Earnings call transcript: Covalon Technologies Q2 2026 shows robust growth

Covalon Technologies reported strong financial results for the second quarter of Fiscal 2026, with significant improvements in revenue and profitability. The company achieved a diluted EPS of CAD 0.04, doubling from the previous year’s quarter, and revenue increased 14.5% year-over-year to CAD 8.7 million. Despite these positive results, the company’s stock price remained steady, closing at CAD 2.08, with no immediate change in market reaction.

Covalon Technologies demonstrated strong performance in Q2 2026 with significant year-over-year growth in revenue and gross profit. The company continues to emphasize strategic product mix management and manufacturing efficiency, which contributed to improved gross margins. According to InvestingPro data, the company holds more cash than debt on its balance sheet and has been profitable over the last twelve months, reinforcing its financial stability. Operating expenses rose, driven by regulatory and testing costs, which could impact future profitability.

Covalon Technologies projects a challenging future with a negative EPS forecast for FY2027. However, the company anticipates continued growth in its U.S. sales channels and international markets. InvestingPro analysis suggests the stock may currently be overvalued relative to its Fair Value, a consideration for investors evaluating entry points. The ongoing investments in automation and manufacturing efficiency are expected to yield benefits in 2027, potentially enhancing margins and profitability.

Executives highlighted the company’s strategic focus on sustainable revenue growth and operational efficiency. They noted, "Our disciplined approach to product mix and manufacturing has resulted in significant margin expansion, reinforcing our commitment to creating shareholder value."

During the earnings call, analysts inquired about the company’s strategy to manage rising operating expenses and its plans to address the negative EPS forecast for FY2027. Executives emphasized their focus on operational efficiency and strategic investments to drive future growth.

Angela, Conference Operator, Conference Services Provider: Good morning, ladies and gentlemen, and welcome to Covalon’s 2nd quarter fiscal 2026 conference and webcast call. My name is Angela, and I will be your conference operator today. As a reminder, today’s conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question and answer session. If you would like to ask a question during this time, you can submit your typed questions via the webcast. Alternatively, if you would like to ask a question over the telephone, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, please press star two. 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.

Brent Ashton, Chief Executive Officer, Covalon Technologies Inc.: Hi. Thanks, Angela, 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, and Saleha Assadzada from Covalon is helping to coordinate the conference call and the webcast today. Saleha will now provide us with some instructions.

Saleha Assadzada, Executive Assistant to Chief Executive Officer, Covalon Technologies Inc.: Thank you, Brent Ashton. Good morning, everyone. My name is Saleha Assadzada, and I am 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 Harbor statement. Please read the Safe Harbor 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.

Brent Ashton, Chief Executive Officer, Covalon Technologies Inc.: Hey, thanks so much, Saleha. Listen, glad to be able to be with you all today, as I said, thanks again for everyone on the call taking time out of your morning, probably a busy Thursday morning, afternoon, or evening, depending on where in the world you are, to hear our update. I’m looking forward to sharing the results and the progress that we’re making as we advance forward with our growth journey here at Covalon. During today’s call, I’d like to really accomplish a few things. First, we’re going to walk through a solid second quarter, including strong revenue growth, excellent gross margins, continuing profitability, more than doubling of adjusted EBITDA from the same quarter last year.

Second, want to spend time on what I believe is a much bigger story for Covalon, which is our work to pioneer and build the contamination prevention clinical category in vascular access. This category is anchored by our VALGuard and our CovaClear cover products, and let me tell you, it is getting real traction with some of the very best hospitals in the United States and beyond. We’ll talk about the clinical, the commercial industry momentum that’s been building for this solution over the last few months and last few quarters. Then we’ll cover some recent highlights, and we’ll wrap up by sharing why I believe Covalon is in the midst of a breakout moment. We’ve got a clean balance sheet, differentiated technologies, growing customer adoption, and a med tech category opportunity that really the broader financial markets still don’t fully recognize.

After that, we’ll open it up for questions. As is typical, we’ll prioritize questions submitted through the webcast interface first, please enter those as we go. Let’s start with the financial results for the second quarter. It was a strong quarter for Covalon. Revenue came in at CAD 8.7 million, up almost 15% from CAD 7.6 million in the same quarter last year. All 3 of our sales channels had positive year-over-year growth in the quarter with both our U.S. vascular access and surgical consumables business and our U.S. advanced wound care business leading the way with each of them growing almost 30% over the prior year. Importantly, the quality of the revenue was strong. Gross profit increased by almost 30% year-over-year to CAD 5.4 million, gross margin came in at 61.5%. That’s nearly 700 basis points above last year’s Q2.

Our adjusted gross margin was even stronger at just a shy bit near 63%. Those margin numbers, they matter. They show up in the work that we’ve been doing around product mix and manufacturing rigor and operational execution, and it’s showing up in our financial results. We’re not just chasing empty revenue here. We’re working hard to build the right kind of revenue, the kind that can scale profitably and create meaningful shareholder value. Operating expenses were CAD 4.4 million, up about 15% from last year’s Q2. A large portion of that increase relates to investments and some costs that supported the regulatory and operational foundation of the company. We’re being disciplined, we’re also not starving opportunities that can create long-term value. The impact of that stronger revenue and margin performance is very clear. Adjusted EBITDA was CAD 1.3 million, up 127% from the same quarter last year.

Diluted earnings per share were CAD 0.04 compared to CAD 0.02 last year. In simple terms, Q2, strong quarter, revenue up, margins up, adjusted EBITDA up significantly, and earnings per share roughly double. It’s the kind of quarter that gives us continued confidence in where we’re heading. Looking at the year-to-date view through the end of March, revenue for the first 6 months of fiscal 2026 was CAD 15.6 million, essentially flat with the same period last year. We spoke about this on our Q1 call. The first quarter just wasn’t reflective of what we were seeing in the business. We had strong line of sight to Q2 acceleration, and Q2 delivered exactly that. The Q1 challenge was largely on the international side, and like most companies that operate in international markets, that revenue can be lumpy at times.

We’ve talked about that here over the last couple of years on several of these calls. It is worth noting that this international sales channel for us, it’s one that grew double digits plus last year, and we have line of sight to another double digit plus growth this year, but inherently can be a little lumpy quarter-to-quarter. On the gross margin side, year-to-date performance is strong. Gross profit was CAD 9.4 million, and gross margin was 60%, up about 200 basis points from the first six months of last year. Adjusted gross margin was 61.5%, which was up about 350 basis points year-over-year. Operating expenses were CAD 8.4 million, up about 11% year-over-year, similar to the Q2, increased mostly around some one-time costs, including some outsourced product testing for some regulatory work.

We continue, though, to be very focused on spending discipline and are making sure that every CAD we spend is tied to value creation. Adjusted EBITDA for the first half was CAD 1.7 million, down from CAD 2.1 million last year. Largely really here, a function of the softer Q1 and some of the investments and timing of expenses that I just mentioned. EPS was CAD 0.04 for the first half. The important takeaway here I think is, the year-to-date picture improved meaningfully with Q2, and our second half expectations remain strong. We believe the business is moving in the right direction, and we are seeing the operational and commercial signals that we want to see. Just as important, we continue to operate from a really strong position of financial strength. At the end of March, Covalon had approximately CAD 16.6 million in cash and abso