Q4 2019 Earnings Call
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<unk> earnings Conference call.
Yes, I'm all participants are in a listen only mode. I forget speakers presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone if you require any ferger assistance expressed star zero I would now like to hand, the conference overthrew speakers today DRAM belief from Bruce Bruce Thank you.
Thanks, operator, and thanks, everyone for participating in today's call. Joining me from the company are marked Schroedahl, 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.
A federal securities laws, including the Safe Harbor visions of the private Securities Litigation Reform Act of 1995. These forward looking statements involve material risk and uncertainties and the company actual results may differ materially for discussion of risk factors I encourage you to review the company's most recent annual reports important.
Okay, which will be filed into securities and Exchange Commission. Shortly during the call today management will also make certain will discuss certain non-GAAP financial measures, which are news as supplemental measures of performance. The company believes these measures provide useful information for investors in evaluating its operations period over period.
Each non-GAAP financial measure reference on this call. The company has included a reconciliation of the 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 be considered in isolation or as a substitute for their pediatrics financial results prepared in accordance with gap.
In addition, the content of this conference call contains time sensitive information that is accurate only as of the state of the live broadcast March 520, 20, 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.
With that said I'd like to turn the call over to Mark.
Good morning, everyone and thank you for joining us today on our fourth quarter and full year 2019 earnings conference call.
We're very pleased with our fourth quarter results. The drove strong finish to 2019, which was our second full year as a public company.
Systematic execution of our integrated growth initiatives generated another record performance and continued to distance the company as the clear leader in pediatric orthopedics.
This morning, I'll review these growth initiatives, which include expansion of our product offering.
Missions set investments conversion of international stocking distributors to sales agencies domestic sales force development clinical education and culture.
Fred will then provide a financial review after which we'll open the call for questions.
We continue to build significant momentum in 2019 as evidenced by our industry, leading sales performance of 26% annually revenue rose to $72.6 million, which represents our 11th consecutive year exceeding 20% growth.
More importantly, this performance results from helping 29400 children in 2019.
During the fourth quarter, we reported strength across our entire business with trauma and deformity growing 34% scoliosis growing 21% and sports medicine, other growing 18%, resulting in 30% total revenue growth in the quarter.
This robust increase was in part driven by deploying $18.2 million upsets during the year and launching seven new surgical systems that will have significantly greater impact on revenue growth and twentytwenty and beyond.
2019 also proved to be a pivotal year for what the pediatrics with the acquisition of or sex and our entry into external fixation, which expands our addressable market by $200 million.
Our strong sales performance in 2019 was not produced at the expense of gross margin, which increased to 75% or adjusted EBITDA, which improved by $2.4 million for the full year 2019, despite the significant and unplanned increases.
In quality and regulatory which have strengthened our competitive position.
The company continues to pursue the primary goal of topline growth, while also steadily improving the bottom line as a secondary objective.
As we look ahead to 2020 with the strengthened balance sheet from a successful capital raise in December we believe that aren't the pediatric skin leverage the impact of the strongest pediatric orthopedic product portfolio on the market supported by a sales force of 167 domestic consumption. So at the end of the.
Fourth quarter.
27% from the same period in 2018.
The domestic sales organization continues to grow at a pace that supports our sales projections.
Based on our performance in 2019, we're confident we will continue to execute on our growth initiatives to support our full year twentytwenty revenue guidance of 22% to 24%.
We also believe that investing $19 million to $21 million and consigned to sets and 2020 will be sufficient.
Because we are deploying increasingly capital efficient systems, but also beginning to realize revenue growth from the full rollout or recent product launches.
Let me know highlight the progress on the execution of these integrated growth initiatives, starting with new products.
Throughout 2019, we maintained an aggressive cadence of new product introductions with seven surgical systems, bringing our total product offering to 33 systems.
As we further expanded the brought US line a pediatric orthopedic products on the market. We're pleased with the recent domestic launch of quick pack bone void filler in December 2019.
The U.S. introduction of this synthetic bone graft substitute in a dual mixing syringe was the result of a new partnership with graft is a medical technology company committed to developing and manufacturing synthetic bone bio materials.
This product and it's sufficient delivery system works to fill remote bone cabot's, He said defects, commonly seen in oncology and trauma surgeries.
Hi Tech closes a significant gap in our product line and when used in conjunction with other open surgical systems increases revenue per case.
In addition to pick pack in November we initiated the domestic launch of PD foot. The first pediatric specific system to treat deformities defeat.
This system incorporates the star lock variable and go locking screw technology, we licensed from cores check earlier in the year. The system offers the smallest plates and screws and our product line and provides greater effectiveness and addressing keep us for flat for club foot and help us.
I would guess foot deformities.
More specifically the sophisticated system is designed to focus on laterally column lengthening cocaine Neal slide off study automation opening and closing where jobs to automate and Arthur a decent procedures with innovative instrumentation that flexibly follows the and atomic movement with the bones during the correction process.
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Based on positive initial feedback we look forward to an expanded roll out of this product in 2020.
In September we launched two cannulated screw systems in the U.S. that improve efficiency and reduce time in the operating room.
Similar to PD Ford, we're very pleased with the additional adoption and will ramp up production to meet increasing demand.
In February 2019, we initiated the global launch of a major scoliosis line extension and long do though that also continues to receive excellent feedback and growing utilization.
We advanced our longer term early onset scoliosis and non fusion projects, which are a growing rob for scoliosis and to spinal tethering system.
We're also pleased with a substantial progress we have made on a novel pediatric device. We licensed from an adult spine company that had chosen not to support his further development.
This is a different technology from the current scoliosis growing rod on the market and we're confident that we can develop a second generation version and enhance its use.
We also submitted the response neuromuscular system to the FDA and completed development of our slipped capital femoral up deficit system, we anticipate both products will launch in the United States in the first half of 2020.
This year, we also plan to launch and osteogenesis in perfect. The system domestically that will address the many issues associated with the primary product currently on the market for use in the surgery.
We also plan to launch several additional implants acquired in the Vinylux acquisition that expand our PD foot system.
Turning to buy likes this was our first major acquisition, which we made in June 2019.
The purpose of this transaction was to acquire or six a novel external fixation technology with revolutionary point and click software that expands our reach from 60% to 80% of the trauma and deformity correction market and opens up a new 200 million dollar market opportunity.
This transaction closed the biggest gap in our trauma and deformity product offering.
And expanded our surgeon base to deformity correction specialists, who treat children outside of pediatric hospitals.
We're extremely pleased with our initial integration of this product line and with multiple new account approvals, which validate our conviction that this innovative external fixation technology will thrive in the hands of our focused pediatric salesforce.
When we announced this acquisition, we reiterated our intention to remain solely dedicated to pediatrics by selling the adult assets of violets by year end.
We fulfilled this commitment with the sale of by likes to squadron capital for $25 million in December.
Squadron submitted the highest bid after an independent process was run by a committee of our non executive Board members.
Proceeds were used to pay down the debt facility provided by squadron, which Fred will describe in more detail.
The novel Orthofix technology combined with the new systems, we have launched since the IPO in 2017 are gaining considerable attention from both existing and new hospital accounts.
This broad and differentiated mine of products has for the first time enabled us to initiate discussions with major pediatric centers about orthopedic Patrick's becoming their primary source of old trauma and deformity products and indicates our progress building brand recognition as the pediatric orthopedics.
Provider of choice.
From a broader perspective, however, our external fixation market penetration remains in its early stages.
The sales training process and account conversions are proceeding as well as we had expected.
This was a complex technology and training takes time, however, more and more reps had been formerly qualified to sell the product. We've added a second or thick specialist in the U.S. and a third in Brazil.
We look forward to continued rapid growth as we expand our addressable market and the fund additional deployment of sets.
Which brings me to another growth initiative set deployments.
During the year, we demonstrated our strong commitment to increasing children's access to our superior surgical solutions by Consigning $18.2 million of sets an increase of 52% compared to $12 million for the full year 2018.
This included $4.5 million deployed in the fourth quarter.
We're pleased with our ability to meet increasing demand and makes it investments beyond our target of $15 million to $17 million for the full year 2019.
We continue to monitor the return on each and every set deployed to drive optimal utilization.
And we anticipate set deployments in twentytwenty will be between 19 and $21 million.
As previously mentioned a majority of this investment will be focused on recently launched new products such as our two cannulated screw systems PD foot the pediatric nailing platform femur system launched in 2018 as well as other capital efficient systems, such as Orthotics and.
Pack.
To support increased set deployments and the growth of our product line to 7300 stock keeping units we doubled the size of our warehouse in late 2018 and are planning to double in size again in 2020.
We consolidated a significant portion of our implants supply in the hands of our highest quality and most responsive supplier.
Oh PS business represents the vast majority of the volume of this contract manufacturer, which is located 45 minutes from our Warsaw headquarters.
We also established a rapid prototype so that's significantly reducing lead times on prototypes used in new product development.
Turning to our international and domestic sales organizations, we implemented our sales agency model in Belgium, the Netherlands during 2019 and in Italy earlier this week.
We continue to be pleased with the growth in countries, where we have converted stocking distributors to sales agencies, which enables us to sell directly to end customers at full hospital prices and gross margin.
Furthermore, in 2019, we added one international stocking distributor as we expanded to 43 countries serviced outside the U.S., bringing us to a total of 39 stocking distributors and aid sales agencies at this time.
During the year, we created a new European legal entity headquartered in the Netherlands.
We transferred a trusted senior executive to serve as our first European managing director established banking relationships introduced accounting systems and implemented Pan European logistics capabilities.
Also related to our international operations, we addressed a major regulatory affairs challenges posed by new requirements of the medical device single audit program or MD SAP.
And by the New European Union medical device requirements or E U M D R.
This challenge required a significant increase in full time professionals as well as unbudgeted consulting fees.
While the personnel cost is now part of our DNA expense base consulting expenses should somewhat moderate in twentytwenty.
We are confident that this investment in quality and regulatory capabilities will support our aggressive international growth.
At a time when many companies are dropping hundreds of their products one sold in the European Union.
In addition to muscle building, our international infrastructure, we increased the size of the domestic selling organization from 131 to 167 sales personnel and increase of 27%.
We continue to work with our distributor partners in the us on strategies for scaling their organizations appropriately to keep pace with the company's growing product line.
At the end of 2019, we had 38 domestic sales partners.
We are actively managing these partnerships to ensure that every territory achieves a balanced sales performance among our businesses.
We established a new domestic sales management structure, increasing our regional sales executives from four to six.
Three of the six specialists are now focused exclusively on Tramon deformity, while three are focused exclusively on scoliosis.
Clinical education remains fundamental to our business and we allocate approximately 3% of our revenues to training. The next generation of surgeons entering the dynamic field of pediatric orthopedics.
This investment represents more than simply influencing potential users and advocates of our products.
It helps us stay on the cutting edge of clinical developments advances the field of pediatric orthopedics and enables children around the world to have better access to appropriate surgical care.
The company remains a double diamond sponsor of the international PDK pediatric orthopedic symposium, the only diamond sponsor of the European pediatric Orthopedic Society, a platinum level sponsor of the American Academy of cerebral palsy in developmental medicine, a gold level sponsor of the international meeting on it.
Dan spine techniques and the gold level sponsor of the Scoliosis Research Society.
In 2019, we significantly increased our sponsorship of the prestigious Baltimore limb deformity course.
We conducted the fourth annual international children spine symposium, the Threerd annual pediatric orthopedic surgical techniques course, and the Akron and PD Ortho West resident review courses.
We also provided scholarships to some 80 residence Inn fellows to attend important surgical meetings.
And we funded multiple full year academic fellowships for promising young surgeons at leading pediatrics centers.
This past June we hired a VP of sales training and clinical education.
This new role will focus on developing innovative clinical and sales training programs some utilizing novel technologies.
Our dock matter surgeon community now has approximately 1200 followers, representing nearly half of the pediatric orthopedic surgeons in the world.
Surgeons utilizing this platform can post cases and pose questions 24 seven.
During the year, we initiated a number of programs to enhance the opie customer experience.
These programs include frequent surgeon visits to Warsaw to meet with our technical staff to review our product development initiatives.
We also conducted our first surgeons satisfaction survey on products clinical education programs sales support and responsiveness, which produced an average grade of 3.67 out of 4.0 and triggered several continuous improvement initiatives.
Finally, our company's culture remains at the foundation of our past success and our future prospects.
Culture is our most valuable asset, particularly at a time when many orthopedic companies have suffered through repeated restructurings in the wake of M&A activity.
You companies emphasize culture as we do and this is evident in being recognized as one of the best places to work in Indiana for the fourth year.
In the selection process, which entails pulling employees at thousands of companies by the Indiana Chamber of Commerce less than 100 companies are designated for this honor.
We'd like to recognize our employees and partners that helped us achieve success in 2019 in multiple dimensions of performance.
With that let me now turn the call over to Fred to review our financial results.
Ed.
Great. Thanks, Mark.
Total revenue in the fourth quarter of 2019 was $19.0 million up 30% when compared to $14.6 million for the same period in 2018.
Revenue in the fourth quarter of 2019 increased 30% to $14.2 million when compared to $10.9 million in the same period last year, representing 75% of total revenue.
International revenue in the fourth quarter of 2019 was $4.8 million, a 32% increase compared to $3.6 million in the same period last year, representing 25% of total revenue.
Total revenue in 2019 was a record setting $72.6 million, a 26% increase compared to $57.6 million for 2018.
You asked revenue in 2019 was $55.1 million, a 27% increase compared to $43.5 million for 2018, representing 76% of our total revenue.
International revenue in 2019 was $17.5 million, a 24% increase compared to $14.1 million for 2018, representing 24% of total revenue.
Our fourth quarter and full year 2019 revenue breakdown by category was as follows.
Trauma and deformity revenue in the fourth quarter 2019 was $13.6 million, a 34% increase compared to $10.2 million in the same period last year and $49.4 million in 2019, 24% increase compared to $39.7 million in 2000.
In 18.
Driven, particularly by the addition of the fourth ex Hexapod deformity correction system.
New product introductions and our increase in deployed sets.
Scoliosis revenue in the fourth quarter 2019 was $4.9 billion, a 21% increase compared to $4.1 million in the same period last year and $21.5 million in 2000, 2019, 29% increase compared to $16.7 million.
In 2018.
Driven by continued product acceptance customer adoption combined with our increase in deployed sets.
Lastly, sports medicine other revenue in the fourth quarter of 2019 was $430000, representing an 18% increase compared to $365000 in the same period last year.
Sports Medicine other revenue in 2019 was $1.7 billion, a 41% increase compared to $1.2 million in the same period 2018, driven by continued product acceptance and an increase in deployed sets.
Nearly all of our revenue continued to be driven by increased unit volume.
Moving down the income statement gross profit for the fourth quarter 2018 was $14.5 million, 37% increase compared to $10.5 million in same period last year gross margin in the fourth quarter of 2019 was 76% compared to 72% in the fourth quarter of 2018.
Okay.
The increase in gross margin was attributable to increased domestic sale at strong margin as well as an increase in international agency sales.
Gross profit in 2019 was $54.6 million, an increase of 28% compared to $42.7 million in 2018.
Gross margin in 2019 was 75% compared to 74% in 2018.
Sales and marketing expenses in the fourth quarter, 2019 increased 28% to $8.4 million when compared to $6.6 million in the same period last year and full year 2019 sales and marketing expenses increased 18% to $31.3 million when compare.
To $26.6 million in 2018.
This increase was driven by an increase in unit volumes sold and associated commissions in the us.
The additional commissions being paid in the international markets that we have transition to the agency model and ongoing marketing expenses.
General and administrative expenses in the fourth quarter 2019 were $7.2 million, an increase of 59% compared to $4.5 million in the fourth quarter of 2018.
This increase was driven by higher depreciation and amortization expense.
Higher quality and regulatory expenses and the addition of the Orthofix expenses not there in 2018.
Full year 2018, DNA expenses were $26.7 million, an increase of 27% compared to $20.9 billion in the prior year.
The increase was primary due to the addition of personnel resources consultants and external testing to support the increased quality and regulatory requirements placed on the industry.
As well as an increase in depreciation and amortization.
Resulting from the aggressive increase in deployed sets in 2018, and 19 as well as our recent acquisition.
Research and development expenses increased 49% to $1.9 million in the fourth quarter 2019, when compared to $1.3 million in the same period last year, an increase 21% to 57, I'm, sorry, $5.7 million compared to $4.7 million in 2018.
The increase was due to support of product validation and launches. In addition to the development of our future product pipeline.
Total operating expenses in the fourth quarter 2019 were $17.5 million, an increase of 41% when compared to $12.4 million in the fourth quarter 2018.
Total operating expenses in 2019 were $63.7 million, an increase of 22% when compared to $52.2 million in 2018.
Operating loss in the fourth quarter of 2019 was $3.0 million compared to a loss of $1.9 billion in the fourth quarter 2018, and the full year 2019 was a loss of $9.1 million compared to a loss of $9.6 million in 2018.
Adjusted EBITDA for the fourth quarter of 2019 was a negative zero point $9 million compared to a negative zero point $9 billion for the fourth quarter of 2018.
Adjusted EBITDA for the full year of 2019 was a negative $1.1 million an improvement from a negative $3.5 million for the full year of 2018.
The change was primarily driven by the increase in revenue and associated gross margin.
Interest expense in the fourth quarter of 2019 was $1.3 million compared to zero point $5 million in the same period last year and were $3.5 million for 2019 compared to $2.3 million for 2018.
The increase in interest interest expense was due to interest associated with the financing to support our Orthotec acquisition.
Which we fully paid off at the end of year and I will discuss in more detail.
Net loss from continuing operations for the fourth quarter 2019 was $4.3 million compared to a net loss of $2.5 million in the same period last year.
Total net loss, including discontinued operations for the fourth quarter of 2019 was $5.4 million or 36 cents per basic and diluted share attributable to common stockholders compared to a loss of $2.5 million or 19 cents per basic and diluted share for the same period.
Last year.
Net loss from continuing operations in 2018 was $12.7 million compared to $12.0 million in 2018.
Total net loss, including discontinued operations in 2019 was $13.7 million or 94 cents per share attributable to common stockholders compared to a loss of $12.0 million were 96 cents per basic and diluted share in 2018.
Turning to our balance sheet as of December 31, 2019, our cash balance was $72.0 million compared to $19.7 million as of September Thirtyth 2019.
As a reminder, in December we raised approximately $60 million in net proceeds from our secondary public offering after deducting underwriting discounts Commission and operating expenses.
Also as Mark previously mentioned, we completed the sale of substantially all of the assets related to the adult product offering available at the end of 2019.
As consideration for the biologics adult business and the Orthofix adult license the amount we owed under our term note be payable to squadron capital was reduced by $25 billion.
We repaid in full the remaining $5 million of our principal outstanding under the term note plus all accrued interest with funds received from our revolving credit facility.
As of December 30, Onest 2019, total net debt was $26.2 million, which does include the $5.0 million outstanding under the revolving credit facility.
I also wanted to highlight a new line on the balance sheet call deferred revenue.
This consists of the and earn portion of the exclusive license arrangement to allow the new owner of by lack the ability to sell products using the orthofix technology to non pediatric accounts.
This deferred revenue will be recognized on a proportional basis across the term of the agreement effectively recognizing royalty revenue and income overtime.
The remaining $12.5 million of the total $25 million purchase price went against the Vinylux assets sold.
The change in net purchases of property and equipment during the fourth quarter 2019 was $1.3 million as compared to a negative $58000 for the same period last year.
And was $11.8 million in 2019 compared to $5.3 million in 2018. This investment reflects the deployment of consigned set which includes product specific instruments and cases and trays.
Including the implant.
$4.5 million of consigned sets were deployed during the fourth quarter of 2019 compared to $1.3 million during the fourth quarter of 2018.
As Mark mentioned, the substantial increase over our historical annual deployment prior to our IPO and one of the key growth drivers.
In terms of guidance, we anticipate 20% to 24% annual revenue growth for 2020.
Additionally, we plan to increase our annual investment in consign sets to a range between $19 million to $21 million in 2020.
While we don't provide EPS guidance I do think it's worth mentioning an estimated $2 million increase in depreciation slash amortization, we expect to see in Twentytwenty as a result of our aggressive set launches and acquisition related intangibles.
I'd also like to mentioned the third year of our three year Cliff vesting restricted stock, which will increase noncash restricted stock compensation by approximately $2 million in 2020.
Now, let me turn the call back to Mark for closing remarks, Thanks Fred.
To summarize our performance in 2019 was driven by systematic execution of multiple growth initiatives, many of which we initiated years ago.
All three of our businesses reported strong growth and we believe that our diversified revenue base holds the promise of consistent future performance and supports twentytwenty revenue guidance of 20% to 24%.
We appreciate the support of both legacy and new shareholders that helped US close a recent $60 million capital raise that gives the company the financial flexibility to support our ongoing growth, including $19 million to $21 million of investment in consign sets in 2020 and further development.
And acquisition of new products and technologies.
But most importantly, we are pleased that our exclusive focus on pediatric orthopedics has allowed us to change the lives of over 165000 children since our inception.
This volume of surgeries is highly unusual for a company of our size and is a testament to the strength of our product offering and our deep relationships with pediatric orthopedic surgeons.
We look forward to continuing advancing the field a pediatric orthopedics, but we also drive increasing shareholder value.
And with that we'll open the call up to questions David Bailey, Our executive Vice President has joined US This morning, and I'm sure between the three of US, we'll do our best to answer them.
Okay.
Thank you at this time I would like to remind everyone in order to ask your question. It seems please press star one on your telephone keypad.
Our first question is from Rick Weiss of Stifel Go ahead. Please.
Good morning to you both.
Thank you for.
The fantastic question.
Let me start off.
I apologize.
For.
After the outstanding results from a brilliant outlook for the year ahead.
Starting on the cope with 19 situation just if you could.
Help us think.
Through the potential any concerns that the current of ours issues might have on.
Supply chain on manufacturing on procedures remind us about.
Or Asia Pac exposure.
Separately direct pushing to Italy.
How do how are you.
Thinking about the situation there.
I'm sorry.
Like there, but just be good to hear your your high level thoughts on all that.
Absolutely Rick let me take a stab at this so I guess first of all we do not sell any products in China.
So that's the first statement I would say that less than a million dollars of our revenue today or maybe 1% of the $73 million comes from Italy and Japan.
Obviously, we just completed the Italy transaction.
We would do that with or without this going on.
And we're very excited about that transit transaction.
I think the majority of this million dollars is really coming from deformity correction surgeries and can be delayed.
The remaining is very small and would be trauma related volume, which is obviously not deferrable.
If we look around the supply chain, we have one very very small supplier that we do get products from China. They were on a two week shutdown that has been completed as of last week and they are now shipping products again, it's probably less than 1% of our.
SK use comes from China. So we think that we'll have a minimal to zero impact on us. The one thing we are keeping an eye on his currency.
Fluctuations the Brazil currency has changed by about 30% in the last eight weeks and while it might not all be related to this they are pointing to this as one possibility and so we're keeping an eye on that and then we may see I would say, we havent, yet, but we may see some.
Delays in surgeries may be in Italy, and other places in Europe, but it's a very very small portion of our overall revenue. So I think it's early days as of right now. It's obviously developing day by day, we don't feel it's impacted the business at all as of today, but we'll see what happens in the next several months.
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Thanks, so that thorough answer.
Turning to the 2020 outlook growth guidance.
Again, very impressive 20% to 24%.
But just help us maybe at a high level for us.
Reflect on the fact that revenue base keeps getting larger.
And yet you're sort of stepping up your 2020 revenue growth outlook, 20% to 24% step up in growth.
Versus the past few years.
Mark.
Brad talked about the factors in your guidance I mean, clearly products more people.
Heard you clearly, but what gives you that extra confidence that.
Business can can sort of step up that growth.
And given your.
Wonderful consistent track record of outperformance.
What factors element do you think give you confidence at the high end or potentially could be better that as we contemplate 2020.
Well, Rick I guess my take on that is that we have any businesses faces a theoretical concerns going forward, but when we look at the tremendous success of worth X. So far the fact that it is outstripping the growth rate of the company as a whole when we look at seven new surgical systems introduced last.
Year, many of which were late in the year and have really not even begun to contribute.
And finally, when we look at the growth in infrastructure, both sales infrastructure as well as capabilities internally in quality and regulatory that are here at a time when many companies are dropping products internationally I think we think that to those strengths with Trump any potential headwinds the company might face.
Yes, I would just add principally on the index side.
Sorry, Rick let me just add couple of comments on Orthofix side, absolutely agree and it's going to be particularly.
Important in the first two quarters.
Because it is all incremental revenue.
And then obviously in the second two quarters will anniversary the having the product last year.
So that's a factor and I also think the significant investment in sets that we've done not just in 2000 in 19, but the significant increase we've done in 2018 and 19 those combined I.
I think enable us to feel like we've made the investments in sets in people grow in the domestic salesforce in our international agencies gives us confidence in that 20% to 24%.
Thanks, That's just one last quick one from me.
It's not the first from I've heard you.
Mark.
Call out the attention you're getting as because of ortho specifically on the.
The impact on your total product line from and your language was from new and existing accounts.
To be primary source all pediatric products.
I don't know if it's the right question. Please refrain from it but.
Yes.
How many accounts of all your accounts are you in fact, the the primary source of all pediatric product and how do we think about bat March or is this something we should be asking about tracking and paying attention to obviously, that's a meaningful feet.
Thank you.
There remain very few accounts, where we are in that position of being the primary source I can only think of one or two at the moment what is encouraging to me. However is that several of the largest pediatric centers in the United States are now engaged in discussions with US about this and we're seeing a very significant increase in revenues from.
In them and.
You know this rolling all will collect more and more mass.
As our.
Our image our brand equity continues to grow.
I think we would hesitate Fred Fred Fred would plan shift, we said that we would start sort of revealing where we are account by account because of course that gets us into a telling you more about paying wins that you need to know.
Okay.
Never enough, but I think.
Thanks, Rick wonderful questions as always.
Thank you next question is from that O'brien of Piper Jaffray. Your question. Please.
Hi, guys. Good morning, that's inside drew on for Matt. Thank you for taking the question.
I guess, just the started out I kind of wanted to talk about the progression of the spine business.
Obviously, it's grown pretty significantly over the last couple of years I guess, what type of new surgeons are you're attracting are these babblers or high volume users.
And then has that changed from from early days and the company's history.
Finally, as Dave to answer that question that drew that's a great question.
Good day Bailey I think we're seeing a and expansion of our user base across both of those customers.
The data colors, the those customers, who do let's say less than 15 scoliosis procedures a year.
As well as being starting to be taken much more seriously by a number of the major scoliosis centers in the United States and I think what we believe is driving that obviously is just a perpetual increasing of our credibility with those customers as our spine business in our school of business grows.
But also our commitment to some of these very novel a unique technologies and the development of those technologies for true unmet needs in scoliosis, such as the growing spine and early onset scoliosis and so I think those factors are in our improving our image and our credibility with customers across the spectrum of.
Usage.
Got it. Thank you and then and on your side deployment guidance for the year, you're guiding to 20 million Bucks at the midpoint.
This is a target you put out every year and beats and I expect you're being pretty conservative with outlook there once again.
I guess the question is are you starting to feel that you're getting to the point where sets in the field is not constraining the growth of the business in any way or are you still long way from that point yet. Thank you.
I think we're still a long way from that point, there is still tremendous demand for sex, but but we are trying to emphasize in in this message is that we're now beginning to back the deployment of more capital efficient sets. The orthofix sets are much more capital offense efficient to that.
And.
Most of our legacy sets with the possible exception of PD plates, which remains a tremendous money money earner.
And quick pack will be even more capital efficient the north effects and so we can stretch the 20 million dollar investment grow so modal.
And get enormous traction from it as a result.
It might be able to provide though more precise answer to that question.
Exactly right Mark in 2019, we increased our set to plan by 50%.
Over 2018.
In 2020 were projecting a 11% increase at that midpoint.
And I think to Mark's point, yes, there is tremendous demand out there for sets.
We're trying to be more measured I think in 2020 on those efficient sets and we feel like we'll get more revenue dollars Fort worth Texas is a tremendous example in that we get 20 to $30000 for a surgery and the SEC costs about $40000.
Our scoliosis business, we get about $20000 for surgery, and our set cost $200000.
So orthofix, we're very very pleased with that not only product technology, but also the capital efficiency of that system.
Very helpful. Thank you.
Thank you drew.
Our next question is from Ryan Zimmerman of BT I'd go ahead. Please.
Thank you thanks for taking my questions. Congrats on all your progress guys.
I wanted to start thanks.
Guidance follow up on from a risks questions earlier, so it is great questions earlier.
Just on the cadence of guidance for the year.
We have a couple of dynamics going on between certainly the inorganic contribution of Orange sacks, you have some of the seasonality that you typically see and seasonality.
With pediatric patients in the summer and so maybe you could just comment kind of on the cadence of growth through the year and how you see that kind of playing out.
Absolutely, yes, that's the point I was trying to make earlier is the growth we feel in the first two quarters is probably going to be slightly higher than the growth, we see in the third quarter and the fourth quarter.
With that being said, we think that the pattern that we have seen last five years and our business.
As far as the third quarter still being the largest quarter.
Followed by the second quarter and then the fourth and then the first is the same pattern, we will see in Twentytwenty.
Okay.
That's helpful and then on honours sex for for a minute here.
You commented certainly on the ability to train your salesforce, but.
Maybe.
Indulge me a little bit on terms or thanks.
We add in terms of its contribution and I know maybe not.
Maybe just wasn't specifically, but do you feel like you're seeing growth from the sales force on or effects since acquiring.
Or are we starting position, where it's the legacy artifacts and we haven't seen the impact of training the sales force yet and that's to be seen over the balance of 2021 to do kind of really get it out there in the field.
Actually we are seeing the impact of new accounts with Orthofix, new users and so while the legacy business is there.
It is it is not supporting the growth. So this has been very steady actually so this is a this is a new user new sales reps selling the product kind of story.
But also add that this product is really brand new I mean, when we bought it it was maybe three years out in the market. It may be had a handful of users because again, they were adult foot and ankle business and they didn't have a channel to market and so we're really in a very early stages of this thing.
And it's very exciting for us not only in 2020, but for the next five years as we continue to increase the training the sales force.
Brian This is Dave one last thing I would say is what I think I'm really pleased we're seeing is that this technology any enhancement of our overall technology platform is also driving and interest from sales reps and new reps throughout history with selling external fixation devices. So we're helping using this technology also to expand our selling organization and why.
We are growing very competent was the device through our own organic sales training initiatives. We're also getting much much more healthy at least in terms of our.
Our understanding of these very complex procedures because of additions to our selling organization that have had historical experience with very complex three dimensional external fixation devices.
That's all that's very helpful. Thank you for that color and then just squeeze one last one and I'll hop back in queue International was a bright spot this corner.
Or any onetime or larger orders and stock in there to call out or is that all hill, just kind of steady as she goes.
Orders. Thank you.
Great question that we're very pleased with the mix of sales.
Between our agencies and our replenishment stock I would say we were less dependent on those stocking sales in the fourth quarter than we have traditionally and I think it's reflected in the gross margin that we see in the overall business. It is a focus point for us to get to a steady growth of more replenished.
Men's and agencies and have much less of a dependency on set sales and we took a big step forward in that regard in the fourth quarter.
Thank you very much.
Thanks Ryan.
Our next question is from Mike Matson Needham go ahead. Please.
Yeah, Hi, Mark and Fred it's David on for Mike Thanks for taking the questions.
So first one just on the sales force I mean, you've grown the salesforce pretty significantly. So how are you thinking about managing that round of hiring and then also revenue growth is kind of tracking sort of in line with the rate of Salesforce expansion. So any initiatives you have in place to kind of drive productivity and get new.
We're reps up that curve a little quicker.
Oh, you're quite right in observing that the salesforce growth mirror that of revenues and that has been the case. The last couple of years and it has occurred more or less spontaneously we're not setting targets.
Or particular people it simply the way this thing is evolving naturally.
I think that we remain in the mode of not worrying about driving salesforce efficiency and leveraging that investment in some way.
In large part because it's not our investment to leverage is not on our RPL, we simply pay a commission for sales as they are occurring I think that the key thing. That's occurred is that we have increased the number of our own field sales managers, who are our employees from four to six and then have attempt.
To specialize three of them only focus on trauma deformity in three only focused on spine and this is having a very significant impact on the pressure being applied to our sales partners in the United States in terms of turning in a balanced sales performance among all of our businesses rather than just.
Focusing on scoliosis or just focusing on trauma deformity and that is actually working even better than I would've thought.
Great. That's helpful and then on the gross margin I mean.
That saw some pretty strong improvement this year and sounds like a lot of it was geographic mix.
Going into 2020, I mean, you have some new product launches.
And then converting some international distributor sales agencies, how should we think of the improvement.
In 2020.
Hi, Thanks.
Absolutely David So, yes, we very pleased with what we saw particularly in the fourth quarter and our 75% overall for the year.
I would say that we're going to be probably in that range in twentytwenty, Italy will help us slightly it's not a tremendous size today, we'll be looking to grow that in the future, but that immediate transition will not change it dramatically. So we'll be looking to keep it in that 75 Ray.
Range growing over time, but very slightly.
Great. Thanks, so much.
Thanks, David.
Our next question is from David Turkey of JPM Securities Go ahead. Please.
Yeah. Good morning, this is actually Dan on for Dave Thanks for taking the questions.
Just first off going back to consigned sets deployment in Fourq you came in stronger than we'd expected. So just curious if you could touch on what led to that during the quarter during the quarter sorry, whether is more opportunistic or you know just as a means of meeting demand for your new product launches and then.
Looking out to 2020, how should we think about investment cadence for said should it be no more similar to 2019 as far as getting the sets on the field prior to the does your summer months. Thanks.
Yes, Great question, Danny good to have you on the call the.
The fourth quarter, we're very pleased with the majority of that was new product related launches.
And to your point the cadence is going to be similar to 2019, where we want to get as much of this stuff out in the first quarter and the second quarter to get ahead of that summer selling season get those assets in the field. Before then and then typically the third and fourth quarter is kinda reserved for a few other sets.
But whatever our new product introductions are throughout the that time period as well.
Great and then just a as a follow up and you talked about all the recent changes to the balance sheet, but just wanted to ask heading into 2020, how do you view your capacity for acquisitions, obviously have some adequate room for tuck ins to the portfolio, but any idea how large of an acquisition your balance sheet could shoulder at this point.
Any areas that you feel there's still gaps in your offering that you'd want to Phil. Thanks.
Yes, great question.
So we do have cash on the balance sheet, which is great. We're very pleased with our.
Endeavor in December to put some more cash on the balance sheet to support the operations more set sales.
As you can imagine we use some of that $72 million to eliminate the 5 million dollar line of credit usage early this year to save some interest.
But we still plenty of cash available.
As we look at.
Acquisitions, and we look at product offerings in general there are still some gaps in the portfolio.
We're working on filling some of those internally and there's definitely some assets out there that would help us still those gaps faster as well.
As far size I mean, we have some cash if it was dramatic I don't know what it would be but if there was dramatic we could go back to the market again in the future. We obviously have enough cash as we sit here today for the next several years.
And an acquisition would be the only thing that we may require us to come back to the market.
So we feel really good about we're rapidly some of the volatility in the marketplace right now we have plenty of cash on the books.
And we continue to look for assets as you said to fill those product gaps.
Great. Thanks, much guys.
Our next question is from Calix from Suntrust. Your question. Please.
Hi, guys. Thanks, so much for taken our questions and congrats again on the progress in the fourth quarter since the two quick ones from us.
On Sept deployment, you guys gave some color as to what segments of the business, you'll be investing in and you're growing sat investments, but it is at a lower rate than than prior years. So can you just remind us about the capital efficiency is behind that investments with or Thats, just relative to other areas of your business any any additional color there would be helpful.
Sure.
We're deploying sets in all of our systems.
Legacy systems, New sets, new new products that were launched in 2019 and new products that will be launched in 2020, but we are trying to be more disciplined and focused on those sets that are more efficient and orthofix is just a great example, we love the technology of the product, but the asset utilization.
One is tremendous as I mentioned I think before the a case maybe builds out at 20 or $30000 for worth backs and set maybe cost 30 to $40000 for or effects compared to our scoliosis system, a $20000 surgery with a 200000 dollar set deployment so.
Just get a lot more leverage lot more utilization on the worth X side of the business than some of our other systems and even within our trauma deformity.
Product lines, we have some that are much better than others with that being said at the IPO. We said we were targeting a dollar of revenue for every dollar that was deployed and we feel very good about that metric. We still are very confident in that metric. It say 12 to 18 month time period delay before all of this.
Sets are up to speed and Ronnie but we still feel good about that metric and think it's the right metric going forward.
I think we're also trying to signal Halo that we are very concerned as a company about capital efficiency.
And in fact, the investment decisions, we make any future acquisitions, we make much like the Orthofix thing.
Well have to have capital efficiency box ticked and so I think that will keep us from needing to be on a treadmill into oblivion to increase capital deployments at the same paces revenue growth indefinitely.
That's really helpful. Thank you guys. That's that's great color.
And then just on on EBITDA and I and thanks for your comments there on the quarter I'm sorry, if I missed this but can you just give us a sound for any items that you view as sort of more onetime in nature and how we should think about go forward spending so should we still be modeling EBITDA profitability in the coming.
Just want to understand sort of the puts and takes there. Thank you.
Absolutely. So you can see in the adjusted EBITDA section on the last page of the press release some of those adjustments, but really.
The other things that are not called out in here in the fourth quarter are really heavy quality and regulatory spending.
Along with validation that the new requirements from MD SAP, the new requirements from the EU NDR, we're tremendous I'm very very a lot of new requirements and so we worked very hard to make sure that were up to speed and compliant on those we made tremendous progress in 2019, we've got some more work to do in 2000.
20, and as Mark said, the additional staff that we brought on there will be some additional consulting fees. Some additional validation fees, but a lot of those expenses were very heavy in the fourth quarter and as you saw we had $900000 of loss adjusted EBITDA loss in the fourth quarter compared to a negative 1.1 more.
$1 for the full year, so very heavy in the fourth quarter, we feel like we did get some of those out of the way. Some will continue but we made a tremendous amount of progress as we look at the business and growing 22% to 24%. We're still definitely confident in our statement that sales and marketing is probably going to continue in the.
Same range R&D is probably going to continuing same range and we're going to try to leverage the gionee side of the business.
It is more and more challenging because as I mentioned earlier, we have a 2 million dollar increase in depreciation and amortization.
In 2020, compared to 2019, and we have a $2 million increase in non stock restricted stock expense.
In 2020, as we reach our third year of Cliff vesting in our restricted stock, but with that being said, we're still committed to leveraging that segment of the business and having those expenses grow at a slower pace than the revenue.
Great. Thank you guys.
Our next question is from.
Next question is from Jon Braatz of Kansas City Capital. Your question. Please good morning, Mark Fred.
Hi, John.
Marketing and your commentary you mentioned that you're you're pursuing maybe some exclusive arrangements with some to be the exclusive provider.
Orthopedic equipment to two hospitals, what does that really mean and one of the opportunities. If you were to attain some exclusive arrangement.
At a large account it would be in the millions of dollars several million dollars of incremental revenue.
Is it is this something that would be unusual for a hospital to do and would it be all of the ordinary.
No in fact, many of these accounts years ago.
By default.
Had to use since these as there.
Primary supplier because the these were adult.
Instrument systems that were the only one is available on surgeons that were used to macgyver bring their way through procedures with those systems very few wherever develop for pediatric use specifically.
And so there are still a number of legacy contracts out there with companies like diffuse entities, which show we have been chipping away at quite systematically over the years and now reaching a tipping point because we have this product line that is fully comparable.
Except as all developed for pediatric patients.
How quickly do you think something like that.
An arrangement could be a achieved.
Everything in the hospital World go slowly [laughter]. So it will be a gradual a gradual thing, but we it's encouraging that we're beginning to see that now.
There are two or three accounts that immediately pop into mine.
And we are seeing significant increases in revenue there at the expense of the very company I just mentioned yep, Okay. All right Mark Thank you very much.
Hey, Thank you John.
The answer acuity session I would now like to turn to call back our presenters.
Well I'd like to thank you all for your interest in the company and for joining us on todays update and we'll look forward to keeping you posted on our continued progress.
Thanks again.
This concludes todays conference call. Thank you all for attending you may now disconnect.
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