Good morning, and welcome to Rockwell Medical's First Quarter 2024 Results Conference Call and Webcast. Please note, this event is being recorded. At this time, I would like to turn the conference call over to Heather Hunter, Senior Vice President, Chief Corporate Affairs Officer at Rockwell Medical. Heather, please go ahead.

Good morning, and thank you for joining us for this update on Rockwell Medical. Joining me on today's conference call are Dr. Mark Strobeck, Rockwell Medical's President and Chief Executive Officer; and Jesse Neri, Rockwell Medical's Senior Vice President of Finance. Before we begin, I would like to remind you that this conference call will contain forward-looking statements about Rockwell Medical within the meaning of the Federal Securities laws including, but not limited to, the types of statements identified as forward-looking in our annual report on Form 10-K and our subsequent periodic reports filed with the SEC. These statements are subject to risks and uncertainties that could cause actual results to differ. Please note that these forward-looking statements reflect our opinions and expectations only as of today. Except as required by law, we specifically disclaim any obligation to update or revise these forward-looking statements in light of new information or future events. Factors that could cause actual results or outcomes to differ materially from those expressed in or implied by such forward-looking statements are discussed in greater detail in our periodic reports filed with the SEC. Rockwell Medical's quarterly report on Form 10-Q for the 3 months ended March 31, 2024, was filed prior to this call and provides a full analysis of the company's business strategy as well as the company's first quarter 2024 results. The reconciliation of non-GAAP measures we discussed can be found in today's press release, our Form 10-Q and other reports filed with the SEC along with today's press release, our investor presentation and a replay of today's conference call and webcast can be found on Rockwell Medical's website under the Investors section. Now I would like to turn the conference call over to Rockwell Medical's President and Chief Executive Officer, Dr. Mark Strobeck.

Thank you, Heather. Good morning, and thank you for joining us today for Rockwell Medical's First Quarter 2024 Results Conference Call and Webcast. Rockwell had another good quarter, reporting our sixth quarter of growth in net sales and gross profit along with improved net loss and adjusted EBITDA over the last 7 quarters. The fundamentals of our business continue to improve, and we are making progress every day as we focus on optimizing our business to drive profitability, meaningful cash flow and increased shareholder value. Let's take a minute and discuss what's happening in the U.S. hemodialysis concentrates market. With our acquisition last year of the hemodialysis concentrates business from Evoqua, the #3 player in the space at the time, the market has now consolidated to 2 primary players to supply the over 12,000 dialysis clinics in the United States. With this consolidation, Rockwell now sits as the only independent supplier of concentrates with the scale and distribution to service these in-center and hospital-based clinics. In addition, we are now the leading supplier of liquid bicarbonate in the country. What does this mean for Rockwell? First, Rockwell is able to accurately price our products in the hemodialysis market. At the beginning of this year, we undertook a new program to adjust our product pricing to reflect the inherent value our products bring to providers. Second, leading dialysis providers are seeing patient censuses return to pre-COVID levels. So while concentrates volumes previously stagnated, concentrate volumes are now growing again from customers who already purchased product from Rockwell. Additionally, we continue to see increasing interest in market demand for our products from medical equipment suppliers and distributors, along with health systems, dialysis centers and skilled nursing facilities inside and outside the United States. Third, we have seen a number of customers convert…

Thank you, Mark. Good morning, everyone. I will now review our first quarter 2024 financial results in more detail and provide you with an update on our cash and debt positions. Net sales for the first quarter of 2024 consisted solely of concentrate product sales. Net sales for the same period in 2023 consisted of concentrate product sales and deferred license revenue of $1.5 million related to the termination of the Baxter distribution agreement. I will walk you through our financials for the current and comparable periods with and without deferred revenue so that you can more accurately highlight the progress we've made in the hemodialysis concentrate segment. Net sales for the first quarter of 2024 were $22.7 million, our highest quarterly concentrate product revenue to date. This represents a 15% increase over net sales of $19.7 million for the same period in 2023. Excluding deferred revenue, net sales for the first quarter of 2024 increased 25% over Q1 2023. Based on our results in the first quarter and taking into consideration our new and expanded contracts and projected volume increases, we have revised our guidance for 2024 and now expect to achieve between $90 million and $94 million in net sales. Gross profit for Q1 2024 was $3.1 million, representing an 18% increase over $2.6 million for the same period in 2023. Excluding deferred revenue, gross profit for the first quarter of 2024 nearly tripled compared to gross profit of $1.1 million for the same period in 2023. We now expect 2024 gross profit to range between $13 million and $15 million versus our previous guidance of $12 million to $14 million. Gross margin for the first quarter of 2024 was 14%, representing an increase from 13% for the same period in 2023. Excluding deferred revenue, gross margin for…

Thank you, Jesse. Operator, please open the phone lines for any questions.

[Operator Instructions] Our first question comes from Ram Selvaraju with H.C. Wainwright.

Congrats on a very good quarter. Firstly, Mark, I was hoping you could give us some insights into the overall market breakdown as it currently stands in the dialysate business, particularly given the fact that there are now essentially 2 main players. So just can you give us a sense of how market share is currently distributed in this sector?

Yes. Thanks, Ram, for the question. So as I mentioned, with our purchase of the Evoqua concentrates business, this market has now really become a 2-player market. As of right now, Rockwell has about 25% of the market. depending on how you look at it, might be slightly more or less with our primary competitor having the remaining amounts. And as I've mentioned, because of changes that are going on in their business, we are continuing to see a number of their customers continue to come to Rockwell to purchase their concentrates. given that we are the only supplier now that is able to handle the volumes that a number of those customers are looking to purchase.

Great. That's very helpful. With respect to gross margin, can you give us a sense of how you expect that to evolve, on what kind of cadence and what you anticipate might be optimal gross margins for Rockwell's core business at steady state?

Yes. So as we mentioned here in the first quarter, right, we've achieved gross margin of 14%, the highest gross margin we've had to date. We continue to believe that this will trend upward through the year. That will be largely driven now through making our products in a more efficient manner and through the reduction of our cost of goods through not only renegotiation of materials contracts, but then also significantly the automation of our manufacturing process. We've given guidance for 25% in '26 of gross margins of 20% in '25 and 25% in '26. And our goal is to continue to drive those higher. We think we can get this business to 30% or more. But we're, right now, focused on achieving the guidance that we've given.

And with respect to that, just as a corollary, do you anticipate that ultimately this is going to necessitate any kind of change in pricing dynamics? Or are you assuming gross margin evolution in an effectively unchanged pricing dynamics environment?

It's going to be a combination of both. Right now, we're focused on efficiencies within our own organization and optimizing the way that we manufacture our products. But as you look out through '25 and '26, it's going to be driven both a combination of price and efficiencies and reduction of cost of goods.

Okay. And lastly, with respect to your attitude towards debt repayment and relative prioritization of debt repayment versus other capital allocation priorities. Just maybe give us a description of where things currently stand, how we should be thinking about your attitude towards debt repayment over the course of the remainder of 2024 and how you expect to continue to involve debt, if at all, in the long-term cap structure of the company?

Yes. So with the renegotiation of the loan agreement that we completed in the first quarter, right now, we are in an interest-only period and we're going to continue to pay within that interest-only period throughout 2024. We've significantly reduced our leverage and get burden within the organization. And I think as we look forward, as we begin to start to generate meaningful cash flow from this business, we're going to look at different ways in which to continue to enhance this business, whether that's through continued investment within our own processes, whether that's through business development and adding new products and new opportunities to the organization that are more innovative, that are higher margin as well as continuing to reduce our leverage. I mean, I give you -- my personal objective is that, over the next couple of years, I'd like to see this business debt free.

Our next question comes from Anthony Vendetti with Maxim Group.

Yes. So you touched on the pricing power, and that's one of the components of as well as efficiency for increasing the gross margin. I was just wondering, in terms of this year, are there any contracts coming up? Is your current pricing structure in place for 2024? And then I wanted to talk about the expansion out West and any updates on that?

Yes. So the current pricing structure is largely in place for 2024. There are a handful of smaller agreements that will come up in the middle of the year that we're currently working on. So that is largely set for this year. And that's independent of some larger things that we are also working on that if they come to fruition, may also have a meaningful impact to our business. we continue to focus on driving more and more of our business out West with the signing of this large health center in the Mountain West region continues to add clinics for us in the Western region. We are actively looking at establishing a firmer presence there. That will allow us to manufacture and distribute products to the West in a more cost-effective manner than we currently do. So that's an active ongoing project for us as we look to expand even further.

Okay. And then just lastly, as a follow-up on homedialysis, can you give us an update on that, Mark?

Yes. So I think as everybody knows, homedialysis continues to be an exciting area of growth within the dialysis market. We are actively working with the #1 player in that space and are currently in the process of -- we currently supply products to that organization and are actively working on a relationship, which we hope to announce here in the near future around new product opportunities with them.

There are no further questions. I will now turn the call back over to Dr. Strobeck.

Thank you. We are very pleased by all the progress we continue to make at Rockwell, successfully transforming this organization into a leader within our therapeutic area. We would not be able to do this without our dedicated team members who are unwavering in their commitment to provide dialysis clinics and the patients they serve with the highest quality products supported by superior customer service. We go above and beyond for our customers knowing that our products provide a positive impact on the lives of hemodialysis patients with end-stage kidney disease. Thank you for your time today, and we look forward to providing you with more updates on our next call.

This concludes today's conference call and webcast. You may now disconnect.