Did a more detailed review of the AVH Q2 results. The AVH price in the US spiked 20% on Fri, which has not happened for quite some time. Looking forward to Monday for a change!

Discl: Held IRL and in SM

TLDR SUMMARY

Very pleasing result - very encouraging signs that short term challenges of slow increase in new accounts is being overcome with a tangible increase in New Accounts (31) and VAC Approved accounts (6).

QoQ Revenue up 36.8%, direct costs up 39.5% but Gross Profit was an impressive 36.4% - encouraging signs of operational leverage perhaps.

Flagged increase in Sales cost has kicked in with a 29% increase, but impact was softened by falls in G&A and R&D, leading to a 7.1% overall cost increase.

FY24 Revenue guidance has been reduced from between $78.8m to $84.5m to between $68.0m to $70m - not great, but this will mostly be from the poor 1Q result. Happy to let this go if positive Q2 momentum is sustained throughout 2HFY24.

Have increasing confidence in management credibility as things have panned out as they have explained and guided in this result - continued confidence will need to be continually earned!

Other pipeline projects - RecellGo Mini FDA certification, Vitiligo studies progressing as planned.

Key for Q3 is continued evidence of sustained momentum in (1) New Accounts (2) Revenue, including expansion of non-US revenue (3) overall operating cost containment to absorb higher S&M expenses.

THOUGHT PROCESS

I am focused almost exclusively on understanding QoQ changes.

PcP changes are good to know, but significantly less important, as my view is that AVH has made step changes in the last 6M due to (1) RecellGo FDA certification (2) made clear moves in its transformation into a broad-based wound care company (distribution of Perma Derm, Regenity products alongside RecellGo) (3) upcoming RecellGO Mini FDA certification etc, which makes it a very different organisation than what it was in FY2023.

I am now thinking of AVH as not a single product, RecellGO-driven company, but as a broad-based wound care Company, which focuses on addressing all wound treatment issue around a central burn wound which is primarily treated by RecellGO - this pivot in thinking has been important to make sense of all the recent AVH moves and what is ahead.

I am desperately wanting to have clarity on where PNV’s NovoSorb sits in both this Continuum of Wound Care and Product Compatibility diagrams to understand how much of a competitor it is to AVH’s market position and strategy and/or whether it makes sense to open a position in PNV to ride on the NovSorb opportunity ahead - have asked the question for the AVH Investor Seminar next week.

Updated Continuum to Include Regenity

THE GOOD IN Q2

Tangible increase in New Accounts for RecellGo Full Thickness Skin Defects - the lack of progress in securing VAC approval for new accounts caused the 1QFY24 results to dive, expectations were reset, and there is now a tangible uptick in New Accounts and VAC approval. Q3 looks promising in terms of extending this new account momentum.

Revenue rose 36.8% QoQ to US$15.1m, at the top end of Q2 guidance of “between $14.3m to $15.3m”.

While from a very low base, good to see revenue increases in non-US markets as AVH focuses on expanding its RecellGo global footprint.

Cost of sales corresponding rose 39.5%, but Gross Profit rose 36.4%, which hints at improving operational leverage as the revenue increase was almost fully sustained through to gross profit margins. Need more evidence that this is sustainable but this is a really encouraging sign. It also lends credence to management’s explanation that the slowdown in 1Q revenue was primarily due to the challenges of navigating the VAC process in hospitals, which AVH had to learn from and fine-tune its approach to expedite the process.

Operating Expenses rose 7.1% QoQ, despite a clearly prior-flagged increase in Sales & Marketing expense of 29% as G&A and R&D expenses fell 16.1% and 5.9% respectively, to compensate for the increased sales cost. This is also encouraging as AVH appears to containing overall cost increase despite the sharp increase in Sales & Marketing expenses.

Cash balance increased $0.5m, or 3% and appears that operations now has a good cash-flow cadence. This augurs well for (1) the AVH objective of being cash flow positive no later than 3QFY25 (2) is likely to further improve as revenue momentum increases in the coming quarters and (3) keeps the risk of a operations-driven cash raise risk, low.

Other projects appear to be going well and on track (1) RecellGO Mini FDA approval (2) Vitiligo study.

THE NOT GREAT in Q2

Full Year revenue guidance has now dropped to between $68.0 and $70.0m from the initial FY24 guidance of $78.5m to $84.5m, but still a very respectable YoY growth of 37% to 41% over FY23 - much of this will be due to the poor 1Q result. 

This is not great, but I am happy to let this go IF there is continued 2HFY24 momentum in (1) New Accounts (2) QoQ revenue and (3) improving non-US revenue contribution, as this blip will likely only be temporary. All bets will be off if 2HFY24 momentum falters!

EXPECTATIONS FOR Q3

• Meet or achieve New Accounts and VAC Approved Accounts - I view this to be more important than meeting revenue guidance as this is the driver of future revenue growth
• Management guidance is for Q3 revenue to be in the range of $19.0 to $20.0m
• Continued step increases in non-US revenue, particularly the EU where AVH is focused on growing its presence
• Sustaining of margins as sales of other wound-care products increasingly contribute to revenue
• Modest rise in Operating Expenses to demonstrate continued containment of costs
• Sustained Cash balance

THESIS UPDATE

• Thesis remains very much intact - the operational outlook of this thesis has improved with this result.
• Moving AVH to a medium-conviction holding in my portfolio.
• Will progressively top up if price weakens again to the ~$2.35 to ~$2.50 range to move the current 2.2% holding to between 3.0% and 3.5% over the coming weeks.