Q3 2019 Earnings Call
Good morning, ladies and gentlemen, and welcome to the RFP, Oh, I Surgical Holdings Conference call I guess time, all participants are in listen only mode. Later, we'll conduct a question and answer session and instructions will follow with that time, having no liked it turned to Colibri, Tim it's small.
He porch. Please go ahead.
Good morning, Thank you for joining the call to discuss Archie our third quarter 2019 result.
The call today are coming from our house, or President and Chief Executive Officer, and Jonathan singer, our Chief financial and administrative officer.
No will provide a brief strategic update and because before John will then discuss for third quarter financial results.
Actual results may vary from any statements concerning our expectations about future events that are made during this call. We make no guarantees as to the accuracy of these statements. Accordingly, we urge you to consider all information about the company and not to place undue reliance on these forward looking statements.
During the call. We will also present certain financial information on a non-GAAP basis.
Management believes that non-GAAP financial measures taken in conjunction with U.S. GAAP financial measures provide useful information for both management and investors.
Reconciliations between U.S. GAAP and non-GAAP results are presented in tables accompanying our earnings release, which can be found any investor relations section of our website.
Thanks, Marty and good morning, everyone.
For the third quarter, we delivered revenue of approximately $76.1 million adjusted EBITDA of $7.1 million or 9.3% revenue.
Starting with our global spine business.
We had a tough quarter in Osborne franchise.
Can we take full responsibility for the results.
That said, we continue to believe we have the right strategy of investing in differentiation and skill to drive long term topline growth and.
And we have high confidence in the portfolio of products, we have assembled and continue to expand upon the supports that strategy.
We want you to know that we are laser focused on the progression of our novel therapies commercial operating model and the acceleration of our worldwide product plan and establish therapies.
This reinforces the importance of skill as a key component for our growth strategy and also for our ability to maintain relevance for customers facing vendor consolidation decisions in the future.
We are working on executing our product plans.
Rapidly develop new products through our R&D efforts and bring them to market given the importance of refreshing our established therapies portfolio.
Among the early new product launches stemming from all reinvigorated R&D efforts.
The end of September we fully launched the serve aligned Sep system in the U.S.
Also in September we initiated the limited market release of the height of hybrid performance system Hps through the auto in Australia and Europe .
In addition, we submitted the five 10-K application to the FDA for the former link a interbody fusion device that's refused Threed technology.
Why do we have made significant progress in building. This channel we continue to be in line with the six month delay we previously shared.
We have solidified the sales structure for novel therapies, and anticipate completing hiring and training for all open seats by the end of the year.
We remain highly confident we have the right novel products to drive growth.
This confidence stems from the clinical and real world evidence supporting the safety and effectiveness of go flat for the right patients in a large fusion based market.
Similarly, we remain confident and cemeteries future given the effectiveness of this therapy and the significant market opportunity amongst sacroiliac joint patients.
Cemetery supports the fundamental principles of Arthur diesel and driving fusion in orthopedic procedures.
The latest interim clinical outcomes on 848 patients at 12 month follow up in the evolution study for cemetery revealed that 73% of patients showed evidence of fusion that 12 months.
These interim data for symmetry continues to be very promising for us taken together there is significant opportunity for the growth both go flux and symmetry as we increased adoption of these novel therapies.
To help develop momentum within the spine franchise and accelerate the progression of these goals, we ask Mark Vizquel Yossi, the former CEO of paradigm spine and Fran Magee Dv, the former Chief Technology officer at paradigm spine to play larger roles within our spine business.
Both Mark and Fran I've been serving us consultants to RTL since we closed the acquisition in March.
And Mark test steps it has stepped in to run our spine franchise on the interim basis and Fran well that's been instrumental in repositioning grow flex as an alternative to fusion for the appropriate patients will now shift this focus to help us accelerate our R&D product introduction by advancing our worldwide product.
Planned for spine.
Dr. Mcgee is one of the pioneers in motion preservation spine technologies, and a 30 year veteran of orthopedic and spine device development, including 10 years as Chief Technology Officer for spine solutions absent the spot.
Mark and Fran have deep knowledge of the spine space and their leadership is already making an impact among our commercial in R&D teams.
Turning to the rest of the business.
The OEM franchise delivered another strong quarter fueled by our continued emphasis on customer intimacy operational excellence and focused innovation.
Our OEM team is two years into their strategic transformation and we're seeing the benefit in the enhanced predictable execution and contribution to our growth.
The OEM business has progressed significantly and today serves a diverse set of end markets with attractive growth profile. It is supported by a deep product pipeline and has earned this solid market position, serving leading medical technology companies under long term.
Hi margin contracts.
The business is further distinguished by our unique technical expertise.
Label product development and track record of operational excellence.
An effort to continue the transformation, we are consolidating the OEM and support businesses into a single operating segment segment.
These themes currently run with highly similar operating mechanisms and rely on many of the same team members and will operate more effectively and efficiently as a single segment.
Ultimately this ship helps reduce complexity and enables our next phase of operational excellence working as a cohesive team to further accelerate growth.
The OEM business continues to be extremely predictable and generates cash. It is an example of the positive impact of our transformation efforts to reduce complexity drive operational excellence and accelerate growth.
And just as the OEM team has benefited from consistent leadership and driving customer intimacy and commercial execution. We believe our spine business isn't the early stages over a longer term transformation that will benefit from strengthened leadership.
Last month in the novel therapies channel and the multiple product launches that we have planned for 2020, and what that I will hand over to John to outline our financial performance.
Thank you Camille.
Gross profit for the third quarter, 2019 was 41.5 million or 54.5% of revenue, a 10.2% increase compared to 37.7 million or 54.5% of revenues in third quarter 2018.
Gross profit for the third quarter of 2019 included $2.1 million charge for the purchase accounting step up of co flex inventory gross profit adjusted for the impact of nonrecurring charges was 57.3% of revenue from the third quarter of 2019, the nearly 300 base.
At this point improvement in margin from last year is evidence of continued progress of our efforts to drive operational excellence in the accretive margin impact from the addition of co flux.
Marketing general and administrative expenses were 37.1 million for the third quarter 2020, 2019, an increase of 7.4 million or 25.1% compared to 29.7 million for the third quarter 2018.
Investments in our pipeline.
During the third quarter 2019, we incurred 3.2 million of nonrecurring acquisition integration costs to support the acquisition of paradigm Ana and continue execution on our strategy to reduce complexity and accelerate growth.
Adjusted earnings before interest taxes, depreciation and amortization for the third quarter, 2019 was 7.1 million or 9.3% of revenue compared with 9.1 million or 13.1% of revenue fifth third quarter 2018.
The decline of adjusted EBITDA is driven by the investments in sales and marketing outlined earlier.
Net loss applicable to common shares was 4.9 million or six cents per fully diluted common share in third quarter 2019, compared to net income Apple to common shares of 2.9 million or four cents per diluted common share in the third quarter of 2018.
Based upon the third quarter performance in our current business outlook, we have adjusted our financial guidance for 2019, we now expect full year revenues in the range of 305 million to 310 million a reduction from the previous range of 325 to 335 and we expect.
Full year adjusted EBITDA could be in the range of 30 to 34 million compared with the previous range of 36 million to 40.
Operator, I'd like to open the line for questions.
Thank you, Sir ladies and gentlemen, if you have a question at this time. Please press Star then the number one key on your Touchtone Tavis, Alan again pardon the number one on your telephone keypad and if your question is been answered or you wish to move your cellphone Keith. Please proceed.
Yes.
Your first question comes from the line of not you read from Craig Hallum capital.
Hi, guys. This is Lucas spare now ski on for Matt Hewitt Craig Hallum.
Just a few questions today I.
Sounded like you lost the key customer, which is one of the things that kind of weighed on revenue, but we believe there was also maybe some weather related disruption, particularly in the southeast.
I guess, what's that's the case send any commentary you can provide on maybe how much of a headwind that was.
Yes Lucas.
We do believe that there was some weather related impact.
Look at it from an operational perspective, it impacted us in two different ways.
Yes.
Hi.
The Texas area.
Their worst delay of surgeries.
Yes.
Difficult to put four quantification around that but we estimate the somewhere in the vicinity of a million dollars is impacted by those factors.
Thank you that's a that's very helpful.
Then I guess turning to your your comments around OEM into sports getting consolidated into a single segment. I guess is that an initiative that's more about trying to find the some cost savings or is it more about trying to accelerate growth in those.
Slides.
Look I think it's a continuation of the strategy around the reduction of complexity predominantly I think theres a lot of synergy.
As we indicated in the script in the operating mechanisms.
There is not what I would call.
Material cost reduction implication of it it's more around what I would call management management efficiency from a decision making process and then just consistency from a strategic perspective, because if you look at the sports franchise, it's predominantly drive driven off of the tissue based.
Portion of the business and about 60% of the revenue in OEM is tissue based as well and so there's just very good synergy and Olivier his indirectly be managing both anyhow and so I think this just put.
More formalized consistent management approach from a strategic and operational perspective.
Coal flex I'm, just kind of any updates you can provide on reimbursement progress. There you know any small wins, you've had or just qualitative commentary on how the.
Conversations with payers are going.
Yes look what I, what I would say is the.
The number one thing that we have we have been focusing on in the conversations with payers is taking the data back to what the PM is which is an alternative to fusion.
The focus is helping in engaging and these conversations and we continue to make progress though.
You know process the reality of the situation is the real world evidence is what people believe when you have the patient that is returning to relatively normal activity with a goal flux and we're counting and weeks four to six weeks and then you've got to be counting.
On fusion in like six months that these are part of the conversations we're having and it's really the majority of that is driven by where do we position of the product.
Versus the concern of the insurance companies, whether we are.
The compression done ends up having to go flexing more cases that we need to have so the focus is on the label and be appropriate patients and the what we're calling the decisions zone now.
We continue with the story about are we seeing progress and where we are I will tell you as I mentioned in my script.
In basically identifying the right patient for these procedures in what I will tell you a since we started that pilot in in late May through where we are today in October . These two areas, we have seen growth of about 33% in the cases.
On coal flex. So this is what gives us continued confidence that the when we have all the right people in place and we have them trained and their effective.
Model will continue to grow.
And just as a summary kind of going back to where we are in covered lives were closed.
We're north of 50 million and maybe closer to 60 million covered lives right. Now. So we don't believe that that is the biggest hurdle.
We're facing and it's more about the effectiveness of the channel and the work, we're doing and flooding that up as Weve discussed over the last call.
Okay. Thank you very much that's all I had do Lucas.
Your next question comes from the line of Dave Turkaly from JMP Securities. Your line is open.
Hi, good morning.
Congrats on the brand Mark on for a more extended role.
What are the things you need to do or how long it may take to sort of get that back to growth. So I don't know if it's more technologies you need to add or do you think you have more personnel you need to swap out or any color on what you think it could turn that around and the timing.
Sure. So if you go back to where we started we have been very transparent the pipeline was relatively dry as the new management team kind of came on board in in 17, we develop it pipeline an award wide product plans and we started focusing the energy you have seen.
The quality of the work of our R&D organization, what of whether it is well for drilling and be awards that they have one sort of a line.
So we're right now focusing on continued execution and accelerating that momentum.
We as we have said in late 19 will start getting the products out there, we're seeing sort of align the extension of quarterly and we're applying for navigated instruments.
Capability.
When you have seen the hps do though come out of the German team and so with friend back in with that team as well and then Fran now also played an instrumental role in accelerating our activity.
The product introductions in what people can expect with us.
Discontinuation of products or through consolidation of vendors and that it's hard to kind of make up for that because you can't look for their R&D that much.
So John I don't know if theres anything else I think in addition, we've got a complete refresh of the biologics portfolio in process.
With a pretty exciting.
Pipeline there.
And we should start to see some other projects or our longer term, but we should start see.
The implications of that as well from a standpoint of new product cadence.
So I think we would be disappointed next year, if we didn't experienced double digit launches if not more.
And that's what we're going through the planning process right now to confirm the commitments across the organization and then what are the implications in the revenue cadence.
Got it and then the Oems sports combo.
I get that there's tissue involved in both but I would think that the sales channel on the.
Customer base that there wouldn't be a lot to overlap I guess.
Any color on sort of.
I guess.
What will happen in terms of those two combining and personnel wise.
Yes.
They do have.
Slightly different sales models, obviously, the OEM businesses.
Executive who is managing a large.
Yes, and market user provider.
Were in the sports in the Prs channels were more direct.
But one of the things that we've been doing in.
Yes on sports chide, but more on the Prs side is moving towards.
Master distributor relationship.
And so that's more like managing.
And OEM relationship because we've really simplified.
Did that channel, we don't have direct reps anymore in either the channel. So it's all through either distributor 10 99 relationships.
So there is a nuance there but.
Jimmy whose historically Ron.
The sales infrastructure on the sales on the on the.
Sports side.
Is now just taking on a larger role across.
But most of the resources underneath him that is supported this for its business.
We will continue to be in place.
So.
From a commercial perspective, you're you're correct, but then once you get into.
Sales and operating planning.
The.
We are getting into nuance of the operation, but yes.
Comedy donors do we need in order to support supply what are the cost reduction initiatives prioritized against sterilization technologies lot more of the backend activity, there's a tremendous amount as well as leverage of R&D across end use markets for customer basis.
Let me, let me just trying to try to see if I can provide the framework in how we think about it the on the R&D team. You know there is doing tissue is doing tissue for both equally to them it customers a customer whether it is an art.
Fourth or it is an OEM customer and same thing on the operation side. So when you kind of think as John was telling you.
The R&D on this on the quality systems on the operation system standing these up in a redundant way with almost similar operating mechanisms and the same people on the backend didn't make as much sense, and so kind of gaining more internal productivity and combining both and then be ability to simple.
Five and work better with our opioid goes on the number of donors, we need as well as the next phase of the operational excellence beyond 2019, what we need to do.
From an efficiency perspective, you get that synergy and then.
You treat the customers us customers.
In the way would go to market with simplified.
The extent possible that sports channel and so it just we're serving a different customer base from that side of the management continues as is today.
Thank you for that.
Your next question comes from the line of Craig Fisher from Cantor Fitzgerald. Your line is open.
Good morning, guys. Thanks for taking the questions.
What we want to start with the updated updated guidance.
So if you look at the numbers in Q3.
It looks like in this screed side.
Three to 4 million for the quarter, John you said that it was about a million.
Due to weather.
But then the guidance comes down.
20 to 25 million.
Maybe if you guys could just reconcile Kenya.
What what assumptions are going into the revised guidance.
Maybe where you can.
Pulling some of that revenue out obviously legacy spine, but it looks like paradigm might come in a little bit lower than we were expecting as well. So maybe just a little color on that would be helpful.
Yes, let's start with.
Yes.
The Street Miss is three to 4 million, but the miss off of our internal projections is larger than that so you've got a foundation that we thought we'd be caught me you're the first half the year, we had tremendous momentum really across the board.
With exception of novel therapies, and that underpinned our expectations going into Q3.
And so.
The continuation of growth really across the board because growth built on growth and so just the math the progression got us to the guidance, but when you when we missed the corridor.
By somewhere between four to 6 million and you're not only you didn't we achieved the third quarter, but we're not growing and in some instances, we're going backwards. So you get a bit of a multiplier effect.
And then we did have a couple OEM customers. They just moved.
Move demand, it's not it's not an implication from a standpoint in the long term relationship. It's just a matter.
Delivery.
Between Q4 in Q1.
That also had a relatively large impact on the swing between expectations for the full year.
So when you add it all up we were kind of limping into the low end of the guidance range. When we went into.
The quarter.
The back half, we felt that based upon the momentum of the base business and a belief that we would see some acceleration in novel therapies that we had a shot at the full year guidance.
But then.
That that pro ration went backwards.
And it's just it's resulted in where we are I don't know that gives you enough detail, but thats kind of that's it at at a macro level I can go.
Hi can go franchise by franchise product by product, but at a macro perspective, that's what's going on.
And that's helpful.
I guess maybe.
Not to get into every single franchise, but paradigm.
I think a pad provided detail on what you expected sales were for the or what you expected in 2019. So maybe just thoughts on revised numbers. There how we should we should think about that.
Okay.
Yes so.
Bear with me the.
The full year expectations for paradigm kind of we went into the year.
With an expectation of somewhere in the vicinity.
Yes.
40 to 45 million.
And having now we're expecting full year to be probably somewhere closer to $30 million.
On a consolidated basis, yes, there is theres some revenue that's going through the international franchise as well.
Okay. No. That's helpful. Thank you for that.
Just another follow up on guidance you have some range that you have some 5 million dollar range.
Q4.
So it's it's relatively large range, but.
I guess I just wanted to understand the assumptions or looking get you can put you at either end of that range how to think about that.
Yeah.
So there's a number of factors that play into it look we were are.
Our forecast accuracy in the third quarter was obviously horrible.
And so there's a there's a level of.
Conservatism that goes into the range in a typical quarter I'd go in with our own 98, 99% forecast accuracy and.
Given.
Where we were not a good word but surprised by the performance of certain aspects of the portfolio. There is just the level of conservatism that goes into the range Greg.
And then.
And then the organization has also.
Step back in how they are forecasting.
And so there's there's conservatism from John the CFO and what I'm presenting to you and there's conservatism from the team that giving me the roll up which is now rolling into the range I think the key things that will impact.
Where we are.
You are very much the same things we've been talking about all year.
But.
Progression of co flux progression of symmetry.
We into there's a.
We are beginning is camille indicated in certain areas to see.
Yes solid performance as we've implemented commercial operating model, we're continuing to roll that out in other areas, we're continuing to hire and train sales folks so as they get up to speed and begin to contribute.
I would say.
Stabilization in impact of new launches.
Established therapies.
Is.
It is built into the guidance range.
We do and have had.
Products back order.
And.
And so we stabilize the supply side.
From a donor and donor quality perspective that will impact the range.
And then Theres always a certain element.
Delivery window.
With the OEM customers.
That.
Yes.
Come into play at the end of the quarter.
So those are the factors that go into that I don't know thats helpful. Ana.
Yes. Thank you.
Walking through that just last one from me would you guys.
You're willing to quantify the impact of the customer loss.
It did you know, it's probably somewhere in the vicinity.
Half million dollars in the quarter.
Okay.
Thanks for taking the questions guys.
Okay. Thank you.
Im showing no further questions at this time I would now like to turn the conference back can you.
Thank you and thank you for your ongoing interest in our T.I. surgical holdings.
Our OEM franchise continues to demonstrate predictability and strength.
Our global spine business, we are committed to accelerating growth as we continue to invest and differentiation and scale. We see early evidence of progress on the implementation of our commercial operating model to drive adoption of our novel therapies, and we are dedicating resources and focus to rapidly develop and introduce.
New products for established therapies, we are confident our efforts will result in a return to growth in this business in 20 Twond we.
We are focused on the execution of our plans.
Look forward to updating you on our ongoing progress.
Thank you very much and have a good day.
Ladies and gentlemen. This concludes today's conference. Thank you for participation have a wonderful day in the August .