Q1 2020 Earnings Call
Ladies and gentlemen, todays conference is scheduled to begin shortly please continue to standby and thank you for your patience.
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Q1 2020 also pediatric Corp. earnings conference call at this time, a participant lines on a listen only mode. After the speakers presentation there'll be a question answer session to ask a question. During the session you need to press star one on your telephone please be advised.
Today's conference is being recorded if you acquire any further assistance. Please press star Zero I would now like turn the conference over to your speaker today Trembley <unk>. Thank you. Please go ahead.
Thanks, operator, and thanks, everyone for participating in today's call. Joining me from the company are marked hurdles Chief Executive officer bread height, Chief Financial Officer, and David Bailey Executive Vice President before we begin I'd like to caution listeners that comments made by management. During this conference call will include forward looking statements with.
In the meeting a federal securities laws, including the Safe Harbor provisions of the private Securities Litigation Reform Act of 1995. These forward looking statements involve material risk and uncertainties and the company's actual results may differ materially for discussion of risks factors, including among others, the which related to cope with 19.
Impacts such pandemic they happened man for the company's products on the company's ability to respond to the related challenges I encourage you to view the company's most recent quarterly reports on form 10-Q, which will be filed with the securities and Exchange Commission soon.
During the call today management will also 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 the operations period over period for each non-GAAP financial measure reference some let's call. It. The company has included a reconciliation.
Non-GAAP financial measures most directly comparable GAAP financial measures and its earnings release. Please note that non-GAAP financial measures have limitations.
What tools and should not be considered in isolation or as a substitute for through pediatrics.
Financial results prepared in accordance with gap. In addition to content. This conference call contains time sensitive information that is accurate only as of the trade up the life broadcast May 620, 20, except as required by law.
The company I understand.
Undertakes no obligation to review our update these statements reflect reflect events or circumstances that take place. After the date of this call with that said I'd like to turn the call Mark.
Good morning, everyone and thank you for joining us today on our first quarter 20, Twond <unk> earnings Conference call. We hope that everyone is healthy and staying safe.
We'd like to begin by thinking of the entire health care community core it skill.
And resilience addressing the global corporate 19 pandemic.
I have also been impressed although im not surprised by the way our organization has stepped up during this crisis.
We saw strong start to the year before the Pandemics here, we have sustained our momentum on corporate initiatives that will allow us to emerge from the code crisis stronger than when we entered.
With a pandemic foremost and everyone's mind, we thought it would be appropriate could give you an assessment of how we're leading north of pediatrics through this crisis as we begin to see elective surgeries rescheduled this month and anticipate approaching normal levels by yearend.
Fred will then provide a financial review before we open the call for questions.
For the first quarter of 2020, we generated 12% revenue growth despite the impact of coated 19.
We had a very strong start to the year with 31% sales growth in January and February continuing the trajectory achieved in Q3 and Q4 2019.
This strong start was also reflected in 30% domestic sales growth for the first quarter 2020 supported by all product lines. Despite the deferral of elective surgeries beginning in March.
Internationally, however, sales decreased 32% for the quarter, reflecting the earlier impact of the crisis in Europe, South America, and Asia, and stocking distributor orders asset purchases and said livery came to an airport in the month of Mark.
Given the higher mix of domestic revenues gross margin increased to 75% in the first quarter 2020, compared to 73% and the first quarter 2019.
Trauma and deformity correction sales in the first quarter Twentytwenty grew 42%.
Our scoliosis business declined by 13% in the quarter and was impacted by a complete deferral of surgeries in the last few weeks of March.
Sports Medicine other grew 14% in the quarter.
Our problem and deformity correction growth was in part driven by the continued rollout of the Orthofix hexapod external fixation system that we acquired last.
In addition to Orthofix for the balance of 2020, we anticipate expanded rollouts of all our recently launched products. This includes epifix and its minimally invasive deformity correction or mid C system, which we acquired in early April and is one of wanting to F.D.A. approved technique.
Allergies potentially allows patients to avoid fusion surgery altogether.
In combination with the launch of our large fragment cannulated screw system and the recent F.D.A. approval of broaden the indications for our response scoliosis system and other important new products, we look forward to offering a significantly expanded portfolio when elective surgeries resume.
As we look forward through the remainder of the year and surgeries approaching normal levels, we believe that orthopedic Patrick's kinda leverage the impact of the strongest pediatric orthopedic product portfolio on the markets supported by our sales force a 167 domestic consultants.
Before I turn it to a more detailed update on execution against growth objectives I'd like to discuss how we are leading the company through the global Cobot 19, and demick as elective surgeries resume this month and grow steadily throughout the year.
Although we were on track to deliver our previous annual revenue growth.
Third consecutive quarter of 30% plus growth.
In late March we withdrew our previously announced Monday commodity revenue guidance of growth in the range of 20% to 24% and investment in consign sat in a range of $19 million to $21 million.
We took this step because of rapidly evolving uncertainties on the duration and impact of coded 19 and in particular its impact on elective surgeries.
We are maintaining suspension of our guidance for the full year 2020, and expect that our near term deformity correction and scoliosis businesses will be significantly impacted by the <unk> of following the strong start to the year, we do not expect the pandemic to impact the trauma business to the same degree.
Furthermore, so called elective deformity correction in scoliosis surgeries are critical procedures that cannot be postponed law and many of our surgeon customers describe a considerable backlog surgeries.
This supports our confidence that surgeries will normalize and perhaps even rebound this year, particularly in the United States.
At this time, we cannot estimate the timing or magnitude of the near term sales recovery or the possible rebound and but we will note that we saw slightly better sales in April and then our worst case financial model suggested and May sales are showing considerable improvement.
We arent close communication with our worldwide selling organization and are tracking the outlook at each of our top 100 accounts.
Some institutions have announced with that they're all ours will run seven days a week with extended hours. Some surgeons have been told to cancel their summer holidays.
We expect that elective surgeries will accelerate in July returning to normal levels by Q4 Twentytwenty in the United States. It is to Susan to comment on the international outlook.
We anticipate that freestanding pediatric hospitals on affected by cobot, particularly those in the U.S. will be the first to return to normal levels of surgery.
At this point, however, uncertainties remain including or support staff availability the impact of few patients seen in clinics since mid March and parental concerns about bringing their children to hospitals.
A key factor keep in mind is it worth of Pediatrics ended 2019 $72 million of cash.
On March 16th the first day, we began to work remotely my colleagues in I reviewed a cash flow stress test model prepared by Fred.
This model has served as the basis for the decisions we have made subsequently.
He has enabled us to assure our employees that there will be no job reductions or base pay cuts and that are sure runs has stabilized and motivated our direct workforce.
It allowed us to establish a distributor relief from so that our U.S. sales agencies could draw down very low interest loans that do not need to be repaid fully until year end 2021.
Well this fund baby superseded by the Federal Paycheck Protection program, we believe that it is stabilized our sales force of independent consultant, most of whom so nothing but orthopedic metrics products.
These actions together with weekly webcast Global town Hall meetings, and a personal telephone call by an executive officer to every employee in the company every week had maintained high level of cohesion and morale.
These steps have allowed us to continue advancing corporate initiatives such as intensified Orthofix sales training you MDR compliance.
Developing sterile individually packaged products for Europe, and working with key suppliers to build inventories of critical products.
We have used our industry, leading position in resources to conduct training seminars for young surgeons.
We have been utilizing the dark matter website to host worldwide surgeon discussion groups on treating children. During the school that pandemic and now anticipating the scope of the recovery.
More recently, we have worked on establishing investigational review board sites and targeting U.S. surgeries for the Epifix mid C system.
And finally, we have commenced an orderly senior executive succession process.
Once the global situation begins to normalize she will be in a better position to estimate the impact on revenue growth and set deployments in the meantime, the company continues systematic execution of our twentytwenty growth initiatives with focus and is free to core which is a testament to our corporate culture that its.
And for all our success.
Let's now turn to these initiatives starting with new products.
In March we announced the limited launch of a large fragments cannulated screw system, which represents the company's 34th surgical system.
The system is designed to address slipped to capital femoral it took us or skippy paces and trauma procedures of long bones and long as bone fragments.
Indications for the system includes skippy femoral neck fractures to deal plateau fractures sacroiliac drilling to disruption.
On the other femur fractures sub Taylor ARX reduces and fixation of the pelvis and illegal sexual join.
The system features an innovative screw designed to facilitate implant insertion and removal.
More specifically you didn't foods patented thread, Kenya relation to ease implant removal with screws into millimeter increment for greater precision.
In March we also received ft, a 510 clearance and expanded indications for our response scoliosis system to include neuromuscular surgery.
As further components are added we look forward to this becoming the basis for our new responses neuromuscular system response and EM.
We will feature a complete set of implants and instruments with unique attributes that address extreme hyper lordosis and simplify insertion. This system will be the first of its kind in the industry.
We also continued development of enhancements in some trauma and deformity correction systems to further improve screw to driver and screwed who played interfaces. In addition to progressing our osteogenesis in perfect nailing system.
In tandem we advanced work on the second generation early onset scoliosis technology with IP licensing from adult spine company that we're developing with the inventor and a panel of surgeons, who use the system.
In addition to our product development pipeline recent new systems, such as PD foot Cannulated screws, and the P. and Pete femur intermediary nail systems.
All represent significant near term growth vehicles.
Well, we announced their launch in 2018 in 2009.
These were only initial launches and a significant investments in sets have been made this year for these systems following strong demand.
Turning to product expansion through acquisitions in January we announced the divestiture of substantially all the assets related to the adult products of biologics and Tennessee, as well as a license for or effects in the adult space for $25 million.
This divestiture was conducted as a competitive bidding process by aboard panel of our independent non executive directors.
Meanwhile, Orthotec sales continued very strong through mid March with evaluations and surgeon conversions.
Currently our sales organization is being trained on the system with Webinars conducted on an almost daily basis with attendance that is threefold greater than before the coated endemic.
Furthermore, or thick sales calls and new surgeon commitments continue to take place through virtual meeting.
The software can easily be demonstrated.
In April we announced the acquisition of assets fix limited and its midstream system or non fusion treatment of progressive adolescent idiopathic scoliosis or am I guess.
This has become the company's 35 surgical system.
As a reminder, we acquired Epifix for 934768 shares of Opie common stock and a $2 million in cash closing.
US milestone payments and an earn out over a period of four years.
We believe the mid C system is a game changer.
It feels a major treatment gap.
Essentially allows patients to avoid fusion surgery altogether.
The system is implanted unilaterally on the concave aspect of the curvature and acts like an internal brace for patients with monkey type, one and Linky type type curves of 40 to 60 degrees.
Importantly, this solution avoids permanently limiting range emotion and is easily removable.
It is one of only two F.D.A. approved non fusion technologies and expands the market for surgical intervention in A.I.S. patients, we know of no other competitive products on the horizon.
The mid C system is backed by eight years of clinical history with more than 370 patients outside the U.S. <unk>.
Importantly, this acquisition opens a new segment in the continuum of Scoliosis care and offers the option to treat patients who are not being successfully treated with bracing.
Before these patients can move to fusion surgery, there often in limbo until their curves progress to 50 degrees or more.
The mid C solution provides a short or less complex and far less risky surgery, then tethering the other non fusion technology available.
We're pleased to stand tall and advance our strategic initiatives with this major acquisition, even in the midst of the coded crisis.
Turning to operations to support our new product launches, we continue to consolidate the great majority of our intent supply into the hands of our highest quality and most responsive supplier, which has maintained full employment based on our orders to build sets inventories of critical products and vend.
Her managed inventories.
LP orders represent the vast majority of the volume of this contract manufacturer, which is located 45 minutes from our Warsaw headquarters and where we also established a quick turnaround prototype so the significantly reduces lead times and product development.
Q2 is typically when we prepare for the summer surgery season ended this quarter, we anticipate consigning, some $7 million of new instrument implant sense African signing $3.3 million [laughter] one.
Despite the postponement by the European Union of its medical device directive until 2022, we continue to address this major regulatory affairs challenge to ensure that we are fully compliant with these regulations as quickly as possible.
Turning to our international and domestic sales organizations in March we implemented our sales agency model in Italy by converting our stocking distributor in that country, thus, bringing us to a total of 38 stocking distributors and eight sales agencies internationally.
In the U.S. the size of the selling organization is currently 167 sales consultants, which is up 21% from the same period last year.
While our discussions with major U.S. pediatric centers about becoming their primary source of trying to form a products have temporarily been put on hold they represent significant future potential and our further supported by the recent addition of Epifix orthotics and new surgical systems introduced since.
Our IPO in 2017.
This is the time the test accompanies leadership and its culture.
We are delighted to see spontaneous demonstrations of leadership initiative and selflessness at all levels of the company.
Although we have worked remotely since March 16th we remain cohesive with a high degree of morale and productivity.
We're proud of our tangible progress toward becoming the employer of choice in the orthopedic industry with recognition in February for the fourth year as one of the best places to work in Indiana.
Employees at thousands of companies are pulled by the Indiana Chamber of Commerce and fewer than 100 are selected for this honor.
Therefore, we are confident that we will retain our employees our sales personnel and our momentum as we continue to drive competitive advantage even during the coded crisis.
With that let me now turn the call over to Fred to review our financial results.
Fred.
Thanks Mark.
Total revenue in the first quarter Twentytwenty was $16.4 million up 12% when compared to $14.7 million than same period in 2019.
You asked revenue in the first quarter of 2020 increased 30% to $13.4 million compared to $10.3 million in same period last year, representing 82% total revenue.
International revenue in the first quarter of Twentytwenty was $3 million.
32% decrease compared to $4.4 million in the same period last year, representing 18% of total revenue.
As Mark mentioned sales in our international markets were impacted earlier by code that 19, then the U.S. with stocking distributors canceling orders then typically weighted to the end of the quarter.
Our first quarter revenue breakdown by product category was as follows trauma and deformity revenue in the first quarter of Twentytwenty was $12.2 million, a 22% increase compared to $10.0 million in the same period last year, which included contributions from all.
Thanks, Hexapod deformity correction system, and new product introductions offset by the slowdown in elective deformity correction surgeries.
Scoliosis revenue in the first quarter of 2020 was $3.7 million, a 13% decrease compared to $4.3 million in same period last year or.
Her scoliosis business was impacted by Tobin 19, more quickly as elective surgeries were deferred.
Lastly, sports medicine other revenue in the first quarter of Twentytwenty was $435000, representing a 14% increase compared to $381000 in same period last year.
Moving down the income statement gross profit in the first quarter 2020 was $12.2 million, a 15% increase compared to $10.7 million in the same period last year gross margin in the first quarter 2020 was 74.7% compared to 72.7%.
In the first quarter of 2018.
The increase was attributable to a higher mix of domestic sales and higher gross margin as Mark previously mentioned.
Sales and marketing expenses in the first quarter 2020 increased 16% to $7.6 million when compared to $6.5 million in the same period last year.
This is driven by an increase in unit volumes sold and associate commit commissions in the U.S. and ongoing marketing expenses.
General and administrative expenses in the first quarter of 2020 were $7.9 million, an increase of 40% when compared to $5.6 million in the first quarter 2018.
The increase in expenses was primarily driven by increased quality and regulatory expenses.
Increased depreciation from significantly increased deployment in prior years as well as increased noncash stock compensation.
Research and development expenses were $1.3 million in the first quarter of Twentytwenty, an increase of 4% when compared to $1.2 million in the first quarter of 2018.
Total operating expenses in the first quarter of Twentytwenty were $16.7 million compared to $13.4 million from same period last year, an operating loss in the first quarter of Twentytwenty was $4.5 million compared to a loss of $2.7 million in the first quarter 2019, driven by the higher noncash.
<unk> stock compensation higher quality and regulatory and higher depreciation as result of the increase that deployment in prior years.
Adjusted EBITDA for the first quarter of 2020, with a negative $2.1 million compared to a negative $1.4 million for the first quarter of 2019.
Interest expense in first quarter, 2021, zero point $4 million, a 25% increase compared to zero point $3 million in the same period last year.
Net loss in the first quarter Twentytwenty was $4.9 million compared to a net loss of $3.0 million in the same period last year and net loss per share attributable to common stockholders in the first quarter of Twentytwenty was 30 cents per basic and diluted share compared to 21 cents per basic and delay.
I would share in the same period last year.
Turning to our balance sheet as of March 31st Twentytwenty after paying off $5 million on our credit facility, our cash in restricted cash was $54.9 million compared to $72.01 million as soon as of December 31st 2019, and the company had approximately.
$21.2 million in total outstanding indebtedness with the full amount of its $15 million revolver credit facility currently available.
Purchases of property and equipment during the first quarter 2020 were $4.0 million, a 20% decrease compared to $5.0 million. During the same period last year, reflecting a decrease in construction and process, which includes partial sets waiting to be deployed.
Including the implants $3.3 million of consigned sets were deployed during the quarter compared to $2.7 million during the first quarter of 2019.
As Mark mentioned this the first stage of a significant deployment of new sets and we look forward to artist painted the deployment of additional sets to meet those demands in the second quarter and beyond.
I also wanted to mention adjustment to our year end 2019 balance sheet.
We when we file our 10-Q soon it will reflect updated purchase accounting related to what backs bile X transit transaction, which resulted in the elimination of 12.8 $12.4 million of deferred revenue and offset with an increase in IP value, which was then sold at year end.
In conjunction with the sale of the violets.
The 10-Q also makes reference to a small acquisition we made in March of Twentytwenty of Telos partners LLC.
A specialty regulatory affairs consulting practice.
The purpose of this transaction was access the most sophisticated technical expertise available in this challenging deal.
Enabling ortho pediatrics to anticipate and comply with future regulations around the world.
The size and personnel impact of this acquisition, we're not material and any external sales that they generate will be reported in the sale sports medicine slash other category.
In terms of guidance as you know we withdrew our prior annual Twentytwenty revenue.
Growth in the range of 20% to 24%.
And investment in can find that in a range of $19 million to $21 million due to the rapidly evolving environmental and continued uncertainties surrounding the duration and impact apco that 19.
Let me now turn the call back to Mark for some closing remarks.
Thanks Fred.
As we have all been reminded throughout this pandemic unforeseen events can append the environment in which we operate.
I'd like to thank all our associates for their extraordinary leadership and personal accountability that has enabled us to help 172000 children from the time, we entered the market in 2008 through the first quarter of Twentytwenty.
I'm confident that our focus and consistent execution will continue to drive orthopedic metrics, leading position in the pediatric orthopedic industry.
Before we open the call to questions in our press release yesterday, we announced the promotion of Dave Bailey, President and Fred height to Chief operating Officer, and Chief Financial Officer effective as of June Threerd Twentytwenty.
These promotions commence and orderly process of senior executive succession in anticipation of Dave being named Chief Executive Officer, when I transition to executive Chairman at some point in Twentytwenty one following my Seventyth birthday.
When that occurs I will continue to work from our Warsaw headquarters and maintain direct involvement in Investor Relations strategy development and operational travel in the field.
This transition stems from discussions began in 2018, when I informed the board than I believed it was appropriate to step aside as CEO sometime following my 70th birthday in 2021.
This triggered an orderly process of succession planning from which emerged to outstanding candidates with complementary skills.
Fred hide is a rare financial executive who brings strong operational inside and corporate development expertise.
And Dave Bailey, who has been with though piece since its founding has deep knowledge of our technologies, our customers in surgical procedures as well as our selling organizations both in the U.S. and internationally.
Dave and Fred already constitute a powerful do.
Therefore, I expect seamless continuity when I ultimately step into the executive Chairmans role.
The three of US have long worked as a team that is unconcerned with titles and hierarchy and I have no doubt in their abilities to continue driving the company forward to the next level of success.
And with that let's open the call up to your questions.
Thank you.
As a reminder to ask a question you'll need to press star one on your telephone to withdraw your question. That's the pankey. Please standby we've compiled the Q in a roster and once again that is star one if you like to ask the question.
And I first question comes from Rick Wise from Stifel.
Your line is now open.
Good morning, you, all congratulations Dave and Fred well deserved.
Mark I don't want gosh.
Right.
Congratulations to you and the team.
Everything you achieved and personally I'm thrilled that you're still going to be around to.
Pick on and communicate [laughter] well. Thank you Rick those are kind words.
No.
Turning to some of your comments today. Thank you for you.
For all the color.
It's hard not to start with your comments about April and May can can you give us a little more.
Good thing when you say April slightly better than worst case do you feel like volume.
Utilized and I appreciate there might be.
Comments for each procedure and each geography, and when you talk about made considerable improvement just that again I want to make sure my understanding is that considerable improvement relative to expectations relative to.
The last week George again, just.
Round ourselves.
Thank you yeah.
In summary April was down approximately 60% from normal.
Trauma was less than that.
Deformity correction were more than that.
But that 60% decline was less than we had anticipated in our cash flow stress test model.
It was noteworthy that international was slightly worse than domestic and the month of April.
Now in May well, we're only a few days into them and we have seen a substantial increase.
But we are still below normal by a considerable amount and we are.
Probably a little better than our stress test model, but are actually reasonably much in line with the improvement that we anticipated would take place in Q2.
But I would stress Rick that the this is.
One data point called April and a few days into a second data point called me, but I think that's about as much as we can tell you about where we are.
Thank you.
And our next question comes from Matthew O'brien from Piper Sandler.
Your line is now open I'm wondering.
Oh, good morning, let me Echo Greg's comments on the not a C suite there congratulations to everybody.
I guess.
Mark for starters on.
On the Scoli season, as Rick visits coming up here. It's obviously you know the summer months are critical for that business.
Can you reconcile some of your comments about the interest or some of these new cases that are being.
Scheduled with parents willingness to bring their kids in for these long procedures and how we should think about that about the season. This time around you know given a co bid overhang.
Dave would you want to comment on that.
Yeah, Matt Hi, good to talk to you Yeah, I think it is very encouraging to see at least in them automate so far that we're starting to see a number of the cases that were booked are we felt like we lost in the last three weeks of March.
Start to be book back in May and that said, we're only looking at the bookings we haven't done a number of those procedures and so in the first few weeks, we've seen a number of cases get scheduled as well the number of those cases get cancelled.
And so as Mark suggested it very early days, but at this stage, we are seeing returns to bookings, which is not something that we witnessed the at all in April we can't speculate at this moment witness what is necessarily driving some of those cancellation.
But it is encouraging see the bookings now for June.
I think that's anybody's guess, we already have a number of cases scheduled in June.
I think it's going to take us for the month of made to determine.
Parents and patients willingness to ultimately go back into the operating room back into the hospital and ultimately to see how hospitals ease back into things.
You know as some of the a pandemic passes.
That's real helpful. Dave just you know along those lines just follow up a little bit more what kind of visibility do you have in a normal year to those volumes in June and July and then how does that kind of how does that look at this point again I know, it's early and there's a lot.
Confounding factor is right now, but how does that look at this point versus maybe you know more traditional type here.
Yeah. It's a great question. So normally we have visibility I would say at least a month if not six weeks in advance for about 75% of a surgery schedule on any given month on I'm, specifically speaking specifically to scoliosis I would say it at this point, we've been very aggressive with our salesforce to try to get them to ensure.
That they post those cases with us and connect with their physicians and their accounts. So that we understand obviously, where we need inventory, particularly in instances, where it's possible that some of these cases could be done over a weekend or after hours or back to back to back when a physician get though our time, so we're being very aggressive.
Right now and making sure that we have clarity.
That said I do think it's encouraging that we have the volume of case that we have on in may as well. The volume of cases, we have on June and I would say that are clarity ended the month of June is pretty similar to where our clarity is normally at this time in the summer and it is clear that even in the month of June it's all of them onto my that were.
Substantially off where we would have where we would expect to be a this time in a normal summer, albeit we're better off than we expected to be a few weeks earlier.
That makes sense, Matt got it.
Makes total sense and just as a quick follow up the commentary about January and February was obviously, a real favorable would love to just see if you could see that little bit where some of that.
That strength was coming from the 30% growth in January and February.
Trauma deformity scoli.
Domestic international just anything you can kind of tease out as far as.
So some highlights or some some stronger points that that you saw there.
Fred would you want to comment on that.
Yeah, absolutely. So we had we had a very strong start to the year.
I would say the its domestic was stronger than our international business growing stronger than our international business. The T.D., even if you back out the worth X was very very strong. So we're very pleased with the organic growth of our TMB business.
And then when you add on or Thats on top of that the domestic performance was just outstanding.
So we're off to a great start the first week of March actually continued that trend and it was really that second third and fourth week of March when things started to slow down dramatically on the domestic side and went to very very little sales on the international side as they saw stuff obviously start much.
Sure.
Very helpful. Thank you so much.
And thank you.
Our next question comes from a Ryan Zimmerman from P.T. I'd. Your line is now open.
Great. Thank you and let me I thought everyone sentiment congrats everyone on the roles.
I wanted to talk about 10 day, particularly on the trauma side you know we've heard from some of the large ortho players that the stay at home orders are having some impact on trauma.
Around the country and so I just love to get your thoughts around that relative to your confidence in the trauma business in our kids still play an outside and are you seeing trauma cases still as a result of that just some color there I think would be helpful.
Even in the the dark days of April we were saying trauma cases, albeit trauma was off from what it would normally be and I think that data confirms the assumption. We made on March 16, when we evaluated freds stress test model that the trauma business would be less seriously impact.
Good.
Because of these were not elective surgeries, which is the case was scoliosis under deformity correction.
Thank you Mark appreciate that and then if we have talked about happy fix for a minute I just would love to understand kind of how you're thinking about the roll out there.
Is this something that you're going to do in a phase manner.
Are you in lesion into the full power.
At 167 sales consultants.
Over time, so just some color on on the commercialization there.
Yeah. The the focus is on comparatively few some 20 I RV sites investigation or review board sites 11 of them are in hand, now and we are working on getting another 10.
There's been very robust demand by surgeons, both at those accounts and many others around the world to get their hands on athletic, but we must remember that this is in HCV product, we want to make certain there is a very good track record due to a good surgeon training before they commence.
Surgery goods support of those cases from our side and finally, good outcomes for the patient because the first 200. These cases will be I will go into a registry, which will be followed for some years and of course, we want that registry too.
To confirm the innate potential of this extraordinary technology. So we're not going to the unleashing a 167 sales reps with this thing we're going to be doing this in a more controlled manner.
Okay, Dave we do you want to make any additional color or I'm, sorry, Ryan if that answers. Your question. That's fine no. Please that some cost one day would be greater than I have one more to sneak one.
[laughter] very right one of the things that we one of the things that we are doing right now is starting to.
We've commenced the process of of very high level training with several of our managing directors in the field as well even potentially some engineers that we have an orthopedic patrick ought to be able to cover these cases.
Helpful positions very specifically on how to use the instrumentation and how to use the implants.
We've articulated that this is a fairly simple procedures, particularly compared to a vertebral body tethering. We are extremely focused on ensuring that the cases go extremely well, particularly early on I think it's very critical that that Oxford and have a great experience with this product we.
I would likely have each one of the first couple of hundred of the surgeries covered by a specific expert either from a epifix directly coming over from Israel or members of our staff who have been a part of several hundred if not several thousand scoliosis pay cases and have a very commanding presence in the operating room.
Such that we can ensure that these procedures go extremely well so we spent.
Like Mark talked about we spent an enormous amount of time a training our sales force on or Thats, where all spending a fair amount of time at this stage training, our our internal people who will be in the or about eight the fixed.
Got it I appreciate the color there, Dave and just to sneak one in on the international orders.
Noting that these are stocking distributors, what's your estimation Fred for a recoupment of those protect orders that worse, maybe lost at the tail end of this quarter is this just a timing dynamic and you pick those up or how do we think about just some of the stocking order timing that you lost content.
One of the quarter. Thanks.
That's great question at the those orders will come back.
They wanted those sets obviously the timing of it I think the big question.
They are all as you can imagine managing through their own cash situation and and understanding the impact their business and they have to I think gained some confidence in surgeries, returning and then building back up their cash position before they would be ready to read.
Purchase and be aggressive and investing more in their business.
So they haven't gone away I think it's a timing question on when they would return.
Okay. Thank you thanks for taking the questions.
Thanks.
And our next question comes from Kayla from Suntrust. Your line is now open.
Great. Thanks, Hi, guys. Thanks for taking our question congrats to Dave and Fred on your promotions and the Mark on the planned transition than a new role.
So you guys mentioned you know the 60% decline in April and that's not too surprising, but you've mentioned also a return to bookings and in May and I'm curious if you give us any sense for how many of those.
Different procedures in April, our being rescheduled or or or in process of being rescheduled at this point.
I think kayla other than the scoliosis cases that they referred to at this very early stage in the month, we don't have any good feel for anything other than to say a sales historically and I he and the last six seven days I have been much stronger.
And then they were in April and clearly reflect a the return of elective surgeries in what roughly half of the states in the United States, albeit at very different levels of.
Operations.
So Dave unless you or you Fred would have more color there I'm I'm not sure I know of any other detail with regard to deformity correction and things other than scoliosis.
Yeah.
Don't know Kayla I think one of the nuances or noticing but we this is anecdotal at this point is that obviously surgery for elective procedures isn't opening up in every account geographically the same way and so we have noticed that certain of our key accounts, particularly on the scoliosis side may have scheduled a number.
For a procedures kinda back to back it back in a particular in may.
But we're not seeing consistent bookings across kind of the entire footprint of our of our customer base and so it's really leads us to speculate and again I would say that the pure speculation at this point, but what we're speculating is that a number of the account that are coming back online are trying to catch up.
From cases that we know we already had booked in the last three weeks of three weeks of March that went away and that we would have inevitably had booked in the month of April. So it's possible that an old accounts were seeing kind of higher volumes in a particular account as a result of the fact that they're trying to get ahead of getting you're getting some of these procedures done before they go into the summer.
But we're not seeing is uniform returned to elective scoliosis or any elective procedures and other pockets of the United States.
Got it okay that makes a ton of sense. Thank you and then there's this I'd add to most partners LLC deal I realize it's small for you guys, but what prompted that deal.
As time has to be curious for more background there.
Well I think we went through this experience last year, where we recognize there was a sea change that was happening in Europe with regard to this new medical device regulation and so we had gotten to know.
The lead partner it tell us which is just a handful of very high level regulatory affairs professionals and we were very impressed with that guy grass not only on what was going on in Europe about how to comply with it in an efficient way and secondly, what to anticipate in the future.
So I think this was the goal here was to be able to access on a permanent basis. The most sophisticated technical expertise we had encountered in this whole regulatory affairs world and that would enable us not to be at play catch up but to anticipate the thrust of future regulations and the.
And to learn how to comply with those in the best possible manner.
One final comment and that is because telos is still out with many clients, which span far greater area than just orthopedics.
We like the fact that they are out talking to other companies and therefore, our at the cutting edge of the thinking in this area and this was not intended to become a huge profit center for the company, although I have to say the better they do the better we will do it was really to be able to have.
Get access to that expertise on an ongoing basis.
Great. Thank you.
Thank you and our next question comes from Mike Mattson from Needham and company.
Your line of high thing.
Thanks for taking my questions.
Just have a few on the p. at all.
So just curious what's the outlook is for gross margins I know that your manufacturing it is outsourced but.
If you see this big decline in the or or sizable decline in the second quarter is that going to have any repercussions to gross margin either in the quarter or.
Looking out over the next few quarters.
Yes, Mike It's a great question and actually this is a period of time, we were glad we don't have all of the fixed costs up manufacturing facilities, and we really negatively impacting our gross margin rate because it is the 100% variable fall out.
The worst we're very pleased that gross margin was very strong in the first quarter and I think it'd be continued very strong in second quarter and third quarter, particularly as the domestic business may return sooner than the international business and we have favorable mix leveraging that 80.
5% gross margin in the us well.
There's really no other fixed costs that we have that will be waiting that down and so we expect that gross margin strength to continue throughout the rest of year.
Okay, and then similarly with regard to your Opex sounds like you're not being real aggressive with cost cutting or anything like that and here. It looks like you were kind of around 17 million than the first quarter. So should we expect that to continue to be kind of in that that range.
Maybe there's some decrease travel and things like that some discretionary spending but.
No just your thoughts on Opex or over the next couple of quarters.
Yes sure.
Then on that commissions.
Emissions, which is almost 30% 32% of sales that's a 100% variable.
And so AD revenue comes down that comes down with it.
In the exact ratio the things that are not variable are obviously compensation as weve committed to keep all of our employees.
The stock compensation doesn't change obviously in depreciation doesn't change. So those things are all fixed where we see some neighboring that's in the semi fixed area are things like travel.
Obviously, that's gone down dramatically and we expect that to be down for the rest of the year.
As well as meeting expenses advertising and some of those other controllable expenses, which I view as semi fixed we're definitely seeing those savings.
In the second quarter, and we expect that to continue throughout the rest of the year.
Okay. Thanks, that's helpful.
And then just wanted to ask on your set placements.
So I know you've spent at that guidance there, but when you look at the original plan. If we kind of fast forward to the end of next year I imagine you will be placed in considerable amount next year as well so.
Do you think you can kind of catch up on that assuming it's slower in the second it maybe even in the third quarter that you can get by the end of next year that you'll be at where are you otherwise would have been with regard to set placements assuming that this kind of recovers and he doesn't get worse.
I guess a pandemic.
Yeah. That's a great question. So we had a lot of our sets for this year R&D on order and so with the replenishment orders being down many of our suppliers are focusing on completing those set owners and getting those to us here.
2020, and so we would expect to deploy a considerable amount of inventory ended the deal.
To meet what we see as you know a demand that's not going away. It's just been deferred and so our goal is to get those sets out there into the field could we see an increase in deployment in second quarter, and then continued deployment in the third and fourth quarter, albeit slightly lower than maybe are.
Overall forecast.
We're very fortunate in the in the back that we Didnt raised $60 million in December of last year.
So while we have the cash to be able to deploy those sense. Both this year and the cash to deploy those sets next year and still have enough cash to take us all the way through the end of next year in a strong position. So I guess my long answer to your question, but the answer.
Yes, we would fully expect that we would have deployed.
20, and ours 2021 cents by the end of next year.
Okay, great. Thanks, a lot.
Thanks.
Thank you and our next question comes from Dave Turkaly from JMP Securities. Your line is an open.
Thanks, It's way too early in the morning for Latin, but congrats to Mark and the doing great ahead, [laughter] well done today, well, though [laughter].
You mentioned it seems like you're continuing to expand the consultants I think you said 167 so.
You mentioned you no no no job reductions, but I'm curious as to.
Plans in terms of where you started the year and what you might be doing on the hiring front either here and you know internationally.
Well things certainly brown to halt in in on that hiring front over the last couple of months and we'll just have to see how this progressive but.
We we we'd have felt that we've got to be committed to our current head count those to the selling organization as well as a direct employees and to maintain a high degree of motivation.
Rather than to be adding to the head count.
I think Dave you know the most fundamental thing in this whole cobot exercise is that there was very little focus by orthopedic companies on pediatrics before cobot and there will be even less focus now and the market will become even less competitive so our whole orientation has been to capitalize.
On that future state of it being less competitive and hit the decks running very hard as surgeries or put back on the books. So maintaining this high degree of motivation with our staff was really a paramount concern to us.
[noise] and maybe just.
A follow up on that you said something in the prepared remarks about [laughter] senior management talking to consultants I think he said it live every week, but I just want to confirm that is.
Yes, we we HM RVP actually puts out a little telephone chain to the entire senior management team. So that one of us touches base with one of our associates every week and these are non business calls is just to call and ask how's the weather in des Moines, Iowa, and How's your family keeping.
But as you can imagine that has a very powerful impact on people who are working remotely so they don't field associates.
Got it last one you mentioned the large fragment cannulated screw I just was curious is that an upgrade.
An older.
Product or is that an entirely new area for you guys. Thanks a lot.
Dave you want to comment on that.
Good day, that's a great question. So we had a cannulate a large cannulated for a single side was a seven okay cannulated screw and it didn't have a lot of instrumentation specific to the what capital Federal a business. This procedure that we are promoting.
Aggressively the new large fragments system. So I wouldn't expect a lot of cannibalization of our existing screw business because that gets used in in a number of different indication, but we would expect to see the the new skippy system. The large frag candidates for system kind of becoming the premier system for a for the skippy procedure in children's hospitals.
Thank you.
And thank you and I'm showing no further questions I would now like to turn the call back over to Mark throw at all.
For further remarks.
Well, we just like to thank all of you for your interest in the company and our progress.
And we hope everyone will stay safe and healthy and then we look forward to being able to provide you with timely updates as the situation clarifies itself. So thanks, so much and have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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