Q4 2020 Orthofix Medical Inc Earnings Call
Ladies and gentlemen.
Today's conference is scheduled to begin momentarily until the time of your lines will be placed on music hold thank you for your patience.
[music].
Ladies and gentlemen, thank you for standing by and welcome to the worth of fixed fourth quarter 2020 earnings call.
At this time all participants lines are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
The rest of your question during the session you will need to press star one on your telephone keypad.
I would now like to hand over to your speaker.
Figure today, Mr. Alex Schwartz.
On your director of Investor Relations. Thank you. Please go ahead.
Yeah.
Thank you operator, and good morning, everyone and welcome to the worth of fixed fourth quarter and full year 2020 earnings call. Joining me on the call today are our president and Chief Executive Officer, John for both day.
And Chief Financial Officer, Doug Rice.
I'll start with the Safe Harbor statement, and then pass it over to John during this call we will be making forward looking statements that involve risks and uncertainties.
All statements other than those of historical facts are forward looking statements, including any earnings guidance, we provide and any statements about our plans beliefs.
The strategies expectations goals or objectives.
Masters are cautioned not to place undue reliance on such forward looking statements as there is no assurance that the matters contained in such statements will occur. The forward looking statements. We will make on today's call are based on our beliefs and expectations as of today February 26 2021.
We do not undertake any obligation to revise or update such forward looking statements. Some factors that could cause actual results to be materially different from the forward looking statements made by us on the call include the risk factors disclosed under the heading risk factors in our form 10-K for the year and then just.
The 31st 2020 and filed this morning as well as additional SEC filings, we make in the future. If you need copies of these documents. Please contact my office at or the fix in Lewisville, Texas.
In addition on today's call, we will refer to various non-GAAP financial measures. We believe that in order to properly understand our short term and long term financial trends and the.
<unk> may wish to review these matters as a supplement to the financial measures determined in accordance with U S. GAAP.
Please refer to today's press release announcing our fourth quarter and full year 2020 results for reconciliations of these non-GAAP financial measures to our U S. GAAP financial results at this point I will turn the call over to John.
Thank you welcome everyone and thank you for joining our fourth quarter and full year 2020 of results conference call on today's call I'll provide an update of our fourth quarter performance. I will then review of the progress we've made against each of our strategic and of shares throughout the year before handing the call over to Doug who will provide the financial update.
I'll close with perspective on the business in 2021 before opening the line for questions.
Shifting to our fourth quarter performance, we are pleased with our performance for the quarter delivering a total revenue of $118 million.
Which was down 3% on a reported basis of 4% on a constant currency basis compared to the prior year quarter, largely driven by strong performance of our spinal implants and the rebound of our <unk> business.
All offset by Covid related elective procedure volume headwinds that impacted our entire business, including our biologics and extremities business.
Total revenue during October and November was flat to slightly up as compared to the prior year, but moving into December we did see a negative impact on revenues in various geographies based on the COVID-19 slowdown in elective procedures on a.
Sequential basis total revenue grew 6% over the third quarter of 2020.
Despite the uncertain operating environment, we are very pleased with our performance during the quarter, which reflects continued execution throughout our organization now.
Now, let's turn to the performance within each of our business units.
I'll first cover our spine products categories, starting with bone growth therapies sales were down 1% versus prior year with performance at many of our legacy accounts continuing to be impacted by COVID-19, and closely tracking with the trends we are seeing in the elective case volume.
These declines were offset by revenue contribution from competitive conversions on a <unk>.
Sequential basis bone growth therapies is up 7% over third quarter to.
The sequential growth in this business demonstrates our ability to continue to work with our physician customers to identify patients in need of our products. Our team has truly adapted to the environment to provide flexible so the service solutions for these patients, including remote and virtual fitting when necessary.
Moving to spinal implants, we are excited to report the global revenue was up 9% as a reported basis in the fourth quarter of 2019.
As a reminder of this category is made up of our spinal fixation and motion preservation products, which are typically used in elective procedures. The primary driver of this result was an 11% growth in U S. Spinal implant revenue largely as a result of strong <unk> sales.
Within spinal implants spine fixation was down 6% as compared to 2019, which was caused not only by the slowdown of electric procedures, but a reduction in the number of complex cases being performed as a reminder, complex cases typically require overnight and lengthy hospital stays the co.
And that environment has limited the vies cases by hospital policy in many regions.
The softness was offset by continued strong performance in our U S motion preservation business with sales growth of $3 7 million up of 129% over prior year quarter. The.
The demand for marketing led six artificial cervical disc has continued with strong trends towards towards surgeon training and revenue driven by new surgeon customers.
So this will be the last quarter that we will breakout the motion preservation business from the rest of the spinal implants as we will focus on our portfolio performance moving forward.
Turning to our part of biologic portfolio revenue was down 9% per versus prior year, primarily as a reduction in elective procedure volumes during the quarter combined with channel disruption and continued price pressure in the market.
Now moving to our global extremities business sales were down 15% on a reported basis versus prior year and 18% on a constant currency basis, primarily due to lower procedure volumes attributed to the COVID-19, particularly on our international markets and the non recurrence of certain large stocking orders occurring in the fourth quarter.
2019.
Next I would like to provide an overview of the progress we have made within each of our core focus areas.
Our commentary as previously focused on our accomplishments during the quarter, but given how chaotic 2020 was I'd like to take a step back and review, where we were able to accomplish during the COVID-19 headwinds.
Starting with our first initiative to improve structure and leadership at the beginning of 2020, we look significantly different than we do today.
Relatively short periods, we overhauled the majority of our organization structurally we completed the realignment of our business units to focus on spine and extremities, which has improved our coordination and setup.
Opportunity to maximize revenue across the enterprise.
Along with that realignment, we also completed the integration of our biologics and spinal implants products under a single sales management team.
Which has allowed us to better leverage on our portfolio and our brand.
One of the things that I'm. Most proud of is the team. We now have the words effects since becoming the CEO. We have brought an incredible amount of talent into the key roles throughout the leadership of the organization.
His talent has complemented the solid foundation of legacy talent already within the organization.
Within spine, we added of president of global spine Amanda.
The managing director of international spine of Vice President of the U S spine and biologic sales and the senior Vice President of motion preservation.
Late in 2020, we brought a new global president of extremities.
On a corporate side, we added of global head of quality regulatory and clinical Affairs. In addition to our head of global operations.
On the leadership team, which is now fully in place we have and will continue to add talent throughout the organization to support our long term growth strategy.
Moving on to our second initiative operational execution.
During 2020, we made tremendous progress under the guidance of our new global head of operations.
What surprised us earlier in 2020, but we managed to successfully operate through the uncertainty while beginning some of our long term initiatives.
In early stages of Covid, we strategically rely on that realigned our facilities and operations to ensure that we met near term demand to be able to deliver to our customers and patients. While we kept the team members safe.
For the last three quarters in a row, we have been dealing with Covid had no manufacturing or supply disruptions today, we are fully operation in our operational at our facilities in the U S and Europe and will now be able to shift away from managing true uncertainty to beginning of our longer term initiatives to become faster moving.
More efficient organization.
Our third initiative is product innovation and differentiation, where we are focused on developing and acquiring products. The procedure solutions to meet unmet needs in the marketplace.
Well of Covid diverted some of our attention during the first half of the year, we were able to activate our product innovation of new product introductions in the back half of the year.
On the spine side, we announced the launch of the Firebird sigh of fusion system.
Genesis bone graft delivery system, and the Aliquant structural allograph to patch.
In addition, early in the fourth quarter, we announced a partnership with Neo medical where were focusing on collaborating in the ASC space and the co development of the surgical platform, including single use sterile pack procedure solutions.
On the extremity side.
The acquired integrated and launched the fit bode intermarriage Larry lengthening system, if some of our international markets and now well positioned to make a positive revenue impact in 2000 22021, as we just recently announced the launch in the U S.
With the recent five 10-K clearance for kit bone.
We are the first and only company on the market to have a pediatric cleared product and this has bolstered our innovation commitment to the pediatric community.
We have initiated our global launch in the first quarter of 2021.
We've also just received FDA clearance for our ortho next surgical planning software platform and we are preparing to launch this for use within our Genie orthopedics portfolio of pediatric extremity treatment solutions.
In support of these innovative products, we continue to focus on and value our investment in clinical data as highlighted at NASS in October of 2020.
At the virtual event, we had a strong podium presence with five presentations.
The recently announced a publication of strong two year data of our <unk> artificial cervical disc the study and the spine Journal.
Demonstrating that the <unk> desk had significant improvements in net can arm pain functional and quality of life scores and verifying the benefits of this unique next generation technology.
Our fourth and final initiative is commercial channel development.
Our priority for 2020 is to invest in and begin transforming our commercial channels to create a stable and highly predictable distribution organization.
One of our focus areas was to add or develop long term strategic distribution partners.
A number of the change structural changes in leadership additions we have made in the early part of the year positively influenced our ability to optimize our commercial channel and I'm very pleased with the initial progress. We have made as we continue to add more high quality distributor relationships and continue to capture synergies across product lines and geographies.
In summary, I'm incredibly proud of what our organization was able to accomplish during one of the most challenging years, we the company as an industry and as a society of ever had to endure rebuilding an organization during a global pandemic was not easy, but thats exactly what we did which speaks to the dedication of our team and the excitement we have been able to build in <unk>.
<unk> in order to retain and attract such high quality people, we have a solid foundation in place and we are excited about what we can do and achieve in 2021 with that I will turn the call over to Doug to review our financial performance Doug.
Thanks, John and good morning, everyone I will provide additional details into our net sales and earnings results and then discuss some of our other financial measures.
Many of the financial measures covered on today's call are on a non-GAAP basis. Please refer to today's earnings release for further information regarding our non-GAAP reconciliations and disclosures.
Starting with revenue as John mentioned total net sales for the quarter was $118 million down 3% on a reported basis and down 4% on a constant currency basis, when compared to the fourth quarter of 2019 in the U S. Total net sales for the fourth quarter were flat to prior year and <unk> total net sales were down 15 per.
On a reported basis due primarily to the timing of certain stocking orders in Q4 19, the John mentioned earlier.
Gross margin in the fourth quarter of 2020 was 75% compared to 78% in the prior year period.
The decline was primarily a result of increased inventory reserve charges that resulted from lower sales as well as increased depreciation expense related to the addition of new instrument sets over the previous 12 months to support new product launches.
For the full year 2021, we expect gross margin to be in the range of 77% to 78% in line with our pre COVID-19 the historical averages.
Sales of marketing expenses on the fourth quarter 2020 were 46% of net sales down from 48% in the fourth quarter of 2019 the.
The decrease was primarily a result of lower variable sales compensation during the quarter and reduced spend on travel of marketing events in the Covid environment.
In 2021, we expect sales and marketing expense to increase to approximately 49% to 50% of net sales as travel and event spending are expected to return to normal and we invest in our commercial channel.
GAAP G&A expenses in the fourth quarter of 2020 were 16% of net sales down from 18% in the prior year period.
This decrease was mainly due to reduced succession and transition charges when compared to the fourth quarter of 2019.
For modeling purposes, because most of our stock based compensation falls under G&A expenses, we wanted to give some color around it for next year, we expect stock based compensation to be about $17 million to $18 million in 2021.
GAAP R&D expenses for the fourth quarter or 9% of net sales up from 7% in the prior year period. This increase reflects spending to support new product development as well as costs associated with our EU MTR compliance efforts.
We intend to continue to ramp up our efforts to drive organic innovation and differentiation invest in clinical trials, such as our <unk> two level indication study and build a robust robust product pipeline in both spine and extremities.
As a reminder, this will cause our R&D spending as a percentage of net sales to significantly outpace revenue growth in the near term.
As a result, we expect 2021 R&D expense to approximate 12, 5% of net sales, including an impact of about 250 basis points related directly to our EU MTR compliance efforts, which we are adjusting for.
Adjusted EBITDA on the fourth quarter decreased slightly on an absolute basis to $22 1 million compared to $22 5 million in the fourth quarter of 2019.
However, on a relative basis adjusted EBITDA increased to 19% of revenue up from 18, 5% of revenue on the fourth quarter of 2019, John will provide 2021 overall adjusted EBITDA guidance in a few minutes.
Now turning to tax we of income tax expense for the quarter of $15 million of our 270% of income before income taxes as compared to income tax benefit of $8 million or a negative 180% of income before income taxes in the same period of 2019.
The tax provision for this quarter was significantly impacted by the timing of earnings during the year. In addition, we recognize the reserve against certain foreign deferred tax assets, which was a noncash charge in the quarter.
Four of non-GAAP results, we will continue to use 27% as our long term adjusted tax rate in 2021 is that reflects our expected adjusted earnings and eliminate certain noncash impacts to our effective tax rate.
Sure.
For the fourth quarter of 2020, we reported a GAAP loss of <unk> 48 per diluted share as compared to GAAP earnings of <unk> 60 per share in the fourth quarter of 2019 after adjusting for certain items and when normalizing for tax using a non-GAAP long term effective tax rate adjusted earnings for the fourth quarter of 2020 was 44 compare.
The 51 on the fourth quarter of 2019. This increase was primarily driven by the lower net sales as well as increased R&D spending to accelerate our topline growth.
Regarding cash we continue to maintain a strong liquidity position with $97 million of cash at the end of the year 2020 compared to $70 million at the end of the previous year's fourth quarter.
As previously mentioned, we received $14 million and Medicare advanced payments as part of the cares Act benefits during the second quarter of 2020.
We will commenced repaying those advances in Q2 this year.
We continue to have no borrowings outstanding under our $300 million secured revolving credit facility.
During the fourth quarter, we announced a new partnership with Neo medical to develop and market single use spinal instrument solutions, focusing on improving patient outcomes.
As part of the partnership we invested $10 million of Neo medical to support the ongoing partnership through a combination of convertible term loan and an equity investment.
Net cash provided by operating activities was $22 $3 million in the quarter.
$10 million compared to $11 9 million in the fourth quarter last year, largely due to strong collections on the outstanding accounts receivable.
Capital expenditures were $4 $4 million on the quarter compared to $5 6 million from the prior year period due to decreased spending on new instrument sets due to the timing of new product launches.
Capital expenditures are expected to be in the 23 of $25 million range for 2021.
Consistent with our increased operating cash flow, our free cash flow, which we define as cash flow from operations minus capital expenditures of $18 million during the quarter was up from $6 million in the fourth quarter 2019.
Free cash flow for the full year 2020 was $57 million. However, in 2021 of our free cash flow levels will decrease significantly due to several items, including the repayment of the Medicare advance mentioned earlier the anticipated next spinal kinetics milestone payment additional investments in our sales channels and in product innovation.
Asian and increased spending on our EU MTR compliance efforts I'll now turn the call back over to John.
Thanks, Doug.
Before providing our outlook for 2021 I would wanted to lay out our key focus areas for the year at a high level of these will look similar to those we focused on in 2020.
With the progress we've made over the last 12 months, we are shifting from a design and strategy phase into in execute phase our focus areas remains the structure and leadership operational execution product innovation and differentiation and commercial channel.
Starting with structure and leadership.
Still some work to be done to add talent in select areas within the businesses to finish out building up of certain teams, which we expect to be complete in the first half of 2021.
I am very proud of our transformation that has occurred within the organization and with the full team in place.
We can accelerate the execution of the rest of our initiatives.
Our next focus areas operational execution of.
Covid will likely continue to be a factor of the operating environment for some time, we've adapted to the situation and are 100% operational across the globe. In 2021, we will focus on the refinement of our global supply chain to become a more efficient and agile organization.
Allowing us to more rapidly introduce new products integrate new distributors focus on working capital management and deliver innovation to our customers and patients.
Our third focus area is product innovation and differentiation.
We have spent a considerable amount of time reviewing our current portfolio and we have developed a comprehensive long term roadmaps to refresh our current products and bring new innovation store of the fix we started to see early progress towards that roadmap in late 2020 with several new product introductions, and we will continue to work to do.
Five adoption of those in the marketplace.
<unk> ahead over the next 12 to 24 months, we anticipate contribution coming from both organic and inorganic strategies on.
On the organic side, our near and medium term efforts will focus on key spine procedural segments of anterior spinal care post your cervical minimally invasive surgery and deformity care.
For the extremities business, we will focus on the key orthopedic markets of pediatric deformity, and reconstruction foot and ankle, especially trauma.
We will also work to roll out enhancements to our existing products with line extensions and continue to pursue.
Additional indications of our expansion of efforts to open up new addressable markets in the years to come.
We have expanded our interaction with leading kols and global spine tier institutions, who will work closely with us and our teams to guide our thinking and our development of our portfolio of broadly and to help develop innovative and differentiated products our ability to attract this level of talent speaks highly to the.
Excitement, we have created around orthopedics and our recent innovation strategy.
On the inorganic side, we will look to be more of active in bringing products and technologies into our portfolio to supplement our internal R&D efforts all aimed at bolstering of our portfolio accelerating topline growth are.
Our fourth and final focus area is our commercial channel.
The playbook here remains the same as it did in 2020.
Invest to create stable and predictable channel that is highly effective.
As we've said in the past we are looking to expand our network of strategic relationships and.
And we are agnostic to the model of these partnerships. We are looking for quality people and organizations, who can help us crew on our business.
We grew the number of the strategic relationships in 2020, and we'll continue to focus on developing the delivery relationships in 2021.
Now shifting the guidance for the full year 2021, we expect top line revenue to be in the range of $445 million to $460 million.
This guidance assumes the COVID-19 impact on procedures will continue throughout the first half of the year with the first quarter being more heavily impacted in the second quarter and that procedure volumes will pick up in the second half of the year as vaccines become more widely district distributed.
We would also like to point out debt from a quarterly cadence perspective, we continue to see headwinds associated with Covid. During the first half of 2021 could expect the back half of the year to show low to mid single digit growth over 2019.
In order to provide more clarity on the near term, we will provide revenue range for the first quarter only and do not anticipate providing quarterly guidance range is prospectively for.
For the first quarter, we expect revenue to be in the range of $95 million to $96 million due to continued COVID-19 related hospital restrictions.
We want to communicate that we are seeing additional pressure early in Q1 on current procedure volumes as compared to Q4 of 2020.
In the U S. We're seeing about a 15% decline in procedures in January and the first part of February with most of the decline coming from more complex procedures that require multiple nights of hospital recovery in state.
The impact on this segment not only reduces our procedural ASP.
It also delays the procedures, where the patients would most likely be prescribed of bone growth stimulator to aid in their healing.
Last week, the national weather emergency created further disruption to our procedural volumes and all storm affected areas, our hearts and our thoughts go out of those impacted including many of our own employees, although the storms past it caused major challenges and disruption to our entire local community state and regions around the.
Countries.
We are fortunate to have a great headquarters facility and staff that allowed us to get back to normal operations. Following the storm cleanup.
With regard to the U S. We anticipate hospital restrictions to begin to ease in March with improvement in elective and complex procedure volumes as we believe this trend will continue into the second quarter of 2021.
Third and fourth quarters are expected to show continued improvement in elective procedure volumes.
In our international markets, we continue to see country restrictions on elective procedures. We believe that markets will begin to open up from the second quarter, but timing of increased procedure volumes, our country to country specific.
As we have mentioned, we will begin to ramp up our investments in product innovation and differentiation.
Dr span operational execution in our commercial channel developments in 2021.
Our expense reductions from travel restrictions hiring and project delays in 2020 will not continue into 2021.
We expect our adjusted EBITDA to be in the range of $50 million to $54 million and our adjusted earnings per share to be 45 to 55, using a non-GAAP long term tax rate of 27%.
Despite the backdrop of of challenging 2020, we are very excited about the future of orthopedics, we've assembled a world class leadership team and organization and worked tirelessly to implement a culture and strategy to drive this business forward into the future.
We are no longer in planning mode. We are now transitioning into execution phase.
There will no doubt the headwinds to navigate in 2021, but we are prepared to address any uncertainties of that comps.
We will continue to work to bring high value solutions to patients surgeons and hospitals around the world with that I would like to transition to the question and answer session.
Operator, please open the lines.
Thank you at this time of question and answer your question. Please press star one on your telephone keypad.
First question comes from the line of Anthony Anthony Petrone of Jefferies.
Thanks, and good morning, everyone well on staying healthy.
Questions on my end of.
Or one for 2021 on new product contribution just wondering how we should be thinking about the cube pack and hip bone.
Contributions from 2021, just considering the launches and then a follow up on fit bone would be.
It's focused on the pediatric space I'm, just trying to get a sense of where or to fix partly is in pediatrics and <unk>.
How it views of that market opportunity.
And I'll come back with the couple of follow ups.
Thank you Anthony on the let's start with football on on that.
Our position in the in the deformity are the pediatric area of us regarding around the.
Formally care and limb reconstruction.
In that area, we basically focus on highly elective cases.
Predominantly around our external fixation with the unit with the addition of Pitbull, we now have internal fixation and correction methods.
This combined with our journey ortho plating system provides us a comprehensive portfolio to address this market and we are positioning ourselves to be.
Execute more heavily in the U S. As we've already began to execute in the international markets.
Regarding the <unk> that product is basically being introduced into our.
Inter body line and we basically use it as a portfolio opportunity to basically address with not only our peak or PTC and also our <unk>.
Titanium antibody devices. So it's a complex comprehensive portfolio for the surgeon to utilize.
That's helpful. And then a couple of follow ups will be one is there a way to quantify.
Overall backlog.
Coming out of the Covid, where we sit in terms of backlog.
We were on a few orthopedic calls this week, specifically also on spine and fourth quarter did see some deferrals.
And I believe that has extended into early part of 'twenty. One so is there a way to quantify that of the deferral of backlog.
And then the last one from me would be what should we be expecting post the FDA AD comm meeting, where it's fragmenting, one data and post market surveillance in order to the down classify in the bone stem space. Thanks.
Yes.
Let's start with deferrals.
Deferrals as we look to the the dynamics in the fourth quarter.
<unk> continued the press into the early parts of December, but then decreased heavily towards the back part of December.
We don't know how much of that was pulled forward as far as it depends highly on the segment, we're talking about we.
We saw in certain areas of cervical more push towards the ASC environment.
Kept further kept procedures going further into the part of December however, in the highly elective complex procedure cases, those started to attenuate earlier in the December month that trend has continued on into January and the first ended the mid February where the.
The highly complex procedures are being postponed because they require multi day hospital stays and so it's hard to handicap, how much of that is pushed forward, but the.
The point about those patients is that they are deferred those complex cases, we will not be get better on them by themselves and so we see them as deferred cases, which will pick up in the months to come but it's difficult to talk about when that might occur because hospitals all have capacity issues right now so they were there.
The high capacity full capacity currently today and how do we fit in those patients over the last six weeks will be determined by the hospital specific specifically.
Specifically.
On the FDA re class.
Don't know exactly the timing on that as well.
Rediscover the timing where October they closed their open comment period and typically in a re class. It takes six to 12 months for them to come in.
And reaffirmed our position of accept the panel's decision. So this is a little different situations. So we don't know where that's going to be three months six months nine months of 12 months from that close date, we're monitoring it closely the good news is that regarding that is that even as a re class that has robust clinical data. We believe we are well.
Positioning the way we operate that business.
We are of very strong sales and service team, we have a strong order to cash we have are very large contract basis as far as to be in all accounts and then we also have very robust clinical data, which further positions us.
In the marketplace and so there could be new entrants and there will be new entrants, we think we're well positioned to address those.
Alright, Thank you very much I'll hop back in.
Your next question comes from the line of Mathew Blackman of Stifel.
Good morning, everyone and I hope, everyone is doing well as well.
Maybe I've got a few questions to start of can you remind us what percent of your spinal implant business is skewed the complex procedures, even just in the Rockies.
Couple of follow up questions.
As we look at the numbers.
We have a good portion of complex procedures.
Balances out right now in the mix, because we have a higher percentage of <unk> coming into the the mix.
Talk about spinal implants that balances out some of that activity as far as overall revenue.
We're still monitoring that right now as far as how much is complex versus simple.
Much of the simple one level type of flow back cases, we are still monitoring how that plays out between the ASC in the hospital environment, but we basically capture we've not lost any business as far as between account basis. During this last period of time.
Okay great.
The key question is on the profitability outlook. It sounds like there are very specific growth enhancing investments in 2021, I just want to make sure though that there isn't any change in your your longer term profitability trajectory in and then the second part of that can you talk to where some of these investments are going EBIT from the commercial channel.
So how much of the overall spend is new versus perhaps some catch up on on deferred or of a pause 2020 investments.
Yes.
Let's talk about the investments first we've talked through 2020, and we will continue to talk of 2021 about our channel where we're basically continue with onboard new distributors trained new distributors and we spend time on energy working with them.
The good portion of it is from the new product innovation and differentiation.
The initiative. This initiative, we are basically building platform projects that are currently under that I referenced in my prepared remarks, and we're also looking for.
Additional inorganic activities, which always have some type of spin following on when you're bringing them on it into the organization. So we look at that as well the other side of the the.
Research and development spend as business <unk>, which Doug mentioned in his prepared remarks debt. This is a heavy lift for the all organizations on the company and we think we're positioned as a percentage of the comparable to what others are spending to be in that European or the EU market.
Matt This is Doug I'd, just overall I'll comment on the profitability of our investment in <unk>.
Longer term growth is not new this time last year pre COVID-19 the guidance that we did give at that time not expecting COVID-19 obviously.
Sort of the midpoint was the 14% range and so the.
Range that we gave for 'twenty, one that certainly COVID-19 impacted here of the beginning of the year, but reflects sort of.
11 of 12%.
The EBITDA, which reflects both the short term.
And long term investments that we've been chatting about for a while with regards to things like <unk>.
Hip bone in.
Other investments, but I would say on.
On the short term of your question around expenses coming back, we certainly hope to be able to travel and meet with our customers and partners.
And we certainly hope to pay.
The commissions on all of our sales plans that we didn't get the due in 'twenty. One so I'd say overall, it's a balance in terms of how we are.
Investing in while we got it.
EBITDA flow through of the way we did.
And then if I could sneak one last one John I'd, just love to get your thoughts on the competitive environment in particular, the right. A couple of recent developments in <unk> now on cervical disc.
Any thoughts on how these new competitors may impact your growth outlook on those two franchises. Thanks so much.
Yes in the.
Let's start with the cervical disc.
Bin monitoring.
The latest entry into the market for years now and we've been track.
Tracking it very closely and are in our selling activities for the last six months and we look at this as cervical disc is at its infancy as far as adoption.
So we believe that additional competitors of that market, especially new innovative technologies that excites surgeons to want to try artificial cervical disc because of the benefit to us.
We're having great success, with <unk>, and where could not only converting.
Converting business from other disc disc.
<unk> companies, but we're also converting new surgeons to the disc market in that latter category I think has benefited by having new high tech innovations into the marketplace.
Regarding the <unk> area.
We spend a great deal of time, developing our channel and also investing in this business. We have multiple investments that we're talking has been BTT such as stem on track and we're also looking at other ways of basically enhancing that product.
Additionally, we of clinical trials invested in the area of the shoulder repair rotator cuff repair its ongoing clinical trial and so.
We'll see new entrants come in it's an exciting area that we'd want to invest in and so we think we're well positioned as I stated earlier that we're pretty well positioned to take full advantage of the marketplace and address any competitive entries.
Thanks, so much.
Your next question comes from the data.
<unk> of JMP Securities.
Great. Thank you and the and thanks for the guidance as well.
Doug maybe if I could.
Thank you.
Just a little bit.
The revenue side, it looks like we get back to potentially back to where we were at <unk> 19.
Obviously, we all know spinal implants is kind of grow based on.
The desk product.
Imagine you might think that the implants may come back to but I'd love to get any color you might want to share.
Given the 'twenty 'twenty was so chaotic as you mentioned.
For either bone growth therapies of biologics or extremities like did.
Did they all returned to growth.
The easy comps, but maybe any color on what.
What you'd expect from them in this year that might be implicit in that $4 45 to $4 60 guidance. If you could help out that'd be great.
Yes, good question, Dave I'll start with some of the numbers and I'll, let John provide some of the color on the product categories, but overall, we guided Q1, which as you know.
At its midpoint down but versus versus <unk> 19 of about 12%.
We think we've got more pressure in COVID-19 related activities going into Q2, obviously, but the back half of the year.
As you look at it will exceed.
The growth rates in 2019, as John said in the script low to mid single digits as we exit the back half of the year.
That growth comes from.
A handful of different product categories.
Spinal implants.
I'll, let John provide color on the rest of it certainly.
The spinal let's start with spinal implants, and we get to the other ones that spinal implants went through it.
Low period in the let's call. It 2012 to 2017 period and it started to come back as far as the interest in innovation and new products, new procedures and there's a there's an exciting among the surgeons out there as far as they want to innovate now they want to bring new technologies in and if you take that combined with the.
All of the demographics of the of the let's call. It the U S population to start with.
We're in the middle of the baby boom basically in the.
In the post 65, right now and that's of high.
It's a large area of fort doing spinal procedures and also the millennials are coming into the $35 40 age group, which is also in other predominant area, where spine conditions present themselves. So we think we're well positioned not only from product innovation and what sort of just wanted to advance, but also demographics and we think we're well positioned in that space.
As demonstrated by artificial discs and other minimally invasive approaches that are being rewarded in the marketplace.
Regarding the extremities business, we see a good position for us, especially with fit bone.
Rounds out our portfolio and it allows us to provide a comprehensive approach to providing the deformity and reconstruction in the pediatric space and it also will augment our foot and ankle space going forward. We also didn't mention about our fits spine initiative, which will come into play which is a growing rod which.
<unk> a procedure to be done and of pediatric environment, where there is no second surgery to correct. The.
Formative.
The presentation. So we're quite quite excited about that and on the BTT area.
I already highlighted about the new areas, we're advancing in but the this is an area, which is now starting to be recognized it has been recognized for its efficacy. In these cases that are slow healers or non healers and that provides great value to the healthcare environment when the.
Are you basically are allowed to do on non op. The repair of a non union versus that are alright.
Alright.
Slow healer for having the secondary services I think we are of great value position going into that and our expanded indications in shoulder will basically pay the dividends in the future as well.
Great and maybe just as a quick follow up if you looked at.
Your biologics and then let's say your fusion spinal implants.
I would imagine that.
From procedures Youre getting both of those sales I don't know what percent that is if theres anything you could share there, but I mean over time.
Net.
You would think that those would track.
Maybe closer together.
And if not maybe any color there as to how much of your biologics businesses use with your implants.
As we move forward should we expect them to sort of.
Not with them six of them, saying just what the other part of the sponge from should we expect them to sort of.
Be more closely aligned in terms of growth.
Yes, we would expect them to be more closely aligned going forward and that was the fundamental reason why we put the spine and biologics sales management under one individual in one direction to align those businesses and get the leverage in those in that area. So we would expect that we're very pleased with our Trinity product line in our <unk>.
MTF Biologics partner, you can't find a better partner of the MTF and so we're looking to expand that portfolio as well. We have also of the fiber fuze program coming into that which is another and other products. So we are continuing to expand the portfolio and also.
The cab better.
Better collaboration between the biologics and the spine fixation sales organization.
Thank you.
Thanks, Dave Thank you Dave.
Your next question comes from the line of Ryan Zimmerman of BTG.
Hey, Thanks for taking the questions good morning, everyone.
John I think you mentioned a little bit on within Bgs.
<unk> won some competitive convert competitive conversions and I'm just wondering if you could expand kind of where you're taking share of who you're taking share from on the bgs side and then I have one follow up.
Yes.
Throughout the 2020 year, we focused on not only growing the business organically, but also attracting new distribution in that area and so we really haven't mapped as far as where it came from.
It's a word equal opportunity.
Share taker in that regard, we look for the opportunity at the on the Street and so we don't particularly the work on one specific area.
And the the reality is we've been successful on a couple of areas and we will continue to work on that because we are of very talented sales management team and we have very low of <unk>.
Very good reputation of the marketplace, where sales reps want to come to work.
Okay.
Doug for you just you got that $300 million revolver sitting out there I'd love for you just to get your comments on kind of your comfort level from a leverage standpoint, and just as it relates particularly to M&A.
Yeah No. Good question Bryan in terms of of our ability to invest in growth really happy with our capital structure on our firepower as you mentioned, we've got a revolver that can scale up to $300 million debt.
We were able to tap.
During the the lowest of the lowest left last year to get us through Covid and make sure that we knew we were going to come out on top as we end the year with almost $100 million on cash and what the cash flow that we do have.
It puts us in a really good position to be able to invest we'd like to drawdown.
Drawdown, we're certainly not afraid of use leverage and recognize the.
The acceleration that business development can provide inorganically.
Terms of comfort level.
I'd say it's deals specific.
We'd have to look at.
The two to three times.
It would be fairly.
The comments I think uncomfortable.
On that wed have to look at how quickly things would pay down and being able to rationalize our investments, but we're certainly not afraid of leverage Ryan I would add to this as debt.
We're ramping up our business development team and we're basically screening more deals than we've ever screened right now and.
Motivated to basically put new technologies and the new new products of programs into this company and we will take full use of our financial ability to do that.
Got it Okay and then just lastly from me I'll hop back in queue. The 23 of $25 million of capital spend that you're targeting this year.
Doug maybe you could just elaborate is that.
A lot of that on instruments.
The manufacturing expansion, just kind of help us understand kind of where that one of those dollars are going specifically in the capex for the year. Thank you.
Yes.
Probably a third of our spend is related to instrument sets.
We've got technology investments as well.
Paul.
What's been too.
Our Capex and then we've also got <unk>.
Some new products and tooling and molding and things of that we're investing in so I.
I hope that answers your question.
Thank you.
Your next question comes from the line of Jeffrey Cohen of Ladenburg and Thalmann <unk> company.
Oh, Hi, John Doug how are you.
Great Jeffrey.
So.
Just fine I was wondering if you could share any further color on any changes or modifications on your distributor channels on as far as some upgrades and exclusives on at least domestically.
Lastly, we are well look as I said state of we're agnostic to how we move forward. So that we get exclusive thats great. If we don't.
Our channel has been heavily.
Populated by non exclusive relationships, we're looking for strategic partners that want to create.
The stronger and stronger relationship with us and could commit more and more of their time to us and this is the work on the work in process will go from where we're at today, we will build a stronger and stronger and the goal is ultimately to have exclusive relationships. Some day, everybody would like that but that's a longer term our longer term objective and will take nonexclusive, along the way to make that happen.
You know on building channels, it's time, and it's basically find the right partner and we're at more partners from the right talent and relationships.
And so it will create a business around that around that talent.
Okay got it is the follow up to Dave's question earlier.
Specifically on the Genesis could you talk about the specific approaches.
<unk> taken there and does that help.
The <unk> drive biologic I know that you're also selling price.
So are you seeing your biologics being used on the larger the larger percentage share on wholesale.
Going on the phone.
Yeah.
On the Genesis it can be used anywhere you want on basically.
Minimally invasive percutaneous lead deliver graft and thats the beauty of the system.
As far as where we're at we're early days of the blend the launch of that word.
We launched in the fall part of the part of the dynamic that's going on with Covid has also many hospitals and surgeons are less apt to bring new technologies and during that period of time, So we're making headway on that area, but we're looking forward to 2021 to really driving that product forward and will adapt we adopted into all of our procedures. When we go out and sell.
So we're looking for leverage there also.
We're still working on pre sales right now you mentioned pre sales that's part of the pipeline that we're working on especially around Trinity because Trinity has certain characteristics that go with it. So we're looking forward to Trinity true fills in the future.
But they're not <unk> right now.
Got it and then lastly from me could you all talk about your outlook, a little bit as far as in the U S versus the international sales.
Provide us a little more color there if you're able to thank you.
We will need to break it between spine and extremities to do that on the extremities business. We look forward to building our U S sales were very strong O U S. Right now and that's where the business was founded and we are of high quality channel put together there and they are working diligently to grow that business and they are they are very excited about the new technology.
Such as fit on will bring into it in the U S area, where basically continue to build that channel and we're diversifying it to basically make a better impact from but both foot and ankle and in pediatrics.
On the spine side, it's kind of the reverse of that the U S business. The U S distribution of stronger and were building the international business. We've hired key talent in the international markets. Both in the Continental Europe, and emerging markets and Australia, and we look forward of them executing the 2021 year.
Got it okay. Thanks for taking the questions.
Thank you.
Your next question comes from the line of Jim Sidoti of Sidoti <unk> Company.
Good morning can you hear me.
Hey, Jim Yes, we got you.
Alright, great I hope, you're all well hope you you survived debt been of weather a couple.
A couple of weeks ago.
Are you able to keep the facility opened the did you have to shut them in.
We ended up closing the facility not.
Not that the facility didn't have power and heat. It's just we didn't want to put the team in harm's way to travel to the office.
Dallas Dallas on the storm like that doesn't do well for transportation. So we just elected to take the the conservative way on that protect our team.
Yes, I think there was probably wiser.
Just one from me because of lot of the questions my questions have already been answered the.
The additional cost to update the product registrations in Europe can you just give me.
Ballpark figure on what that is and is that something that should go away by 2022.
Yes.
A good question, Jim it's a significant investment for us.
In 2020, you saw of spend just over $4 million already but primarily weighted towards the back half of the year as we deferred as much as we could.
During the uncertainty, but this year, we guided that about 250 basis points of our topline is going to be invested in those efforts. That's both in Europe and in the U S.
We would expect.
The next year is going to be significant spend in terms of R 22.
The level of compliance efforts.
<unk>.
Robust.
Thorough review and compliance effort that we have with complete with people on professionals on systems.
But I would expect that the majority of the spend with the debt this year and next year.
We engage on the clinical trials.
Underlying supporting the things that we need and then it would taper from there.
Jim if I might add.
A note on that assets.
It was a strategic decision to do this because of our extremities business is highly European based we had to do it for that but at some of our peers of competitors that don't have the European businesses. They don't have the spend and so when you hit the.
U S focused you won't see this type of spend and so you have to look at that the comparing company of the company. We decided we're going to be a global company and we're going to invest in Europe and also the CE Mark is required for certain other regions outside of Europe to be able to debt to be able to sell your products. So that was a strategic decision. It is an expensive decision, but we think it's of great long.
<unk> decision.
Alright, thank you.
Thanks, Tim.
Thank you there are no further questions at this time I would now like to turn the call back over to management for any closing or additional comments.
Thanks, operator, and thank you again for joining US today, we look forward to updating you on our progress on our next quarterly call have a great day.