SomnoMed Limited (SOM) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the SomnoMed FY '24 results. [Operator Instructions] I would now like to hand the conference over to Karen Borg, Co-Chief Executive Officer and Executive Director. Please go ahead.

Thank you. Good morning, and welcome to SomnoMed's Full Year 2024 Earnings Call. My name is Karen Borg, Co-CEO of SomnoMed, and I'm joined by Amrita Blickstead, my Co-CEO. We're excited to be presenting the highlights of our financial and operational performance for the year ended 30th June 2024, before opening the call to your questions. I'll move across to FY '24 and provide a snapshot on Slide 4. FY '24 was a reset year for SomnoMed as we focused on building the foundations for sustainable and profitable long-term growth. We delivered on our guidance with [indiscernible] growth of 9.6% year-over-year to $91.7 million and an EBITDA of $0.6 million. It was a year to get the foundations right. A reminder that when Amrita and I came into the business, there were key immediate operational and financial issues that we now feel comfortable saying, have been taken care of or on track to be, and we can look ahead with confidence that we will continue to deliver against stated targets. We achieved these results by primarily driving operational focus, including rightsizing our cost base, continued revenue growth from new and existing customers and a shift to our newer generation product line. With the knowledge that our continued investment in manufacturing capacity will return us to stronger, consistent and self-funded revenue and earnings growth. We also strengthened our balance sheet over the year with net cash of $16.2 million after raising $38.1 million in gross equity capital and repaying our Australian debt facility in full. We exist in a huge addressable market, nearly 1 billion people in the world suffer from the effects of sleep apnea and our products meet this need due to superior quality and differentiation. The evidence for this is seen by the ongoing strong demand across all of our regions for our products. And it is not only for us to continue to foster this demand, but to drive execution to deliver against it to. As new CEOs, we are on a mission to build the trust of our team, our investors and most importantly, our customers. We want to prove to our customers that we can continue to deliver a leading product and customer experience. And to our investors that we can return to double-digit revenue growth and achieve 10% EBITDA margins in the next 3 years. We're now transitioning over to Slide 6. And with that, I'd like to hand over to Amrita to go through the financial details.

Thank you, Karen, and good morning, everyone. I'll provide you with a summary of our financial performance and key drivers for F '24. As Karen mentioned, our revenue for FY '24 was $91.7 million, up 9.6% from FY '23 and in line with our revised guidance of 6% to 9% growth. We experienced strong demand this year across our regions for our core products, with total units sold for the year exceeding 100,000 for the first time in our history. This was driven by our sales and marketing initiatives, our medical education programs and our leadership position in the oral appliance therapy market. We continue to see a shift in our product mix towards our premium products, [ Avant ] and Herbst Advance, which are better clinical outcomes than our Classic and Flex products and have a far more scalable and time-efficient production capability. Despite executing a $5 million cost out, our reduced head count and streamlined processes did not compromise our Q4 sales performance or customer service. The impact of these savings will be reflected in FY '25 financials. Our capacity constraints were identified going into the second half of the year. The early investments we made into the manufacturing facility to gain greater efficiency enabled us to deliver 10% greater output in May and June compared to the first half of FY '24 and enabled us to achieve our revised guidance. We will give more color on this later in our operational update. Our major regions showed solid growth despite headwinds due to capacity constraints, longer turnaround times and more aggressive competition. While we remain conscious of the competition, we believe addressing the customer experience by improved turnaround times will go a long way to securing our leading position. Our EBITDA for FY '24 was $0.6 million, down from $2.1 million in FY '23 and within our revised guidance range of $0.3 million to $0.8 million. Product gross margin for the year was 69%, down from 72% in FY '23. This was primarily driven by the manufacturing facility capacity constraints, leading to more investment being required with a delay in the associated revenue. This flowed through to the group gross margin, which was also down 200 basis points. As volumes increased through FY '25 and beyond, we are expecting our gross margin to recover. You will also see the impact of FY '23 incremental head count annualized in regional admin expenses for the year, somewhat offset by the cost out initiatives enacted in Q4. While we remain focused on profitability, we are committed to building out a high-performance management team to drive execution against our longer-term priorities. This will continue in FY '25 as we have already added Jonathan Vowels as Vice President of Manufacturing and Operations and Mary Kennel as Global Director for Regulatory Affairs. Our search for a high-performing CFO also continues. It is worth calling out on this page that we have included an underlying EBITDA metric, which adjusts EBITDA for AASB16 lease expenses. We believe that this metric is a better proxy for our cash earnings and provides more transparency and comparability for our investors. So we will continue to report this number going forward. You can see the supporting reconciliations in the appendix of the materials on a historical basis. Our net cash position at 30 June 2024 was $16.2 million compared to $12 million at 30 June 2023. Supported by 2 capital raises totaling net proceeds of $38 million completed in FY '24. We have repaid our debt facility with Epsilon in full, which will reduce our interest payments this financial year by $1.7 million, and we now have the financial flexibility to invest in our growth initiatives. Our net cash flow from operating activities was negative $3.3 million, excluding one-off restructuring costs. We expect material improvement in cash flow in FY '25 with our stronger EBITDA and significant reduction in interest expenses with the repayment of the debt facility. Next, we will move on to the operational update. Before getting into the detail, it is worth calling out how Karen and I think about capital allocation more broadly. We were initially very focused on providing balance sheet flexibility through repaying our debt as a priority and that now allows us to invest the sustainable growth unencumbered. We believe this is the best way to maximize long-term shareholder value. This investment in the short term comes in the form of manufacturing facility CapEx. As Karen mentioned at the beginning of the call, demand for SomnoMed products remains strong, but we have been hamstrung on the supply side as a result of capacity challenges. To ensure we can both remove bottlenecks and increase capacity to reduce wait times and backlogs, we have and continue to invest in our manufacturing facility. Over Q4 and the coming 12 months, there has and continues to be incremental CapEx investment but is expected to deliver a circa 55% uplift to the capacity ceiling we hit in FY '24 and set us up comfortably to deliver on expected demand for our product. We are encouraged by the early evidence of return on recent investment into the manufacturing facility. We continue to see improvements in production processes that allow for a greater output, reduce backlogs and reduce turnaround times for our new generation [ milled ] products, exceeding customer expectations. We have started to see data to confirm this in the first quarter of FY '25. For the first 8 weeks of trading, we have seen a 20% year-on-year revenue growth, which much of this cleared backlog of orders. We continue to get lots of questions on Rest Assure. The company is continuing to work through areas for which the U.S. FDA has requested further information and expects to provide its response through the FDA by early September 2024. Upon receipt of the FDA's response, the company will then assess the global beta market entry in 2025. To give further color to this, both Karen and I, as new Co-CEOs, believe we have to prioritize getting the foundations right of this business. For us, that means sustainable, self-funded organic growth. Rest Assure remains an important part of our long-term strategy and will be a key influence on medical guidelines and reimbursement. But we will not do this by putting the core business at any risk in the short term or not delivering for our customers. With that, I will hand back to Karen to discuss our guidance and outlook for FY '25.

Thanks, Amrita. As we look ahead to FY '25, we're confident that we have the right strategy, and we're building the right team and that the foundations are in place to generate positive earnings and operating cash flow. Based on this and our current outlook, we're providing the following guidance for FY '25. Revenue of approximately $100 million, which represents a growth of over just 9% year-on-year and an EBITDA of more than $5 million. CapEx spend of between $3 million to $4 million. With respect to FY '25 trading year-to-date, revenue is growing approximately 20% year-on-year on the back of the reduction of the backlog and strong sales results. This positive trend is expected to continue for the rest of the first quarter as the backlog continues to sell-through. There is an expectation that growth will flow in the remaining quarters as the backlog is cleared. We have factored these dynamics into the FY '25 guidance. With that, I would like to thank you for your attention, and we'll now open the call for your questions.

[Operator Instructions] Your first question comes from Dennis from [indiscernible].

I guess, I'd like to touch on Rest Assure and your plans for the launch. Clearly, you're planning to be quite careful in the way you go about it. Can you just give a little color about what you'll be looking at over that period?

Thanks, Dennis, for your question. Yes, certainly, Rest Assure Has been a priority for the organization. And, obviously, we are in the process of responding to the FDA. In terms of what we will do, and obviously, we are conscious of the fact that we cannot guarantee the FDA's response at this point in time. We will submit our response to them and then wait for theirs back in return. If it is a positive response in that they are willing to authorize that we move forward with the introduction of the product, we will actually commence quite cautiously as this is quite a transformational product for the entire marketplace. And we'll be looking to use the initial introduction of the product as a beta through which we'll be gaining data on how basically our consumers are responding to the product, how clinicians are engaging with it. The data obviously will then also be used to inform health information that will be used to potentially inform guideline change in reimbursement modifications.

Okay. So yes, there's, as you say, a lot of information you need, particularly to sort out reimbursement. And where are you at with production capacity for the Rest Assure device?

That's obviously a work in progress. We are -- have been working on, obviously, the introduction of Rest Assure through our manufacturing site for some time now, and that continues to be work in progress.

[Operator Instructions] There are no further questions at this time. I'll now hand back to Ms. Borg for closing remarks.

Thank you very much. I would like to thank all of the participants in today's call. We very much appreciate your engagement and your ongoing support for SomnoMed. And we look forward to speaking with you in the future and keeping you abreast of our developments. I'd also like to thank the team at SomnoMed, all of whom who have contributed towards today's presentation materials. Thank you very much. I believe there may be one more question.

Yes, sir (sic) [ ma'am ]. We have the last minute registration coming from the line of Daniel. Daniel your line is unmuted, please proceed with your question.

Sorry about that. Thank you very much for the presentation. It's Daniel Palmisano. I was just wondering -- I mean, it's probably a bit of a layperson's query. But looking at the spread between Europe, North America and APAC, I'm curious as to why North America is so considerably lower in terms of its revenue compared to Europe. I would have expected with a population of approximately 80% of Europe that we'd be seeing greater revenues out of North America. Is there any plan to emphasize that market by any chance?

Yes. I mean America obviously is a key market. And clearly, it's the largest health care market in the world. So we have got high expectations of that market's growth. That said, there is quite a different reimbursement environment in the European environment as there is to the United States. And that's one of the reasons why the growth has not been as significant as it has been in Europe, where, as I said, reimbursement is quite mature. We are obviously working in the United States to expand the reimbursement availability and have been doing some work in that area now for a little while to ensure that we subsequently can leverage through reimbursement continued growth. But the growth in the U.S. is strong, and I'm looking forward to seeing that accelerate too. So thank you for your question, Daniel.

That does conclude our conference for today. Thank you for participating. You may now disconnect your lines.