Q2 2019 Earnings Call

If anyone needs assistance during the conference Press Star in Shield four in operator later, we'll have a question and answer session to participate in that portion of the call Press star one to get in the queue now it's my pleasure to turn the coaches to lead to Lee.

Thank you and good afternoon, everyone welcome to Wright Medical second quarter 2019 Conference call. We appreciate you joining us I'm Julie do we Wright's Chief Communications Officer with me on the call today are Bob Palmisano, Wright's President and Chief Executive Officer, and Lansberry, Reits Executive Vice President Chief Financial and operations Officer.

We are also delighted to have Dr., Judith Baumhauer orthopedics wouldn't ankle surgeon from the University of Rochester School of Medicine, and the primary investigator in the pivotal Cortiva motion study participating on the call today with us.

We issued a press release this afternoon regarding our second quarter results and a copy of that press release is available on our website at right Dot com.

The agenda for this call will include a business update from Bob a car T that clinical perspective from Dr. Baumhauer, a review of our financial results and updated guidance for Lam.

A question and answer session and then conclude with closing comments from Bob.

Before we begin I'd like to remind you that this call includes forward looking statements, including statements about our outlook for 2019.

Each forward looking statement contained in this call is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements.

Additional information regarding these factors appears in the section entitled cautionary note regarding forward looking statements in the press release, we issued today more information about risks can be found under the heading risk factors in Wright's most recently filed annual report on Form 10-K , and subsequent quarterly reports on Form 10-Q as supplemented by our other FCC filings.

Our SEC filings are available at Www Dot FCC dot Gov and on our website at right Dot com.

The forward looking statements in this call speak only as of today and we undertake no obligation to update or revise any of these statements.

Our earnings release and today's discussion include certain non-GAAP financial measures. Please refer to the reconciliation, which appear in the tables of today's press release and or otherwise available on our website.

No further that our form 8-K filed today provides a detailed narrative that describes our use of such measures unless otherwise noted today's discussion refer to results from continuing operation.

Also note that unless otherwise noted all growth rates discussed today are on a non-GAAP constant currency basis compared to the prior year quarter.

Dr. Baumhauer is the paid consultant of Wright medical however, the opinions expressed by Dr. baumhauer are her own and do not necessarily reflect the views of Wright medical.

It is now my pleasure to turn the call over to Bob Palmisano Bob.

Thanks, Julie and welcome to our second quarter earnings call.

Our U.S. upper extremity business delivered another strong quarter and grew approximately twice the market rate of growth.

Additionally, Cartier performed well and our direct sales territories, which grew 29% pro forma in Q2.

However, both in total and for TV [laughter], specifically, the second quarter fell short of our expectations.

We believe we are in a great position strategically and what the fundamentals of the business I remain very optimistic about the future opportunities of our business.

However, I am not happy with our Q2 performance.

And our revised outlook for the remainder of the year.

Also there has been some recent negative negative commentary from the investment community community regarding the clinical performance of course of the car to your product and the market opportunity for Teva that we strongly disagree with them.

Nothing mentioned in this commentary was new to us nor do we think anything differently. Now. This was all known at the time of the deal what's considered our deal model and has no impact on current year constant currency growth or growth organic growth rate.

[laughter], we have great things going on in our business and I will touch briefly on the highlights, but we will we will devote the majority of a CLO two addressing the two issues that most significantly <unk> impact to Q2, and providing our views backed by strong data on the computer product performance and market opportunity.

First the highlights.

The U.S. shoulder your shoulders grew 16% in the corridor, which is approximately double the market rate of growth and consistent with our growth expectations for the full year.

We launched our new revive revision shows or at the end of the second quarter and that launch is off to a very strong start.

The revive launches a significant new product launch for our shoulder business and highlights our ability to keep oh positions a jerk address the revision second that other shoulder market, which is growing at approximately twice the primary shoulder replacement market.

[laughter] blueprint adoption has continued to expand and helped drive shoulder gains as we mentioned on our last call. We plan to roll out. The next picture. The Nic feature a blueprint digital ecosystem. This year called score SCR war or surgeons clinical outcomes researchers.

Score is currently a limited user release that allows orthopedic surgeons to easily collect data and track their shoulder arthroplasty patients clinical outcomes affectively trailer truck trucking outcomes is increasingly important not only for manufacturers, but also for surgeons to assist them in improving their practice and their negotiations with payers.

Additionally, these outcomes will be used to feed to feed the artificial intelligence to feature a blueprint and approved pre operative planning.

We expect to revive launch along with continued penetration of our performing buys glass system, simpliciti shoulder and blueprint, enabling technologies to connect to continue to drive outstanding shoulders sales growth in 2019 and beyond based on our excellent growth. We now expect to be number one in shoulders worldwide by the end of this year up from number three just a few short years ago.

U.S. biologics continued to perform well with 17% growth in the quarter led by the continued adoption of augment injectable.

In total we grew 9.4%.

Organically for the quarter, which was below our expectations. Despite the lower than expected revenue, we still expect to meet our previously stated financial objectives of double digit constant currency organic growth rate gross margins in the high 70% range.

And exceed adjusted EBITDA margin of 20% for the full fourth quarter of 2019.

Now for the issues.

The second quarter Cartier sales of approximately 8 million were not were negatively impacted by significant drop in cortiva sales in the distributor territories not due to any clinical performance issues for the product.

The entire miss for the quarter of Cortiva is attributed to the legacy car T <unk> distributor territories.

Which declined 40%.

All right over year over year at sale significantly lower than Q1 levels.

It was clear.

And that as a group of distributors can <unk>. It was clear that as a group the distributors collector of only believe that they would not have access to car T. The long term.

They stopped devoting time and resources to this product and actively try to move as many customers as they could and away from car T. It huh.

Constant contractually, our salesforce was not able to sell into those accounts and Oh, yeah. In Q2, two calling back the negative impact from the distributors.

This was in contrast to the director territories, which were on plan and it grew 29% pro forma over the prior year quarter and saw growth accelerate from Q1 to Q2.

To address this we acted quickly and terminated the cortina distributors.

As of August 1st the U.S. Cortiva business has been transitioned to our direct U.S. lower extremity sales force.

Having cortiva in our direct Salesforce fans is definitely better for the long term, but it will take time for them to regain the distributor business that was lost in Q2.

So in summary for Teva across on the Q2, Miss was clear and straightforward and we quickly took action to address it.

The other issue in Q2 was the performance of our U.S. square foot business as I have discussed in the past. This is the most challenging part of our business and the most difficult to predict.

I described this in last quarter's call as a knife fight, where the daily performance and motivation of the Salesforce plays a big role.

Our major competitors and the corporate business are not the large public orthopedic companies, but the combination of a number of smaller individual not public companies some of which are physician owned.

Combine this group of companies combined this group of companies is approaching 20% market share in core foot and growing.

They share the same independent distributor sales force on a nonexclusive basis. These companies do not compete on product differentiation or product attributes, but more on aggressive acquisition of design surgeons certain investors and competitive sales reps.

These dynamics are not new and we have successfully competed against these computer these competitors in the past.

However, the intensity regarding surgeon a sales rep acquisition for these companies has increased significantly sales positions and our lower extremities businesses are highly sought after and that continues to be the case. However in Q2, our reps were specifically targeted by these competitors, resulting in a larger than normal regrettable turnover rate and salesforce distraction that impacted our core book performance.

[noise] what are we attacking we're attacking the the issue in several ways.

First we have made changes to our lower extremities sales force compensation. These since these changes our turnover has been in line more in line with historical levels second we are increasing the size of our lower shomi salesforce and aggressively filling our open position was experienced reps with many already on board.

Third we made significant progress with major hospital purchasing groups in the first half of the year, scoring major contracting wins with a very large.

Private tax exempt non governmental health system in the United States and a leading health care provider currently serving more than 10 million members. One of the one of the contracts that particular notable was that we had not previously had access to contracted business from this provider in our core foot and ankle business. During our negotiations with these large hospital purchasing group, we found a company with surgeon ownership, we're at a significant disadvantage because of the potential for conflicts of interest.

Additionally, our hematology surgery center business I could take cash continue to perform well and grew a strong 14% and what should be a tailwind tailwind for this part of our business.

Fourth we have very significant products in our pipeline that will arm, our sales force with meaningful product differentiation in the core business. This includes several innovative products that will be in limited user released later this year to Trupanions, which are one of the largest procedures and foot and ankle.

Also and most notably our new digital organization that we announced in May is driving several future digital solutions targeted to the core foot and ankle market.

We have taken significant actions to address the issues with legacy Cartesian distributors, and our and our corporate business, including terminating that they currently have a distributors. We are confident that the actions. We have taken will improve the growth the growth rates of car fever, and the whole U.S. lower extremities business. However, it will take some time for the benefit of these actions to be evident in the sales results and we believe our updated guidance takes that timing appropriately into account.

We believe these issues are transitory and remain confident in the growth prospects for our extremities market overall properties, specifically and for all or none for our business in total.

With regard to the market opportunity for Teva, We said the vast majority of fusion or colectomy colectomy patients could be candidates for cortina, resulting in a market opportunity of approximately $400 million.

We still believe this.

Some of the investment community in the investment community are confusing current rates of individual physician adoption with market opportunity.

Based on emotion Pmeight study, which is the highest level of scientific data available approximately 63% of patients screened and tracked met the strict inclusion criteria for the study.

However, approximately 90% of patients screened and track would have been candidates for current breakeven based on the final FDA approved labeling of the product.

Current adoption rates with existing users is off to a great start. This this early in the product life and as with any new technology, we expect the number of users and their individual usage rates to increase over time.

I did want to mention I also do want to mention some positive criteria wins that happened just happened in July .

We received FDA approval for two new car Kiera implant sizes, six and 12 millimeter, providing physicians with more with more options for treating the patients. The us commercial launch is planned for the second half of 2019.

As of July 1st we are now selling the car T. The implant in Europe , and Australia through our direct sales force.

Later this year, we plan to begin a limited launch or that criteria from implant and the United Kingdom.

New Kingdom with additional European countries to file early in 2020, we have not communicated a specific timeline lyme for the thumb indication in the U.S., but I'd say I'd study completed enrollment this past March and has now moved into the patient follow up phase.

I now want to spend a few minutes reviewing the robust clinical data supporting the card cortiva synthetic cartilage implant for great tow arthritis to address the questions raised in some analysts notes.

I am delighted that Dr., Bob powers on the call with us today to provide her scientific and clinical perspective.

Before I turn the call over to Dr., Bob Bauer I didn't want to make some suffered some specific specific comments on criteria kiva.

When we acquired Cortina our goal was to lead with the best in class differentiated technologies in extremities and biologics that is still the case.

To be clear, our Cuba shortfall in Q2 was due to underperformance by the former criteria Arqiva distributors. It was not due to any clinical issue.

Cortina is backed by the highest level of prospective randomized clinical research and has been proven to be a viable alternative to fusion for patients wanting to maintain a range of motion.

With almost six years, a follow up from a rigorously conducted clinical trial. The data supports Qatar, Turkey that be a game changer in the treatment of this condition.

The market opportunity has not changed based on the P. may study and our own independent research.

We conducted an extensive independent research study of 200 physicians hip users and non users both before we acquired occur Kiva and repeated that study again, just this past month with a different set of 200 positions.

The conclusion of those studies were strikingly similar.

In the most recent study 95% of current Craig Cartier users expected to maintain or increase their usage and 71% of the non car T. The users expected to use the product in the future.

We believe Cortiva is a fantastic more conservative treatment option than fusion that can easily be revised for the small percentage of patients who are dissatisfied no matter what the reason.

Our Teva enable enables motion that has high patient satisfaction rates, which are comparable to the satisfaction rate of hip and knee replacement.

Keep in mind that we are still in the early phases of car T. Bill of the car T. The launch and therefore is not unusual to see some amount of variation and physician learning curves.

Clinical experience and adoption rate.

We do not expect this to two.

We do expect this to improve as our clinical education programs continue to train greater numbers of physicians on proper patient selection and the importance of setting realistic patient expectations on the front end, particularly with regard to the time it takes to realize the full benefits of the procedures.

With that.

It is now my pleasure to introduce Dr. baumhauer.

Dr. Baumhauer is an orthopedic foot and ankle surgeon from the ownership of Rochester School of Medicine Dr., Bob Power was the primary investigator in the pivotal motion study, which compared the safety and efficacy of Cortiva diffusion in the treatment of great tow arthritis and resulted in an FDA PMA approval for the criteria implant.

This is one of only four orthopedic products approved through the PME a process in orthopedics Dr. Baumhauer has also author authored several party of a clinical publications, including the including the original motion study and the car and the criteria mid term outcome study that show clinical safety clinical safety outcomes record Cheerier for a card Cortina were maintained at 5.8 years.

Dr. Baumhauer property you.

Thanks, Bob.

It's a pleasure to be here today and share my scientific and clinical perspective on the car T that synthetic cartilage implant, which I consider to be an important event and effectively treating great choice right.

And really more importantly from my position to allow them to have decreased pain has just been motion and improve their function.

I'd had an excellent result, with the car T. The implants.

And I have great confidence in it.

I've been following the same inclusion exclusion criteria that the motion study used.

I've been educating patients on the recovery time line for pain relief using the motion study graphic displays.

And the return to function perfect place to define their expectations.

In light.

It's validated data has demonstrated that it comes as the prospective randomized study.

The data clearly demonstrates that patients begin to see clinically meaningful reduction in their pain as soon as two weeks post operatively.

However, they continue to maintain that pain improvement at the three six and 12 months just like the clinical trial told us it takes up to a year to realize the full benefits of the parties.

Here's what the science in the car T. The clinical data tells us.

In the original motion study of 152 patients species the car T. The implant.

I would be long term outcomes were available for 106 patients and 135 eligible at this time point with a mean follow up of 5.8 years.

These outcomes demonstrate that the car T lesson synthetic cartilage implant.

Provide durable team really the patients achieving a 70, assuming a 97%.

Median reduction in pain. It is sustainable it's functional improvement with patients demonstrating 176%, maybe an improvement in sports activities.

It also demonstrated motion preservation with patient experiencing 25% improvement and range of motion from baseline.

And lastly, a high rate of satisfaction with the treatment with 93% of patients, saying that they would have that procedure again.

Great and then 30% reduction in our view score or visual analogue score is a validated clinically significant reduction in pain.

Keeping patients demonstrated this substantial and clinically meaningful reduction in pain at their two week post up and at every subsequent visits included in this study as successfully as assessed by this validated digital analog scale.

This is not unusual to see this level of improvement.

Slowly over time.

For other motion preserving orthopedic procedures, such as hip replacements knee replacements in April we see these similar patterns in successful implants.

We know.

Not only does this the bone need CEO since we did drill a hole and implanted an implant but he takes his talk tissue is also needs to heal because there are still moving and doing their job.

So the secret here this time.

And while there is somewhat greater pain reduction in the fusion group earlier on.

At one two and 5.8 years the differential in that really STS score for that one two and 5.8 years compared to car Chiva, if not clinically significant.

This is not meaningful to the patient.

The early benefits if you will the fusion for that that improvement obtained at <unk>.

Shorter timeframe comes with this.

And.

Oh, the joint infused in the wash of joint mobility, not what the patient Swat.

And then he patients are willing to trade off a certain amount of low level pain.

For a period of time for the extra mobility at the car T. The device provides.

And this is demonstrated by our high patient satisfaction scores.

The sheer number of products, which have been designed and cleared by the FDA that attempted to retain motion is also suggested that patient preference is to retain motion and joint function.

It's hard to give a device is the only.

First met a parcel of land Joe joint.

Device supported by prospectively controlled level, one clinical data demonstrating its safety and efficacy.

As is the case for all medical device procedures for some patients that procedure it doesn't always work.

And then the motion study, 11% of the car T. The patients had a reaffirmation for various reasons.

But remember that the fusion group also had some re operations, 12% of the fusion patients required to subsequent secondary surgical intervention to treat non union to remove broken hardware.

Debt fusion group also at the risk of infection nerve injury and wound healing problems.

There were no cases of Cortiva implant fragmentation, where or bone loss.

A key benefit of Cortiva is for those patients who are still experiencing pain or functionally she'll and wanted to explore a different treatment option. He can convert to a fusion. So pets that option as there is no Blaine wash, there's no shortening of that bone in other words correctly that does not burn up rich.

And to summarize I consider could achieve it could be a significant events.

And effectively treating great towards for I guess, preserving motion improving function and decreasing teams for my patients.

Is quickly becoming an important treatment option like patients.

For my patients in my practice and I look forward to continuing to provide my patients, but this breakthrough technology I have the upmost confidence in it and the science that we produced with.

And I'll turn it back over to Bob.

Thank you Dr. Bob.

In summary, I continue to be optimistic as we look forward, we remain confident and committed to our previously stated long term financial goals.

Delivering double digit constant currency net sales growth maintaining gross margins in the high 70% range and achieving non-GAAP adjusted EBITDA margin in the mid 20% range exiting 2021.

We also believe 2019 total year results will show adjusted EBITDA margin of over 20% exiting the fourth quarter gross margins in the high 70% range and double digit organic constant currency growth.

With leadership positions in high growth markets to truly differentiated products in all our market segments, except exceptional enabling technology for shoulder and total ankle. We believe we will maintain our current number one position in global foot and ankle and grow to be number one in shoulder globally by the end of 2019.

With that I'll now ask Lance to provide further detail on our second quarter financial results and outlook.

Thanks, Bob as we get started please note that unless otherwise stated all of today's discussions regarding our sales growth rates refer to our constant currency growth rate compared to the prior year quarter and our results of operations refer to our as adjusted results, which are non-GAAP financial measures as described by Julie during the introduction of our call unless otherwise noted today's discussions refer to results from continuing operations.

Please refer to non-GAAP reconciliations in our press release.

Bob covered the highlights of our underlying sales growth in his earlier comments I will provide some additional color on the piano and then focus my comments on the updated outlook for 2019.

Globally, our net sales grew 13% constant currency and 9% organic constant currency. This was driven by strong performance in our us upper extremities business with 16% growth in shoulders, 17% growth in U.S. biologics and solid growth in our international business.

This was partially offset by underperformance in our us lower extremities business.

The U.S. lower extremities business was roughly flat in Q2 on both an organic and a pro forma basis.

As Bob discussed we saw a significant drop off in revenue from the car T with distributors and disappointing performance in our core foot products.

We've already taken actions to correct these issues, including Terminaling terminating the car, Cuba distributors, and making adjustments to our sales compensation program and aggressively back filling open positions with experienced reps.

Now moving on to some detail below the sales line.

Beginning with Q2 adjusted gross margin, we achieved adjusted gross margin was 79.1% for the quarter.

As the line items, making Europe up our Q2 operating expenses.

Selling general and administrative expenses as adjusted totaled 66% of net sales for the second quarter of 260 basis point improvement to Q2 2018, due largely to our continued ability to hold DNA and distribution spending flat, while driving revenue growth.

R&D expense as adjusted was $18.8 million for Q2 of 2019 and 14.7 million in Q2 of 2018.

And finally amortization expense was approximately 7.9 million in Q2 of 2019 compared to $6 million in the prior year period.

Below the operating income line net interest and other expense was 8.4 million for Q2 of 2009 compared to $8.6 million in the prior year period.

For share count our Q2 per share results as adjusted are based on adjusted average diluted shares of 128.6 million for Q2.

Altogether. This resulted in adjusted EBITDA of 35.3 million and 15.4% of net sales for the quarter.

From a cash standpoint, our total cash balance at the end of Q2 was approximately 150.6 million.

I will now discuss our 2019 full year guidance.

Consistent with our past practice. Please note that our guidance ranges and assumptions for 2019 exclude any consideration for the effect of potential future acquisitions or any other possible material business developments.

Additionally, it is important to note that we will be using a number of non-GAAP financial measures to describe our outlook for the business in particular unless stated otherwise all todays discussions regarding our financial guidance refer to our as adjusted results of continuing operations. Our press release issued today notes those items that are excluded from our as adjusted results.

As stated in today's press release, we've updated our net sales guidance for the full year 2019 of approximately 925 million to $930 million. This guidance range assumes foreign currency exchange rates in line with current rate, which resulted in a negative impact of approximately one percentage point as compared to 2018.

And $30 million of Cortiva sales in 2019.

This range implies full year 2019 constant currency net sales growth of 12% pro forma constant currency net sales growth of 9% and organic constant currency net sales growth of approximately 10%.

A reduction in guidance is all attributable to the Cortiva sales in the U.S. distributor territories and that is the performance of our core foot business.

The very strong growth for Cortiva in the direct sales areas in Q2 gives us confidence that we can drive strong growth and cortiva.

However, it is going to take some time to regain the significant amount of business that was lost in the distributor tier four territories in Q2.

That business deteriorated throughout Q2, and exited at a rate lower than the full quarter.

Our guidance appropriately assumes the sales in these accounts is going to get worse before it gets better.

As Bob has discussed the corporate business is the most competitive and challenging part of the business. The market is still very healthy from a growth and margin perspective, and we are committed to getting this part of the business to consistent strong growth.

We've taken a short term action to improve the competitiveness of our Salesforce. We're also working on longer term initiatives to develop more meaningful differentiation in this part of the business.

We've had some ups and downs in our core business, we've always been able to return it to at or above market rates of growth and we have confidence in our ability to do that this time as well.

We expect some recent big contract wins recently experienced rep hires in a more highly motivated sales force to all have a positive impact on the business.

From a guidance standpoint, we are taking the conservative approach and assuming that those things will take some time before they have a significant impact and therefore are not building any improvement in the core business into our guidance assumptions for the second half of the year.

We have updated our full year 2019, non-GAAP adjusted EBITDA from continuing operations to $157 million to $163 million.

This guidance assumes approximately 290 to 350 basis points of EBITDA margin expansion in line with our previous guidance. Despite the lower revenue levels. It puts us on track to deliver our goal of EBITDA margin in excess of 20% for the full fourth quarter of 2019.

On an as adjusted basis, we expect to be an income position in 2019, which will result in a slight increase in our diluted shares.

We estimate approximately 131 million non-GAAP adjusted diluted weighted average ordinary shares outstanding for fiscal year 2019.

Our full year organic growth guidance is 10%, which implies growth in the second half the year at approximately 8% to 9%.

Taking normal international sales fluctuations into account as well as the Q2 exit rate for the U.S. core foot business, we expect Q3 organic growth rates to be in the mid single digit range and then low double digits in the fourth quarter.

The primary factor, creating the difference in the growth rate between Q3 in Q4 is international.

Also built into our assumptions is an expectation for the U.S. lower extremities growth rate did decelerate in Q3, and then improved slightly in Q4.

Our guidance assumes cortiva sales of approximately $13 million in the back half the year, we expect Q3 cortiva revenue to be approximately 5.5 million in Q3 and $7.5 million in the fourth quarter.

In addition, we have approximately one percentage point FX headwind in Q3 and minimal headwind in Q4 at current rates.

As Bob mentioned, while we are confident the actions we have taken to improve us lower extremities growth rate and turnaround. The cortiva business. If you will take some time before the benefits are reflected in our sales numbers.

Our comments on our quarterly cadence take this into account.

We expect our Q3 EBITDA margin expansion to be considered to be let considerably less than the full year, just due to the timing of spend combined with the seasonally lowest sales quarter and to be in the range of 150 basis points.

We still anticipate EBITDA margins in excess of 20% for the full fourth quarter.

In closing we are disappointed in our Q2 revenue performance and the resulting lower outlook for revenue for the year.

It is frustrating for all of US shareholders management and employees. When there is a setback when they occur you have to acknowledge and take swift aggressive action to address it and we've done that.

The overall fundamentals of our business and our markets have not changed and we remain confident in the opportunities in our business. We continued to be in a great position strategically and have a full pipeline of future innovative innovative implants and digital solutions.

Despite the issues with the Cortiva distributor territories and the core foot business landing at the same time, we still grew 9.4% organic constant currency in Q2 and expect to grow 10% organic constant currency for the full year.

We were also still on track to deliver on our full year and Q4 EBITDA margin goals. Despite the lower revenue levels and remain confident in our ability to achieve our long term financial goals of double digit organic revenue growth maintaining gross margins in the high 70% range and achieving non-GAAP adjusted EBITDA margin of mid 20% range exiting 2021.

Before we open the call to take your questions.

I will note that Dr. Baumhauer has graciously agreed to stay on the call to answer questions.

Please limit your questions for Dr. baumhauer to matters pertaining to the Cortiva motion PMI study or hurt clinical experience. The cortiva any questions relating to financial projections market size estimates et cetera will be handled by bothered me.

With that we would now like to open the call to take your questions.

Thank you and ladies and gentlemen, if you have a question at this time just press Star then the number one kielty your Touchtone telephone. If your question has been answered or you wish to be most yourself from the queue.

Again, if you have a question just press Star then one and our first question is from Larry Biegelsen with Wells Fargo.

Thank you so much for taking the question this is Shannon.

Thank you so much for the color.

On the call, especially on the clinical front.

Just wondering if you're looking to focus more on physician education.

Given.

The ability in results and then can you elaborate on how you're addressing the issues that you faced in Q2, and then I have a follow up.

Yes medical education and increased medical education is.

Really.

A key part of our strategy going forward and it's always an important thing with right, but I think we and we really intend to step this up.

We will.

Continue to to.

To train a lot of physicians.

Train them, well, making sure that they do they are understand.

The patients what good patient selection is as well as how how to set.

Patient expectations.

Expectations. So I think that we're on top of that and I think that we've done a good job with that.

And we will even focus more on that.

Well, how we dealt with the distributor issue is that we we fired them off quite frankly.

The.

Collectively.

Really lost interest because they felt that they were going to lose the product and no longer wanted to invest their resources time and energy and promoting it now we we had agreed with them that we were going to keep them as long as they performed.

But.

They.

They decided that that wasn't.

But they wanted to do so we now have.

I think we have we have one distributor left and hopefully that will work out but the rest of the Mark Mark has all been turned over to our direct sales force and we're very optimistic about that we had great response and in Q1 and Q specifically in Q2 with a 20 foot 29% growth in our direct sales force, but it's not all going to come back right away.

So thats why were building in some conservatism.

As we go forward for the rest of the year.

Thank you that's really helpful and.

Thank you good.

Pipeline.

Team.

What are you most excited about for next year.

Andy.

And delivering double digit growth in 2020. Thank you.

Question.

Yes, we feel confident in in 19 of having double digit growth and certainly confident in 2008.

20 of having double digit growth.

I think it will be still in the early stages of the Carcara launch next year, we have new products in our pipeline as I said in my prepared remarks.

Several new products as it effects by onions, which are the largest one of the largest.

Areas.

In.

And.

And four foot procedures.

We think we have some unique solutions there.

There is that they are starting and permit.

Physician preference testing late this year and should be in the market market next year.

Additionally.

Digital is coming and.

We think that.

To address this core market this core product Mark.

Foot core foot market is that having.

Differentiation is going to be key I, I say often that.

One of the problems in this areas for US is that it's the one market that witness the one market that we deal with that.

Doesn't really have a lot of product differentiation, so you're you're constantly in a battle every day.

I describe it as a knife fight every day and some days you win a knife fight and sometimes you lose a knife fight in Q2, we lost a knife fight more than we had we had hoped.

But the real the real key here is not give it not not just just not just saying and that's the way it has to be.

Short term, we believe that we will be bringing more nice fighters to the knife site and having more motivated nice high irrs in the in the in the knife fight long term, though I think the real solution is and having differentiated products.

Okay and differentiated products that you might think it's hard to do with basic plates and screws, but having digital assisted surgery.

We think will really separate us, particularly from the the small.

Non public companies that I referred to before because they're not going to have digital solutions, and we will be able to equip.

Our reps are the physicians that we do business with to have.

Hopefully to have better outcomes, because they will have.

The aid of digital which we know is very important to we've seen this in shoulders and other areas. So the more enabling technologies to better enabling technologies the better the outcomes in them.

And the more market share you kind of get that that we have.

So that's my that's what how I look at it Shagun.

Thank you very much.

Thank you. Our next question comes from Brandon Henry with Art BC.

Yes, thanks for taking my question.

Can you can you help me understand the difference in the performance in the foot versus the ankle business into Q I don't know if I heard a growth rate for total ankles and then just also help me understand.

Why you believe the sales force turnover kind of spike in the second quarter and then maybe your expectations for sales force hires for the remainder of 2019.

I just have a follow up.

So Brian I'll take this is lance I'll take the total ankle question the total ankle growth.

Was lower than what we've seen in Q2 also it was 5%.

So.

We're not really worried about that weve seemed looks like that in the past you know I think in Q4 17, it was roughly 5% and then.

We've seen a bounce back and be strong after that so sometimes we see these anomalies.

And we had that in the quarter, but nothing to change related to the market or our position in the market or are.

System and ability to drive market expansion that it was softer this quarter.

Also I'd add that year to date, it's still 12% and.

And.

The district the.

We had I think that the some of that.

Is attributable to the same issue of Salesforce.

That we had in our core products. These are basically the same reps and as we had a lot of.

Of turnover regrettable turnover in our.

Our core business that also affected the.

The.

Total ankle business.

But I think that total ankle business is more sticky.

Thanks.

RUPS 10 don't tend to like to do and as we recruiting reps and I think this is a big advantage and big advantage that big advantage that we have the reason for the the turnover Brandon I covered this a little bit in my prepared remarks is that we have the biggest.

You mean, the competitor that were now this coming up strongest and now is about 20%. If you lump. It together are they small companies combined and they don't necessarily or they're not necessarily involved in providing a lot of medical education, providing a lot of new products, garnering a lot of resources, whether they're able to recruit.

Sales reps.

Based upon a very high commission rate that will bring a lot of business with them.

And this has always been part of the game, but really intensified in Q2, particularly in mid May we were at.

Offsite meeting I'm never forget in mid in mid May and.

So our sales people kind of huddled together and they were they were what the long and short of it was is that we had lost about seven or eight sales reps in the previous two days.

And it was all to the same two companies.

And it was these this this kind of a system, where they were just going to pay real Hot Commission rates.

And that.

With very low demands.

Where we tend to be a little bit more demanding didn't offer any things like.

Medical education or are.

Any kind of support that we give but this this was very attractive to a number of sales reps now that.

That's part of the process we.

We are we have we operate a little bit differently, we operate that we will have.

Good products big pipeline of new products, hopefully differentiated products.

Given a lot of support but we did have to fix the comp issues. So that we can be more competitive short term, we didnt want to we didn't want that to continue. So we took to short term actions. One was directed to raise the comp levels for our for our reps and secondly is to.

Try to bring on board some extra reps, so having more more more motivated.

Short fires and more short fighters as our short short term solution to that the longer term solution as having differentiated products, particularly digitally enhanced products.

Okay. Thanks for that color and then just a follow up question on Cortiva.

I'm still I'm still confused on kind of a disconnect you saw and then the second quarter between the distributor and the director really related card Teva sales. So just kind of help me understand that why the distributor problems kind of war well thought out.

Prior to the to the deal closing and then also there was there was a negative thing kind of single Center study that came out and Cortiva in June So maybe just respond to that and then did you see any further drop off in Cortiva sales sale that for that study was release. Thanks.

Regarding the distributor issue.

Is that.

We had good growth in Q4 of last year and good growth in Q1 of this year.

So it was hard to see going into Q2, what was in front of us.

And as I said in my prepared remarks is that collectively distributors at that point thought that they were all going to lose criteria and stopped investing in them as a matter of fact, many distributors had.

Hello.

Specified.

Cortiva sales reps in their distributorship many of those.

Let those people go and did not continuous support the product as a matter of fact.

Particularly when some.

Negative notes came out.

Headed to the confusion use that to to drive this years away, we felt that and when we spoke to them that we were not going to bring them back and the best thing to do was to go direct.

We did not want to do that at the beginning now you know I've tried to several different ways.

With try to convert distributor dollars into revenues.

Perfect for for for the company and it seems like none of that seems to work.

But.

And that the probably in retrospect, we should have done is taken a bigger hit upfront and saying is this is going to happen just built and if you add to your model, but we are optimistic given that we were going to keep these distributors they were going to keep their accounts.

And that and that.

And.

And as long as they perform well they could they were going to keep the product.

I fail to fully appreciate the paranoia of this group of people.

In.

Brandon you had a question about that single site study Dr. bomber I think you're familiar with that study would you be comfortable commenting on that.

Yes, I'd be delighted to.

Hi.

That that level four studies, so thats a single series from a single serve again.

Group of patients and.

That that study certainly put a car T. The integrate so.

But it had so much variation from what we did and the level. One study is really comparing apples and oranges.

Hey.

The authors of that study.

And honestly admitted to all of these things, but they stated that they changed their surgical technique halfway through.

They did things like you didnt follow the inclusion or exclusion criteria. They had patients that were included deadhead.

Steel tools, just four weeks following.

Patients that didnt have any pre operative.

No outcome assessments. So you really didnt know what changed there was over time. So it could then in fact at those patients Didnt really have the level of pain that would warrant and operation.

Wouldnt have benefited from this operation we know a lot of those things now.

They also I didnt really follow the recovering now that we have for.

Ill patients will do over time as I, often say to my patients. They don't Judge me for three months and the recent Florida as you drill a hole and it takes about three months for bone to catch it spread from that endeavor and although you can walk on it and it's a very quick ability to get back to daily living activities. It takes longer to sort of realize the pain relief and improve function and I think if they just said.

Told the line they would have had a little bit better.

The outcomes and a better experience for this.

They also sort of post there during the course of this recovery by injecting it with Ford is down and putting on.

Motion.

Devices and would allow for passive motion, we know now for knees and hips.

Other joints. So we don't use task of motion.

Devices any longer.

Do it in the ankles.

But they did it in a tolling and moving a tailwind irritating at Marlow, just irritated more so I think all of those things might have contributed to some of the.

Results that they had but I do feel a foetus tape it was very helpful.

Because what it did was it it sort of showed us we really needed to emphasize the recovery.

The inclusion exclusion criteria the.

Selection of the right patients.

The recovery math, and we anticipate and as Bob commented on we have a great effort now towards education, Florida.

So again.

So that they will understand that this is a great.

Appalachian and you need to educate your patience about what they can expect over time I think if you do that you're going to get the excellent results that we saw in the level. One study. So I think you need to take that study will be a grain of salt.

Certainly is a lower level of evidence study than what we did.

And I think it has a lot of variation into which as we mentioned a few items, but there are many more it did multiple operations.

On the on the station, where we had an isolated great till.

Arthritis patients should they did patients it already had tire operations and the impact on that on the outcomes also with.

The difficulty.

Get difficult I understand based on our study so those are all the things that.

You have to consider.

Okay. Thanks, I'll jump back in the queue.

Thank you Dr. Bob.

Thank you. Our next question comes from Mike Matson with Needham and company.

Hi, Thanks for taking my questions.

I guess I had another one for Dr. Bob Bauer.

I just wanted to ask about the pain.

It seems to last longer potentially.

As you've noted and I was wondering if you have any thoughts as to the reasons for that I guess in the last response, you kind of indicated that you thought it might have something to do with the whole that's been cut into the bone but.

I'm just curious why you think the recovery times or sort of longer.

Yes, I think.

You say the pain last longer I would say that it doesn't decline at the at the same slope. If you will and that's because the the toaster movement in your still functioning and we're not giving it west during that time interval. It Jeff I always tell my patients. It's like they can a cake you put the stake in the oven.

And if you wanted even if you turn to update I'll, then temperature or whatever it's just not going to bake right. You just have to wait till the time.

Finishes and then post takeouts.

And it's Mike I want to tell it takes a period of time for you to go through a process of drilling a hole and the soft tissue dissection that occurs around that.

And then would a fusion yes, there is no request to do any motion, but yes. The car Cuba until continues to function during that time frame that it's recovering some of like working on a car when it's so moving down the highway so.

I would say that.

Time is.

Benefit here and we do know that Ed.

Three months it turns the corner in patients perceive that based on the graph in the.

Six months, even better year, even better two years.

Equivalent.

5.8 years equivalency with with what you see with the great till fusion.

So I think I hope that answers your question.

Yes, It does and I guess, just with your real world experience with the product I mean is it been comparable to the outcomes that you saw in the motion to trial.

Yes.

Absolutely My my experience is Ben.

Parallel to what we saw in the motion trial and.

Thats why I really can use it thats why use the word confidence because I can you give us confidence and I can guide my patients.

So to let them know what they can expect in the timeframe that they can expect it and when you tell from things like that and they're able to wait.

Net effect, if I told the patient.

Oh, you want to get that right.

Three months well have a fusion they say no no wait a minute I follow up Mike Arqiva I'll just give it.

I will accept your recovery time.

They just want to preserve motion.

Okay. So it sounds like just managing the patients execution is kind of.

The key here to let them know that it could be take a little longer than they might otherwise expect.

Yes.

Okay, Alright, and then just a question on the guidance just can you give us some sense of how much of the Cortina sales in the original guidance were coming from the distributors and the reduction how much of that is that really just isolated to the.

The distributor issue or is some of that for other reasons or just be to be conservative with the direct reps.

Might that is all related to the sales in the now former Cortiva distributor territories I think we talked about.

You know in the past three previous past couple of calls that the 20 or so distributors that we retained.

Had the.

Really the vast majority of the business acquisition, so that was of the existing business.

That was the biggest part so the reduction is in in those territories a lot of that occurred in Q2, particularly if you look if you could look at where it exited.

You know I think to be safe, we're assuming it's going to go down further.

And then our team is going to be able to grow it back from there. That's what is built into the guidance.

Okay. Thank you.

Thank you and our next question comes from Matthew Blackman with Stifel.

Good afternoon, everyone, Bob maybe if you could take a step back and compare and contrast, the intensity of the headwinds you are facing today in the in the core lower extremity business versus those you experienced a couple of years ago. They feel similar more intense west intensity and I have a follow up.

Yes, I mean, it's different.

You know at that at that time.

It was.

Some of it was a.

Again, a distributor issue that we had.

I had a lot of distributors that were handling the.

Previous 20, a lower extremity business that we decided I'd like this time, we've tried to keep in mind that timely we decided to replace them all at once and that that caused that cause the issues.

And we try to hire a lot of new reps in at one time.

And and.

And you know.

It takes time to do that and it takes time for reps to get to get situated.

And productive so that's different than than this time. This this was what we had and we saw in Q2 was this growing entity of these.

Physician owned.

Non public.

Not companies don't don't try to don't try to do anything in terms of differentiation or or.

Or.

Our or.

Medical education, but are really involved in in aggressively going after reps design surgeons and investors.

Physician investors. So there are two different things quite frankly.

Now. The result is the result is the same and that we have a whole the climb out of.

But I think that we have tried to take that into account when setting and setting our guidance for that for that for that business.

I think that we reacted quickly and as quickly as we could.

In in May and June to get ourselves situated.

But a lot of the damage is done it will take some time to do.

But the.

Long term.

We believe that.

No. This is what we like to do we'd like to build product differentiation into our portfolio. We don't like to can be we don't like necessarily be in markets that are commodity like and so we have a plan that we know that we foresaw.

Yes, when we decided to.

Form a whole digital organization to help us not only in upper extremities, but lower extremities have product differentiation. So I think we're on the right track I wish it would all happen tomorrow, but to be realistic it's going to it's going to take a while.

I guess, what I really was asking do you think it's going to take heavier lifting together this whole Wes just this.

The ability to get out of the hole that you are and obviously these are two different situations, but.

Just comparing the amount of work that you need to do to get at it I think I think the way I'm looking at this is that the Q3 the coordinate oranges.

Going to be somewhat similar to Q2, maybe even maybe even less.

We wish we should start to see some uptick in Q4.

And then as we get into next year I think will be.

We should be able to get back on our on our trajectory of having a having.

Market growth rates for our core products.

Okay. That's helpful. And then the follow up is would you hope to have the bulk of the new reps. The backfill of these reps hired by the end of this quarter or into next and just remind us how quickly does that yes, it's an ongoing process.

One of the things we learned when we had a lot of reps.

Was that.

We thought that we tried hiring non orthopedic reps and training them that did not work well for us. So what we know is that we have to hire orthopedic reps. There are a lot of orthopedic reps that.

I would like to join right.

Because of all the support that we get we give.

And those are the people and companies like.

Cynthia has really disbanded there their extremities lower extremities sales force. So there there's plenty of people that are that.

With a minimal with.

Perpetrating I would say minerals right could be again get up and running productively. So we hired some.

We continue to do that and I think that.

The net should all be done. The addition should be all done by end of year I would say is that what the the other part of that is to stop people from leaving.

And that.

That is.

I think that that has gotten better since we revised our comp plans. However that continues to be an issue.

Yeah, we have reps that do a million or $2 million in revenue one of these companies that I referred to before can take these reps paid on our straight commission basis, and they're making double what.

And the other orthopedic company will pay them, but that's just usually for a year then it goes back down.

So we have to fight with that can you to continue to fight that battle as well.

Alright. Thanks appreciate it I'll get back in the queue.

Thank you and our next question comes from Robbie Marcus with JP Morgan.

Thanks for taking the question.

Maybe if I could put a little finer point a lot of people are trying to get at the U.S. salesforce productivity and by my math it looks like you're cutting second half growth in the core business ex car T.

3% to 8%.

And.

Bob or Lance I guess.

What are you going to do to prevent this one year market growth rates on easier comps. One year you have difficulty you know what are you going to do strategically. This I will tell you Bob I mean, I would like to take the easier job with the great pay as well and I'm sure you're always going to face that with the rep. So I guess from a.

More holistic strategic point of view what are you going to do then maybe steady out the performance here and.

We're not starting from scratch, we've already started and I think that's that's primarily the the overall strategy as well as well as having more NIE fighters and better up night buyers, but primarily is said to have product differentiation, we make a big difference.

Robbie also that the allure of a higher commission rate to higher commission rate is not guaranteed comp and you know.

Some of our products fall under the category of things that are less differentiated but not all of them and so you know rep is not going to be able to necessarily be able to support all their business over and you know so it is not an unwinnable flight.

As it is today, but we definitely need to to get it.

More based on differentiation longer term.

Okay, and then just a follow up on that Lance it sounds like comp is moving higher.

You're going to have to do some hiring in the back part of the year.

Just help us walk through maybe some of the puts and takes I know the EBITDA.

Numbers are coming down, but the margin isn't changing terribly and you're still north of 20% in the fourth quarter. So help us just maybe with some of the puts and takes on where the increased spend is offsetting some lower spend and how to think about that trend going into next year. Thanks.

Sure. Yes, there is definitely some increased spend on sales comp both for a number of reps. But then also just the the compensation for the rest we have.

No.

We were able to obviously offset a lot of that and get.

Even with the lower revenue number and higher sales comp you hit our EBITDA margin targets for the year, So were able to offset a lot of that.

Just thinking about this in the context of the lower extremity business. Some of that is just reallocation to other areas until we get the salesforce right.

No there is no need to spend on some of those other areas now we're not cutting back on anything around R&D are trying to drive differentiation or anything like that but you know we have to rewrite prioritize a little in the short term.

To get the more night fighters and keep the ones that we have until that's where a lot of that has come from.

Thanks, a lot.

Thank you. Our next question comes from Matt O'brien with Piper Jaffray.

Hey, this is Kevin partially on for Brian . Thanks, So much for taking the questions. A few quick ones from me I'll ask on that one I wanted to start on why did Q2 Pepsi the issues may be transitory you mentioned high twentys growth on the direct side, obviously pretty good can you provide any color on reorder rates utilization for a party that from docs that have been using the product say more than six months more than 12 months and then secondly, when you. Originally did the deal you said that Standalone. The business is really only in the US the international number was up meaningfully year over year and also sequentially that seems like the scaling of theatres to be working it and can you kind of talk about the pace of growth internationally in the coming quarters and are you going to be going direct sooner in some regions and how much benefit can you get there overall thanks.

I'll take the usage I'd say, just and we have a lot of data we would reference some of it in the prepared comments.

Around.

The behavior of current users and more importantly, the expected future behavior of current users and that's with the you know that you referenced a large survey that we did in that survey, 95% of current users, we expect to maintain or increase their usage going forward.

So I think we feel good that this is something that Curtis for users.

C as an important tool in their toolkit and feel good about that and then we're also seeing.

Great performance in our direct territories with the product. So that's what gives us confidence that that it's you know as we said transitory.

And that we're going to see improvement over time, we just needed to get access.

For our direct salesforce into those territories, which we have now and then we need to give him some time to regain that business.

Regarding the international piece piece of that Kevin.

I think it was in July that we start we actually went direct in most of the European countries UK is by far the largest the largest opportunity, but we're also in Australia. So it's really too early to tell.

But I think that I think that we're going to do real well, we did a lot of pre work.

There and.

I think that as far as I understand we're off we're off to a great start I'd also mention of what I said in my prepared remarks is that later this year.

We in physician preference testing, we have a different product being launched it in.

In the UK and maybe some other direct markets I'm not I'm not sure.

And.

So I think that I think I think that the opportunity is to grow faster than we had expected in international markets, but give us a quarter or two to digest that by that a feeling really optimistic about that right now.

Perfect Thats really helpful. Thank you.

Thank you. Our next question comes from Travis Steed with Bank of America.

Hi, Thanks, Thanks for taking the questions.

So lance.

Comment and no less than three months ago.

Strong momentum in the business.

In Twoq would be better than Q1, and maybe elaborate on in a while this happened so quickly over less than a two month period and with such a surprise and also your confidence that these reset expectations.

And the new 2019 guidance.

Are the right numbers and how confident are you and achieving those numbers now.

Yes so.

No we did point to an expectation for a slightly lower growth rate in Q2 than we than we had in Q1 and toll, but we definitely had.

A lot of confidence coming out of.

Both Q4, and Q Q1 results two quarters in a row.

And we definitely did get surprised in the second half of the quarter I think Bob referenced to a specific mid quarter meeting, where we had a spike in turnover that we're dealing with and then the Cartier distributors were definitely.

Significantly worse in the second half of the quarter than the first so I mean these have to concede that yes, we got we got surprised on on those two fronts.

And have tried to react.

Immediately to to to deal with both of those.

As far as confidence in the second half.

We know we understand where we exited Q2. So we know we have rolling into Q3.

In the second half of the year and we've tried to be realistic on our expectations for how long, it's going to take to get some improvement in the two areas, where we've had some issues.

No really the rest of the business is doing really well I mean rightly. So we're talking about the issues on this call, but you know the rest of the business is really.

In line or better with what we've been expecting.

What we've talked about at the beginning of the year. So we feel good about that and we're not really expecting improvement in the cortiva distributor territories or the core business in the second half. So that's how we're trying to handle guidance and be realistic about the time, it's going to take for the actions that we're taking to really show up in the numbers of traps and I'd add is that.

Really be clear very disappointed in.

Our Q2 results.

Given that I think we missed consensus by about 1% and and.

And we made EBITDA. So so we were.

So we were.

Disappointed that the issue that and why guidance for the rest of the year is lower is that.

We exited.

Q2, with a with around 1% Miss a trajectory was was it was bad that's why we're that's why the guidance for the rest of the year as where it is and I think it's very realistic.

Hopefully we can beat it but we were we were not only dealing with.

$3 million or 1% Mis, we're dealing with we had a trajectory that we need to reverse before we could grow again.

I don't know if you're willing to say how many sales reps you lost in the quarter and if that stabilizing from the last few weeks the quarter and and also the 8 million and Cortiva. This quarter, how much of that came from the direct reps just trying to get a better sense of.

The organic ramp you need and the back half to get to the $30 million.

Yes on the Cortina splitting that out we said that you know obviously heading into the quarter. The majority of the business was with the with the distributors I would say.

In the quarter it ended up being closer to 50 50.

So that give you some context without giving giving you the exact numbers and I'm sorry, what was the other part of the question.

Oh the turnover.

Yes, we typically don't give exact turnover numbers I think.

The Big thing is it was.

Got it in a very short period concentrated period of time, some pretty regrettable losses in that was more impactful per se than if I gave you a number year over year not alternative or the same.

Great. Thanks for taking the question.

Thank you. Our next question comes from your line once with BMO capital markets.

Good afternoon.

I got a bunch of questions.

Position.

Public companies.

For a long time so.

Youre lower.

Force sort of the target of them this quarter.

I'm going to keep going here.

Hi, Andy.

Fabulous deals.

Why would we not have a similar situation.

Upper extremities.

We have competed with these folks for some time and I think.

I think we've been successful at times and have been less successful are there other times.

The.

The intensity has really picked up as they are.

They are becoming increasingly emboldened increasingly more aggressive.

In.

In.

So listening.

Design surgeons.

Whether or not they have actual projects for them is irrelevant.

Secondly is.

That.

Temporary basis, they can offer significantly more compensation.

Turnips.

And.

So we think that we can deal deal with them, but.

In any particular time, and a very particularly when they're super aggressive into.

You could take.

So eight or 10 reps that have million dollar territories.

And that goes away it takes a while to get it back and I think thats. The scope of things. We're talking about we have a 350 ish kind of Salesforce salesforce and eight or 10 territories can really swing greatly the overall outcome.

So it doesn't take a lot, but it takes the right ones that that caused caused a difficulty.

And I think as I keep on saying is that the answer to this is short term is to do what we're doing long term is that having product differentiation with these which these companies will not be able to compete with effectively.

And Joanne, yes, what an upper the damage of dynamics are completely different in upper extremity you don't have these.

Smaller nonpublic.

Companies that have a shoulder.

That's really not the case the other thing is too is theres a lot more product differentiation.

In that space as there is no again this is primarily related to the core foot mainly for foot business, where there's less differentiation in a high number of smaller competitors.

Okay.

When you.

The deal model was to have a 1% accretion to revenue.

100 basis points to adjusted EBITDA.

Is that intact.

Well no I mean, the pro form our pro forma revenue growth is going to be slightly less than our organic revenue growth for 2019.

Yes, I think our TV could still be accretive beyond 19, but for 19, no thats not intact for EBITDA margin were still delivering our overall.

Our overall EBITDA margin goals, whether thats from Cortiva or someone else were going to get to where we said we were going to get to.

Okay.

Upper extremities can you give us something positive please.

Anything product pipeline.

Yes.

And we had.

Continue to have mid teens or better growth in that area.

Growing double the market, we really we launched the revive product at the end of Q2.

We think thats going to have a significant opportunity for us.

In the in the last half of the year and going forward we have.

Obviously, some tough comps versus last year, and and they and their non revive part of the business.

But.

That that business is spectacular and continuing to perform well.

There's there's no issues with distributors no issues with turnover.

Blueprint is a real catalyst and gaining more and more traction and helping us convert more and more doctors all the time, we're introducing new features to blueprint.

This year this year.

And I think that that's really a great story and as Lance alluded to an upper extremities is theres huge differences in this huge difference in product product differentiation is huge in that area and I think that that's why we've been so successful we are.

But at the time of the merger we're targeting we were number three player and we're being very bold and predicting by the end of this year, we will be the number one player.

So despite our trials and tribulations is that we will look into this year been number one player globally in both lower extremity and upper extremity.

Thank you.

Thank you and our next question comes from Chris Pasquale with Guggenheim.

Thanks, Bob you mentioned digitally enhanced products and lower extremities, a couple of times as part of the solution in terms of differentiating your portfolio my sense from the conversation we had last quarter. When you broke out the digital group internally was that the efforts in lower extremities, we're still pretty early so how far away you from actually having those products at your core foot portfolio Park.

You know it is early and you know I'm not going to give the timeline today.

But.

It's not tomorrow, but these projects have already started its not like we were starting from scratch.

We have a.

Hi level high capacity team.

And.

I just think that this is really going to make a difference and and I am driving them everyday to do a quick or quicker quicker.

But.

I don't want to say because I'll get into this trap that I think that one can get into one try to predict something you really don't know the timelines for us to say well you said it was going to be this and it's not so I'd rather just say.

In the <unk> and hopefully the near future we will have.

Digitally enhanced.

Core foot products.

That would provide a real advantage in the market.

And you have a number of differentiated products in your lower extremities portfolio today, and I know that the selling strategy historically has been the silo those relative to the core portfolio, but.

Several of them read directly on the same physicians these same procedures things like pro step.

Augment so why is there not an opportunity to leverage that differentiated portfolio in your contracting with hospitals and surgeons rather than try to play the same game that your competitors are playing in terms of compensation and blanketing the market with reps.

Yes, Chris It's a great question and there is an opportunity to do that and we we have had some success. There we referenced some some recent big contract wins and some big Big IDN.

Also our assay business is doing a lot better and a lot of that has to do its kind of you know turn it in more to a facility sale as opposed to an individual procedure sale and things like augment and post up or are very helpful for that.

So directionally that's correct right now, though there is still a fairly.

Meaningful chunk of the business, where the differentiation is pretty incremental between any company.

And Thats the part of the business that is more susceptible Bob being moved with the with the Rep relationship and that's the part that we have to protect long term with differentiation in short term with you know basically equipping the salesforce to be successful in retaining wall.

Thanks, Andy just sneak in one on Cortina and the new sizes, you're launching I'd be curious your thoughts maybe dr. Bob powers thoughts on how significant those are in terms of expanding the range of patients who can be treated thank you.

Dr. Primary would you have you have do you have an opinion on that.

Hi, I just cut then so when you talk about the range of patients that are treated you mean.

Can you just expand what you're talking about.

Hi question Doug.

Baumhauer was the two additional sizes that got approved.

How significant is that and how many additional patients does that open up.

As applicable to the procedure.

So.

I think that the the two additional sizes will be helpful for.

Fishman should have.

Yes, smaller and larger size flat so that will be helpful.

And although I can't really speak to.

Non FDA approved things that are done in the United States I can talk about.

My discussions I've had with the Canadian group in UK Grill.

And they have approval to be able to utilize.

Hi implants in the lesser total is that the MTP joints and I think.

Yeah experienced should that has been.

Very good and.

I think this publication is coming down the pike in regards to that so.

I think it will be helpful for us in the long term.

But as it as its approved currently for that great. So there are sizes.

Hi, Ptos that are problematic that need different sizes that will be helpful as well.

Little bit larger and little bit smaller.

I would remind you Chris is that the the approval.

Outside the us is much broader.

So.

So the product can be used in many more areas than just the big town.

And the sizes are probably more significant for those markets.

Thank you.

Thank you and our next question is from Rush standpoint with Jefferies.

Yes, thanks for taking the question lots been asked already but maybe.

No Bob when you think about about the the loss of doctors you know when you when you lose reps you lose doctors you mentioned in your bringing new folks into replace the reps you've lost I mean, how long does it take to get these relationships back going again.

I know you've kind of guided to.

The back half numbers, but is there any risk that it takes longer for these.

For these reps to get productive.

It's hard to give a specific specific time I think that.

What I was talking about in my remarks and answer some other question was that that these.

Competitors.

I talked about in this basket of competitors.

Tends to.

Go after design surgeons and offer them design work.

On a consulting agreement.

So that they can.

Then they would bring their business with them now.

In some cases, there are actual projects and some some some cases there are not.

That's just a fact.

So once once that happens.

Is that you really that surgeon has generally gone.

And you have to then replaced them with you with your Salesforce to get to get to get to get more to more to get more surgeons.

The when we.

When we lost.

I don't think we're in the same position that the reps that we're losing are taking all their business with them. They are taking a signal.

They are taking some particularly this core business that is pretty undifferentiated, but.

These competitors do not have total ankle they do not have Chicago.

They don't have car T.

And a whole range of products and were able to maintain relationships for those products, even though the core business.

Is gone too with a rep. So it's hard to say how long that takes but we got it back.

When we lost all those reps distributor reps and 2017.

In 2018, we had a pretty pretty successful rebound. So it's hard it's hard to say.

Right right and I guess, there's been so much time, but just.

I guess the struggle is that we did go through this before right. You mentioned it took you a couple of years post tornadic at the lower sales force finally in place. It was just about a year ago right and then one year later things have sort of slipped again.

How do we get comfortable that doesn't happen again, right that that and I think you're you're probably going to highlight the products and things you.

You are going to bring to market, but just seems like this is a lot more economically driven in some ways and so how do you.

Make sure this doesn't continue to happen to you guys.

The dynamics are different and I'm, saying the result was different but there certainly is an.

Dynamics are different in that previously is that.

We had a significant part of that core business interest in.

28 distributors and we.

Decided rightly or wrongly.

Two.

To bring that business into the direct salesforce, because we had two sales reps in the same area and a lot of cases, and we Didnt think that was productive. So we let the distributor reps go and what they did is they they they kept a lot of those relationships allow those doctors that what's happening today is.

It is.

Different in that the.

The.

Are the sales reps that we have have been somewhat susceptible.

To these companies that.

Are not offering.

The full range of products or the full range of medical education through offering high commissions.

And that's attractive to a certain number of reps and it doesn't take a lot to make a big difference as I described before.

Nine or 10 of these that $1 million apiece makes a big difference.

Okay Thats helpful. Thank you.

Thank you.

And our next question comes from Richard Newitter with SVB, leaving.

Thanks, just two quick ones here.

The first is just.

How confident are you that product differentiation in this more commoditized portion of the market is ultimately going to watch it got to help you win the fight going forward and that there is not something more structural that we'll be talking about in a few quarters, where it's just customer wants price prior to that over product differentiation, then I have one more thanks.

Yes, I think that's always going to be a part of the market thats very price sensitive and.

Or whatever however.

Product differentiation that leads to better.

Outcomes.

That.

Physicians are pretty motivated by that and as our as our and they're pretty motivated by having their patients have the best outcomes possible.

No I haven't I've been to medical devices 20 years or so.

And I would always say that.

Give me the product differentiation any day.

I think that I can work with that I could grow that.

When I'm in a in the commodity markets.

You always susceptible to the two poaching you're always susceptible to a two.

All kinds of.

Dynamics that have anything to do with the quality of products. The how it affects the physicians as well as patients and Thats, primarily what we believe it and so I think that there are certain part of the market that it will make a difference, but I think that it will make enough of a market that we should be able to get market growth rates.

At or above market rates for sure if we have product differentiation.

Okay.

And actually two more one hazard does your view of the lower extremity end market growth change at all from roughly high single digits and then just a follow up to the defense strategy that you're playing with respect to compensation rejiggering to ensure no more poaching hopefully.

Are you what's your what's your level of confidence that that you're not going to lose any more of your your heavy hitters. I mean, how have you locked some of your key reps and four year long or more contracts. Thanks.

Yes, I think the.

The.

End markets are haven't changed in our opinion, 7%, maybe 8% and that area is a is the data that.

Is available and I think that hasn't changed.

There are there what it is is there are more people in it should dividing up that that that market.

And again more of these.

Small non public.

Physician owned companies that that are being pretty pretty aggressive.

With it.

What was the second question rich.

Just just.

The nature of the.

The compensation a region.

Forward.

We're we're we're being as aggressive as possible I think that we've.

Yes.

And Dan.

We have outside people helping us.

Do you have to help us design this.

I can't say that everyone is protected and everyone is is not subject to two fantastic offer that they may get but I think in general we are seeing a slowdown in that and hopefully.

That we will.

Well I think we will be.

A successful.

With both the compensation the career opportunities to support you put the whole package together I think that we should be successful.

And and our turnover rate.

In general.

Even in the second quarter was abnormally high it was high but it was not abnormally high what was different about the second quarter is that it was very intense in a very short period of time.

Thanks.

Thank you operator, yes. The next question your mill, we have time for one quick or maybe two quick questions. So I'm, sorry, we're not going to be able to get to everybody in the queue Tonight.

The called run over an extra half an hour or so so we'll take another couple of quick questions. So.

I apologize for that but I don't want to have the call RIN.

Way over so we'll take two more questions and then will that will be it.

Thank you ma'am and our next question is from Craig the Zoo with Cantor Fitzgerald.

Thanks for squeezing me in I'll be quick so on.

I guess just want to ask on car T. The long term growth.

Lance appreciate the comments.

Breaking out the cadence for the second half.

So.

I guess, if if we use a seven and a half million that you mentioned in Q4.

Can we expect acceleration from that point, maybe some sequential acceleration or how should we think about continued growth in 2020, and then even 2021.

Yeah, correct, I think we're ready to get into.

That we're really talking about 2020 at all right now beyond our kind of long term stated objective of double digit organic growth and certainly not ready to give specifics around cortiva.

You know I think the main thing is we have a.

Lot of confidence in the product long term and it's really just a question of how long does it take us to dig out of the hole created with these these distributor territories. So we try to give you I mean, just his explicit guidance as possible for the second half of this year and then let's get a little further along and then we'll be ready to talk more about 2020.

Okay. Thanks, and one quick one on total ankle I know you guys said growth was 5% and that was likely an anomaly, but just wanted to see if there was any competitive pressure or anything else you saw from the total ankle market specifically in the quarter. Thanks no.

No we havent.

Competitors are pretty much the same.

We are maintaining.

Very high market share and probably 70% or so.

So no there's no competitive issues in total ankle anymore.

Thanks for taking the questions guys.

Thank you and our last question is from Matt Taylor with you yes.

Hi, Thanks for taking the questions I was wondering if you could give us.

Some insight into your projections for.

Net additions to your lower extremity sales force for the year. After you put some of these actions in place.

Going forward can you talk about your goals there in 19 and 20.

You're talking about numbers of people.

The nice planters yes.

Well.

I think that we're going to be hiring is as many qualified people as we can.

And so I think.

Okay, I'm not going to give a specific number because.

If we have we find more people want to come on Board. Then we think we need we're probably going to go after them.

In the short term, we typically have turnover so if we over higher.

That's going to be fine because eventually will need them.

Okay and then the second question is what do you think about your acquisition strategy. I mean, obviously you had a lot of distributors drop off here with currency.

For other deals going forward does that mean that you have to discount the distributor revenue more to change your approach I'll add to it that's an excellent question.

All right.

I would say that I would be very wary of Quiring any company no matter how much I liked the product that most of its revenues comes from a distributor salesforce.

It's very difficult and we found this.

Through.

Getting beat up a couple of times now that it's very difficult to translate those distributor revenue dollars into our company revenue dollars.

In that distributors are.

Yes. This is these are usually small product lines within a distributorship.

They may get attention for a while.

And particularly as a distributor thinks that they may or may not have it they get very paranoid and stop investing in it. So I would say that in terms of strategy on M&A.

I would think it would be very difficult to get me across the line.

With a product area that is mostly distributor revenue base.

Thanks, Doug.

Thank you and this concludes our DNA session for today I would like to turn to call back to Bob Palmisano for his final remarks.

Thank you operator, and thank you all for joining US today it was a very lively discussion.

I look forward to speaking you again next quarter on our earnings call.

We appreciate your interest and your continued support this concludes our call.

And with that ladies and gentlemen, we thank you for participating in today's program.

You may now disconnect.