 20. Now when detailing the core revenues by region, we can note that all 3 of them were affected by a similar drop versus last year due to COVID-19 in the second half from minus 20% to minus 22%. Europe and APAC, although having a double-digit first half growth, could not withstand COVID-19 effect in the second half, both finishing at minus 6% versus last year. North America, for its part, is still showing a plus 3% over the year, which was notably the result of the buoyant first half led by the launch of the digitally manufactured Avant. Slide 21. This slide is showing us the revenue and gross margin breakdown. So the left-hand slide is just to put in perspective the effect of sales on each segment over a total percentage of gross margin for the group. In spite of COVID-19, we were able to maintain a significant contribution of mass devices to the latter with a drop of just 1 point to 69% versus last year and a total percentage of margin for the group that was preserved at 58%. Now on Slide 22. When talking about the core EBITDA, we are taking a conservative approach, comparing FY '20 to financial year '19's underlying EBITDA, knowing that the reported EBITDA was only $3.4 million in FY '19. Even so, the drop is only minus 5%, as mentioned by Neil. FY '20's reported $4.7 million EBITDA does include a one-off government assistance of $2.2 million. However, had COVID-19 not happened, as mentioned before, we were on our way to achieve a guidance of about $6.5 million. The financial summary on Slide 23 gives us a P&L view of the business. What really stands out is the commitments and the ability of all SomnoMed's teams to control in a pragmatic manner, sales and marketing expenses as well as administrative and corporate expenses while preserving skill set. And this is really what, given the urgency and the pipe time line, enabled us to reach the EBITDA of $4.7 million. On Slide 24, we can see that as a result from site management and unwavering support from our investors, we're able to generate a cash flow of $22.2 million. That without notably proceeds from share issuance and borrowings, still represent an operating cash flow of $3.4 million. This has led to the strengthening of the balance sheet and a proper capitalization, which are essential for the future of the group. Thank you very much. Neil, back to you.

Thank you, Hervé. I think the exciting part for us are our future horizons on Slide 26. And you may have seen these 3 key future horizons before. The first is really advancing the treatment, treatment focus, as I said in the very beginning, meaning an investment always in sales and marketing, focusing on that investment globally and making sure we reach the potential of sleep physicians and dentists working together around the world. That includes our medical initiatives focus, which is predominantly the European and the American and North American focus that we have, launching our digital product range and making sure that we remain operationally and service excellence throughout the globe. Positioning the patient's alternative is what I spoke to you earlier about, the effectiveness equation. It entails an effective medical outcome of the treatment of patients that suffer from this disease. It's working with all the partnerships we have to drive consumer education and focusing on reimbursement policy changes in nonreimbursed markets. And finally, our future horizons, meaning the technology-driven piece, evidenced by the digital manufacturing that we now have, our new products in that space that we're now launching, the technology bridge that apnea brings us and in automation and real-time precision that we will be introducing into our product, product range and services. Optimizing patient pathway and connectivity is the ultimate technology piece that SomnoMed is working on. The last slide, Slide 28, is really the outlook for FY '21. And I believe the year will be 2 distinct halves. I think the first half will be more of restore and recover as we respond to a changing market condition, guided by governments, regulatory conditions regarding the COVID-19 situation and our ability to stabilize as we have already done this company. The second half, I believe, will be a rebuild and grow and an exciting phase, again, for our organization. We're going to execute on strategic initiatives, and we're going to optimize everything that we do within this organization. Regionally, market fundamentals really remain sound across the globe. Revenue growth through product and service differentiation will be the key, and we will continue to focus on the medical referral channels and the medical initiatives launched across all 3 significant regions that we operate in. Research and development of further innovations will continue, adding technologies led by certain advancements that we are launching in both the medical and the dental sectors. Just as an updates that you understand where we are from a July perspective. Our revenue results were under by 5% to the prior year, again, an improvement and a positive trend on June's negative 14%. And on that basis, because of the uncertainty at this stage of the future, we're able -- we're not able to really give guidance for FY '21. I think it's really, really important in concluding, SomnoMed is totally dedicated to treatment-focused, technology-driven as our mantra. We're focused on the future horizon that we have for our business and delivering on the significant opportunity that remains in treating patients with OSA with the most comfortable and effective alternative possible. Thank you for listening to our presentation this morning.

[Operator Instructions] Your first question comes from Shane Storey with Wilsons.

My first question is really to ask about what you're seeing in terms of diagnosis and referral sort of activity in the U.S. and maybe your top 3 European markets? So I guess I'm trying to assist the extent to which you fulfill sort of pent-up deferred demand there at the back of FY '20. And would you say that European sort of diagnosis and sort of volumes are normalizing ahead of USA when we sort of think about fundamentals?

Thank you for the question, Shane. Yes, a really good question. I think in Europe, certainly, it's more hospital-driven and hospital-led from a diagnostic perspective. But having said that, I think that the backlog is largely done. I don't think that there's a pent-up demand at this stage. And I think what we're seeing in Europe is a higher mix towards more recent diagnostics now being treated very, very adequately in certainly the 3 biggest markets that we have in Europe. Europe is around 85%, what we would call back to normal, so to speak. So I think at those sort of levels, we would have caught up the March and April effect probably into the June and July period. And what we're seeing right now is a more recent diagnostic pathway being treated. In the U.S., that's more sort of home sleep test-driven and less PSG in hospital sleep diagnostic-driven. And so we would have seen that a lot quicker out of the blocks. We would have seen that backlog being treated a lot quicker than we would have in Europe. And I think that from an American -- North American perspective, we're about 70% back to normal, if you like. And of course, every state is currently different to be able to say that's a sort of homogeneous statement is difficult because the states are all different. But the diagnostic, I think, is also largely caught up in the U.S. And of course, in APAC, it's also a home sleep-driven market. And I would say that what we're sitting today from a revenue perspective is the more recent diagnostics.

Yes. Because I'm trying to reconcile, I guess, the comment you put in the outlook there saying that July revenue was around 5% off prior year. Although I take it that, I guess, diagnosis rates are sort of [ 85 ] or maybe less elsewhere. Was the prior July just a sort of an outperforming kind of months for that comp to have come in sort of minus 5%?

I don't believe so. Look, July, August and September are always, as you know, a weaker quarter for us. Q1 is generally a weaker summer holiday period of both the U.S. and in Europe. So I think it's a comparable July. I don't think anything extraordinary happened in July. So I think it does tell us the trend. I'm a bit -- trends are trends, and I don't know what the next month or the next 2 or 3 months might bring us depending on what might occur from a recession perspective, especially in a non-reimbursed market. But I think that the trend is positive. It looks like we are back out of the real severity of what COVID-19 did for us from a diagnostics and treatment perspective. I think what's still to be seen is the long-term or more medium- to long-term effect of recessions to come.

Yes. And with that in mind, sort of looking at the segment notes, I see jurisdictionally margins were pretty stable, maybe a bit lower in Asia Pac. But my question there is, how are you going about reinstating some of the operating costs as they kind of come back into '21 to support the growth? Do you think the costs will sort of come back in line with the revenue recovery? Or do you find yourself in the first quarter sort of investing ahead of that a little bit? Because my sense is that we might see a lower margin in the first half and then some expansion in the second half. I just wondered whether that was a fair way of looking at it.

I think that is a fair way to look at it. I think in our business, the mix between sort of variable and fixed components in our COGS is because of the service and sort of support excellence we have in all the hubs around the world to make sure that, that is really key and paramount for our dental communities. So I think when we come back at either 10% or 20% or 30%, certainly, a lot of the fixed components are already there, and we slowly bring in and ramp-up the variable expense as the volume comes back. So I think that there will be some slight pressure on margins as Hervé has sort of alluded to in the first 6 months of this year. But I think we will be able to sort of react and respond to that pretty quickly and to really capture that gain for the second half.

And then finally for me, do you think -- is there a sense that you could be in a better position, say, to come AGM to provide, I guess, more quantitative guidance about how the year plays out?

Shane, I'm hoping so, but that can't be promised.

[Operator Instructions] Your next question comes from Peter Meichelboeck with Select Equities.

Look, I just wanted to check on the discontinued ops. It looks like it was about $600,000 of expenses in the second half after only $50,000 in the first from RSS. Are these subleases that have come back to you guys, if they've gone bad or something? Is that what's occurred there?

Yes. Thank you, Peter, for the question. I think COVID-19 has made every auditor around the world exceptionally nervous. And we have had to provide for everything left under the RSS banner, even if we are not going to be able to collect on the AI, that's outstanding or still sublease to some of these leases under our name. So this is merely a book entry to provide for this under a very, very nervous outlook due to COVID-19 that we've had to provide for.

Right. Is there a P&L -- I'm sorry, is there a cash -- it seems as though there's a cash flow impact as well? Or is that something different?

There is a cash impact for this year, fiscal '20. As you'll see in our cash flow generated, we managed to generate $5.6 million in positive operating cash flow, but I have commented on the preliminaries at only $5.2 million for SomnoMed core. So $400,000 related to RSS.

Right. Okay. So in terms of sort of FY '21, what should we be thinking in terms of sort of, I suppose, the P&L and cash flow, in particular, in relation to this?

I think from a P&L perspective, everything's been provided for. I don't -- I think everything is now being provided fully for RSS. Whatever was left is now being dealt with in our P&L, and I think there will be some cash effect perhaps in the next 6 months as we buy out assets to sell or sublease the last 2 properties that we have under their name.

Right. Okay. And R&D spend, I'm not sure if I've missed it, but I think it was a bit over $1 million in FY '19. What was the figure in FY '20?

I think a very similar number relating to the digital platform that we have launched with Avant and our new digital product to be released this quarter.

Your next question comes from David Blake with Bioshares.

I had just a question about North America. And I wanted -- I was wondering if you could tell me where you were seeing better access to dentists in various states. Can you help me out with some more detail on North America?

Thanks, David. The detail is different literally month-to-month, unfortunately. What we see in America is even where states are closed, dentists are open. And even where states are closed or are open, dentists remain closed, fear for treating their patients. Most of the practices we see open and trading on a more consistent basis tends to be the ones in Central and Southern states of America. California tends to be pretty closed and nervous, but with some customers open, and the same for the eastern seaboard. Having said that, though, this seems to change month-to-month. And so it's very difficult to give a little bit of color on particular states or particular jurisdictions within the U.S. that seem to remain either open or closed. Having said that, again, most of our leading customers and volume customers are open and trading to a certain level. Otherwise, we would not be at the 70% level that we're seeing right now.

We are showing no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.