Covalon Technologies Ltd.

Good morning, ladies and gentlemen, and welcome to Covalon's Q3 fiscal 2026 conference call and webcast. My name is Christine and I will be your conference operator today. As a reminder, today's conference is being recorded. Thank you for joining us. If at any time during this call you require immediate assistance, please press star zero for the operator. At this time, I would like to turn the conference over to Mr. Brent Ashton, Chief Executive Officer.

Hi, thanks, Christine, and good morning to all of you on the call today. We really appreciate you connecting in. Kim Crooks, our Chief Operating Officer, and Katie Martinovich, our Chief Financial Officer, have both joined me on the call here today. and Saleha Assadzada from Covalon is also helping to coordinate the conference call and the webcast today. She'll now provide us with some instructions.

Thank you, Brent. Good morning, everyone. My name is Saleha Assadzada and I'm the Executive Assistant to Covalon's Chief Executive Officer. I'd 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 Harbour Statement. Please read the Safe Harbour Statement on this slide. This is also available on our website. I will now turn the call back over to Brent Ashton, Covalon's Chief Executive Officer.

Hey, thank you, Saleha. And really glad to be with all of you today. I hope that each of you has had a great summer so far. And thanks again for taking the time to be with us today. This was a very strong quarter for Covalon. And over the course of the next 15 or 20 minutes, I really hope that you get a feel for what has made this so and why we're so optimistic about the journey that we're on. During our time today, I'm hoping to accomplish four things. First, I'm going to walk you through the third quarter numbers and the nine-month year-to-date view, giving you some color behind those numbers as well. Second, I'm going to go a little deeper into some of the metrics and buzz around Covalon's contamination protection solution, because that's where a great deal of the acceleration is coming from. Third, I'll show you some broader insights into our vascular access and surgical consumables business and some of the performance metrics behind that. and then I'll wrap up and share a bit more on the value creation journey and where we're heading. After that, we'll open it up for questions. As always, we'll prioritize questions that are submitted through the webcast interface first. So please enter those as we go along here. So let's start with the quarter. In short, it was an excellent one. Revenue was $10 million. That's up 20% from the same quarter last year. We had growth from all three of our sales channels, U.S. Advanced Womb Care, the U.S. Vascular Access and Surgical Consumables, and our international sales channel. The U.S. vascular side led the growth this quarter at 51%, which is about 10 times the underlying market growth rate. Not double, not triple, both of which would have been good in their own right, but 10 times. We'll dive deeper there in a few minutes. Gross profit was $6.7 million, up more than 70% from a year ago. Gross margin was 67.2%, and last year's third quarter was 46.5%. That's a huge improvement, and two things drove the bulk of this. The first is the vascular access acceleration. Our US vascular business carries high margins, and so as that accelerates faster than the rest of the company, we see gross margin benefit. The second is the comparison itself. Last year's third quarter carried a significant inventory write-down, and this quarter carried a small inventory provision reversal. So, probably helpful, let me give you the cleaner comparison. Adjusted gross margin was 66.4% this quarter against 55.6% a year ago. Still, more than 1,000 basis points of increase, a very strong result. Operating expenses were $4 million, essentially flat to last year at up 1%. Now sit with those three numbers for a moment. Revenue, up 20%. Gross profit, up 73%. Operating expenses, up only 1%. That's what it looks like when a business scales efficiently. Net income was $2.8 million. A year ago, it was $65,000. and adjusted EBITDA in our third quarter here was $3.0 million. And that's more than triple the amount we reported a year ago. Add it all up and earnings per share were 10 cents compared to zero cents a year ago. And 10 cents this quarter is more than the sum of our last five quarters combined. So a big step forward for EPS. And so here to tweak on this stuff, the Q3 slide a little bit, You can see our excitement around these results. The five financial metrics in green. These are all the highest that Covalon has posted in at least the last five years in any quarter. Revenue, gross profit, gross margin, adjusted gross margin, and adjusted EBITDA. A very strong quarter. Of course, a lot of things had to come together really well. I'm extremely proud of the work that the full Covalon team has done to achieve this. This wasn't just the work in the quarter. This is the work over the past few years where we've been really transforming the company. Now, the nine-month view through the end of June. Revenue was almost $26 million, up 6% from the prior year. Similar to the quarter, all three of our sales channels had growth. Vascular access in the U.S. leading the way, up 35% for the nine months. Gross profit was $16.1 million, up about 23% from last year. Gross margin was 62.8% for the year to date, up from 54%. On an adjusted gross margin basis, we were at 63.4% against 57.2% last year, so a little more than 600 basis points higher. Similar to the quarter, the accelerating sales of the higher margin U.S. Vascular Access and Surgical Consumables sales channel helped to drive this. Operating expenses were $12.4 million, up about 8%. Most of that increase is related to product testing in support of our regulatory submission work, along with higher amortization on assets we placed into service this year. Net income for the nine months was $4 million, more than double the $1.7 million from last year to date. Earnings per share, $0.15 against $0.06 last year to date. And adjusted EBITDA was $4.7 million, up more than 50% from the $3.0 million last year to date. And just one more word on the year-to-date view. The soft first quarter that we had is still within these numbers. We told you on our first quarter call that Q1 was not indicative of how we saw our broader performance operating. We backed this up with a solid second quarter, and the third quarter has now said it in a way that is hard to misread. A few words on the balance sheet. Cash at the end of June was $19.4 million, up from $17.4 million at our fiscal 2025 year-end back in September. We carry no bank debt. We generated $7.4 million of cash from operations in the first nine months. Last year to date, that number was $3.0 million. And we put that cash to work. Earlier this fiscal year, we paid out $4.1 million to shareholders in the first dividend in this company's history. We also invested a little more than a million dollars in property, plant, and equipment, most of it to drive efficiency and capacity work in our Mississauga operation. Think about what that means together. We funded a sizable dividend. We funded sizable capital investment. And we still finished June with more in cash than we started the fiscal year with. Over $2 million more. That's a rare accommodation for a company of our size, and it gives us meaningful financial flexibility going forward. Now to one of the bigger stories behind those numbers. I shared earlier that our U.S. vascular access and surgical consumable sales channel grew at 51% in the quarter, which was 10 times the underlying market growth rate. And that growth was led by our contamination protection solution. Now for those who are on the call who might be new to following Covalon or for those who want a quick refresher on this amazing solution, let me give you a bit of a primer. Vascular access is everywhere in modern care. Something like 90% of hospitalized patients have one or more IV catheters implanted in them during their stay. And most people on this call have probably had one or many throughout their lifetime. And the reality of bedside care is it's messy. Patients vomit, diapers leak, wounds drain, drinks get spilled. When any of that reaches an IV connection or an IV dressing, what should have been just a routine cleanup becomes an urgent intervention. Lines have to get rebuilt, dressings have to get changed, and sometimes the IV catheter itself has to be replaced. Every single one of these events costs precious nursing time, It costs expensive supplies and it puts a patient at risk for complications, including bloodstream infections, which kill hundreds of thousands of patients every year and cost health systems billions. Covalon's solution has two complementary product lines. ThalGuard LineGuard protects IV line connections and access points from contamination, and CovaClear dressings protect the primary IV dressing from contamination and disruption. Together, these incredible products from Covalon address different weak points on the same clinical pathway. The customer benefit is significant and it runs three ways. First, a reduced risk of patient complications. Second, reduced reactive nursing time, which then hands that time back for proactive patient care. And third, reduced facility spend on replacement IV therapy components and supplies. It's a really rare triple winner for hospitals. And for this strong solution from Covalon, our revenues in the US from these two products grew 68% over the same quarter last year, and it grew 34% over the second quarter of this year. 34% sequential growth in a single quarter tells you the pace we're operating at here. This slide is here to show you that adoption of Covalon's contamination protection solution is not just a bunch of impressive growth numbers, but the products that make up the solution are showing up more and more in large, well-regarded children's and acute care hospitals all over the US. You've seen the names we've shared after our first and second quarter calls this year. Mayo Clinic, Nationwide Children's, Texas Children's, Seattle Children's, Stanford Healthcare, The list goes on. And on the right side, you can see the institutions that have come on board in just the past few months. University of Virginia Health, Children's Health, Orlando Health. You can see all of them in front of you. And these aren't small, unknown facilities. These are institutions with strong bedside nursing teams that are trying to do the best job possible in really challenging conditions. They have rigorous value analysis committees that are put in place to separate out the hype from products that earn their place on the shelf. Some of the largest companies in healthcare would be delighted to be winning accounts like these at the pace we're racking up wins. And we've barely scratched the surface. Every one of these hospitals starts somewhere. For some, it starts with an initial order for more than $100,000 worth of product for a house-wide implementation as was the case for one customer this past quarter. For others, it can start with one product, one unit, one site, and what we typically see, whether they start with a little or a lot, is that the hospital extends to more products, more units, and it goes on from there. We'll go a little deeper on this theme in a couple of slides. So I'm sitting here in our Mississauga offices telling you that this is working and that we're winning. But I also want you to be able to hear what we hear every day, the incredible feedback on the use of our products from the people that are actually using it. One nurse leader told us their nurses are loving the product and it's likely saved hundreds of unplanned dressing changes so far. Another wrote, and I'm quoting, please, please, please stock these. These are infinitely better than the previous product that they were using. And then this one, which I think could be the most important line on the page. I am glad you're addressing contamination because now I can actually do something about it instead of ignoring it. So thank you. And really the context there is for years, contamination of vascular access connections and access points was something that nurses simply managed around with jury rigged solutions or nothing at all. There was no good product answer. What has changed is not that contamination started magically happening. What's changed though is that there's finally something that nurses can do about it with the amazing products from Covalon. Excuse me. I thought that it would also be helpful to visualize how much progress has been made on the contamination protection solution. On the left is our hospital location base at the start of our 2024 fiscal year. And on the right is where we sit here today. almost a 3x increase in less than three years. And even with all that expansion, there is a ton of fertile ground to hunt moving forward. There are something like 6,000 hospitals in the US, and you could try to count all the dots on the screen, but I'll save you the effort. Our solution, it's in a couple hundred of them. And while our single largest hospital account is on track to spend more than $600,000 with us here on this solution, Other hospitals represented by the dots in this page are by definition smaller with a ton of room to grow themselves. On the last call and through some follow-up, we had some requests to show some of the data around the hospital metrics that we've shared in the past. So, as you might recall, the three main priorities for our U.S. vascular access and surgical consumables sales channel are retain, Grow existing and add new. Simple but highly effective. And just for clarity, the lens for this data is our entire U.S. vascular access and surgical consumables sales channel, not just the contamination protection solution. So one step up. And on retention, we held 100% of our top 50 hospital system customers from fiscal 2025. Every single one of them. and in a medical consumables business, that's a really important metric to watch closely because it tells you that our products are working and the clinical teams want to keep using them. On growing existing accounts, revenue from that same top 50 group was up 46% in the third quarter this year against the third quarter last year. 46% from customers that we already had. And on the next slide, you'll see something even more incredible. and on adding new, we brought on 58 new hospital customer locations in the past nine months. Critical because we know that once they start buying something, one product, a thousand products, one unit, 10 units, it quickly expands from there. So let me spend a minute on this slide because it may be one of the most important commercial data points in the deck. What you're looking at here is our five largest hospital customers in the U.S. vascular access and surgical consumables channel and what each of them have grown on a fiscal year-to-date basis. So comparing the first three quarters of this year against the first three quarters of last year. Four of the five customers are growing north of 50%. Our number one largest account is up 54%. Number two, 67%. Number four, 83%. And number five, 53%. Every single one of them up double digits. And I want to be clear about why this matters, because growth percentages can be easy to dismiss. If we told you that we had tripled a brand new account in a community hospital, maybe a hospital that was going from $1,000 a quarter to $3,000, well... Rightfully so, you would nod politely and move on. What is on this slide is the opposite of that. These are our largest accounts. Collectively, they're on track to drive over $2.5 million of revenue for us this year. That's over half a million dollars per account. By every normal rule of this industry, these are the accounts that are the mature part of the book, maybe growing single digits, maybe not even. and in nearly 20 years in MedTech across two very large diversified companies and visibility to a lot of smaller companies that we took looks at over the years, I honestly can't recall seeing a top five account list that was compounding at this rate. It generally just doesn't happen. And when it does, it's telling you something specific. It's not a single product sitting in a single unit as a trial. It's a product expanding to multiple products. Thank you for joining us today. Even at these large accounts, there's still room to grow, and we're not stopping until every patient that can benefit from our amazing products in these accounts is able to use our solution. So let me wrap up prepared remarks with three takeaways. First, this was a strong quarter, and it was strong on quality and not just on volume. Revenue was up 20%, adjusted gross margin up more than 1,000 basis points. Operating expenses up just 1%. An adjusted EBITDA of $3 million more than triple a year ago. Almost $20 million of cash and no bank debt. All three sales channels grew. And revenue, gross profit, gross margin, adjusted gross margin, and adjusted EBITDA were each the highest this company has recorded in any quarter in the last five fiscal years. Second. We're proud to grow all aspects of the company, but contamination protection is really fueling a lot of excitement here. 68% growth year over year, 34% growth over the prior quarter. You get that from solving a really challenging clinical problem that no one else has been able to do. And third, at Covalon, we're working hard to do a lot of the big and little things right in advancing our company in wound care, in vascular access, and in the surgical space. It's both a sprint and a marathon in everyday matters. So our team wakes up each day driving hard to get our amazing technology in place to benefit patients, nurses, doctors, hospitals, and other providers, and ultimately our shareholders. Clinical value cascades to commercial value, and commercial value cascades to shareholder value. The book on how Covalon's ultimate value gets determined has yet to be fully written, but I like where the story is headed. The direction is not in doubt here and we're not finished, we're not satisfied and we are not slowing down. So let me close by thanking our great employees for the effort behind these results. Thank our customers for trusting us with their patience and thank our shareholders for your continued support. So with that, we'll transition to Q&A. For our questions, we'll start with questions that are typed into the Q&A feature here online. We'll take a 30 to 60 second pause to get things in order and then answer your questions. Thank you very much. We received a lot of questions, which is good. We'll do our best to work through them here. Several people had similar questions, so we'll do our best to group those together.