SomnoMed Limited (SOM) Earnings Call Transcript & Summary

Thank you for standing by. Welcome to the SomnoMed 2021 Full Year Results Conference Call. [Operator Instructions] I would now like to turn the conference call over to Mr. Neil Verdal-Austin, CEO. Sir, the floor is yours.

Good morning, ladies and gentlemen, and welcome to SomnoMed's webcast of the FY '21 results. As said, my name is Neil Verdal-Austin, and I'm the CEO of this extraordinary company. We also trust that everyone is well and doing all that you can do to remain safe during this very difficult time. Fiscal year '21 was certainly a challenge, not only for SomnoMed but for everyone throughout the world. The fiscal year began 4 months into a global pandemic that created much uncertainty and unfortunately, continues to do so today. SomnoMed, I'm pleased to say, has managed through this initial COVID-19 period extremely well. And after the usual disclaimer slide, it gives me great pleasure to start at Slide 4, our financial and fiscal year '21 highlights. Starting at the revenues, our revenues posted were just short of $63 million and up 9% over the same period last year. That's up 15% in constant currency. For us, really impressive results, full year impressive results from both Europe and APAC, with North America turning the year around in quarter 4 to deliver the same full year revenues of FY '20 in constant currency terms. For us, an amazing final position considering the year we had in North America. The EBITDA is $3.9 million and down 17% on the same period last year and will be explained in more detail in the financial slide. However, we are very impressed and pleased with the gross margin from oral appliance product -- product range, which was maintained at the 70% level. Our costs are very well managed within the context, of course, of the quarter of COVID situation. But the second half investment of EBITDA has begun and is aligned with our technology projects for the future and the future success of this company, and more on that a little later on the presentation. Cash was at $21 million at June of this year. And again, very well managed throughout the year with purposeful allocation against these technology projects that are now underway. Slide 5 highlights the strategic and operational highlights for the year. And just in some sort of summary for you, the patient-centric multidisciplinary approach of SomnoMed continues. We are more than just a treatment company providing a treatment solution. Sales and marketing remain our focus -- ongoing focus investment in these growing teams globally. And the reimbursement foundation continues and develops in all aspects of the world wherever that is necessary and is important as a foundational piece of a medical device company. Medical education, of course, remains a cornerstone of what we do in all markets. And we believe the product differentiation within our range is critically important and has stood the test of time even through this pandemic. Our digital manufacturing platform encourages efficiencies and with it brings better margins, which, again, you will see in the financial and fiscal slides later on. Moving to the market opportunity in Slide 7, it's clear that the obstructive sleep apnea market is large and the disease affects many, many people globally. The disease is progressive, and that means it doesn't get any better if left untreated. The various classifications that they have between the severity of OSA normally drives treatment options that are given by sleep professionals. And all that can be seen from this slide is the significant opportunity that even exists in the mild and moderate category for SomnoMed moving forward. As we move to SomnoMed itself and we move to Slide 9, our vision is clear. We are a patient-centric organization. We care about the treatment of patients who suffer from obstructive sleep apnea. Our mission is also very clear. We aim to do that in a multidisciplinary approach by engaging with all parties necessary to achieve that vision. And SomnoMed will become, through that vision and mission, more than just a supplier of an oral appliance treatment. Slide 10 shows what SomnoMed has basically achieved over the last 14 to 15 years. SomnoMed, as a company, has always had a global footprint in mind and from the start, have been instrumental in building the oral appliance industry within the sleep community across the world. Our reach is unparalleled actually across 28 countries and now having treated over 620,000 patients globally. SomnoMed's hallmark has always been clinical evidence-based research and education. SomnoMed has actually set that standard across the world. And importantly, as we are concerned about patients, we also track and survey our patient base to ensure that the comfort provided by our product range means that our patients remain in treatment, and more about that a little later on. Slide 11 speaks a little bit about the SomnoMed product difference. The difference that SomnoMed makes around -- is around our mantra, treatment-focused and technology-driven. Treatment-focused revolves around our product innovation, comfort and retention. And technology-driven means that SomnoMed has embarked on specific transformational technology investments, not incremental, transformational technology investments that will build a smart product ecosystem in the very near future. At the forefront of this is the SomnoDent Avant, our flagship typically new oral appliance that provides improved comfort because of the BFlex inner liner and improved efficacy. Slide 12 elaborates on the 3 main treatment options, if you like, offered to patients that are all quite different when it comes to an interesting perspective on 2 core methods: levels of invasiveness and cost. In general, oral appliance treatment in that option is very easy to fit and wear, is generally preferred by most patients, is definitely less invasive and over time, far more cost effective than either CPAP or surgery. Slide 13 really gives you the concept of what SomnoMed's main aim in the sector. It's to grow the oral appliance sector itself. Growing that share of oral appliance within the total number of positively diagnosed patients worldwide is the main aim. And today, that's around 8% to 10% and not really representative of the true patient choice opportunity and treatment compliance that our products offer. 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 are off with CPAP irrespective of severity and simply cannot tolerate that treatment. Remember, this is a long-term disease that comes with very severe comorbidities if left untreated. And as such compliance is more critical in the equation than perhaps efficacy when looking at long-term effective treatment solutions. And I think Slide 14 tries to show that concept best. CPAP is highly efficacious, no questions about that, but it does suffer from ongoing and pretty much well documented low levels of compliance. Oral appliance therapy is largely efficacious. Not all severe patients are treated effectively, but enjoy significantly higher levels of compliance. Therefore, patients remain in treatment. Therefore, patients get effective long-term treatment. And when patients are treated in that manner, they avoid the permeability, including the cost savings, over many, many years. We believe this is a compelling argument for all our sleep medical professionals around the world. And with that introduction, I'd now like to hand over to Hervé Fiévet, our CFO, to cover the financial slides for you.

Thank you, Neil, and good morning, ladies and gentlemen. Without further ado, let's have a look at this graph on Slide 16 that shows the total group revenues by half year. While the first half was affected by the end of the first wave of COVID and down by 7% versus PCP, the second half, even in spite of further waves of COVID, showed a rebound by 33% versus last year, especially on Q4, which bodes well for FY '22. This led us, as Neil mentioned previously, to growth of 9% versus FY '20 or 15% at constant exchange rate to almost $63 million revenues. Let's now move to Slide 17. So this graph breaks down the revenues by region, starting by North America that was more heavily affected on the first half of the year due to then pre-election and general health context as well as a comparison with the Advance launch during PCP. But that recovered during the second half, and it needs to be noted that at constant exchange rates, the minus 9% versus previous year becomes flat. As for Europe and APAC, not affected by the effects previously mentioned during the first half, the excellent recovery during the second half, notably pulled in Europe by core investment markets like France, Germany and Switzerland, has led to growth of 20% for Europe or 23% at constant exchange rates and 17% for APAC. Slide 18 is about gross margin. It is really to emphasize the ability of the group through this difficult context to maintain its main product line's gross margin at 70% of sales, which enabled to deliver all the value of the revenue increase to the P&L. This was achieved by efficiencies driven by an acceleration of the adoption of digital impression scanning that represents, for instance, almost 60% of our orders in North America, combined with an increased demand of our digitally made devices. So Slide 19. Talking about the EBITDA now. When there was an undeniable positive contribution of the gross margin and savings due to cautious cost management and increased digital meeting, the EBITDA has eroded versus FY '20 by 17%. This was driven by our commitment to our staff during COVID-19. The reduction in government support scheme during successive waves of the pandemic and the beginning of the investments in needed resources aligned to the technological transformation that will drive future growth. On Slide 20, this summarized version of the P&L illustrates clearly the investment in key roles across digital and R&D channels to support the technological transformation in both the regions with an increase by 11% of G&A expenses and centrally with an increase by 54% of the corporate and head office legal expenses in critical IT resources, clinical affairs and reimbursement. This also happened while the government support scheme dropped by 71%. These effects were partially made up by savings on meeting induced by COVID-19 context as well as the gross margin contribution to only show an EBITDA reduction by 17%. So now Slide 21. While the gross cash level shows a drop by $9.1 million over the period, it is actually the result of a principal action to repay the bank liability of $4.9 million with HSBC. The remainder is due to the $1.6 million reduction of government support as well as an increase of capital expenditure by $1.5 million on transformational project, as mentioned by Neil previously, and $1 million increase in working capital as growth continues in our key markets. And when we were in this context of investments, a very careful cash management of all the other line items resulted in maintaining a net cash position of about $19 million. This confirms the strength of our balance sheet at the end of FY '21 ahead of the year of investment to achieve category leadership, as Neil will now detail. Neil, over to you.

Thank you, Hervé. I think the next few slides really show that SomnoMed is very well positioned for this upcoming opportunity and has a very clear idea of the future horizons that will require investments for the company's future growth. Slide 23 starts to show how we are positioned for this growth. SomnoMed has built a strong foundational platform over the years and underpins the next steps for the future growth we anticipate. SomnoMed is worlds apart when it comes to the systematic building of a long-term medical device company, which will now enter its next phase for growth. Slide 24 shows how SomnoMed recognizes that to achieve this opportunity, a focus on awareness, acceptance and adoption is critical in building that medical device company. SomnoMed will now also invest in technology and innovation to be that category leader. Our transformational technology investment is progressing well at this stage and is now entering the beginnings of the clinical trial phase. This investment is critical for the future of this company and has come about by truly listening to the market. We have researched, consulted and reflected on the key barriers that exist to prescribing more oral appliances and are as such committed to delivering those solutions to overcome these barriers. SomnoMed is quite unique in this industry as we are truly, again, patient-centric and thinking multidisciplinary in approach and technology-driven in execution. We've always been more than just an oral appliance treatment company and will be even more so now. SomnoMed will bring to the industry a smart product ecosystem, and unfortunately, that's about as much as I can say for now, that will drive the further acceptance and adoption of oral appliances in the OSA market, where proof of SomnoMed's long-term effective therapy model will be delivered. Slide 25, which I think you've seen before, shows you a little bit more about what the smart ecosystem will mean, really an integrated and automated technology platform that creates a data-driven ecosystem. This will lift SomnoMed into a new category of oral appliance treatment, unique and on our own, and redefine how the industry will view SomnoMed oral appliance ranges in the future. Slide 26 shows how we're going to be doing this. And to maintain the oral appliance market category leadership, we will deploy the financial framework strategy, as noted before in previous presentations and again in this presentation this morning. SomnoMed will purposefully invest our current EBITDA into these future horizons to accelerate future growth and market penetration globally. This is exactly what the company now needs to do, only slowed by COVID-19, but certainly nothing more. Our opportunity is now, and we intend to bring you that opportunity. So moving to the outlook for FY '22 and our final slide, it clarifies that view and the year ahead. Even during a COVID-affected world, SomnoMed will now provide some guidance. Our revenues will be at least 15% growth for FY '22, assuming that COVID does not get worse in any of the 28 markets in which we trade. But, however, to achieve the long-term opportunity for SomnoMed and for its investors and for all its shareholders, we will also fully invest this year's EBITDA. Also to note, we will use around $8 million in cash towards the 2 main projects that drive this transformational technology change. And this investment and the new technology will herald in a new chapter, a new era for the company, and we are almost there. Your patience will be worth it, and I will be able to disclose the details of this more fully towards the end of '21. To conclude, SomnoMed has an incredible vision, talented, engaged and passionate people that thinks competitive advantage, best-in-class products, a global footprint and a purpose-driven investment plan for the future. Thank you, ladies and gentlemen, for your attention this morning. We are extremely excited about the journey ahead. This ends the fiscal '21 results presentation, and we will now move to questions. Thank you.

[Operator Instructions] And the first question we have will come from Melissa Benson of Wilsons.

I just had a question, firstly, around the U.S. market geography and the trading you've seen. So we saw a good shift in momentum in the fourth quarter after kind of a slower first 3 quarters. Are you able to comment at all on the trading in the last kind of 1.5 months or so in the U.S.? Are you kind of seeing that same fourth quarter momentum? Or has there been some pullback in that run rate thus far?