Q3 2019 Earnings Call

Welcome to the STAAR surgical third quarter 2019 financial results Conference call.

During today's presentation, all parties will be no listen only mode.

Following the presentation called be open for questions.

If you have a question. Please press the star followed by the one under Touchtone phone.

If you're using speaker equipment today. Please just the handset before make your selection.

This call is being recorded today Wednesday October Thirtyth 2019.

At this time I want to turn the conference over to Mr., Brian more senior director Investor Media Relations in corporate development for STAAR surgical.

Thank you Michelle.

Good afternoon, everyone.

Thank you for doing it's almost STAAR surgical conference call. This afternoon to review the Companys financial results.

The third quarter of 2019 ended September 27 2019.

On the call today are carrying Mason, President and Chief Executive Officer, and Upper Andrews, Chief Financial Officer.

The press release of our third quarter results was issued just after four PM Eastern time. It is now available on Staars website at Www dot.

Star Dot com.

Before we began let me quickly remind you that during the course of this conference call. The company will make forward looking statements.

We caution you that are used statement that is not a statement at historical fact is a forward looking statement.

This includes remarks about the company's projections expectations plans beliefs and prospects.

These statements are based on judgment and analysis as of the data This conference call.

Subject to numerous important risk and uncertainties that could cause actual results could differ materially from those described in the forward looking statements.

The risks and uncertainties associated with the forward looking statements made in this conference call and webcast are described in the Safe Harbor statement in today's press release.

As well as stars public periodic filings with the FCC.

Except as required by law STAAR assumes no obligation to update these forward looking statements.

<unk> reflect future events or actual outcomes and does not intend to do so.

In addition to supplement the GAAP numbers, we have provided non-GAAP adjusted net income.

Adjusted earnings per share and sales in constant currency.

We believe that these non-GAAP numbers provide meaningful supplemental information.

And are hopeful of assessing our historical and future performance.

Table reconciling item a GAAP information to the non-GAAP information is included in todays press release.

Following our prepared remarks, we will open the line into questions.

I'm publishing analyst.

We ask analysts limit themselves to two initial questions.

Then re queue with any follow ups.

We thank everyone in advance for their cooperation with this process.

And without to turn the call over to carrying Mason, President and CEO of Star.

Thank you Brian good afternoon, everyone.

The third quarter 2019 results, we reported today represent record sales for a third quarter.

All time record for cash generation.

And our ongoing progress at affecting paradigm change within refractive vision correction.

Global I see L. unit growth of 35% and the third quarter represented the ninth consecutive quarter of double digit I feel unit growth.

As our lens is continued to take share the refractories market.

Growing at rates significantly above the industry.

Importantly, we achieved strong unit and revenue growth.

While maintaining our commitment to GAAP earnings profitability.

This is quite an accomplishment in the context of small cap medical technology companies.

Where we believe star is one of just two public companies with expected year over year revenue growth of at least 20% unexpected positive GAAP net income for fiscal 2019.

This is based upon the publicly available consensus estimates of 24 publicly traded medical technology companies with market caps below $5 billion.

Based on strong results in the third quarter and the first two quarters of the year. We are today reaffirming the financial targets for the full year 2019, we initially outlined for you back in January .

These targets include 30% I feel unit growth, 20% company revenue growth.

Higher year over year, GAAP net income positive cash flow at a higher year over year level of cash on our balance sheet.

Turning now to the details for the third quarter.

Topline growth was driven by 35% I see organic growth on a global basis as I just mentioned.

On a regional basis I see L. unit growth in the third quarter successfully hurdle record year ago levels in several markets with Japan units up 57%.

China units up 48%, South Korea units up 38%, France units up 20%.

Spain units up 14%.

Okay units up, 13% and Germany units up 11% as compared to the prior year period.

Commercial activities during the quarter designed to support the final weeks at the high implant season in China included mobile and social media marketing for consumers.

Implants in China during the high implant season were in excess of 50% growth over prior year.

A record for China surgeon partners home, we congratulate for this key milestone achievement.

As these programs concluded in September we initiated new marketing programs in Europe that will soon include a very exciting and new Influencer campaign in Spain.

We're also advertising in the U.S. in September we began Billboard and you tube advertising to extend and amplify I see L. digital banner M. clinic marketing in the Midwest.

Surgeon engagement during the third quarter included two very significant events.

In August we held our inaugural U.S. surgeons console meeting in Dallas, Texas.

We hosted leading of filmic surgeons optometrist and up dynamic business leaders from across the U.S. for a day of shared learning that included podium and panel presentations, including safety and effectiveness data.

Refractive practice business modeling lens based only practice continue and consumer awareness programs.

In September .

We hosted our annual experts meeting for International Surgeons ahead of the European Society of Cataract and refractive surgeon Congress in Paris via that was our biggest and best today with almost 300 surgeons and clinicians that are experts meeting.

Turning to our regulatory activities.

In Europe , our evil eat off plans for Presbyopia remains under review by deck from our notified body.

We continue to anticipate this product will be on the market in the second quarter of 2020 in CE Mark countries opening a new and large market opportunity for star that expands the target age range for our evoke family of lenses.

In the U.S., we received a letter from F.D.A. dated October 25th 2019, approving or supplement seeking approval for the clinical trial for our evil family of licenses in the U.S.

The letter included a few additional study design recommendations, which we are working to include in this study protocol, we are responding to F.D.A. within a week or so we continue to qualify study sites and expect our timelines will not be impacted as we work to close out the study design, including.

<unk> latest recommendations, we very much look forward to moving expeditious expeditiously three next steps and enrolling patients.

Before I turn the call over to Deborah for more detailed review of our financial performance I would like to highlight a few near term opportunities, where we look forward to meeting with the investment community in the coming weeks.

Next week on Friday November Eightth, we will be hosting our invitation only 2019 institutional investor and analyst day in New York City, where we look forward to outlining our strategic vision for the 2020 to 2022 three year planning period.

On November 13th we will be meeting with investors that the Stephens annual investment conference in Nashville, Tennessee.

We also look forward is seeing some of you at our Lake Forest corporate headquarters during the fourth quarter now I'll turn it over to Deborah. Thank you Karen Good afternoon, everyone I'll start the financial overview with a summary of top line results and then provide more detail down the income statement.

Star reported net sales of 39.1 million in the third quarter 2019, an increase of 23% over 31.8 million reported in the year ago period.

Foreign currency headwinds, primarily the euro abated during the third quarter, our revenue and growth rate reported in the first nine months of 2019 was negatively impacted by approximately approximately one point threemillion and 140 basis points respectively.

Strong topline growth was driven by I see a revenue growth of 28%, which represented 87% of total company net sales in the quarter.

Moving down the income statement, our gross profit margin from third quarter was 74.4% compared to 75.1% the prior year quarter.

Gross margin in third quarter was temporarily reduced due to period expenses incurred in the construction of new manufacturing facilities intended to satisfy growing demand for products.

As a reminder, gross margin of our I see all product lines remains in the 80% to 85% range and we continue to anticipate gross margin expansion as we move forward.

Total operating expenses for the third quarter were 25.7 million, an increase of 15% compared to the prior year quarter of 22.3 million and improved compared to the 17% increase in operating expenses during the first half of fiscal 2019.

Taking a closer look at the components of operating expenses DNA expense in the third quarter was 7.1 million as compared to 6.1 million a year ago. The increase in G., an expense was due to increased headcount and salary related expenses, including stock based compensation and increased facility costs.

And professional fees.

Marketing and selling expenses were 12.5 million as compared to 10.6 million and include continued investments in digital strategic and consumer marketing.

Our R&D expenses were 6.2 million compared to 5.6 million in a year ago quarter. The increase in R&D expenses was primarily due to an increase in expenses related to clinical trial activities.

We generated operating income of approximately 3.3 million during the quarter as compared to operating income of 1.6 million in the year ago quarter for both the third quarter and nine month period ended September 27, 2019, our operating margin was eight and <unk> percent compared to 5% and fee.

5.8% in the year ago periods, respectively.

Net income during the quarter was 2.4 million or approximately five cents per diluted share as compared to a year ago net income of 1.5 million or three cents per diluted share.

On a non-GAAP basis, adjusted net income for the third quarter was 5.5 million or 12 cents per diluted share as compared to adjusted net income for the year ago quarter, a 3.4 million or seven cents per diluted share.

A table reconciling the GAAP information to the non-GAAP information is included in today's financial release.

Turning now to our balance sheet, our cash cash equivalents unrestricted cash at September 27, 2019 totaled 112.3 million compared with 104 million as of December 28, 2018, the company generated a record 11.8 million in cash from.

He's in the third quarter 2019.

Finally, as we've received a number questions from investors regarding the quarterly calendarization of our fiscal year sales and to assist analysts with their models. Please note that we continue to expect a comparable calendarization of quarterly sales as a percentage of total annual sales in fiscal 2019.

I mean, as we experienced in fiscal 2018.

In fiscal 2018. This calendarization was 22% in Q1, 27% in Q2, 26% in Q3 and 25% in Q4. This quarterly Calenderization is consistent with a moderate seasonality in our business that has Q2 as the highest dollar quarter follow.

Closely by Q3, then Q4, we continue to anticipate Q1 will be our lowest revenue dollar quarter of the fiscal year. This concludes our prepared remarks, operator, we're now ready to take questions.

As a reminder to ask a question you would need to press star one under telephone.

Withdraw your question press the pound key please standby, while the compiled the cumin they roster.

Our first question comes from Jason Mills of Canaccord Genuity. Your line is open.

Hi, Good afternoon, Karen Thank you for taking the questions.

I wanted to start, but if I could with the United States. So I'm guessing you will go into more detail next week at your at your Investor Conference, but.

Could you give us a bit more detail with respect to be recommendations. The up do you had for you. It made me well for us at least preliminarily, what sort of timeframe as you might expect to enroll the number of a patients that the FDA is asking you to enroll.

The other components of the timeline being follow up of six months I'm, assuming that hasn't changed and let us know that has and then perhaps a.

Six to 12 month.

Review cycle is then.

So to be average for the ophthalmic devices group for awhile. So some of those pieces are somewhat similar for you, but enrollment piece I'd because what investors wanted to get their arms around it. So if you could comment on that that'd be a it'd be great. Thank you.

Sure. Thank you Jason.

So we did receive a letter on October 25th from the F.D.A. again, we got full approval to begin.

And we received a few comments regarding possible considerations.

We ought to look into so we are reviewing not now and we expect within a week or so to respond to the F.D.A. with what we believe that should be close to $5 not final agreement regarding this study we're very enthusiastic.

Rick about the activities that have been underway as we have more surgeons interested in participating in those clinical trial. Then we have slots available. So our opportunity here is to be very quick and Swift I can also tell you that.

If you were to imagine that in this trial and over the last several months and meeting with you as surgeons, we've talked a lot about the diopter ranges associated with this study and the availability of patients who may need the enrollment criteria.

And so I can't get into detail, but what I can tell you is that it's clear that the majority of these surgeons have relatively large practices for refractive surgery procedure. So we expect that there will be an offer and we hope and belief that will be a great except.

For those qualified patients who want to be part of this study for all the right reasons. So our expectation is that we will be able to enroll in what we most wouldn't consider a aggressive timeframe and that we will then follow through with all of the criteria that.

We have offered and all of the considerations that the F.D.A. has requested and then we would would be able to in swift timeframe be able to meet the six month.

Criteria, which has not changed and then the review cycle issue mention which is typical in our industry.

Okay. That's that's very helpful. Karen Thank you for that with with respect with respect to the.

The European business, you've got eat all coming and you did have the society in Germany.

Expanded the indications and we did here at the user reading in Paris, you see a user meeting quite a bit of discussion about using this product vivo lens and lower diopter.

Ranges.

Perhaps comment about the trends, you're seeing and lower diopter patient in Asia, the opportunity to expand growth in Europe vis-a-vis. This opportunity and then does the U.S. study included option for lower diopter patients some questions broad, but it's really specifically.

Focus on lower Diopter Rangers, Thank you and I'll get back in Q.

Thank you Jason as you know, we have been increasing market share substantially and a number of Asian countries and with that has been an adoption at the lower diopter range, that's been more aggressive than we could have even imagined.

And so we know that you now we have double digit market share in some cases going about 20%, we'll be talking about this at Investor day.

Where we started was low single digits for the most part a few years ago, and so we couldn't grow that fast and that aggressively without hitting into those lower dr. ranges and as I said in my prepared remarks, we were in a situation where the global refractive surgery market, including all.

Procedures refractive surgery is only going into 2.6% range, where we'd grow and at above 30, 536% units consistently throughout the year on average so we're taking share we're taking share at the lower diopter ranges in Asia.

And in Europe , we're doing the same and so in Germany and in Europe for the most part as you're probably aware.

July and August [laughter] everybody's I'm enjoying their free time, and then in September they get back to where we had an extraordinarily great September and we expect to close that they're very very well.

In Germany, Spain, UK et cetera, as in terms of growth.

There is a lot of excitement about eat off.

Coming to our markets in Europe , we have a lot of doctors again ready and poised to would like to be part of the structured strategic rollout that we are planning.

I'd say all in all when we look at the U.S. for Asia or Europe , we are looking it moving down the doctor range to expand the total market opportunity.

And I'd like to also add that at our Investor day, we're going to have a number of proof points either through video and or through surgeons, who are in the room, who are present, who will be talking about why lift.

Feature of refractive surgery is lens based that is really the theme of the next three years in terms of strategic direction for this business.

You have a number of strategic partners around the world who are already there and we have many lined up for excited for the future of having the majority of their business move into lens based we will have examples.

From surgeons in the United States, who are moving into 70% plus I see l. practices with no laser vision correction equipment presence in their new business model.

So it's a very exciting time carrots star.

Thank you Karen I'll get back.

You're welcome Jason.

Our next question comes from Chris Cooley of Stephens. Your line is open.

Good afternoon, and congratulations on the record quarter.

Thanks, Chris.

Since tracing took a lot of the fun ones I guess, all congratulate you on the record cash flow the generated in the quarter.

And maybe my first multipart question would be on the gross margin could you just maybe help us on pack.

What weighed on gross margin.

Order and you specifically cited some onetime startup expenses, but I also noticed you had higher.

I will.

I'd say traditional cataract sales and other surgical products in the quarter them.

We had contemplated to realize those are a little bit lower margin and both of those have been scaling. So could you maybe just talk about the puts and takes there.

The gross margin.

Quarter, then how that flow through to the operating line and then I'll have one follow up.

I'll answer that question for you Chris Yes.

You know most of the costs that we expect a associated with some manufacturing build out in need out and hearing like forest is capitalizable. There are some administrative expenses or a number of administrative expenses that we incur in the preparation.

Oh, the facilities that are not capitalizable and you're seeing those run through or well you don't feel exactly but it's coming through gross margin I currently.

And you're also correct. We did have a you know I think we I think we discussed earlier in the year.

But other product sales had been declining.

We expected the rate of decline on other product sales to slow down.

Towards the mid year, and then you know decrease throughout the second half potentially even resuming growth in some areas.

So obviously those are lower margin products and they do have a negative impact on our overall gross margins.

Great that's really helpful. I appreciate it.

And then maybe just lastly from me.

From a broader maybe strategic standpoint.

<unk> update us regarding when you think no doubt could actually be.

Backing up you know we scaled so basically what type of additional capex is required there what's realistic from a timing perspective and then.

How would you envision utilizing that facility going forward as you're trying to balance the startup in the United States, which I'm, assuming it's going to be fairly steep but.

But continued high double digit growth outside of United States as well thanks, so much.

Okay.

So our plans are to indeed dal.

Create a stated yard advanced engineering advanced manufacturing discipline capability that will cover all of the product requirements. Initially for China, then moving into some of Asian, some of Europe . So we're basically moving out our sales and marketing.

And other administrative offices to another building and making sure we convert the current building for all need now manufacturing and sell in terms of Capex.

So are you know our goal now and you know our ability to him can meet that looks good right now, but we do have a lot of work to do so we're not going to 100% guarantee it but that's our target.

Great. Thanks, so much unforeseen actually.

You bet. Thank you.

Our next question comes from Bruce Jackson Offend Smart company. Your line is open.

Hi, Thanks for taking my questions I'm going back to the gross margin and the of the cadence so.

We've got the the overhead absorption.

With feed off until you start shipping next year, so should we be thinking about the gross margins for Bob will be it continue at the slot for maybe a little bit lower in that pick up in the back half of next year.

No. We expect to continue expand our gross margins will be talking more about that owner at our Investor day presentation, but we do expect to continue we expect our gross margins year over year in 2019 to increase versus what they were last year.

And we expect the same going forward.

Okay, that's great and then in the fourth quarter with Tee up their operating expenses any any changes over third quarter.

Well in fourth quarter, our expectation is that we will pick up expenses associated with more of our clinical trial work, so fourth quarter and in comparison to Q3 will most likely be a little more aggressive.

And then as you asked in the in the beginning of your question regarding the breakdown of the quarters on the topline we expect like in 2018 that the contribution on the topline should be about 25% and the total.

Okay. So that kind of gives you a look at your business model right there.

Okay, and then last question for me.

With the different companies countries, there are different seasonality characteristics I believe that Korea.

Is generally kinda like a fourth quarter first quarter type of market do you have any early any early read on how business is going in Korea right now.

Well I Korea business is very good we were not obviously be we're not able to gives you exactly what we expect the growth rate to be but we do know that Korea, a year ago was very aggressive in their ordering as they were gearing up for some new large business.

Opportunities with strategic agreements. So our expectation is that Korea will continue to grow quite aggressively for the entire year, but quarterly.

You know I think it all depends on how they see late December early January requirements shaping up.

Okay. That's it for me congratulations on the quarter.

Thanks, Bruce Thank you very much.

As a reminder to ask a question. Please press Star then one.

Our next question comes from Brian Weinstein of William Blair. Your line is open.

Hi, Good afternoon, it's actually Andrew Brackman on for Brian maybe just going back to the first line of questioning on the Europe launch of the Presbyopia product next year do you just remind us about the commercial infrastructure that you have in that region right now and how you're planning on utilizing that upon the launch of that product and then maybe some specific investments that you have plan there. Thank you.

Okay.

So we do go direct in Spain, and Germany, and the UK in Europe , and most of the remaining major markets. Our distributor covered however, we will be implementing a hybrid business model next year in a number of those major markets, which will be very similar to what we're doing.

King for example, in China, and other countries, where we handle all the marketing is selling a the practice development the startups.

A lot of the management of outreach to patients consumer awareness et cetera.

And so we have detailed plans and infrastructure plans in place obviously for our direct countries. Today, we're building those up to meet what we believe will be significant demand and then we will be assisting and the other strategic markets with a STAAR surgical employ.

Always who will be managing the strategic rollout, we believe very effectively.

Okay. Thanks, that's all we got.

Thanks, Andrew.

Well I've a follow up question from Chris Quilty of Stephens. Your line is open.

Well. Thank you appreciate you taking the of the follow up.

I'll just trying to get one in front of next week in the past you've talked about the U.S. opportunity.

Current indications for use for the Vincent.

The clickable to about 10 ish plus person.

Good.

Could you tell us if we looked at.

The current I have few that we see it would obviously the lowered off at a range outside the United States in particular in Europe .

Just from a broad strokes what percent of the U.S. market do you think that you'd be able to address with that type of a label in the hypothetical. Thank so much.

Okay. So.

Yeah. This is gonna be it aggressive response, but you know our belief is that we should be able to answer at least 70% to 75% of refractive surgery requirements with the evil family of lenses in the United States and so our goal.

All of course is internally very aggressive in terms of what we would like to be able to do I can tell you that as I mentioned earlier certain of our surgeons a few who you will meet next week, our targeting 70% to 75% of their total volume for IC.

That's great. Thanks, So much you welcome Chris Thank you for the question.

There are no further questions. Please turn the call back over to Karen Mason for any closing remarks.

Thank you operator, thanks, everyone for your participation on our call today, we look forward and seeing many of you next week at our Investor and Analyst Day in New York. We appreciate your interest in investment in STAAR surgical and all the best to all of you. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

HM.