Good day and thank you for standing by. Welcome to the AVITA Medical Inc. Second Quarter 2023 Earnings Call. At this time all participants are in a listen-only mode. After the speaker’s presentation, there will be a question and answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would not like to turn the conference over to your host today, Jessica Ekeberg, Director of Investor Relations. Please go ahead.

Thank you, operator. Welcome to AVITA Medical’s second quarter 2023 earnings call. Before we begin, let me remind you that this call will include Forward-Looking Statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are neither promises nor guarantees and involve known and unknown risks and uncertainties that could cause actual results to differ materially from any expectations expressed or implied by the forward-looking statement. Please review AVITA Medical’s most recent filings with the SEC, specifically the risk factors described within Form 10-Q for the quarter ended June 30, 2023 for additional information. Any forward-looking statements provided during this call, are based on management’s expectations as of today. AVITA Medical’s press release for second quarter 2023 results is available on our website, www.avitamedical.com under the Investors section. A recording of today’s call will be available on website by 5:00 PM Pacific Time today. Joining me on today’s call are Jim Corbett, Chief Executive Officer; and David O’Toole, Chief Financial Officer. I will now turn the call over to Jim for his comments.

Good afternoon, and thank you for joining us today. I will begin today's call by discussing highlights of the second quarter, followed by an update on 2023 priorities. Following this update, you will hear commentary on our financial performance from our new CFO, David O'Toole. David is an accomplished financial executive with extensive experience in both public company operations and capital markets. David most recently served as a CFO of Opiant Pharmaceuticals, a biopharmaceutical company developing treatments for addiction and drug overdose, which was acquired by Indivior in March of 2023. Please join me in welcoming David. Now, turning to the quarter, we had an extraordinary second quarter with two landmark FDA approvals and a pivotal FDA submission. These approvals and submission are critical to advancing our platform and will continue to enable us to unlock the growth potential of AVITA Medical. I will discuss these in more detail later on this call. In addition to our FDA successes, we continue to deliver strong financial results with commercial revenues of $11.7 million, which is a 42% increase over the same period in 2022, and was at the top end of our guidance of $10.7 million to $11.7 million. This 42% growth is an acceleration of our first quarter year-over-year growth of 40%, which itself was an acceleration of our fourth quarter year-over-year growth of 37%. We have accomplished this with virtually no new burn center accounts, indicating increased adoption within our existing accounts. As mentioned on prior calls, our commercial revenue is comprised of two components, U.S. revenue and foreign revenue. Japan represents a majority of the foreign revenue line item. With that overview of our recent performance, let's now move on to our 2023 priorities and activities that continue to transform our business. On June 7, we achieved a…

Thank you, Jim. It is a pleasure to be here and be part of the AVITA Medical team. In the three months ended June 30th, 2023, our commercial revenue increased by 42% to $11.7 million, compared to $8.2 million in the same period in 2022. The increase in commercial revenue was largely driven by broader surgeon usage, as well as deeper penetration, particularly within smaller burn procedures, along with commercial sales with our partner, COSMOTEC in Japan. Although our expanded commercial team was in place for the launch of full-thickness skin defects on June 8, there was no meaningful revenue attributable to the commercial expansion in the quarter. We expect the expanded commercial team will begin to have an impact in the third quarter. Gross profit margin was 81%, compared to 83% in the same period in 2022. The decline was primarily attributable to a decrease in product production in one month of the quarter, caused by the need to qualify new vendors for certain manufacturing components. However, throughout the process of strengthening our supply chain, we maintained our perfect service level. Since then, we have resumed manufacturing volume to keep pace with our expected third and fourth quarter sales growth. As we have emphasized previously, approximately 50% of our product costs are fixed, attributable to the manufacturing facility, which means our gross margin will increase as product volume increases. Further, I would like to note that the decrease in gross margin for this quarter was unusual, and we fully expect our third quarter margin to show an increase compared to the gross margin in the third quarter of last year. Total operating expenses for the quarter were $21.2 million compared to $13.9 million in the same period in 2022. The increase in operating expenses was primarily due to the…

[Operator Instructions] Our first question comes from a line of Joshua Jennings with TD Cowen.

Hi. Good afternoon. Thanks, Jim and Dave. It's great to see the FDA approvals come in and the strong 2Q results, and Dave, congratulations on the CFO seat at AVITA.

Thank you, Joshua.

Absolutely. I wanted to start off and just, I think, Jim, you talked about the broader label that you secured for the soft-tissue data, fantastic outcome, and I think you mentioned that you're potentially rethinking the commercial organization structure with many more indications opened up. Anything you can build on that -- out on that, just to help us understand how you're thinking?

Yes. I think that's a terrific question because it was -- the label indication is significantly broader than what we anticipated. So, what we're doing, I think, first and foremost, is staying focused. The previous understanding that -- under what we believe was the soft-tissue repair and reconstruction, which is 127,000 procedure expansion. For the time being, we're staying right focused on that, because there's plenty there for us to grow and get the momentum we want and build the underlying adoption. On the other hand, there is a number of applications that come under full-thickness skin defects that create a much bigger opportunity for us. So rather than rush into that, because we have no need to, we're going to spend some time assessing the -- so to speak, low-hanging fruit, in lack of a better word, and conduct some clinical research on some of these spots' indications. We have some that's anecdotal, so we're bringing that all together. And I think by the time Q4, which really is Q3, the November call comes around, we'll have some of these new indications circled, and we'll have a strategy about how to go about them. So it's really just great news. It just fills our pipeline. We stay focused. I think for us to try to adjust at the final moment before launch might cause us to defocus and be less effective. And right now, we've been rewarded by being a very focused organization about how we go about doing things. So look forward to some more insight as Q4, really Q3, call comes around.

Understood. Thanks for that. And just, I guess, a strategy question, I mean, just noticing you're moving from focus on burn centers to now incorporating hospitals, trauma centers, outpatient setting is on the list and also potential physician office setting. I mean, is there an opportunity, not in the near term, we have a lot in front of you here in the short term, but over time to kind of build out the portfolio and look at some external business development opportunities? Thanks for taking the questions.

Yes, Josh, there certainly is. We're expanding immediately into the trauma center world, and that incorporates the burn centers. As you know, half of the burn centers are already level one trauma centers. So it helps us get off to a fast start. But it is in our gun sites, so to speak, that there is technologies that are used with RECELL, that are used before and after RECELL, that are very important to the physicians who are treating the patients that RECELL is applicable to. We have -- I would describe, a significant effort underway to identify some technologies that fit that category, and we have some work underway to choose them. And again, I think that will show some fruits of that labor by the November call. So it is a focus, because we are a very consultative sales force, and as such, the physicians interact with our sales team. For our sales team to have some other technologies that are applicable to their patients is very common sense from a portfolio business model point of view, and it will basically cost very little to execute in terms of cost of sales, because it will be our same sales team. So I think your insight there is right on the money.

I appreciate those answers. Thanks, Jim.

Our next question comes from the line of Brooks O'Neil with Lake Street Capital Markets.

Good afternoon. I appreciate the comments you made to Josh, but I'm curious if there's any color at all with regard to the response or any approach you've made to Level 1 and Level 2 trauma centers and doctors who operate there?

Thanks, Brooks. I think it's on one hand early, but on the other hand, we're six weeks in since we started our selling activity. What we are seeing is an increased activity in all the accounts that are outside burn centers, and we're achieving VAC approvals, and we're getting cases done. One of the reasons we raised our guidance is because of that early momentum and actually the consequence of our early preparation, because when the approval came, we were ready. So, I think we're feeling quite bullish about the remainder of the year and 2024 ahead of beyond that. And so, without specifics, that's the experience we're having.

Great. Then I'm curious, I have some sense that there's been at least some opportunity opened for you to apply RECELL to smaller burns and pediatric burns. Have you had any success in those areas so far?

Well, we have, and it's a difficult thing to measure, right, because the hospital buys a RECELL kit. We don't get necessarily clear insight to who they use it on, but we do get it and we do receive that feedback anecdotally. And I think you can see it mostly on a macro level. For us who have been growing actually faster against a larger base the last three quarters without adding new accounts is very reflective of a penetration event going on with this technology resale. So, we are getting those cases. It's difficult to quantify them because of what I just described, but the macro numbers validate that there is just simply increased adoption of RECELL over time.

Great. Then I just wanted to ask you one more, and it really relates to your personal philosophy, Jim, about providing guidance. In today's world, some people are trying to sandbag and put out numbers that you can easily beat. I think you've described a somewhat different approach of trying to build credibility. But could you just talk a little bit about how you view the provision of guidance for analysts and investors at AVITA Med?

Sure. Yes, it's a rather important question, Brooks. I appreciate you asking. We intend, when we set guidance, to hit the middle. That is what we believe when we set it. We're realistic, and that is why we bracket it. So in this case, we finished well ahead of the middle. $11.2 million would have been the middle. We had a stronger end of the quarter. Some of that is obviously reflected. Three weeks of June, we had the increased indication already, and we were preparing. So, we had some early adoption that contributed to that. So, my personal philosophy is to be within the range of guidance, for sure. Perfection is a dollar over the middle, where we get the middle, but we're on the upper side of it. And the team said afterwards, at the end of the quarter, they said, how do you feel the quarter went? I said, we missed guidance. We didn't get it quite right. We set it too low. You should expect us to be within guidance, and the middle is our goal. And that's how we think about it. And it is about credibility. I would like our investors and analysts who follow us to be able to depend on what we say and what we do and not believe that we're trying to play it easy. We're here to grow this company and not to hold back about it. So, you will find the sandbagging in our practice.

That's great. I'm pretty excited about the opportunity you have, so I look forward to seeing strong results in the back half of the year.

Thank you, Brooks.

Our next question comes from a line of Matthew O'Brien with Piper Sandler.

Hey, can you guys hear me okay?

Very well, Matt. How you're doing?

Good, thanks. Thanks for taking the question. So, Jim, maybe the starter for you to follow up on Brooks's question, the guidance raised, you just mentioned beating the midpoint by about half a million dollars. You're taking the guidance up by about $2 million in total, so there's an extra million five in there, roughly, for the year. I'm just wondering, you had always expected trauma to be in there, soft tissue to be in there, but what are you seeing that's giving you even more confidence in the business? And then, is it a training thing? Are you seeing a bunch of new centers you can really point to that are coming on faster than you thought, maybe getting to the back committee? Just a little bit more detail on why the guidance raised and what exactly you're seeing from an enthusiasm perspective on soft tissue?

It's a multidimensional question, Matt, but let me try and take you through my thinking process here. First and foremost, when we set original guidance, yes, we were expecting approval in June. That said, despite having breakthrough device designation, you don't know for sure that you got it until you got it, although we were quite confident, as you know. So that is one element. The second element that led to the -- so therefore, when it comes, you can feel comfortable counting what you expect from it. Now, what reinforced that for us is we took the move, as you recall in Q2, to fully ramp up and train the team. And so, when this approval came on time, there was actually no space between the approval and our showing up promoting the full-thickness skin defect broader indication on the following day. So, when you combine those and then the early response is very positive, again, wanting to be predictable, it was very clear to us that our prospects were stronger and that is reflected in the increase in guidance.

Okay. Just maybe -- just a little bit finer point on that, Jim, is there anything running ahead of schedule versus, and I know you got the approval a little bit ahead of schedule, but like training or center ads or anything along those lines that's ahead of schedule you can point to specifically?

I'd say, the most ahead of schedule definable element was having the team fully hired, fully trained, and in our market, you know, in our construct, we certify a salesperson to be able to support a case. And when June 7th came, every new rep was ready to do that. So, being fully prepared, there's no ramp up, you're right out in the field. And I think that's the most tangible thing I can point to.

Okay. Fair enough. And I'd love to get David involved here as well. And again, David, congrats on the new role.

Thank you.

You've been very clear as far as the spend goes in the back half of this year. Do we get to a point where there is leverage on the P&L in 2024, or is it still going to be a de-leveraging situation as you're building this market next year? And just talk maybe a little bit about your cash position and potential needs there? Thanks.

Yes. So, thank you for the question. I appreciate it. I'll take the second question first around cash. As of June 30th, we have a solid balance sheet. We've already indicated on a number of calls and discussions that we are in the process of developing our 2024 plan, which will include a number of things that we'll have to take into consideration as we move forward. And that is, we will be launching, if it's approved, RECELL GO, which will need additional working capital. We'll need to build inventory for that. We will also be looking at our strategy for Vitiligo. And we will have other working capital needs. All of those will come out of our 2024 operating plan, which we will give more guidance in February once we have that developed. But I can tell you right now that we have a solid balance sheet as of June 30th. As far as leverage, we've talked about when we think a salesperson is crosses over as far as paying for himself. And that is himself or herself. And that is when they're selling around five units per month. And a fully trained salesperson is usually selling around 20 units per month. So, as Jim indicated, we hit the ground running on June 7th. And so, we think that we're going to get leverage from those new salespeople quickly. How quickly that will be? Hard to say. It's still early days. But as we move into 2024, you would expect that all of the sales field professionals are selling at least enough to cover what their costs are.

Perfect. Thanks so much.

Our next question comes from a line of Ryan Zimmerman with BTIG.

Good afternoon. Thanks for taking the questions and congrats on the quarter. David. Nice to speak with you.

Thank you.

So, maybe just to start, the margin guidance is encouraging, especially given the bounce back expectation in the back half of the year. But I'm just wondering, David, if you can kind of talk about maybe margins longer term. We got RECELL Go coming into the picture in 2024. And just how you think about margins over the longer term, maybe treading towards the higher end of your guidance or potentially even above that as we think about it across margin?

Yes. Thank you for the question. I appreciate it. And thanks for following us. We've talked about this before. And the biggest component of our cost of goods sold is the manufacturing facility that we have. And it's fixed. And it's 50% of our cost of goods sold. That's not going to change as we move into RECELL Go within percentages. It's, for the most part, 50%. So, as we look forward, and we've talked about this, as our volume increases, and we would expect our volume to increase over the next 18 months with the sales force fully in the field. And so as -- it's either for the ease-of-use product that we have now or the RECELL Go cartridges that we will when it is approved in 2024. That volume, as we look into 2024, will increase. And our margins should go up accordingly. We will give more guidance in 2024 once we've developed our plan. But you can see a situation where we would be approaching a 90% margin as long as our volume, our sales, are in line with what our expectations are.

Okay. Fair enough. Now, it's very exciting. I mean, those are fantastic margins. Looking forward to it. Jim, turning to the early launch in full-thickness skin defects, can you just share anecdotally, given that you have been able to see early case adoption. What specific cases are doctors most comfortable with, kind of if there's a trend in terms of utilization of this new indication where you're seeing success? And then, conversely, where you may need to educate physicians about the potential and the latitude with which the label gives you for the new indication?

Ryan, that's a big question. But let me give it a shot. First, let me try and get specific. We are having a multiplying week-over-week effect of both new accounts being added and new VAC applications underway. So, every week, the numbers move meaningfully in this short time we've had. So, that's a tangible way for me to speak about it. The cases are still pretty broad, because there is a lot of differentiation among them. The ones the physicians, so to speak, capture most easily are cases like degloving, like necrotizing fasciitis. Those types of cases are very obvious resale cases, and they quickly gravitate to them. So, I don't have macro trends or numbers yet on those because as you know, it's been just several weeks. But we see that they aren't – what's the right word? They're quite aware of RECELL. We've done some market prep during the time, because we had -- that Salesforce was principally in place and going through training and not promoting for in excess of four weeks on average before the launch. So, they had time to condition the market, identify the high grafting physicians because you can do that through CPT analysis. So, I think the bullishness that we feel is reflected and A, we did finish the high end of our guidance, as you know. I shoot for the middle, so high end is a – it means it went a little bit better than I planned for. And in the raising of guidance for the year, I think reflect that as well.

Okay. Good stuff. Looking forward to seeing this play out. Appreciate it.

Thank you.

Thank you.

Our next question comes from the line of Ross Osborne with Cantor Fitzgerald.

Hi, guys. Congrats on the quarter and thanks for taking my questions. So, maybe just circling back to sales rep productivity, just want to make sure I'm on the same page. So, in a prior question, you replied there's not really a ramp for new sales reps to cover their cost. But in terms of hitting your 1Q average productivity of about 20 kits per month, how long do you think it would take for these new reps to hit that more efficient level?

It's a good question. I have a different way to characterize that metric for you. So, the first element is not time-based, it's just cost-based. So, it takes five resale kits per month to cover the cost of the sales rep. So, we look at that as an investment. So, when we hire a sales rep, we know getting to five, everything after that becomes contribution margin to the rest of the business. We do have a range of when that occurs. It ranges from as quickly as three or four months. It takes on some -- in some cases in a very brand new territory with no prior resale might take six months. That's a range of when they get from cost break-even to contribution margin positive. As far as the 20 reference, to put it in context, we have -- when we went to this expansion, our average rep exceeded 20 per month. So, that was shared to put in context that five. So, once you five, on your way to 20, and when you get to 20, we're in really great shape. So, what we expect is that this wave of sales force hiring will be contribution margin positive within the next four to six months. Is that helpful to your question?

Yes. Much more clear. Thank you very much for that. And then one more if I may, and apologies, we're juggling a couple of calls, but are you able to break out, you know, Japan, Australia, and UK? I realize Japan's probably the highest contribution to revenue outside of the U.S. And if not, would you be able to tell us what percentage of total revenue the U.S. accounted for?

Okay. So, in our international revenue, Japan is well over 90% of it. What we do in Australia is rather a strategic remnant from a few users who we've kept supported, and the same for Europe. Now, there is an international strategy coming in the November call, which will, of course, I don't want to say fourth quarter call, because that's really the February call, but in November, I've been guiding to. So, I think you can expect that our revenue for the year in Japan will -- we have no reason to express other than the current year-to-date run rate as a way to think about that revenue.

Got it. Well, thanks again for taking our questions, and congrats on the quarter.

You bet. Thank you.

That concludes today's question and answer session. This concludes today's conference call. Thank you for participating. You may now disconnect.