Q1 2020 Earnings Call
That's just talk about like to walk everyone through the Conformis first quarter 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question answer session.
Before we begin I'd like to remind you that Conformis management will make statements. During this call that include forward looking statements within the meaning of the federal Securities laws, which are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act. It might see 95 any statements contained in this call that are not statements of historical fact should be considered forward looking statements off.
Forward looking statements, including without limitation thinks about Conformis strategy future operations and expectations do you anticipate it in fact at the novel Corona virus pandemic.
The actions of the and the actions Conformis is taking complaining and response.
Whether or when restrictions or only elective surgeries will be relaxed and demand for procedures will increase future financial position and results gross margin product margin operating trends financial guidance market growth total revenue mix byproduct and geography, you anticipated timing of conformance product watches the potential impact.
In advantages of using personalized implants business initiatives and transitions in our commercial operations are based upon current estimates and various assumptions. These statements involve material or risk and uncertainties that could cause actual results or events to materially differ from those anticipated or implied.
These forward looking statements, including those discussed in the risks risk factor section of Conformis public filings with the U.S. Securities and Exchange Commission.
Accordingly, you should not place undue reliance on these forward looking statements walking forms may elect to update these forward looking statements at some point in the future Conformis. The disclaims any obligation expected, except as required by law to update or revise any financial projections and forward looking statements, whether because of new information to future events or otherwise.
This conference call contains time sensitive information and it's accurate only as of the wide broadcaster date May 11 2020.
Now I'll turn the call over some market gusty conforms, President and Chief Executive Officer Mark.
Thank you operator and welcome everyone to Conformis is first quarter 2020 earnings conference call with me on the call today's our CFO Bob.
During the call we will share prepared remarks on a variety of topics, including our first quarter financial and operating performance. It's all his comments related to the Covidien 18, pandemics impacts on our operations.
Following the prepared remarks, we look forward to answering your questions.
On March 23rd 2020, we drew our full year growth targets and noted that it was due to the cobot 19 endemic and its impact on orthopedic scheduled surgery.
This was disappointing because 2020 had gotten off to solid start we live in our release that while these estimates in the longer accurate or reliable as of March 12, 2020, our best leading estimate had indicated that for Q1, our global product revenue could've been approximately 3% lower than revenue in Q1 2019, an improvement from that.
10% decline in the prior quarter. Additionally, leading indicators for Q2 2020 had projected returns positive close with global product revenue growth. That's made its increased 8% versus prior year.
The only put forth. These numbers again, please the first quarter actual performance in context of the pandemic impact our first quarter revenue decline of around 20% was clearly due to the drop off in elective surgery in March of this year.
As of March production schedules orthopedic procedures, we had been experience an uptick in our order rate. This was I believe due to two positive trends positive feedback an uptake in our new IP franchise, but even more due to the positive feedback and interest in her new identity Milano identity products team delivered a great product concept and roll out the timing of.
This has been unfortunately.
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We're proud of the conforms team in the way our colleagues have responded from a leader for shipped perspective, we've sought to protect our employees and their families protect our production capability.
Second support our patients in customers and communicate communicate communicate that and we have allowed those employees, who are able to do so to work remotely for production employees, who cannot work remotely we have among other actions implemented enhance cleaning encouraged employees practice social this thing in common areas record physical Barry.
He is where possible and limited visitors.
You should we continue to monitor supply channel and they're not currently aware of any potential concern.
As you reported on March 23rd However, we were forced to make it difficult decision furlough roughly one third of our workforce and substantially all of our temporary workforce.
Subsequent to this and as a result, great efforts by our finance team. It outside advisors on April 17, we're able to secure a paycheck protection program a case PPP loan of approximately 4.7 million. This government relief allowed us to bring back almost all of our furloughed employees.
There will be many questions about the ramp up of scheduled surgery, well, we're pleased to see the beginnings of the resumption of schedule surgery, we would not be providing any new guidance for 2022 to the continuing uncertainty in the ramp up as a result of different policies across multiple states in Canada.
And of course concerned about possible false bikes and cover they few infections that would potentially to renewed surgical interruptions.
We can't really fit our April revenue decline was approximately 19, 95% over prior year I would like to note that conformis is not have any revision oncology or trauma orthopedic products that would've been acute are considered a central surgery.
Such among orthopedic companies were likely one of the most heavily weighted towards pure primary elected total joint replacement.
Absolutely as indicated earlier I can say that we've started to see the uptick in both orders and surgeries last week of April and this first week in May before I provide further comment and thoughts, which I will be later on.
About the remainder of the year, let me now turn the call over to Bob for more detailed financial view of Q1 Bob.
Thank you Mark and thank you everyone for joining us.
Before I begin the financial review I want to share change in the level of detail, we'll be reporting on our revenue results.
Going forward, we would recording revenue at the total knee and hip level.
While.
We will continue to provide business updates on new products, we will no longer be providing chronic level revenue details.
As you know with the launch of market product. We are now no longer just the meat company and as such we believe it is appropriate to migrate our reporting to align with these two major product categories.
And it will also be consistent with our major competitors report get orthopedic results.
Ill now move on to the financial review.
We reported first quarter revenue of 16.5 million, representing a decrease of 20% or 4.2 million year over year on every 40 basis.
Excluding the negative impact of changes in foreign currency exchange rate of $32000 revenue decreased 20% on a constant currency basis.
Revenue in the first quarter 2020, and 2019 includes royalty revenue of 185000, and 175000, respectively related to patent license agreements.
First quarter product revenue was 16.3 million, representing a decrease of 4.2 million or 20% year over year, I reported and constant currency basis.
Sales of our new products declined 4.1 billion to 15.8 million or 21% year over year on a reported and constant currency basis.
Sales of our Conformis hip system were 441000, a decrease of 10% year over year on both reported and constant currency basis.
You asked product revenue decreased 3.8 million to 13.8 million for 21% year over year.
You asked sales of our knee products declined 3.7 million to 13.4 million were 22% year over year.
First quarter U.S. product revenue represented 85% of total product revenue compared to 86% for the same quarter last year.
Rest of World product revenue was 2.5 million a decrease of $406000 were 14% year over year on a reported basis and 13% on a constant currency basis.
Product sales and new countries as well as growth in the UK helped partially offset the negative impact of the Covis 19 global pandemic.
With that I'll now be truly view of results across the rest of the piano.
First quarter gross margin was 44% of revenue compared to 48% of revenue for the same quarter last year, a 380 basis point decrease.
The decrease in gross margin was driven primarily by little volumes increase in inventory reserves for on news product.
Increasing reserves factors in the higher than normal delayed surgery as a result of the covert nicely pandemic.
Total operating expenses decreased 1.1 million to 15.3 million or 7% year over year.
This degree decrease was driven by a 20% reduction in our sales and marketing expenses, primarily as a result of lower variable costs due to the decrease in revenue.
Net loss was 9.4 million or 14 cents per share compared net loss of 7.6 million or 12 cents per share for the same period last year.
Net loss per share calculations assume weighted average shares outstanding.
67.3 million shares for the first quarter 2020, compared to 62.8 million shares for the same period last year.
Net loss in the first quarter included foreign currency exchange expense of $714000 compared to foreign currency expense of 653000, the same period last year.
We had cash cash equivalents totaling 21.5 million as of March 31st.
Rather than 20 compared to 26.4 million as of December 31st 2019.
Lastly, I want to close with a brief discussion on liquidity.
As a result, as the Colgate 19 impact on elective procedures do not expect to satisfy the trailing six months revenue covenant at the end of June 2020, which may be an event of default under the 2019 secured loan agreement.
Got it at East West Bank, unless the parties agreed to a new finding to plan within 60 days After June Thirtyth 2020.
We have already begun discussions within advice about the new plan and although we're still early in the stages of discussions we believe we will be able to work than boss.
Absolutely resolving issues that may arise.
Under that assumption and with the 4.7 million PPP mode, and a combination of Stryker milestone payments and other non dilutive financing. We believe we can find if the company into Q2 2021.
We will of course continually review expenses closely and look for opportunities to reduce discretionary spending.
With that let me turn the call back over to Mark to add additional color.
Thanks, Bob.
Well this global pandemic has been challenged for people all over the world I want to acknowledge and thank the incredible employees of performance through their efforts. We've continued to move the company forward and are ready to support the resumption of schedule hip and knee replacement.
Some of the specific actions we have undertaken are as follows during the selling positive proactively offered numerous virtual medical education sessions for surgeons, both domestically and internationally.
We've held a number of professional education events for our sales agents. In addition, as noted in our March 23rd or at least we maintained our development activities and as a result of continued to progress or new product development programs. This includes activities related youre at Stryker partnership.
Well on the subject of our work with Stryker, Let me pause to provide a little more color on this partnership.
As we all know there's a significant shifts in total knee arthroplasty to lower cost save care facilities, such as hospital outpatient centers and ambulatory care centers.
Oh, the 800000 or so primary needs performed annually in the United States. Some reports indicate that more than 50% might be performs on outpatient basis and the next three to five years.
We think the covert 19 pandemic will accelerate the shift fees.
In order to capitalize on this trend performs and Stryker entered into a strategic collaboration whereby conformis. This is designing and supplying PXI guides to create a need a box solution for their market leading traffic on total knee system.
We expect the travel I mean, a box to be available in mid 2021, but of course actual commercial availability will be up to stryker.
Continuing on other actions. We have undertaken include our operations team has continued to produce implants for substantially all of the orders we had in house before the pause in elective surgeries.
To date, approximately 43% of those have already been implemented are scheduled to be implanted. We currently expect to see almost all of the remaining cases, 90% or more to be reschedule.
Most importantly, we continue to receive I tend to be instruments parts and were able to build over 60, new sets. During this pause now more than 100 identity sets to deploy to the field immediately and we anticipate to achieve our goal of 500 be identity sets being available before yearend.
While we cannot predict exactly how revenue will ramp during the resumption of orthopedic procedures. We are prepared to serve our customers patience as we as we happen to pass.
We have seen are leading indicators climb since the weekend being on April 11, which appears to have been arlo right as we model various ramp scenarios here is a list of some of the current working assumptions, we have the remainder Kecy Q2, and most of Q3 will be difficult to predict.
But with a bumpy, but clear upward trend in resumption of Georgia.
Replacement procedures.
Elective surgeries, when normalizing Q4, it 90% or more across the United States, assuming there is the second pause and elective surgeries due to an uptick of Coca 19 of fish infection rates.
Elective surgeries will come back quicker in the U.S. than in Europe.
We think as I've said, the trend towards or HFC surgery will accelerate which is a good sign for conformance, given our EMS and sufficient inventory.
We also think that reps will still be required for procedure support you, though credentialing testing and personal protection equipment requirements will become more rigorous.
As Bob indicated we will continue to manage our business closely through this difficult time and adjust accordingly as circumstances dictate.
Importantly in all scenarios, we are looking at we believe we'll be ready to support our customers across all geographies as they resume their surgical schedules.
Once again I would like to acknowledge and thank all the conformance employees consultants advisors and customers that continue soldier on with US through this challenging time all of your efforts and goodwill or greatly appreciated. Thank you.
That I'll turn the call back to the operator, and Bob and I are happy to take questions.
Ladies and gentlemen, fear of a question or comment at this time. Please press the star than the one key on your Touchtone telephone. If your question has been answered Mr. put yourself in the queue. Please press the pound king.
Our first question comes from Josh Jennings with Cowen.
Hi, good afternoon, thanks for taking the questions.
Mark I was hoping to just touch on the new product launches.
Primarily I you'd be a identity me and the ship how would you have us think about.
Those launches in the setting of this cobot crisis I'm not as you see a recovery will you be marketing those two platforms as aggressively as you would have been pre cope it and how should we think about the ramp of the two products.
Yeah.
Absolutely Josh like I said, we had good headway going into this going going certainly in the March.
Both those franchises, we continued to build hip inventory.
So we're going to be able to to go after that new franchise as aggressively as we anticipated we actually did a number of virtual.
Teach ins with new surgeons, we've we've gotten you know new surgeons interested.
In the Hep. So so we're excited about that and the identity was doing well.
As I mentioned and.
The fact that we were able to continue to build sets I think it's a big deal because now we had pent up demand anyway, and now we're going to be able to satisfy that demand with new sets and we're seeing that as I indicated we're seeing an uptick in early indicators in orders.
For identity and for forehead.
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Some feedback Josh I don't if that's your phone or something on the call.
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Operator can you maybe.
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Oh, Josh I would say I'm, if you could just Q backup for your concept for the finished your questions out.
Thanks, Thanks, operator, we go through.
Our next question comes from Stephen Richmond with Oppenheimer.
Hey.
Hi, Mark you mentioned that number 90% a couple of times just wanted to clarify. So I think you were saying so you're going assumption right now is that for Q would be at sort of 90% to another words like 10% down from last year is that right. And then you also mentioned 90% of deferred procedures will come back.
So you talk a little bit about where you're getting that sort of that latter assumption as well that some of your talks with talks and the field or anything else would be helpful.
Not to confuse so you're right I mentioned 90 twice one negatively in one positively so not confuse them.
And just to be clear on the negative one it was it was really only for the month of April which we provided color on and as I said, we're already seeing upticks here in the early part of May.
As far as Q4 were obviously, we're modeling a lot of different scenarios and again as a kind of have to take a view, but based on the surge as I've talked to based on our field checks.
Also you have to remember we were a little more sorta northeast and ER.
Atlantic.
Having if you will on our business as a smaller marketshare player, Steve, but but I kind of feel like our best modeling suggests we're gonna be sort of 90% to 100% of normal rate you know as a base case in Q4.
I think there's a scenario that says it could be higher.
Give a pent up demand, there's obviously scenarios to say you know with maybe some of the restrictions and capacity.
It can be challenging to do that but I think that Q4 will be you know will be sort of base case of that 90, 90% to 100% of you know nom normalize a normalized.
Man.
And then went about these do the procedures that are being deferred today. It is that also started you think that almost 90% or so those could ultimately.
Okay get done.
Yes, we think we think they're going to get done and so we believe that they're they're going to pepper in over the coming months I I've seen this is probably the biggest debate right people monitoring Steve about you know our certain patients kind of go away or they are not going actually want to get their hip and knees on whatever I believe oh.
He is a big disease that progress is I believe eventually eventually they'll they'll get done so what we're seeing from a performance perspective is.
A lot of interest in scheduling those patients a lot of interest to getting cut back on the surgical calendar and getting them up and ready to go quickly and so as we indicated of the cases, we fell 43% already have been completed its surgery date. So we expect you know another.
Our 47 them to 50% to get in so we'll have the stuff. We've built we expect we'll do it at least 90% of though so of the inventory we've built.
Yeah, there's a 9% number again, but it's really it's we don't expect I've seen numbers of like 20% drop out and I wanted to put our stake in the ground I don't think we're going to you know again I could be wrong, but I don't think we're going to see that I think I think I think in the performance world were going to see at most a 10% dropout.
Okay, and then just lastly, mark on your AMC comments, you obviously, there's been a lot of talk about up a potential acceleration in match shift in their ability to get up and running quicker are you seeing that yet or is it just too early I mean your business model does lend itself there more.
Are you are you seeing that it I know two could've been a theory, but are you seeing that in actuality at any signs of that.
So I would say, we're seeing the discussion and yes, I can certainly putting off to one or two customers that have absolutely indicated there starting in their agencies first than we've seen some of those schedule cases, new to the assay or to the outpatient and I've seen physicians talk.
Talk about they want to view the healthier younger patients first.
Younger relatively for only patients and they and Steve they want to.
You know in some cases move them to the a is here to the outpatient center I will tell you that our discussions have drastically picked up.
Our contracts or discussion with customers.
Around that we are seeing market increase in those discussions in that ability and that's part of what is making the modeling challenging I think if you talk to you know historic players. They think there's you know there's not enough bandwidth is not enough capacity.
You see center and I think Thats true if you're stuck in the old mindset, but performance customers, though they can do more capacity with the conformance model and I think that's why we're seeing more interesting discussion. So the question for US is well those discussions translate into actual cases for us in the ramp up for that that's certainly.
Again, one of the models that we looked at and that's you know certainly would be in our upside scenario.
Got it thanks Mark.
Thanks, Steve.
Our next question comes from Robbie Marcus with JP Morgan.
Hi, This is actually Lilly on for Robbie Thanks for taking the question.
Given the current economic environment, how are you thinking about the impact.
No.
Economic downturn on the business and to what extent is contemplated in your expectation for getting back to 90% in fourth quarter.
Yeah, I I think Thats a great question that we look at a bunch of demand drivers and then we look at things that would be sort of demand breaks if you will and it's this is part about unemployment in the concern around that is.
Come up a lot recently about where people have insurance coverage or not well the demand to be there. They won't take off work and I I think that's a fair point.
Right I think it's a fair point, but I look at it and say you know a lot at least half the demand is Medicare. So I think that's going to be Okay. Then you look at the unemployment in commercial.
He look it will they have insurance coverage noninsurance will that be like can and will they get it done. So it's really a tough one but I I.
I sort of believe that there's enough other positive things driving it that it won't be that much of a drag I would say I'm actually.
I'm actually probably a little more worried about people just feeling like they want to get back to you know the hospitals and be safe, but I really started to see a lot of communications from hospitals. I mean people are adjusting I've seen a lot of pre recorded video messages and calls with surgeons about how the reassuring their patients about their journey.
To to the tap the procedure and the testing and coated free environment again, I think there's another reason why eagle point towards outpatient and they have see because they can control things better there.
So while it's a concern I, that's what the reasons why am.
I kind of said the 90% to 100%.
I think there's a scenario where could be more than 100% if unemployment is better than anticipated in the fourth quarter.
Great. Thank you and one quick follow up.
You implemented fairly aggressive cost cutting initiatives.
How do you think these steps could impact your ability to ramp up and be competitive and the second half of the earned in 2020 line. Thanks.
Well I'd like to say that due to the you know the loan that we received and I know we were fortunate to be able to get that as a small company, it's actually not as bad as we probably would have to get too because we're able to bring employees back and then work down.
Work on not only our backlog, but also continued to.
This gets a little detail, but as we intend on March 20, Threerd inasmuch as we continued on a manufacturing development from a R&D standpoint, but many of our programs our moving to you know what we call manufacturing validation develop and we needed operational employee support to do those so being able to bring some of those people back to work on a couple of.
Our programs like for instance, our Cementless and whatnot, where it's a nice juncture, so that allowed us to keep those schedules moving forward. So I.
I feel good about that I think there will be some cost cutting around travel and I think there's going to be less in person met Ed.
So those you know our I think they're going to be well tolerated understood because the nature of the environment actually.
Well as we said we're going to look at all things as we see the different scenarios play out and we'll adjust and our expenses and support activities around those scenarios as as they happen.
Okay. Thanks.
Thank you again, ladies and gentlemen, fill the question or comment at this time. Please press Star then one key on your touched on telephone.
And I'm not showing any further questions Tom electronic call back over to warehouse.
Okay, all right well. Thank you appreciate an operator, thank you everybody.
Ladies and gentlemen, assess conclude todays presentation you may now disconnect and have a wonderful day.