Q3 2019 Earnings Call
Sorry, all participants' lines are in listen only mode. After the speakers presentation. There will be a question and answer session twice in Washington, <unk> session, you'll need to press star one under telephone. Please be advised that today's conference is being recorded if you have require any further systems. Please press star zero I'll now hand, the Congress every speaker today, the strong belief with the roof.
Thank you. Please go ahead.
Thanks, operator, and thanks, everyone for participating in today's call. Joining me from the company are marked Rudolph Chief Executive Officer, and Fred height, Chief Financial Officer.
Before we begin I'd like to caution listeners that comments made by management. During this conference call will include forward looking statements within the meaning of federal securities laws, including the Safe Harbor provisions of the private Security Securities Litigation Reform Act of 1995. These forward looking statements involve material risks uncertainties and the companies.
Actual results may differ materially for discussion of risk factors I encourage you to review the company's most recent annual report on Form 10-K , which was filed with the Securities and Exchange Commission on March seven 2019 during the call today management will also discuss certain non-GAAP financial measures, which are used a supplemental measures of performance.
The company believes these measures provide useful information for investors in evaluating its operations period over period for each non-GAAP financial measure referenced on this called the company has exceeded a reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures in its earnings release. Please note that.
non-GAAP financial measures have limitations as analytical tools and should not [laughter] isolation before as a substitute for pediatrics financial results here importance with gap. In addition, the content of this conference call contains time sensitive information that is accurate only as a 50 life broadcast November eight 2000.
And that team, except as required by law. The company undertakes no obligation to revise or update any statements reflect events or circumstances that takes place. After the date of this call with that said I'd like to turn the call of Tomorrow.
Good morning, everyone and thank you for joining us today on our third quarter 2019 earnings Conference call.
Oh I'm pleased to review with you our strategic progress and our accelerated growth.
I'll start with an overview of our performance for the quarter and then review our key growth initiatives, which include investments new products acquisitions, and the integration of Orthofix International growth culture and clinical education.
I'll, then turn the call Herbert Fred for a detailed financial review and update to our full year 2019 guidance. We'll then open the call up to questions.
The third quarter was another period of systematic execution the produced the largest revenue quarter in the company's history.
<unk> point $7 million in sales and more than 31% growth year over year.
We drove growth across all product lines with frontline deformity, growing 31% scoliosis, 29% and sports medicine other 90%.
Domestic growth was 35% an international growth was 16%.
We're pleased with the impact of recent new product introductions together with the increased utilization a recent set deployments.
In addition to our strong trauma and deformity performance. We're pleased by the impact of new product sales supporting our scoliosis business with continued adoption of our small stature scoliosis system and band block duo introduced in December 2018 in February 2019 respect.
Like.
We also saw three of the five high volume Scoliosis Surgeons, who are out her practice in the second quarter returning to limited practice in the third quarter.
Well the surgeons will not immediately returned at the same level of volume overnight. We're pleased to see their impact on third quarter revenues and we anticipate that they will ramp up surgical volume at their new institutions.
[laughter] contributing to our overall performance was our first full quarter with worth X, which was approved in multiple new accounts and validated our conviction that this innovative external fixation technology will thrive in the hands of our focused pediatric sales force.
We look forward to the continued benefits from more attacks. In addition to new product launches in trauma and deformity and scoliosis.
And we believe that our sales force, which grew by 21% to 158 consultants during the quarter continues to grow at a pace that supports our sales trajectory.
Finally, we're pleased that we continue to improve operating metrics, including gross margin increasing to 77% and a positive adjusted EBITDA of zero point $7 million, while staying on track to deploy $15 million to $17 million of consignment sets in full year.
2019.
We're confident that our progress to date will drive another year of strong growth.
And to this confidence leads us to update full year revenue growth guidance to 24% to 25%.
Let me know described the progress executing our integrated growth initiatives, starting beset deployments.
We remain dedicated to increasing children's access to our surgical systems across the globe through our initiative to maximize instrument in implant set deployments.
We continue to enjoy pent up demand for ourselves.
Year to date, we have deployed an impressive $13.7 million upsets, an increase of 29% compared to $10.6 million for the same period last year.
This included $1.7 million deployed in the third quarter, which keeps us on pace to achieve our target had $15 million to $17 million and consign sets for the full year 2019.
We see steady contributions to revenue as the sets become fully utilized over a 12 to 18 months ramp up period, and we'll continue to monitor the return on investment of each set to drive optimal utilization.
Our set deployments continue to be split between legacy products and new systems.
Which brings me to our second initiative new products.
We try to strike a balance between developing new technologies and continually improving legacy products.
We started shipping our two new Cannulated screw system domestically in September after receiving ft, a 510 clearance in July .
These two systems provide significantly expanded range of screw sizes and substantial enhancements to instrumentation, particularly for screw removal.
The systems were designed in consultation with pediatric orthopedic surgeons. So cases in Fraser range, specifically to follow procedural flow with color coding to speed the selection of appropriate instruments that match screw diameters, thus increasing efficiency and reducing operating rooms.
Time.
Surgeon feedback has been very positive so far with these two new systems and we'll continue to deploy more sets throughout the fourth quarter and into 2020.
We also received 510 cents in August for PD foot, the first pediatric specific foot and ankle solution, which we expect to launch later this month.
This is our first system to offer variable angle locking screws, which we licensed from Qsrs check medical in April .
And is designed to address common pediatric foot deformities, such as Cape Us foot flat foot club foot and Halex analogous among other small bone indications.
Similar to our Cannulated screw systems PD foot was developed with input from a small team of eminent pediatric surgeons with a heightened focus on ergonomic instrumentation that enhances surgeon control.
With the imminent launch of PD fraud, we will offer 32 surgical systems seven more systems than the 25 in the third quarter 2018.
We continue to grow our product offering at a pace that any possible new entrant would find daunting.
And we look forward to the continued development of additional systems throughout 2020.
We are progressing our osteogenesis in perfected nail as well as our slipped capital femoral Episys neuromuscular scoliosis and spinal tethering development programs.
We recently licensed a novel technology to treat patients with early onset scoliosis, which we are embodying in a second generation system that is an alternative to growing ron's.
We're also continuing working with the European design firm on growing implants for scoliosis and interim made you Larry nailing. So we can offer surgeons significant improvements to the current first generation technology.
We'd like to thank our development teams and our supporting positions for their impressive progress developing surgical systems that enhance pediatric outcomes.
Additionally, we are proud of our ability to attract innovative technologies for license or acquisition that expand our market opportunities.
And this brings us to our third growth initiative acquisitions.
We could not be more pleased with how well the violets Orthofix acquisition is going in the first full quarter we've owned it.
We have seen significant interest by many of our surgeons in evaluating the Orthofix system and several of these evaluations have led to recent approvals at large institutions that by likes had been trying to penetrate for the past two years.
Multiple product evaluations have recently begun at other hospitals, and we look forward to converting more surgeons in the near term.
As a reminder, these are high value complex surgeries similar to those in our scoliosis business. There also well established supplier relationships so conversions take time.
We recently supplemented our orthofix team by hiring to highly experienced sales managers with extensive competency in external fixation.
Although half of our selling organization has been trained on Orthofix. These two sales specialists will accelerate adoption of the system by helping penetrate new accounts and attending initial surgeries to ensure a good outcome.
We're also adopting the same sales management approach that has driven our scoliosis business to growth rates of 30% in higher by systematically monitoring a comprehensive list of targets surgeons, each with an assessment of their potential and the stage of conversion.
We're also very optimistic about the international opportunity for architects and have seen an extraordinary degree of enthusiasm by our distributors who have access to this product.
We've also made substantive progress divesting the adult aspect of biologics and we are extremely confident that we will have completed this divestiture by year end.
This will allow us to remain committed to our exclusive focus on the pediatric market.
I'll also recouping, a meaningful portion of our investment.
Additionally, we continue to review a number of other interesting acquisitions, all offering innovative technologies that can complement orthopedic metrics product offering.
Turning to international growth, we continue to sell in 43 countries outside the United States through seven sales agencies and 38 stocking distributors.
During the quarter, we transferred a trusted executive from our Warsaw headquarters.
For the European to run our business in Europe and support our presence there.
Earlier this year, we establish the orthopedic Patrick's European headquarters.
And we anticipate having a warehouse operation by year end.
We remain excited about the growth in countries, where our sales agencies sell directly to end customers and we're working to finalize the conversion of another European stocking distributor in the next few months.
To maintain our leading position in international markets, we together with all medical technology companies have had to step up to major regulatory challenges with substantial increases in our quality and regulatory affairs staff.
This will ensure that we remain compliant with the step function increase in the rigor of regulations in CE market countries.
While these investments have been substantial we believe that they will generate significant future competitive advantage as other companies abandon products in countries requiring the CE Mark.
I'd also like to point out that our company's dynamic culture and reputation in the orthopedic industry have allowed us to attract significant numbers of high quality applicants for every quality and regulatory position, we have had to fill.
And this supports our belief that as one of the best places to work in Indiana, We are increasingly viewed as the orthopedic industries employer of choice.
This brings me to corporate culture, which is our foundational initiative and lies at the core of our ongoing success.
Our non hierarchical culture continues to promote a high degree of engagement and commitment from all our associates visitors to our Warsaw headquarters since this immediately.
We're organized around business teams that run our trauma deformity, and scoliosis businesses directing product development marketing sales and the support from corporate functions, such as operations quality and regulatory affairs.
Business teams focus all our associates on the customer maximize engagement and makes us agile.
Our culture is also reflected in the recent dramatic expansion of our open concept office space, which was completed during the third quarter. The physical expansion of our Warsaw headquarters is tangible evidence of our growth.
This expansion also included doubling the size of our warehouse and constructing dedicated training and education facilities, which will support our continued commitment to sales training and clinical education.
Our clinical education growth initiative continues to differentiate us from other companies, which offer a few if any pediatric programs participation in medical meetings is an important part of our clinical education effort. In July we were a gold sponsor of the international meeting on advanced spine tick.
Mix in September we were a gold sponsor Scoliosis Research Society annual meeting. This was followed by our platinum sponsorship of the annual meeting of the American Academy of cerebral palsy, and developmental medicine, where we hosted a peak course on our locking cannulated blade plate and distal femoral loss to automate says.
Comes.
Rounding out the quarter, we attended the orthopedic trauma associations annual meeting.
In October the pediatric the orthopedic metrics Foundation for education and research supported the fourth annual orthopedic metrics pediatric orthopedic surgical techniques course.
This sold out program conducted in simulated operating rooms brought 15 eminent pediatric orthopedic surgeons together with 35 Fellows and young attending surgeons and is now a standard requirement in many fellowship programs.
The Foundation also funded the second to annual PD Ortho West course in October our residents review course at Shriners Hospital in Sacramento that attracts young surgeons throughout the Bay area.
Additionally, the foundation sponsored for the AIDS time, the residential review program at Akron Children's Hospital, which draws approximately 125 residence annually from the upper Midwest.
Our clinical education Medical Advisory Board composed of 10 eminent pediatric orthopedic clinical educators has challenged orthopedic citrix to train the next generation of pediatric orthopedic surgeons.
While state of the our products and technologies are one aspect of our success clinical education programs for young surgeons help us that advance the field of pediatric orthopedics.
As does our unique 1100 and members surgeon community on dock matter, a digital tool that enables experts surgeons to post cases or pose questions 24, seven and receive responses from fellow surgeons around the world.
During the past month, we have seen approximately 77% of our members engaged in using this tool.
Set deployments new product development.
Acquisitions International growth.
Culture and clinical education. These are the integrated growth initiatives that cumulatively are strengthening orthopedic patrick's competitive position and driving our growth.
Let me now turn the call over to Fred to review our financial results credit.
Thanks Mark.
As a reminder, that third quarter 2019 results include our first full quarter with the impact of worth X.
The impact of the biologics is included in discontinued operations.
Total revenue in the third quarter 2019 was a record setting $20.7 million up 31% when compared to $15.8 million for the same period in 2018.
In the third quarter of 2019 us revenue increased 35% to $16.8 million when compared to $12.4 million in the same period last year, representing 81% of total revenue.
International revenue in the third quarter of 2019 was $4.0 million, a 16% increase compared to $3.4 million in the same period last year, representing 19% of total revenue.
Our third quarter revenue breakdown by product product category was as follows.
Trauma and deformity revenue in the third quarter 2019 was $13.8 million, a 31% increase when compared to $10.6 million in the same period last year.
We're pleased with the continued improvements from the first quarter 2019, when we experienced a temporary slowdown in the elective deformity surgeries with strong performance during the significant summer selling season combined with our first full quarter with fourth decks external fixation system.
Scoliosis revenue in the third quarter, 2019 was $6.5 million, a 29% increase compared to $5.0 million in the same period last year, which continues to reflect new surgeon conversions and new product adoption as.
As Mark mentioned, we also saw light revenue contributions during the quarter from three of the five key domestic surgeons that were temporarily out of practice in the second quarter due to changing locations or on sabbatical.
Similar to trauma and deformity performance, we experienced strong scoliosis sales during the significant summer selling season, which provides us confidence to achieve our updated total year growth guidance.
Lastly, sports medicine other revenue in the third quarter 2019 was zero point $4 million, representing a 90% increase compared to zero point $2 million in the same period last year and while much smaller in size compared to our two other business segments continued adoption.
Nice growth.
Moving down the income statement gross profit in the third quarter 2019 was $15.9 million, a 33% increase compared to $12.0 million in the same period last year.
Gross margin in the third quarter, 2019 was 77% compared to 76% in same period last year.
Sales and marketing expenses in the third quarter of 2019 increased 23% to $8.8 million when compared to $7.2 million in the same period last year in general and administrative expenses in the third quarter 2019 were $7.3 million, an increase of 49% when compared to.
$4.9 million in the third quarter 2018.
The increase in expenses was driven by higher quality and regulatory efforts along with increased depreciation from our significant increase in deployed set.
Research and development expense were $1.4 million in third quarter of 2019, which was a 24% increase compared to $1.1 million in the second quarter 2018.
Total operating expenses in the third quarter of 2019 were $17.4 million compared to $13.1 million for the same period last year driven by the previously mentioned items as well as the inclusion of or Thats operating expenses.
Operating loss in the third quarter, 2019 was $1.5 million compared to a loss of $1.2 million in the third quarter 2018, driven by higher sales and gross margin offset by higher quality and regulatory efforts depreciation as well as stock based compensation.
Adjusted EBITDA for the third quarter of 2019 increase to zero point $7 million compared to a negative zero point $1 million for the third quarter 2018.
The change was primarily driven by the increase in revenue and associated gross margin.
Please note that there has been an adjustment to our previously reconcile reconciliation of 2018 adjusted EBITDA and then we no longer adjust or public company costs as well as unusual professional service and legal fees.
Interest expense in the third quarter of 2019 was $1.3 million compared to zero point $6 million in the same period last year. The increase in interest expense was related to our increase in debt related to the biologics and north ex acquisition.
Net loss from continued operations in the third quarter of 2019 was $2.9 million compared to a loss of $1.9 million in the same period last year.
Total net loss, including a small net gain from discontinued operations was $2.7 million worried loss per share attributable common stockholders of 18 cents per basic and diluted share compared to $1.9 million or loss of 15 cents per basic and diluted share in the same period last year.
Turning to our balance sheet as of September Thirtyth 2019, our cash balance was $19.7 million compared to $21.9 million as of June Thirtyth 2019.
Purchases of property and equipment during the third quarter 2019 were $2.0 million compared to $1.1 million. During the same period last year, including implants $1.7 million of consigned sets were deployed during the quarter compared to $2.3 million during the third quarter of 2018.
We have now deployed $13.7 million of sets for the nine months ended September Thirtyth 2019, compared to $10.6 million in the same period of 2018.
They 29% increase and keeps us on track to achieve our total year 2019 set deployment plan, a $15 million to $17 million.
As of September Thirtyth, 2019, total net debt was $51.2 million, including the $30 million term loan associated with the biologics fourth ex acquisition.
As Mark mentioned, we've advanced the process of finding a buyer for the Violet adult product line and expect a significant reduction in our outstanding debt position by year end.
In terms of guidance, we updated the low end of our annual revenue rose.
For 2019 from 23% to 25% up to 24% to 25%.
Additionally, we remain on track with our annual investment in deployed consigned set in the range between 15 and $17 million in 2018.
Let me now turn the call back over to Mark for some closing remarks.
Thanks Fred.
To summarize we are excited that we can report a quarterly revenue growth rate exceeding 30%.
We're pleased that this acceleration in growth was produced by consistent performance across all three of our product lines.
We're proud of our ability to execute systematically across multiple growth initiatives.
We are convinced that this success continues to be driven by our exclusive focus on pediatric orthopedics.
We are delighted by our initial success with or sex and its likely contribution to future growth.
We are confident that the divestiture of Alex's adult assets will be completed by year end.
We're gratified that our investments in clinical education are enhancing our brand equity in the mines have experienced and newly trained surgeons alike.
We are proud of our positive contribution to society by making a difference in the lives of children around the globe.
So on behalf of my colleagues I'd like to thank all our associates for their passion, they're commitment and their hard work that made the third quarter such a success.
And with that I'd now like to open the call up for questions.
Operator.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q and a roster.
Our first question comes from Matthew O'brien with Piper Jaffray. Your line is no.
Thanks, Good morning, Thanks for taking my questions.
Just for starters on on the Q4 guidance I understand you know roughly 25% year sales are generally generated in Q4, but this would be the biggest sequential step down from an absolute revenue perspective that we've seen this what's your implied at the midpoint is about down 2.6 and.
Most we've seen is 1.2 over the last couple of years. So can you just help us understand.
Where that big step down comes from is it just a level of conservatism or is there something else that we should be mindful of.
No you're right, Matt the fourth quarter is always our softest quarter, it's our lowest quarter. When you look across the four quarters. The summer months are always strong with June and July we do have an uptick in December when there's a small break for the kids.
But we do have lower sales in the fourth quarter compared to the third quarter. There's nothing I would say going on we continued to be conservative as we always have been in our forecasting and I think that just continues here throughout the rest of 2019.
Okay Fair enough and then I'd love to follow up question, just here a little bit more about what that.
I know, it's early days, but a lot of interest in that.
Product line.
So as you're going to some of the accounts. We already have relationships can you just talk about what that that conversations been like and then how much.
How much interest level, you're seeing so far as we think about that product rolling into 2020. Thank you.
Well, Matt as we said, we're very very pleased that the relationships we have with a number of leading surgeons who are also big frame users is a making it.
Reasonably straightforward to gain in evaluation and then we've been very pleased that these evaluations have been going well.
We would have expected frankly, there to be is somewhat slower process of gaining evaluations given the stickiness of supply relationships with the several major suppliers historically of external fixation systems and I think it just validates this expectation we had that with the nature of a pediatric focus selling Oregon as.
Station, we would have any easier task of gaining these evaluations. So I think thats, what we see so far there had been some very gratifying conversions already and this is the sort of thing where you don't need many conversions to goose the sales growth rate of this thing.
And at least in the first quarter, we owned it I think we saw a significant acceleration of sales in July and August the.
The second no Im sorry August and September in August and September the second two months of the quarter. We saw this very gratifying increase in sales. So we'll see what the fourth quarter brings but so far this thing has a easily.
Patients.
Great and here. Thank you.
Thank you. Our next question comes from Ryan Zimmerman with BTG. Your line is now open.
Good morning, and congrats on the on the corner.
I want to ask how your gross margins.
We're very impressive this quarter and I don't think you called out international stocking distributor conversions, so maybe help us understand.
What drove the gross margin performance this quarter and what we should be thinking about for the cadence of international stocking distributor conversions and sat Fi 20, and then I've a follow up thank you.
Great. Thanks, Ryan so the gross margins really driven by the mix of our revenue.
As you saw 81% little higher domestic percentage of our total revenue again summer selling season is helping drive that we also had the addition of the Orthofix product, which is primarily sold on the domestic front with some international included but they have very similar gross margin story.
Our products in that 80% to 85% range and so as the domestic growth outpaced the international growth here in the third quarter that helped drive our gross margins. If you look at the trend of our gross margin percentages across the quarters. This year, it's very similar to last year.
Sure. It's obviously just a little better given the strong growth on the domestic side of the business.
With regard to the international stocking conversions, we continue to to work on a major one in in Western Europe .
Now that we would hope would be done by year end. It is astonishing how complex. These are in terms of various legal and regulatory requirements, but nonetheless that is progressing well. We will then shift our attention to a even more significant conversion that will require perhaps several years to fully.
The be played out but this will be quite transformative with regard to our European business.
That's very helpful guys and then.
Onset deployment.
On pace to do 15 to 17 million as you said.
Just directionally I'm not looking for guidance roughly 20, but maybe just comment on where you see set deployment going and next year.
Consistent with what you're doing this year expect to accelerate or just any color. There I think would be directionally helpful. Thank you.
Yes, we're very pleased with the set deployment that we've done this year and what will finish out strong. This year I think couple of things drive that number one is demand for the legacy system. So fulfilling the demand we have on legacy systems and then also the pace.
That we deliver new product introductions, and the pace of which we roll out those new sets. So we're in the final stages I think of our strategic planning that will roll into the budgeting process, which will determine what is that demand and the appetite for deploying sets next year, but it's really.
Measuring the demand and how much of that we're going to fulfill along with how aggressive we get on new product development. So I would say that we're not going to provide a number but it's going to continue at a very healthy pace to support the growth of the business.
Understood. Thanks for taking the questions guys. Congrats again.
Thanks Ryan.
Thank you. Our next question comes from Rick Weiss with Stifel. Your line is no.
Hi, Good morning, Mark Good morning, Fred.
Let me start with.
Question on on the extra day that quote you lost.
In the second quarter that with.
A little bit of a headwind you had indicated we've come back the second half.
Fred how do we think about that impact.
In the quarter, you, just reported and and or the.
The fourth quarter.
Yeah, we did in fact pick up that extra day here in the third quarter. So that drove a small portion of that 31% growth that we saw so we are back even and the fourth quarter will have the same number of days that we had last year so be it even comparable.
Can you quantify that impact this quarter me now, it's obviously modest I mean, it seemed like a few hundred thousand dollars, maybe if revenue.
That's right it's pretty modest.
Okay.
The second.
And again back to international briefly I guess.
Two part question one.
International growth seemed a lot slower this quarter than when I look at that more typical mid twentys ish kind of growth we've seen.
Maybe help us understand what's happening this quarter and what that might mean or not mean going forward and and and maybe mark you could highlight I mean, clearly you're you're I feel like you're a little more focused on growth opportunities internationally, whether its conversion whether its.
Stepping up on the leadership front investing in infrastructure, maybe help us think about.
What you're trying to achieve and where we see that impact of some of these investments in changes.
In 2020 or not what's going to longer is this about sustaining that mid twentys kind of growth or could it accelerate again any color be welcome.
Well with regard to the international growth I think we have to admit that international sales are inherently lumpy. They are very much function. For example, set sales that we don't totally control and in certain quarters, we get a lot of them and others. We don't we were very satisfied.
By the replenishment volume.
Growth that occurred in the third quarter and in many ways that is the truest indication of strategic strength in markets, because that's indicative of surgeries.
We also saw some structural things that happened in the quarter completely unrelated to primary demand such as a very large stocking order that didnt quite makes a quarterly cut off and will enjoy that in the fourth quarter.
And to be Frank we Didnt need international growth in the quarter to achieve this sort of performance.
With regard to what we're trying to achieve internationally, particularly in Europe I think we feel that we are all in that we're now in the right countries. So country expansion is not the issue. It is a drive for penetration of market share growth in these areas and so the conversion of stocking distributors.
To sale agencies is one element in that secondly is the investment in people in Europe . The individual that we moved to Europe to take over our business ran our tramon deformity business worldwide for a period of time and in fact had actually been president of a distress.
Peter in Europe before we hired him. So he is a very experienced guy and we were we will now be building out around him focused infrastructure on clinical training and education on regulatory affairs and sales managers, who will focus on specific country markets.
And then I think a third element of this is the huge investment we've been making in quality and regulatory a lot of which is directed at compliance to the EU MDR and this other initiative of unifying regulatory standards in seven of the major markets, including the United States.
And we're doing that in the background other companies, who are actually coming to us wanting us to buy their pediatric lines, because they're going to abandon them.
So I would think that overtime, we would see a further acceleration of our international growth, particularly in Europe , as we do more than to be blonde skimming the market, which is what we have done historically.
Gotcha and just one last one for me if I if I could.
Mark you highlighted.
That to your reviewing other interesting acquisitions, which is always exciting to here and.
Makes sense.
Tremendous sensed it looks to me as you continue to flesh out the build out your.
Very special portfolio.
But I'd be curious to hear your thoughts on a couple of points related to that.
How do we think about size type.
You know music.
Complementary and adjacent to everything you have.
And.
In thinking about your balance sheet in round numbers 20 million in cash 60 million debt.
It did.
Are you in a sense restricted do you feel like restrained from doing anything until you sell bile acts and can we assume that if let's just say vinylux cuts debt in half.
Plus minus I don't know what you're expecting that then your then you feel you have sufficient.
Financial flexibility to go out and do you want to do.
Lot of questions in there.
I'd be curious to hear your thoughts.
Let as usual, let me try to answer the conceptual on this and leave the hard lender Fred with regard to adequacy as capital.
We are right now evaluating both some small acquisitions it in no way would tap power capacity financially.
As well as some very significant acquisitions. These are all directly in our wheel house with the exception of one that is of a longer term nature that might move the company into an adjacency of non surgical products that are used by our customers directly.
But at any rate I think the key point is these will be most definitely complimentary acquisitions. Some of those for example that we're looking at our in this whole field of early onset scoliosis or non fusion technologies that are reversible that we see the market moving too so that people.
Let a younger and younger age can be treated before there.
Spinal deformities progress with surgeries that are not permanent fusion of the back and we see that as the future of a pediatric scoliosis treatment and so there's some very interesting things out there to look at that will further increase the innovation than our company can bring to the market.
And I'll leave it to Fred to answer how the Hell, we're going to pay for all that.
Absolutely.
I think as Mark mentioned, we continue to look at a lot of opportunities many of them range in size from very small nice tuck ins to two larger opportunities and obviously the smaller stuff, we can execute ourselves on our own as we look at larger things. The first step as you mentioned would be too.
To get rid of some of the debt that we have on our books through selling the adult product lines of by Lax.
But beyond that we have a great strategic partner.
On our board and supportive of the company's squadron.
Who helps us if we need to move in it in a quick fashion to support the business through short term debt I think longer term if there's anything of size. It would obviously require a funding through the equity side of the balance sheet and I think that could happen either before or after.
Action to make sure we have funds available to pay for acquisitions.
To pay for the operations of the business going forward and to fund any potential future acquisitions that we would be looking at as well. So I think its combination of all three things reducing the debt we have on our books now.
Helping getting help from squadron and then eventually over time, some equity capital raise as well to shore up the balance sheet.
And just to amplify on what Fred said in answer your question about violets. The timing is such that the violets acquisition will have taken place before we make any further purchases.
Okay, great. Thanks, and thanks for another great quarter.
Hey, Thanks, Barry Mikes Rick.
Thank you. Our next question comes from Dave Turkaly with JMP Securities. Your line is no.
Great. Thanks, good morning.
So EBITDA positive in the quarter and I think we're looking for breakeven on the piano sometime next year I was wondering if maybe you could comment on that as.
Our goal in 2020 or 2021.
Yes, I mean, it's a balancing act as we've talked about Dave.
It's a balancing act between controlling spending and driving growth opportunities that we see ahead of us and so I think we'll can we will continue to try to balance that equation best we can.
But bringing in the Orthofix acquisition as additional cost obviously it was a nice addition to the PNM will actually helping some of the profitability.
But those type of opportunities as they are in front of US we'll continue to take advantage of that the quality regulatory I think is a new world that were in its not something that is temporary or that's just a quick project that we're working on this is the new world that we live in and its new world all of our compare.
Deters live in as well and I think those costs are going to continue on but we see that as a strategic advantage by supporting the qualification of CE Mark on all of these products on when any with many other people are banding. These marketplaces, we see it is true compare.
Of advantage, which will continue to help drive our growth.
So I think we are again balancing the opportunities we see to support the business and to drive the growth than advancements of this space with trying to get to profitability. We can be profitable very quickly as you can imagine if thats, what we wanted to do but we're going to continue to support the overall growth of the.
Business that we see tremendous opportunities and.
As we see fit.
Got it and then I don't know if you want to talk about the contribution specifically from from Vibex, but I think there was also or thanks, and then maybe four or something to that order of magnitude.
Foot and ankle type products that came as well and I believe you said you might so with the petty foot.
I just wondered if you could comment on either side of that or is that any contribution.
Okay.
Early but any thoughts there.
Well certainly orthofix is the biggie. These additional products that came along with it our are minor. They are line extensions that can be sold with some of our other products and.
They are interesting in terms of Flushing out flushing out of a product line more fully but from a financial standpoint would be very very marginal orthofix was the reason we did this deal and that is what we're looking at growing robustly, yes, I would just additionally comment that those other product lines that we.
We look to add to the PD foot.
Slide 10-K is a process that is going to take time, it's going to require five 10-K.
Adjustments and we have not even started on that process to be honest with you. So what use what's included right. Now is just continuing selling the orthofix and the ex fix product lines.
In the future in 2020 will be then taking a few of those other foot and ankle products, let's say, a staple and rebranding that under the ortho pediatric name and bringing that to the market place under our product lines, but that is not something that contributed here in the third quarter that'll be something that will help.
Bus in the future.
Got it I guess, one last one quickly if I could that I think Zimmer got approval of a tether product and I would just like to get your thoughts on sort of them as a competitor and how you maybe your system that you're developing kind of compares with that or are they pretty similar I would imagine they aren't but any thoughts there. Thank you.
They are based on the same principle, we would like to see our as different.
I think that one needs to a recognizes zimmer has been selling the only product that has been used in tethering off label for a number of years is the protocol diagnosis and it was developed for the adult lumber fixation market I think Zimmer found itself in a very difficult regulatory Kwan.
Agree because the FDA ahead, though we are told alerted it that it would not tolerate this product to continue be sold in these quantities without there being some kind of regulatory approval and that is why we think zimmer saw the humanitarian device exemption, we do not see this as some harbinger of a new.
Competitor in the pediatric orthopedic space.
Quite the contrary.
So we actually view this though is very encouraging because it is the first time FDA has approved a device for spinal tethering, there will be others, not only for spinal tethering, but for a non fusion scoliosis treatment and that is have enormous interest to us and I think we've said all.
Also day, but our goal is to develop a portfolio of these products that are not fusion related and that can be used with younger patients and that are reversible and so in that general sense. We're very encouraged by FDA approval of Dennis.
Thank you for that.
Thank you. Our next question comes from Margaret Assort with William Blair. Your line is now open.
Hi, Good morning. This is an on from market.
I first wanted to focus on Tama insofar many again and if you could just walk us through some of the the primary drivers of growth this quarter.
Whether it was the contribution of ours by.
We're just continuing strong demand of legacy products new products.
We expect those same divers to continue in the next several quarters and then on top of that the PD Thad launch in the coming month.
And then just curious if you plan on launching orthopedics internationally to and in the near future.
Well you know the story on trauma deformity is a very boring one Anna because when we look at the growth rate of every product family and the trauma and deformity area. They were.
Positive.
And with one exception I think they were all in the 20% range. It is extraordinary how these products. All these product families and trauma deformity grew more or less consistently and contributed to this performance.
With regard to the PD foot launch, but we have been awaiting the few instruments that require us to finish out the sets to build out the sense. Those are all here and that product should be launched literally within a week or so so we're very optimistic about the impact.
That PD foot would have to this integrated portfolio of solutions for deformity and trauma correction.
And there has been considerable interest internationally in orthopedics and so we would anticipate that.
Again, it's a function of getting enough sets, but we will be aggressively putting that in the hands of distributors that will be representing it.
And there has been considerable enthusiasm already from our international distributors in terms of taking that product on promoting it.
As Mark mentioned, there is tremendous demand for that product, which were excited to see we're we're selling it today in Brazil, and Colombia view limited countries, but I think the big opportunity for that will be the continued expansion in those areas, but as well getting CE mark for that product.
That product today has never had the CE mark on it and so we are.
Focused resources working to obtain the CE Mark we don't think Thats a quick process given all the other activities going on in that space, but eventually when we do get the CE Mark on that product, we anticipate high demand for that product across all CE marked countries and we're very excited about moving forward.
With that we did also just in the month of September early October receive approval in Australia for the product for the first time and so we've not yet sold it into Australia, but we'll be doing that here starting in the fourth quarter and beyond so another very nice opportunity for us going forward.
Okay. That's really helpful. Thank you and then my second one quickly is on the scoliosis side, John Scoliosis revenues in the quarter again, you said that you saw three of the five certain.
Hi volumes start to return to practice going forward I view sort of now included in guidance and even though you're assuming that the other to come back and then if I recall correctly last.
Last quarter, you saw a number of conversion or surgeon conversions is this something you're also continuing to see.
As to the guidance I'm certain that Fred has taken into account to the three people who have returned to practice.
They've all moved it takes time for each of the three to increase their volume, but we're seeing that occurring.
The I think the other two are both on military deployment and I'm not sure when they're coming back, but they were significant users and they will I think though the the headline here was scoliosis is that all of these conversions that continued to take place simply increase the gene pool, and so were not as dependent on bye.
Hi, Dave High volume surgeons, as we might have been and with each passing quarter. The number of people using our scoliosis product grows the scale of the business grows and that dependency on individual surgeons decreases. So that's my conclusion with regard to this it's great to see the three returning to practice, but.
Im not sure. This is even a factor that you specifically comprehend spread in the guidance that you put together, but you might want to comment on that you're absolutely right. I know the one I think is on sabbaticals not coming back in the fourth quarter and it's not at level of detail that we would get into and in the specific forecasting we feel good about the scoliosis business in the fourth quarter.
Regardless of those two surgeons. The three that have now started will be ramping up which is going to help us obviously, but the other two will benefit US later in 2020 Red has actually been very modest in not to crowing about his prediction that the small stature system would have a dramatic impact it has and so that.
As I think another great headline here that the that's a small stature system complementing our normal system.
As has been very helpful in account conversions.
That's helpful. Thank you.
Thanks, Dan.
Thank you. Our next question comes from Mike Matson Needham and company. Your line is now open.
Thanks.
So I apologize if youve gone through that but I didn't hear it. So I just want to try to get an understanding of with a true underlying growth was in the quarter. So I think you had an extra selling days and then obviously, it's a contribution from the acquisition. So can you quantify those two things in terms of dollars or percent.
The growth in the quarter.
Yeah as.
Rick was saying earlier in the second quarter of 2019, we had one less selling day and so that we did called that out on our call, which had a small impact I mean, we're talking a couple hundred thousand dollars and we did pick that back up in in the third quarter, which helped US again, a few hundred thousand.
Dollars its rounding.
And so that helped us a little bit.
That keeps us even now year to date and in the fourth quarter will be comparable year over year with the same number of days.
The overall growth of the business as you saw in all three segments was up dramatically the or thanks to the extent did that had an impact on it all came in the TV business.
Which grew nicely at 31%, but we're very pleased with the underlying growth in that business that returned to the.
20% growth, which is where we had saw we saw that business growing previously except for the first quarter when we had.
It's unusual slowdown in the deformity correction business.
Okay. So I mean, I guess, if we're estimating that deal data at 750000.
Deal I'm, sorry, not deals.
At a reasonable assumption.
Yeah, we're not going to breakout specifically what it is the overall business the growth is steady with or without the bill with or Thats or Thats just gives a little adder.
Okay, but but I mean, it sounds like you think that the underlying growth per even stripping out these one offs in the quarter.
Absolutely.
The cumulative thanks, Mike.
All of these trauma deformity products, particularly won a significant as an external fixation device in making us more.
More attractive for total hospital conversions more relevant more competitive in total hospital conversions and not having an external fixation device was a big gap in the product line. Another thats close we would expect to see that together with our current trauma deformity line.
Our legacy line, there will be an uplift in sales and hopefully it will help increase the growth rate of trauma deformity, who knows maybe even into the range of the scoliosis business, which has been so robust over the last years.
Yes, Okay. So there is sort of a halo effect with that that product line we acquired.
That's an excellent description thats, an excellent different a halo effect indeed.
Alright, and then just one final question on the Salesforce expansion. So it seems like it's been kind of tracking with your revenue growth, which I guess makes sense is that is that kind of where you expected to continue going next few years.
Yes, Theres no question that we would view the selling organization is needing to grow more or less in pace with sales, but as as I'm sure you'll be aware.
Every territory has its own dynamics and the key here is we think a new selling organization sales management organization, where weve added the number of managing directors, who are our employees in the field working with our distributors on strategically how does.
Each of them scale their business, so as to keep up not only with a bigger company, but also more and more products.
And so that is a story that will have no 34 different chapters each one for the 34 territories, we have nationally but in aggregate.
The answer should be that the selling organization ought to grow with sales.
Okay got it thank you.
Thanks, Mike.
Thank you ladies and gentlemen, this concludes our question and answer session I would now like to turn the call back over to Mark total for any closing remarks.
Well I'd like just just thank you all today for joining us and for your interest in our company as we improved the lives of kids around the world, while also enhancing shareholder value.
So have a good day everybody.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.