Q4 2019 Earnings Call

[music]. Thank you for.

Standing by welcome to the STAAR surgical Fourq Human 19 financial results conference call and webcast.

Tom All participants are to listen only mode.

The speakers presentation, there will be a question and answer session to ask a question. During this session you need to press star one or your telephone. Please be advised that todays conference is being recorded if you're acquiring further assistance. Please press star zero I'd now like to end the comps over to your speaker today, Brian more senior director Investor Media Relations and corporate.

Thank you. Please go ahead.

Thank you Jesse.

And good afternoon, everyone.

Thank you for joining us on the STAAR surgical conference call. This after being to review the Companys financial results.

Fourth quarter to fiscal year ended January 3rd 2020.

On the call today or care and made some president and CEO.

And Andrew as Chief Financial Officer.

The press release of our fourth quarter results was issued just after four PM Eastern time and is now available on Staars website at Www Dot Star Dot com.

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

We caution you that any statement that is not a statement of historical fact is a forward looking statements.

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

These statements are based on judgment and analysis as if the data this conference call and are subject to numerous important risks and uncertainties that could cause actual results to 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 Bart described but safe Harbor statement in today's press release as well as far as public periodic filings with the FCC.

Except as required by law STAAR assumes no obligation to update these forward looking statements to 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 and adjusted earnings per share and sales in constant currency.

We believe that these non-GAAP numbers provide meaningful supplemental information and are helpful assessing our historical and future performance.

Hey table reconciling the GAAP information to the non-GAAP information is included in todays press release.

Following our prepared remarks, well open the line to questions from publishing analysts, we ask analysts limit themselves to two initial questions.

Then ritchie with any follow ups, we thank everyone in advance for their cooperation with this process.

Now I'd like to turn the call over to care and Mason.

Excellent and CEO star.

Thank you, Brian and good afternoon, everyone. The fourth quarter results. We reported today are consistent with the preliminary results we issued on January 13.

And represent continued financial operational and market share momentum for store.

I feel sales I see l. units gross margin cash and earnings per share all grew significantly over prior year results.

Starchy, 33% I see L. unit growth in 2019 successfully hurdling breakout levels of growth in calendar year 2018.

Global I feel units grew 27% in the fourth quarter.

Q4 represented the 10th consecutive quarter of double digit I feel sales and unit growth as our alleges continued to take share of the refractive market.

Our even though I feel family of once this is growing at rates significantly above the low to mid single digits of many of our industry peers.

And we believe this demonstrates the growing reality, that's a future every cracked a vision correction will be land base.

The time for Star is now.

On a regional basis I see L. unit growth in the fourth quarter was driven by standout performance in several markets, including.

Japan units up 95%.

China units up 43%.

Germany units up 29%.

Same units up 20%.

India units up 16% and I feel units in the U.S. up 10% as compared to the prior year period.

Growth during the fourth quarter in fiscal 2019 was driven by increased adoption of our lens based solution to a visual freedom by new and existing surgeon customers, new marketing programs, and new and expanding strategic cooperation and alliance agreement.

One example of our success in marketing during fiscal 2019 with a fourfold increase the number of visits to our I see a website Doc finder.

We recorded more than 1 million visits to our dog later in 2019.

The potential leading indicator of future I feel patients the increasing visits to our dock finder illustrate that our marketing is resonating with potential patients as they seek to learn more on their ideal journey to achieve visual freedom.

We exited 2019 with a significant $120 million of cash on our balance sheet and no long term debt.

Let's turn now to the potential impact of the Corona virus.

First our thoughts are with all those who had been or maybe come impacted globally by the virus.

We extend or a heartfelt hope for Swift and safe resolution of this global health concern.

As you know at this time the predominant impact of the virus is in China.

We have been directly in touch with and working with our customers. These last few weeks.

Our customers are generally dedicated a filmic hospitals.

Universities Oncolytics.

And as such are usually physically separate from other types of hospitals or health care facility.

We understand they are hopeful to resume robust clinical activities, including implementation of the evil I feel family of lenses in March.

Stars try to employees had been working remotely since February threerd following the lunar new year, and we'll continue to do so until they're committed to return to in office work by the Chinese government.

Currently approximately half of our customers in China remained close with the other half reopened but only offering emergency services at this time.

The Star China team has been engaged in an extensive remote customer outreach program that includes online meetings and digital training courses.

Engagement has been high for example, during the week of February 10 Star, China had more than 2500 health care professionals participate in online training.

Attendees included roughly 500 up Salix surgeon as well as nurses examiners and I feel specialists.

Our online efforts have continued.

Many of our larger customers have themselves been actively engaged in online patient outreach programs that include patient marketing.

Your occasion and procedures scheduling.

The key takeaway is that our surgeon customers Anup downlink partners are engaged and ready to begin implanting as soon as they are committed to do so.

A few things to keep in mind with respect to our business in China and Q1 of each fiscal year.

First star has no supply chain or manufacturing risk in China or any other Asian geography.

Second Q1 is generally our lowest sales border as a year representing about 22% of stars total annual revenues the path to fiscal years.

And third and I see L. procedure delayed is most likely not a procedure lie.

Many I see all patients than mine planning for their visual freedom after a lifetime in glasses or disposable contact.

The decision is personal and can be very emotional with many patients telling us the decision to have the I feel is like changing.

The patients choice to have an ideal procedure also comes with a tangible financial commitment that is often plan for months or even years in advance.

We therefore believe the current pots and procedures, it's simply a short term deferred sale.

At this time, we clearly have experienced a reduction in expected orders for the quarter.

As such we currently expect in Q1, a potential 5 million to 7 million dollar delay in sales orders.

However.

Given our assessment of the current facts as we know them, we're making no change to our full year sales forecast for 2020 at this time.

I think it's important to reaffirm and I would like to reiterate that stars business momentum was very strong and at the Corona virus and computing continued into the first month of 2020.

Star remains the clear leader and proprietary refractive lens based solutions.

We have a larger addressable market that today includes 1.9 billion miles.

And in the near future is expected to nearly double with the anticipated approval of our eat all presbyopia OLED.

Today, there are approximately 1.7 billion post IPO.

Locally.

In terms of execution, we kicked off 2020 with additional clinical and regulatory milestone achievements focused on further realizing our very large and growing market opportunity.

In mid January we announced CE Mark approval for the use of our currently approved email I see a lenses as these supplemental or piggy back land to correct residual refracted error in dissatisfied post cataract surgery patients.

We believe use of our evil I feel as the piggy back when especially after the expected approval to correct for presbyopia can serve as a growing solution for the millions of cataract patients annually that end up back in glasses.

On January 31st the first patient was implanted in our U.S. Nivo investigational clinical trial at price vision group in Indianapolis.

Dr Price stated our practice has routinely sought out opportunities to evaluate the most promising vision correction treatments on the horizon and we look forward to our continued participation in this study of the Ebola lenses.

The Eagle U.S. clinical trial is now fully underway in nine of more than a dozen prominence refractive surgery centers across the U.S. that we anticipate will be part of his study.

For those of you keeping track our U.S. clinical trial will include three distinct phases, leading up to a potential commercial introduction of evo to the U.S. market.

Number one implanting 300 primary eyes number two six month follow up on all patient.

Number three.

Data preparation of the package for marketing approval and submission to the FDA for review.

Details of U.S. clinical trial entitled a multi center clinical evaluation of the evil E book clubs that Dan Implantable Collamer lens.

Were posted took clinical trials that got yesterday and will be updated as required.

As we look to the remainder of 2020 art Eva lead off lens for Presbyopia remains under review by Dechra, our notified body.

And we continue to anticipate this product will be introduced to the market through a phased rollout by the end of the second quarter of 2020 in CE Mark country.

Targeting early Presby old age is 45 to 55, our Ebola lead off length will open a large market opportunity for older patients outside the historically approved 21 to 45 year old age range for I feel.

2020 will also be a year or greater marketing investments and creativity and building awareness understanding and a sense is community around her evil I feel family of lenses.

We will have more you to mobile and interactive ads highlighting the messaging that our research suggests resonate smoked with consumers for example that our I see a lens is removable that it does not induce dry ice indra and that our lenses provide excellent night vision.

Well expand the number of cities, where we market in China, and a strengthened our campaign and Korea, where we've recently signed a case pop star Swan not alone has an influence.

Well also have additional new informs your campaigns in Spain, Germany, and other geographies that broadens the sense of community among existing and potential evil I see all patients.

In the U.S., we plan to support the growth of lens based clinic well also advertising in key cities with top doctors that have signed alliance agreements with committed levels of I see L. unit growth.

Last week, we launched our new social media campaign, and he U.S. City, which includes both paid inorganic postings on Facebook and Instagram.

Finally.

Our has initiated a search for its next CFO as we previously announced in December Deborah has decided to retire and 2020 after we appoint and transition a new CFO.

Before I turn the call over to Deborah for more detailed review of our financial performance.

I would like to acknowledge Debrosse almost 25 years of service just STAAR surgical.

On behalf of the entire star team and most personally I would like to thank Deborah for her quarter century is service for star.

Debra.

Thank you Karen and good afternoon, everyone I'm, sorry, the financial overview with a summary of top line results and then provide more detail down the income statement.

Our reported net sales of 38.9 million in the fourth quarter 2019, an increase of 25% of 31.2 million recorded in the years old period.

The foreign currency headwinds, primarily the euro which jumped $20000 for the fourth quarter as compared to approximately 1.3 million for full fiscal year in 2019.

Strong topline growth was driven by I see our unit and revenue growth of 27%.

I see on sales represented 86% total company sales for both the fourth quarter and fiscal year 2019.

Moving down the income statement, our gross profit margin for the fourth quarter was 74.1% up 40 basis points as compared to 73.7% in the prior year quarter.

Gross margin in the fourth quarter increase due to improved unit call, partially offset by period costs associated with the project to resume manufacturing.

Gross margin on or I see all product line remains in the 80% to 85% range and we continue to anticipate total company gross margin above 80% by the end of the three year 2020 to 2022 planning period.

Approximately half of the anticipated margin improvement should come from manufacturing cost reduction and half from continued mix shifts to our higher margin I feel business.

Total operating expenses for the fourth quarter were 26.5 million, an increase of 21% compared to the prior year quarter 21.8 million.

Taking a closer look at the components of operating expenses GNS expense in the fourth quarter was 7.9 million compared to the prior year quarter.

2 million.

Increase the G.N. expenses due to increased headcount and salary and related expenses, including stock based compensation.

Crease travel expenses.

Increased insurance expense and increased audit and tax faulting costs.

Marketing and selling expenses for 11.2 million compared to the prior year quarter of 9.9 million the increase in marketing and selling expenses due to increased headcount and salary related expenses, including stock based compensation and investments in digital marketing advertising and promotions and trade show.

Research and development expenses were 7.4 million compared to the prior year quarter of 5.7 million the increase in research and development expenses due to increasing headcount and salary related expenses, including stock based compensation and increased clinical expenses associated with our E.

Clinical trial in the U.S.

We generated operating income of approximately 2.3 million during the fourth quarter as compared to operating income of 1.2 million in a year ago quarter.

Fourth quarter operating margin was 6% as compared to 3.8% for the year ago period.

For the full year 2019, operating margin was 7.9% up 260 basis points over the prior year.

Net income for the fourth quarter was 6.4 million or approximately 14 cents per diluted share as compared to a year ago net income of 1.1 billion or two cents per diluted share.

The fourth quarter, 29, Cheney, who do an approximate 3.4 million or seven cents per share income tax benefit.

On a non-GAAP basis, adjusted net income for the fourth quarter was 5.5 billion or 12 cents per diluted share as compared to adjusted net income for the year ago quarter, a 3.2 million or seven cents per diluted share.

Table reconciling the GAAP information to the non-GAAP information is included in todays financial release.

Turning now to our balance sheet, our cash cash equivalents unrestricted cash a January 3rd 2020 totaled 120 million compared with 104 million at the end up a year ago fourth quarter. The company generated a record 25.8 million in cash from operating activities.

For the full year 2019.

This concludes our prepared remarks, operator, we're ready to take questions.

Thank you Tom I'll like to remind everyone in order to ask your question. Please press star one all your telephone keypad will cost you estimate would you compiled acuity roster.

Your first question comes from Jason Mills with Canaccord Genuity.

Great. Thanks, Karen can you hear me occasionally you made club adults.

Yes, I can hear you Jason.

Okay.

Again, congratulations on a great year first mistakes grey bars. Thank you. Thank you so much for the color on it I guess.

The question is the five to 7 million makes sense at this point given the uncertainty.

But I guess over what time period do you expect these sales are these procedures to be done and how will you account for them. So let's say that it's it's mostly felt in the first quarter and they may come back, perhaps over Q2, Q3 timeframe, where you'd be able to coal.

That incremental revenue out of the incremental revenue upside that you saw as an offset to the downside during this crisis.

And bottom line is we had already planned contributions from each of our major markets.

On a quarterly basis and as you know it's always been split.

You know, 22% then 27 I believe since 26 and 25. So what we're doing now is we're taking a look at the number of units that we didnt realize in February and we've already actually received orders from.

Customers through our distributor.

For shipments as soon as they reopen.

So we're already seeing what we call that kind of held back robust interesting getting back to work in a big way.

So in answer to your question when we.

Our next on the call or where do we have visibility we feel it's important to share will talk about how is the spread will be my expectation based on talking to our team and the customer is there going to work very very hard very aggressively and a lot of overtime to get back on.

On track to what they had planned for their year.

I just want to remind everyone that they have budgets that they need to meet they've employees they need to pay they are in a very.

Lets say recovery mine shit mindset to get back to work and get back on their own income statements in the right way from the smallest practice to the largest shots. So.

Great that's loud and clear my second question is kept clinical care in its accounted for <unk>.

Could you talk about the approval choline and you mentioned Deckers still.

Are you waiting is this in line with your expectations and I guess, maybe talk a little bit about your own more color on the planned rollout phased rollout and then in the United States.

Can you give us an update on pace of enrollment I guess, it's probably.

More yesterday during the day before showing and so forth. We could you give us an update on how that's going.

Thank you sure.

So our phase rollout is designed to make sure that those who have participated with us.

As principal investigators those who are familiar and very strong in it and excited about presbyopia through trying other product and who are already enthusiastic about bringing presbyopia deep into their practice will be the first practices.

Where we'll roll out the product we have a detailed plan for a one year timeframe in terms of starting off with a dozen strong sites then moving to 25 50, and then hundreds thereafter, we plan to do a major rollout.

Yes, Crs and our experts meeting in the October timeframe. Our earliest surgeons will have the benefit of all of the patient and search and materials. The training programs everything will be ready to go in fact is ready to go now but.

What we want to make sure of is that as we initially roll out the near intermediate and far vision characteristics and quality. They are standing lens that it's well characterized in daily practice, which as you know is a learning experience for surgeons, who have been involved in just a clint.

Called trial environments. So it's good for the surgeons and it's good for us in guiding all the new practices, we plan to bring on with his lens in terms of the pace of the U.S. roll out we're extremely excited about the feedback we're getting a number of the surgeons had.

You know I I'm not I'm not you know my clinical people don't want me to talk so [laughter] thinks a bottom line is we have a lot of patients in the queue.

I'll leave it there thank you.

Karen.

You're welcome Jason.

Your next question comes Ryan Zimmerman with B T. G. Your line is open.

Right. Thank you.

Up to Jason's question.

Karen what impact are you assuming right now in Korea, and Japan, a with the Corona virus.

Yes so.

So we speak routinely of course with her teams all over the world and today is today on a weekly basis that our sales leads call land to give up to the moment detail and I can tell you that at this point in time.

Japan is operating fully normally and aggressively as they have been no change.

And Korea, there has been some concern, but what we're being told is it's not in refractive surgery, it's is especially in cataract surgery.

So at this point in time, we're not getting any negative.

Feedback from our team.

Okay. That's very helpful. And then the fog too on the clinical side of things.

Talked about some of the steps you're gonna goes through for the about clinical trial in the U.S. that data preparation submission period can you just talked about kind of what the assume timeframe.

For that and we can kind of then make our asked men's or gases around potential approval timing in the U.S. Thank you.

Yeah, typically companies give themselves proximate lead free to six fun.

To compile the data and to do all the checks and balances associated with making sure that we present accurate and complete information to be reviewed by the regulatory body.

Obviously, our goal will be to accelerate is possible, but to make sure that we err on the side of complete effective safety and effectiveness data.

Thanks for taking my question. Thank you. Thank you very much for initiating coverage and asking those questions today Ryan we appreciate it.

Your next question comes from Anthony Petrone with Jefferies. Your line is open.

Hi, Thank you and thanks for taking the question. He was just a follow up on Corona virus.

Trying to reconcile maybe some of the comments.

That al calling me this morning on their call their seen a pretty significant impact in China in February specifically, they called the 90% reduction in and through procedures versus their internal estimates [laughter]. So just trying to get a sense of the February trends relative to the comments that alkone made.

And then I've a follow up on the U.S. clinical study. Thanks.

Sure. Thank you Anthony.

Certainly by the end of January and into February where clinics and hospitals were closed and remain close no procedures were performed in the first three weeks to January we had an extraordinary kick off to the year and a number of procedure.

There's remains scheduled for wendy's clinics and hospitals reopen.

So I think the bottom line is I think it follows from what we've been hearing all throughout from our sales team is that it seems that the cataract lens business has been deeply impacted in terms of what occurred and what you know is expected in terms.

The negative relative recovery, but these refractive procedures as I explained in my prepared remarks, many of them have either prepaid or already are 100% set to go. So we're seeing a difference in the refracted response at this time, well see how things play out.

That's great maybe the follow up just say on this topic for a moment would be.

The idea that there's a good chance to recapture these procedures and so are you seeing just a rescheduling at this point because again on a alcan side, they talked about possibly recapturing some but some of those procedures potentially being launched and then all I was just one final one on the U.S. study.

Thanks.

Well I you know I can't comment on L. Collins opinion, our outlook is that a refractive patients is committed to all the benefits that and I see how I feel has over other laser vision correction procedures.

Have a really enthusiastic customer and so I believe that patients. The fact that theres been scheduling online by our customers. The fact that we have an energized you know over 2500 practitioners 500 of tumor surgeons. During this process were unfold.

Non cat. So you know we feel quite close to the situation and we're pretty confident in terms of if work gets done it'll get done with us.

Thanks, Brian.

Thank you.

Your next question goes from Jim Sidoti with Sidoti and company. Your line is open.

Hi, good afternoon.

I guess like everybody else world.

We're all focused on the on the quarter bars or the course my hobbies.

[music].

How are you set your capacity because you know it could plays out as the way you think it will.

The procedures are gonna be rescheduled.

Possibly late in Q1, but more likely Q2 Q3.

The capacity to work to meet demand.

Absolutely.

We are this morning again, we went through you know inventory both sphere can toric lenses and the ability to bring in toric in the most to requested sizes for all the markets, especially China is busy season will most likely take place at the end of Q2.

We went into Q3, we're very well prepared.

Right and then my second question is related to the U.S. launch.

Before we can't market the.

On the he wrote to customers until you get the approval, but are you able to start training.

Leading surgeons to do the procedure before the approval and have you still.

No no we can do nothing on the commercial side, even if it is.

Training related it you know until we have approval of the emo lens in the U.S. we were.

Purely managing with our contract research organization partner, a really extraordinary clinical trial experience for the surgeons and the patient surgeons will share information amongst each other a little bit but they know that what the requirements are in terms of their ability to really talk about the trial.

Hi, Thank you.

Thank you Jim.

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

Hi, Good afternoon. This is actually Andrew Brackman on for Brian I'll follow a similar line of questioning here. So I guess in the context of that $5 million to $7 million just you've talked about can you maybe just expand on how that's expected to play out with the strategic cooperation agreement strategy that you have I guess the reason I ask this is because my understanding of the some of these agreements.

Sort of call first required minimum purchase levels on a quarterly basis and as we're talking about $5 million to $7 million of a delay here I'm just curious on what the stipulation drawing that contracts that allow for that delay and then your.

Competence and getting that back thanks.

Okay, well I think it's important to remember that we have.

And appropriate set up with our distributor in terms of getting lenses to each of the facilities on a predetermine basis and so we will have the ability to meet whatever the partner really wants in terms of delivery time as well as such.

Section of lenses. So when you asked whether or not we would hold them to their quarterly commitment.

The answer is yes, but in terms of the timing of the total for the year they'll be flexibility and I'm sure. Some lenses will move from quarter to quarter, but we're not really concerned.

In anyway that anyone's going to be using the February timeframe as a reason not to meet their annual commitment if anything we'd been assured the opposite that they cannot wait to get back and that they have no intention of missing their annual commitments.

Okay. Thank you that's very helpful. And then on the U.S. clinical trial just on the clinical trials a website. It has an estimated primary completion date as January 1st 2021. So we take that is when the follow up is completed or when you expect the final patient to be enrol. Thank you.

Okay. So the January 2021 is the end of the trial and then there is the preparation of the data to be given to the FDA on as quick a timeframe as we can achieve three to six months.

Got it thank you.

You're welcome.

Your next question comes from Bruce Jackson with the benchmark.

But.

Hi, Thank you for taking my question want to know if we could get an update on the manufacturing site build out in Switzerland.

Okay. So we have.

Continues the process of preparing the need our site.

But our expectation is that will probably move back by approximately a quarter or to the shipments of manufactured product from this was facility.

And the reason for that is the timeframe is not as concerning candidly as it was when we had what we felt less a potential trade challenge for American manufactured product.

We still believes that the Swiss manufactured product is the right answer for our Asian customers, This, especially China, who appreciate a Swiss manufactured label, but we are a little less in terms of intensity with getting that done and we are accelerating other spending.

For the near term that we believe we'll have a quicker return to the company.

Okay, great. Thank you and then I'm just a follow up on that you Duff program.

When do you anticipate I'm starting in the U. Dori Toric pilot study.

The you know I've talked pilot study at this point in time will is scheduled definitely in 2020, we have not finalized the date, but we have everything ready to go.

Okay Super Thank you very much.

Thank you Bruce.

And that's all the time for questions I turn the call Dr., Karen Mason for any closing remarks.

I'd like to thank everyone today for their participation on our call I'm will be on the road in the coming weeks meeting with the investment community, where we look forward to speaking with in seeing many of you as always we appreciate your interest in investment in star on the boss to all of you. Thank you.

This concludes today's conference call you may now disconnect.

[music].