Q4 2020 OrthoPediatrics Corp Earnings Call
Okay.
Okay.
Welcome to the fourth quarter and full year 2020, or so Pediatrics Corp earnings Conference call. My name is April and I'll be your operator for today's call.
This time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
Ask a question during the session you will need to press star one on your telephone please.
Please note that this conference is being recorded.
I will now turn the call over to Christine Thank.
Thank you you may begin.
Thank you operator, and thanks, everyone for participating in today's call. Joining me from the company are Mark door at all Chief Executive Officer, Fred Hite, Chief Operating Officer, and Chief Financial Officer, and David Bailey President before we begin I would like to caution listeners that cash.
<unk> made by management. During this conference call will include forward looking statements within the meaning of federal Securities laws.
The safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
These forward looking statements involve material risks and uncertainties and the company's actual results may differ materially from a discussion of risk factors, including among others. The risks related to COVID-19, the impact such pandemic may have on the demand for the company's products and the company's ability to respond to the related challenges.
I encourage you to review the company's most recent annual report on form 10-K, which will be filed with the securities and Exchange Commission.
During the call today management will also discuss certain non-GAAP financial measures, which are used as supplemental measures of performance. The company believes these measures provide useful information for investors in evaluating its operations period over period for each non-GAAP financial measure referenced on the call. The company has included a wreck.
Conciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures in its earnings release free.
Note that the non-GAAP financial measures have limitations and analytical tools and should not be considered in isolation or as a substitute for ortho pediatrics financial results prepared in according with GAAP.
In addition in.
In addition, the content of this conference call contains time sensitive information that is accurately only as of the date of this live broadcast T Day March 11th 2021.
As required by law the company undertakes no obligation to revise or update any statements to reflect events or circumstances that take place. After the date of this call with that said I'd like to turn to call over to Mark.
Good morning, everyone and thank you for joining us today on our fourth quarter and full year 2020 earnings conference call.
We stand at the one year anniversary of the COVID-19, pandemic, which has the greatest public health crisis in a century.
'twenty reminded us how fortunate we are a partner with surgeons and healthcare providers, who so deeply impacts the lives of patients and their families, particularly during the past year.
He also brought out the best in our company and our associates, who rose to meet unprecedented challenges found new ways of working demonstrated resilience and most importantly continued the disciplined and consistent execution of our growth strategies their efforts position us well.
As we emerge from the pandemic stronger than when we entered it.
On March 16, 2020, we closed on our office and began working remotely my colleagues and I immediately resolve to stabilize our employee base by announcing that there would be no dropouts or salary reductions.
We stabilized our sales organization by making available low interest loans to our 36 domestic sales agencies and reassured suppliers that we would not reduce orders for new consignment inventory.
We continue to stand by pediatric surgical societies throughout the world that depend on our leading financial support.
And we were the only industry sponsor that did not reduce or eliminate its financial contributions to these organizations in 2020.
I'm proud that orthopedic Patrick's doesn't manage through the pandemic in a manner befitting a company that has been recognized as one of the best places to work in Indiana recently for the fifth year.
As a result of the resilience of our people, we delivered full year sales of $71 $1 million down 2% from 2019, primarily due to fewer elective deformity surgeries and international stocking distributors, who were affected by the economic collapse of their markets.
However.
Fourth quarter and annual sales were also impacted by a $2.7 million revenue reduction booked in December 2020, due to the repurchase of inventory from a stocking distributor in Germany, Austria, and Switzerland that we converted to a sales agency in December.
This $2 7 million dollar reduction decreased fourth quarter revenue growth by 14%.
And total year revenue growth by 4%.
It is important to separate the impact of this accounting treatment from the fundamentals of the business, which continued to improve in the fourth quarter.
In fact during the fourth quarter, our domestic business grew 26% to $17 $9 million.
Total domestic sales grew 14% to $63 million, while we saw a slowdown in December which continued into the first six weeks of 2020. One we are encouraged by an acceleration in domestic sales over the past several weeks and we look forward to reporting continued growth in the first quarter.
A 2021.
International sales in 2020 were $8 $1 million, representing a 54% decrease year over year impacted by the reluctance of our 42 stocking distributors to purchase inventory due to the decline in elective surgeries in their markets.
International sales were also negatively impacted by the aforementioned repurchase of $2 $7 million of inventory from dramatic countries as they converted to the sales agency model in December.
However, it is important to note that international sales agency revenues grew 51% in the fourth quarter nearly double the impressive 26% growth in the third quarter of 2020, and this growth was before the conversion of Germany, Austria, and Switzerland, which we anticipate will further stimulate.
Agency growth in 2021 and beyond.
We are encouraged by the momentum of international sales agency growth throughout the second half of the year and are pleased to have expanded the sales agency model in December 2020 to 14 agencies in 13 countries.
Even though we're not yet out of the woods non COVID-19, our domestic and international recoveries gives us confidence in our guidance for 2021, which is full year sales growth in the range of 31% to 38%, reaching $93 million to $98 million.
This morning, Fred will provide a detailed review of these results and discuss our financials and procedure recovery rates by geography and business unit.
I would now like to focus on four factors that give us confidence in the outlook for 2021, and our plan to execute a seamless management transition this year.
I'll, then turn the call over to Fred after which we will open the call up to your questions.
There are at least four reasons, we are optimistic about the 2021 sales outlook.
They include continued domestic sales momentum.
Turnaround in international stocking distributor purchases.
International sales agency growth and.
And synergies from our three acquisitions.
Point number one domestic revenue continues to demonstrate significant momentum.
In the fourth quarter of 2020 U S sales were $17 $9 million, a 26, one percentage increase compared to $14 $2 million for the same period in 2019, and an acceleration from the 17% growth in the third quarter of 2020.
This represented a turnaround from the second quarter of 2020 on domestic sales declined 12%.
While we faced domestic headwinds late in the fourth quarter of 2020 and during the first six weeks of 2021, when we saw a temporary decline in elective surgical volumes domestic sales have improved dramatically since that time we.
We believe that recent progress on vaccines and vaccination rates, coupled with the greater capability of hospitals to treat COVID-19 patients should allow us to weather any future spikes in COVID-19 cases over the next six months when the majority of American adults are being vaccinated.
Domestically, we were encouraged in the fourth quarter of 2020 by the performance of our trauma products, such as PMT femur, which exceeded 1000 cases since its introduction in 2018.
Our sports Medicine, and other category delivered $1.0 million of revenue and benefited from the addition of <unk> sales.
Scoliosis revenue was $6 $6 million of 35, 7% increase compared to $4 $9 million in the fourth quarter of 2019.
Throughout the year, we built solid momentum in our response 556 O system and Firefly Pedicle screw navigation guides as we added 23, new response users.
Point number two.
While international revenue in the fourth quarter of 2020 was $1 $1 million or <unk> 77, seven per cent decrease compared to $4 $8 million for the same period last year sales reflected the aforementioned $2 7 million dollar reduction of revenue as well as the impact of weak sales from <unk>.
International stocking distributors.
Many of these distributors are small private companies focused on specialty orthopedic products and they've been reluctant to commit to additional inventory given the economic dislocations in their home markets.
Beginning in January 2021, However, international stocking distributors have begun purchasing increased quantities of product.
This may be due both to the depletion of their inventories as well as what we believe to be an enormous backlog of surgical procedures in many European countries and Brazil.
Point number three.
International sales agency revenues accelerated from 26% in the third quarter of 2020% to 51% in the fourth quarter that is why we're pleased by the successful conversion of our largest European market, Germany, Austria, and Switzerland to a sales agency.
As conversions in other markets produced an approximate doubling of revenues and gross margin because we bill hospitals that retail prices rather than selling to stocking distributors at wholesale prices.
Over time, we have also increased the organic growth rate and converted markets by Consigning instruments sales more aggressively.
The turnaround and stocking distributor demand the significant backlog in several countries coupled with continued growth by international sales agencies give us confidence that our international business is rebounding.
It is in this context that we can cite receiving UK regulatory clearance for PMT femur and initiating the clinical use of our <unk> system in the U K, where initial feedback from surgeons has been overwhelmingly positive.
Additionally, the first <unk> surgical cases for pediatric orthopedic deformities and Europe were performed at the paler European Institute Meta cover hospital in January and February 2021.
We look forward to launching <unk> across additional locations in Europe, the middle Eastern Africa. During the first half of this year.
In addition to Europe, we received 14 regulatory approvals in Canada in 2020, including Orthotics BNP femur PD. One response for five five O on 556 O and band lock.
We also expanded our product offering in Australia to include Pnp femur response for five five O <unk>.
Point number four.
Our recent acquisitions have delivered strong synergies in 2020, and we're confident they will do so to an even greater degree in 2021.
<unk>, which we acquired in 2019 continued to deliver strong growth with certainly a surgeon conversions in 2020, we recently received CE Mark approval for <unk> in Europe.
International sales agencies performed the first cases and inventory has been built for what we anticipate will be the largest international launch in our company's history.
<unk> increases our reach from 65% to 85% of the trauma and deformity addressable market and it has fulfilled the promise of positioning our company for total account conversions, both domestically and internationally.
In April 2020, we acquired <unk>, which is one of two recently approved non fusion technologies and represents a revolutionary approach to how scoliosis is treated.
We then received FDA approval to expand the label to 35 to 60 degrees for progressive curves from 40 to 60 degrees previously, which allows <unk> to compete head to head with spinal tethering. The only other non fusion technology approved for use in skeletal day immature patients.
<unk>.
<unk> enables surgeons to provide permanent curve correction, while retaining spine flexibility and is a less invasive surgical procedure compared to spinal fusion.
At the end of January 2021, and <unk> have received full IRB approvals at 11 of the 20 IRB hospitals and has conducted twenty-seven extremely successful surgeries.
Surgeons continue to be impressed by its results and we anticipate that in 2021 at the fix will complete the 200 cases to fill the registry where upon we will expand the launch in the United States.
<unk> produces very high revenue contribution per dollar of set inventory and improves our return on capital.
Telus has also produced robust sales growth.
Our rationale for this acquisition was to gain access to state of the art expertise on the complex and sweeping changes in the worldwide regulatory environment. We had not expected that tell us his expertise will be insignificant commercial demand and are delighted that tell us continues to win significant contracts that medical device companies.
Some of which are in the orthopedic space.
To summarize domestic momentum the international turnaround and acquisition synergies are all potentially aided by other investments we continued to make in 2020, despite the pandemic.
We deployed $5 million in consigned sets during the fourth quarter, bringing the total investment in 2000 $20 million to $18 million. The same level of investment we made in 2019.
We also completed a 20000 square foot expansion of our distribution facility and our Warsaw headquarters, which represented the second expansion in the past two years.
We believe that our investments in international markets consigned sets and facilities will allow us to advance our commitment to being the end to end provider of pediatric orthopedic surgical products around the globe.
Turning to management succession.
You'll recall that in April 2020, the board elected David Bailey, President and Fred Hite, Chief Operating Officer, and Chief Financial Officer. These appointments took effect on June 3rd 2020 at our annual shareholder meeting and represented an orderly succession process that began three years ago now.
I informed the board of my intention to step aside as CEO upon reaching my 17th birthday in 2021.
At the upcoming annual meeting it is expected that David Bailey will become CEO and I will become executive chairman of the board.
I plan to remain involved in industrial relations strategy development and field travel as an executive officer of the company.
<unk> expected appointment as president and CEO will meet both our board's intention to execute a seamless leadership succession and my personal desire to make way for a new generation of management, while continuing to contribute to the company's goal of helping children throughout the world.
Dave has been with orthopedic Patrick's over 14 years and during his time Adobe. He has cultivated an extensive knowledge of our technologies customers and sales organization.
Fred has been our CFO for six years and has deep experience in operations and corporate development from his years at symmetry medical and general electric.
I've had the pleasure of working closely with Dave and Fred over many years and I have seen firsthand their acumen professionalism and character.
Our goal has been to conduct an orderly what might say, even an inevitable management succession and I am confident the Dave and Fred are a powerful team that will lead the company to the next stage of its development.
Before turning the call over to Fred to review the financials I want to take a moment to thank our shareholders for standing by US in late 2020 and early 2021.
We will continue operating with integrity and transparency guided by our company's cause of transforming the lives of children with orthopedic conditions as of last week or the pediatrics products have been used in an estimated 200000 surgeries throughout the world and we're just getting started.
With that I'd now like to turn the call over to Fred to review, our financial results and provide an outlook for the first quarter.
Fred.
Thank you Mark Mark.
Yeah.
Total revenue.
Fourth quarter of 2020.
Mark can you mute your line please.
Total revenue from the fourth quarter of 2020 was $18 $9 million is 0.1% decrease compared to $19.0 million.
For the same period last year.
S revenue for the fourth quarter of 2020 was $17 $9 million, a 26% increase compared to $14 $2 million per the same period last year, representing 94, 3% total revenue.
International revenue for the fourth quarter of 2020 was $1 $1 million, a 78% decrease compared to $4 8 million for the same period last year, representing five 7% of total revenue.
In December 2020, we recorded a $2 7 million revenue reduction due to the repurchase of inventory from a large stocking distributor in Germany, Austria, and Switzerland, as we converted the Docker region to a sales agency model.
The $2 $7 million reduction impacted fourth quarter total revenue growth by a negative 14%.
Total revenue in 2020 with $71 1 million, a 2% decrease compared to $72 $6 million per 2019 U S. Revenue in 2020 was 63.0 million, a 14% increase compared to $55 1 million for 2019.
Representing 89% of total revenue international revenue in 2020 was $8 $1 million, a 54% decrease compared to $17 $5 million for 2019, representing 11% of total revenue.
The aforementioned $2 $7 million reduction of revenue impacted total year 2020 revenue growth by a negative 4%.
We are strongly encouraged that we could build on the momentum we carried from the third quarter deliver accelerated domestic growth in the fourth quarter of 2020.
Beside of the U S. As Mark has mentioned many times with fewer standalone pediatric hospitals ex U S procedure trends are taking longer to normalize and recovery in the international market continues to lag the recovery seen thus far in the U S, which again resulted in little to no debt.
<unk> during the fourth quarter of 2022, our stocking distributors.
That being said international performance was strongest in EMEA and Asia Pacific, particularly with our sales agencies.
Our fourth quarter and full year revenue byproduct category was as follows.
Trauma and deformity revenue in the fourth quarter of 2020 was $11 $3 million, a 17% decrease compared to $13 6 million in the same period last year and $47 $7 million per the full year of 2020, a 3% decrease compared to $49 $4 million in 2019.
<unk>, driven particularly by stronger trauma growth.
And encouraging signs of recovery in elective deformity correction surgeries, specifically, our Pnp bema and canyon related screw system.
The aforementioned $2 $7 million reduction of revenue impacted the trauma and deformity fourth quarter growth rate by a negative 20% and impacted the full year 2020 revenue growth growth by a negative 5%.
Scoliosis revenue in the fourth quarter of 2020 was $6 6 million, a 36% increase compared to $4 $9 million from the same period last year and $27 million in 2020, a 3% decrease compared to $21 $5 million in 2019 the decrease.
It was driven by lower sales of our response by five to fix out system and Firefly pedicle screw navigation guides, resulting from fewer elective procedures.
Lastly, sports medicine other revenue in the fourth quarter of 2020 was a $1.0 million rep.
Representing a 135% increase when compared to $430000 in the same period last year Sports medicine. Other revenue in 2020 was $2 $7 million, a 57% increase compared to $1 7 million in the same period in 2019 due primarily to the acquisition.
<unk> of pellets.
Moving down the income statement gross profit from the fourth quarter of 2020 was $15 $1 million, a 5% increase compared to $14 $5 million from the same period last year gross profit margin for the fourth quarter of 'twenty 'twenty was 79, 9% compared to 76, 2%.
For the same period last year.
<unk> profit was negatively impacted by $1 1 million for both the fourth quarter and full year 2020, due to the aforementioned $2 $7 million reduction of revenue.
Gross profit in 2020 with $55.0 million, an increase of 1% compared to $54 $6 million in 2019 gross margin for the full year 2020 was 77, 4% compared to 75, 3% for 2019 the increase in gross <unk>.
<unk> was due primarily to the increased domestic revenue and the addition of sales agents and our international markets driving favorable mix.
Sales and marketing expenses in the fourth quarter of 2020 increased 13% to $9 $4 million compared to $8 $4 million in same period last year and full year sales and marketing expenses increased 2% to $31 $9 million when compared to $31 $3 million in 2019, the increase was due primarily.
Increased sales commission expenses, driven by both domestic sales growth as well as the converted sales agents and our international markets.
General and administrative expenses in the fourth quarter of 2020 or $10.0 million, an increase of 39% compared to $7 2 million in the fourth quarter of 2019 full year 2020, G&A expenses were $38 $3 million, an increase of 44% when compared with $26 seven.
<unk> million dollars in the prior year the.
The increase in G&A expense was due primarily to increased stock compensation expense driven by a third year of restricted stock grants and a three year cliff vesting cycle and onetime stock grants related to executive management transition.
The addition of personnel and resources to support the growth of our business.
Increased legal expenses related to our ongoing litigation and acquisition.
Increased depreciation from additional consigned sets.
Increased amortization from our recent acquisitions and the increased G&A expenses associated with the acquisition of <unk> and tell us.
In the fourth quarter of 2020, we accrued $6 $3 million related to more multiple legal settlements as those amounts became F debatable and probable the amounts in the future may differ from our accrued amounts.
Research and development expense was $2 $1 million in the fourth quarter of 2020, an increase of 8% from $1 9 million from the fourth quarter of 2019 for the full year 2020 research and development expense decreased 8% to $5 3 million compared.
Compared to $5 $7 million in 2019, the decrease in full year research and development expense was driven by a reduction.
Investment in research and development projects as a result of the sales decline related to COVID-19 pandemic.
Total operating expenses for the fourth quarter of 2020 or $27 $9 million, a 59% increase compared to $17 $9 million from the same period last year. The primary increases during the fourth quarter were due to the accrued legal settlements of $6 $3 million as well as other G&A expense previously mentioned.
Full year operating expenses were $81 $8 million for 2020, a 28% increase compared to $63 $7 million per 2019, the increase in operating expense for full year 2020 was primarily driven by a 44% increase in G&A previously mentioned, including the accrued legal settlement.
Operating losses for 2020 was negative $26 8 million compared to negative $9 $1 million per 2019 adjusted.
Adjusted EBITDA for the fourth quarter of 2020 was negative $2 6 million compared to negative $919000 for the fourth quarter of 2019 adjusted EBITDA for the full year of 2020 was negative $5 $9 million from a negative $1 1 million for the full year of 2019, the changes were primary.
Driven by the impact of Covid on our demand.
Interest expense in the fourth quarter was zero point $6 million compared to $1 $3 million from the same period last year and with $3 $4 million for 2020 compared to $3 5 million for 2019.
Fair value adjustments of contingent consideration was $1 $7 million in the fourth quarter and $3 5 million for the full year 2020 as compared to zero in 2019. These amounts represent the time value of money associated with our year for system sales payment on.
The <unk> acquisition and will continue in varying amounts until the second quarter of 2024.
Net loss from continuing operations for the fourth quarter of 2020 with $14.0 million compared to a net loss of $4 $3 million in the same period last year net loss per share in the fourth quarter of 2020 with negative 0.73 per basic and diluted share compared to a negative <unk>.
<unk> three six per basic and diluted share in the same period last year and net loss from continued operations in 2020 was $32 9 million compared.
Compared to $12 $7 million in 2019 net loss per share in the full year of 2020 was negative 182 per basic and diluted share compared to a negative <unk> 94 per basic and diluted share in 2019.
Turning to our balance sheet as of December 31, 2020, our cash restricted cash and short term investments were $85 3 million compared to $89 7 million as of September 30 of 2020. Currently we have no outstanding obligation on our $25 million revolving credit facility, which expires.
Buyers in January of 'twenty 'twenty four.
The change in net purchase of PP&E during the fourth quarter of 2020 was $4 1 million as compared to $1 3 million for the same period last year and with $10 $5 million in 2020 compared to $11 $8 million in 2019. This investment reflects the deployment of consigned sets.
Which includes product specific instruments and cases and trays and.
Including the implants $5 1 million of consigned sets were deployed during the fourth quarter of 2020 compared to $4 $5 million during the fourth quarter of 2019 for the full year 2020, we deployed $18 2 million of consigned sets compared to $18 $2 million and the full year two.
<unk> thousand 19.
I would now like to turn to our outlook for 2021.
As we head into the first quarter and full year of 2021, we remain diligent and pay close attention to the evolving landscape of surgical procedures.
Domestically elective surgeries were being deferred in southern California, and at several of the hospitals in the northeast. However, unlike the widespread deferrals during the second quarter of 2020 children's hospitals are less affected by the surge in adult Covid cases hospitals appear to be treating adult patients more effectively in this.
Environment with that being said during the end of the fourth quarter 2020, as well as the start of the first quarter of 2021. We did continue to hear of selected cases that were canceled as pediatric patients tested positive for COVID-19 prior to surgery.
Recently, we have seen a significant increase in demand and expect that to continue for some time to come as reported Covid cases decline and a larger percentage of the population becomes vaccinated.
Internationally, there is a wide divergence on the Covid impact, Germany, Australia, New Zealand appear to have control of the pandemic very well and there is little to no impact on elective surgeries. However, their partial deferrals electrics elective surgeries in several countries in the EU and the U K.
<unk> remained significantly impacted.
For the full year 'twenty 'twenty, one we expect to see very significant growth over the prior year with sales, reaching $93 million to $98 million.
And representing a 31% to 38% growth.
We believe the following developments will significantly contribute to reaching our expected sales goals in 2021.
<unk> will have the 200 case registry completed by late 2021.
<unk> will benefit from 38, new domestic users and conversions will continue to accelerate.
Our launch of the <unk> and sterile package products in Europe during the second quarter of 2021.
Major pediatric center conversions to 80% or more.
Benefits from the countless hours of virtual training, which we have completed in 2020.
$18 million of consigned sets deployed in 2019, and 2020 will impact domestic and international sales agency markets.
International stocking distributors are starting to place larger replenishment orders and for the first time since March of 2020. They are starting to place set orders to meet the increased demand in their market.
Germany, Austria, and Switzerland conversions are already showing favorable impacts in the first quarter of 2021 and will continue for the full year of 2021 and beyond.
As the pandemic environment continues to evolve we believe our business model focused on strong execution.
Cost containment and a robust balance sheet position us optimally to execute and adapt to these new challenges.
Let me now turn the call back over to Mark for some final comments.
Thank you Fred.
We have not yet emerge from the Covid pandemic, we have recently seen a significant uplift in sales to international stocking distributors.
This turnaround coupled with strong international sales agency growth should correct. The performance issue, we had in 2020 with.
With continued domestic growth and strong synergies from <unk> and <unk>, we believe that the company will indeed emerge even stronger from the pandemic than when we entered it.
As always this is due to the dedication of our associates around the world who have risen so admirably to the challenges of the past year or the pediatrics designation as one of the best places to work in Indiana recently named that honor for the fifth year reinforces our conviction that our.
<unk> in 2020, and our outlook for 2021 are due to our culture, which is this company's most valuable asset.
With that let's turn the call over to your questions. Please.
As a reminder, if he would like to ask a question. Please press Star then the number one on your telephone keypad again that is star then the number one.
Your first question comes from Kalo Crum with <unk> Securities.
Hi, guys. Thanks for taking our questions. So first can you just provide a little bit more detail on this $2 7 million revenue reduction just what what prompted the change from the preliminary number.
What have you learned I guess from the time of the January pre announcement and today that resulted in that change.
Yeah, absolutely. Thank you for the question Kayla.
The agreement that we had with the stocking distributor in Germany, Austria, and Switzerland with signed on December 31, 2020, and the New Agency agreement was then sign the first week of January in 2021.
And we completed our normal sales reporting process in early January and we issued the pre announcement on January 11th before the investor conferences at that time.
As we said.
As we then really got into it and examine the transaction we recognized its complexity.
And working with our auditors, we determined that the correct accounting treatment in light of the new revenue recognition guidelines.
The 606 required us to book this is a revenue reduction in December of 2020.
This situation is a bit unique in that this is a very very large I guess, a stocking distributor for us. Unlike some of our other smaller independent family owned businesses and sales.
The current agreement that we had the termination agreement and the New agency agreement were different I would say than other agreements we have in place.
That all culminated.
And throughout the auditing processes, we are closing our financials and obviously shows up as it does in the <unk>.
Results that youre seeing today.
Yes.
Got it no that makes sense that makes a ton of sense. Thank you Mark for clarifying that and then you guys mentioned this does international stocking picking up in the first quarter is there a way to quantify that potential benefit.
I'm not sure we want to put an exact number on it but I would say that it gives us high confidence in our $93 million to $98 million from the year end as well as making the statement that we expect to report continued increase in growth for the overall business here.
<unk> in the first quarter of 2021.
Great understood. Thank you guys and then I guess, just one on an app effects.
It sounds like the early rollout is going really well.
Expected to complete the registry numbers this year.
Can you just help us frame sort of the supply capacity, because I think that myself and a lot of us on the line get pretty excited about <unk> and just how comfortable are you sort of that you have the right capacity this year and next thank you.
Yes, another great question.
Those are good problems to have.
Listen the demand for this we have been anticipating for some time and so we have been building inventory of this product in anticipation of this launch and the anticipated significant increase in demand for the product as more and more of these 20 surjit.
Three hospitals come on line. So I am pleased to report that we will not have a lack of inventory for this product again as Mark said the investment required for these sets are very very small so it makes a ton of sense to have plenty of assets available as well as plenty of inventory on our <unk>.
<unk> to make sure we can meet the ever increasing demand across the world for this product.
Very helpful. Thanks.
Your next question is from Ryan Zimmerman with <unk>.
Great. Thanks for taking the questions. Good morning, everyone. So.
2020 was obviously a unique year and you know your cadence of sales got a little turn on pad.
Through the year, just given what we normally think of with kids and it's typical seasonality kind of in the second and third quarter.
Just curious if mark or Dave or Fred if you want to give any color in terms of expectations around.
Seasonal cadence for the year.
How youre thinking about this.
I appreciate obviously the impact from the first quarter, but could we get back to maybe a more normalized coli. Susan for example mid year.
Some thoughts there I think would be helpful.
Yes.
That's a really good question I think at this stage, we can't say for sure but it does appear to have particularly in the last several weeks that were moving back to a more normal environment and hopefully that continues.
We don't know exactly how this will affect obviously our busy summer season.
But theres no question that there are patients that are still backlog through the back part of the fourth quarter and early part of the first quarter and while we may be seeing.
An increased volume of those patients come on line now I guess, Ryan we would expect to see that continue throughout the balance of the summer. We believe there is still a reasonable backlog of pediatric patients from even last summer.
Didn't get done again. This is speculation at this point, obviously, we've had a difficult time with the impact of Covid to really understand the seasonal impact on our business, but I do think it's fair to say that we will get back to a more normalized environment well, we hope to see us get back to a more normalized environment and have the cadence of our revenue.
And the volumes returned back to normal throughout the summer season.
Okay.
Maybe one Fred for you.
Historically, you've given us your expectations for deployment of capital in 'twenty one.
You talked about the capital you did deploy in 19 and 20.
Can you talk a little bit about your expectations for deploying capital, particularly in sets.
For 'twenty one.
Yes, it gets rather than putting a number on it I would just say that we're going to continue to deploy sets for sure. We're going to continue to invest in the business just like we did throughout 2020. Despite the lower volume I think we're also going to start to see the benefit of the Abbvie fix.
Lower capital required to drive those growth numbers. So we can deploy very little amount of capital and drive significant multimillion dollars of growth with abbvie fix which will reduce slightly reduce the necessary capital to continue.
Continue to deploy more and more so we're going to continue to deploy sets and meet the demand of our products, but it may be at a slightly lower pace as we kind of let the demand catch up with what we've done here in the last two years.
Okay Fair enough and then if I could squeeze one more in since you ended with 171 reps.
Hey, help us understand kind of how you think about that sales agent group.
Increasing in 'twenty, one, particularly as we think about productivity per rep.
The implied guidance and the necessary requirements step ups, if you will and productivity from <unk>.
Thanks for taking the questions.
Yeah. Good question Ryan.
As you know this is a metric that we track it but it's primarily for for the benefit of the market, we don't necessarily track productivity per rep. Because it has such a difference between the the geography on a rep by rep basis in the volumes within a specific hospital that said I think you could probably expect.
To see as a more normalized environment in terms of our sales agents in the United States, adding reps to meet demand as you know 90% to 95% of our surgeries are covered.
So there is our sales rep in the room and sales.
Sales grow by 31% to 38%, it's just simply going to require more people to be able to cover those cases and so on.
I think that you probably will see sales rep growth.
It may not mirror that 31% to 38% range, but it certainly won't be better than you saw in 2020.
Yeah, Okay I appreciate the color and thank you for taking the questions.
Your next question is from Rick Wise with Stifel.
Good morning, everybody.
Let me start off.
Come back to the some of your.
Quarterly thinking and the cadence of quarters at a higher level, just starting with the free.
Quarter.
I sort of standard myself, where its march 11th.
You're seeing some clear trends I appreciate that things could change but.
Can you help us think through.
How the first quarter could shape up or are we likely to see it.
Off the.
The non reduced fourth quarter number because of the stocking.
Accounting.
Should we assume it's sequentially better than the fourth quarter, given the trends you've seen.
Just help us think through the first quarter and how you are thinking about the flow of quarters to get to your guidance as the year unfolds stronger second half versus first I assume you know just.
Any color would be great.
Yes, Rick.
Thank you.
See continued an increase in the growth rates. So we saw 7% in the third quarter.
If you back out the $2, seven which had a negative 14% on the fourth quarter in the.
First quarter could be something like 21% growth. So continued increase revenue growth of the business.
As the recovery continues to impact us and I think obviously the second quarter is going to be tremendously high growth because of last year, but we would see the revenue continued to.
Then kind of <unk>.
Increase and follow a similar pattern.
Net ex Covid historical.
Many of the schools today are back in full swing. So there are some patients that are not getting surgery until the summer months because right now they are in school and so we would expect to see very strong June and July and then if things continue as expected the fourth quarter, probably be a lower revenue dollar.
Then the third quarter.
So just to make sure I'm understanding so far.
Good quarter.
Quarter dollars ahead of the fourth quarter of second ahead of first third quarter is always as you say the strongest and sort of returning to hopefully more normal seasonally slower fourth quarter. So that would be the one sequentially lower quarter as we sort of frame the year am I hearing you correctly.
Yes that is absolutely correct that better said thank you.
Alright good.
And I was hoping also to get a little more color on gross margin.
And you sort of alluded to it gross margins were much better than we looked for this quarter again, I assume thats the U S versus greater U S mix versus all U S. How.
How do we think about gross margin this year.
Myself.
Volumes returning.
Yes U S O U S rebounding, but now you've got direct.
And three of your largest markets, Germany, Austria, Switzerland.
I mean help us think through the GM setup for 'twenty, one as well.
Sure.
I think it's important to understand the negative $2 seven impact on the fourth quarter gross margin rate at $79 nine the.
The products will return and then they're used set that we had sold to that stacking has driven over the last five 710 years and they came back to us at a discount and so.
It came back to the books at a 40% gross margin. So it's a negative so it's a return of sales or 40%, which did inflate that fourth quarter gross margin rate because of that transaction and so if you were to back that out I think it's going to be something more like a normalized 75.
76%, which is kind of where we see the overall business on a full year basis going forward 76 ish.
And then having the positive impact of the agencies, but if we start selling said to our stocking distributors at our cost that's a negative impact.
It's kind of offsetting one another for 2021.
Great I'm, so glad I asked actually.
Two other questions from me.
Can you.
Talk a little bit about your thinking about.
Our strong balance sheet, and how you might deploy at an.
And 2020, one should I be thinking that.
Given everything that's going on in integrating your your acquisitions of 2020 et cetera that you're probably not.
Not going to be as active on the M&A front or technology tuck in front as you've been in the recent past or is that not the right way to think about it.
I would say that we continue to look for good technologies that we can deploy and.
And help the industry.
And so if there is an opportunity out there we would look to take advantage of it the strong balance sheet helps us make those decisions and if necessary. We can go get some debt, which will have any debt really to set.
On the balance sheet today to help finance something like that will continue smaller tuck ins.
But we continue to look for anything that could help the industry regardless of size with that being said I don't anticipate us, making any announcements anytime soon but we continue to look.
Got you and just last for some reason I'm obsessed with the total account conversion aspect of the story.
Can you.
Is it is it possible to tell us how many.
At this point or give us any color around what percentage of your U S business today as you know.
But what you would define as total account conversion then.
And is there a pipeline.
How do we think about your activities around that and the impact of that kind of mindset.
On your 21.
Outlook or business.
Thank you.
Yeah, Great question. So we have a pipeline that pipeline consist of in fact I just looked at it before this call we have a pipeline of well over 100 accounts that we are monitoring very specifically and looking for opportunities obviously to improve share, but also to contract with to move.
Our our business to that let's say, 80% plus particularly in the trauma and deformity area. We normally place about 10 of those accounts is very very high quarter kind of possibilities and hope to close a couple of those accounts every quarter and have a very specific number of accounts that we want to move into that 80% category.
Every year and so we observe as an executive leadership group of about 10 of those accounts on a quarter over quarter basis and measure against that and we like the pace of conversion of a few of these accounts kind of every quarter and at this day.
We have a very long runway as you know we are present in every major children's hospital in the United States and most in kind of the developed world and and there is I would say at this stage very few of those are at the 80% range of our trauma and limb deformity products that said as you talk about inventory and the inventory.
We deployed last year, we deployed $18 $2 million worth of inventory last year on a sales number that was expected to be a lot larger obviously, but got affected by the pandemic.
And we are starting to see the deployment of that inventory that we put out last year going right into hospitals and a few of accounts even over the last.
Few months, we're seeing where we're not deploying a few sets into an account, but we may be deploying 25 sets into a specific accounts and whether those are contracted to be 80% contracts or not we know when we get shelf space. When we have a reference there present every day.
But those are the types of accounts that tend to grow two from 30% 50 percentage of ultimately 80% share and we like the funnel that we have and we like our position right now.
Thank you so much.
Your next question is from Mike Matson with Needham.
Yeah, Thanks for taking my questions Fred.
I guess first half.
The audit been completed and when do you expect to file your 10 day.
Yes, absolutely.
We have completed everything.
A clean opinion from Deloitte and the 10-K, we filed.
File yet yet today, so that should be out there.
Okay great.
Then for the.
Distributor that you acquire.
The $2 7 million of revenue sorry, yes, the revenue adjustment into context can you can you quantify their annual sales.
Theyre, probably doing about $2 million a year annualized sales to day.
With definite opportunity to grow that I would say that was.
Probably 2000 Twenty's revenue.
Throughout COVID-19, but throughout 2 million Bucks.
Okay, Alright, and then.
Has the experience with Covid and the fact that a lot of these the stocking distributors.
We're.
Really kind of going through this destocking.
Phase has that caused you to accelerate your <unk>.
Conversion effort or is it just continuing that kind of a normal pace.
No I think it just is continuing as normal pace I mean, clearly we see the benefit we saw the benefit when we started down this road many years ago.
Having I would say eliminating some of the lumpiness of the revenue and not having our partners rely or not have cash available to invest in the business and so I think it absolutely encouraged us to continue moving forward.
But I don't know that we're going to really change any direction because of it.
This is a big one this is one that we've had on the docket for a long time. It was extremely complex. This is Fred.
<unk> talked about earlier and I don't see anything in the near term that's of that scale.
But certainly we expect this one to have a very substantial impact on revenue this year and into the future and then I think we will resume the pace of maybe one maybe two of these a year.
But we definitely have an accelerated these things these and again, even the small ones are complex. So it's a matter of bandwidth as well.
Okay got it and then finally just on the legal settlement. The accrual there can you provide any additional detail or out.
What that involves.
Yes, I think as most everybody knows we've got several outstanding.
Items with a K 12, there's.
Dr. Barry matter, there's the Io met I'm Ed.
In Florida.
Typical cases related to IP.
And some things have I guess progressed here recently such that those.
Become a potential settlements have become estimate able and probable and so we for the first time and put those on the books because we can now see the engine and his insight on many of those and so while those amounts are not final their estimates we think we're a lot closer.
When we were just six months ago to wrap in some of these things up and get them behind us.
Okay got it thank you.
Thanks, Mike.
Your next question.
Okay.
Hello.
Hi, David.
Sorry about that can you hear me.
Yes, we can hear you okay.
I didn't hear my name Carbonite, but thanks for getting me in.
So Fred just so I understand this and I think this puts it to bed hopefully you recognized $2 7 million in sales, let's say over the last I don't know maybe 510 years I think you even mentioned.
And.
This new ASC 606, you mentioned I'm not familiar with that but is that something new are you familiar with it and I imagine that is the.
Pronouncement that says hey take at all if you buy that stocking distributor.
Reverse or contra revenue.
The cumulative sales in one period.
Is that fair and have you seen that before.
Yes, it's I haven't seen it before.
You said, we installed the set which is what we bought part sets. So that we can consigned inventory into the hospitals and continued to serve the marketplace. We've sold those assets to them over many many years.
They are used they're now use sets, but they are absolutely required to be able to service the marketplace.
And yes.
ASC 606 is related to revenue recognition and returns and so it is I have seen it before and it is absolutely correct, where you would book.
Look a lower revenue number for this in this case $2 $7 million.
As we brought that back onto our books.
Got it and then.
Looking at the guidance.
Turning to solid growth.
In 2021, I was wondering if you might want to give us any color in terms of.
Whether it's operating or net loss like do we think.
You know you guys experienced some incremental leverage.
The revenue growth comes back the lost shrinks or growth or just any color. There in terms of what you are kind of high level thoughts are for 'twenty, one maybe on the bottom line.
Yeah, absolutely. So obviously adjusted EBITDA was negatively impacted by Covid that this legal settlement by other things.
But aside from those we have continued.
Statement that we want to grow the business aggressively on the top line and at the same time from an operating point improve the bottom line of the business. We have definitely learned how to do some things differently related too.
Travel and.
Communicating effectively obviously with zoom and other methods and we will be deploying those and continuing to deploy those in 2021 to save some money. So as that revenue returns very aggressively 31% to 38% will be controlling our spending and improving the bottom line the business for sure.
Great. Thank you for that I'm going to sneak one last one if I could.
You said you had <unk> sales agencies from 42 stocking distributors.
How do you look at the 42 the conversion potentially for conversion are there others. In there that you think would meet the materiality level of this ASC 606 or are most of them smaller I guess, just any thoughts there because I don't recall seeing it in the past so I figure maybe maybe you have a <unk>.
D of.
The size of some of those entities.
And if theres certain ones youre considering converting thank you.
Yeah, absolutely what I would say is that you know.
There's nobody else out there.
Anywhere close to this size.
This was by far our largest most sophisticated stocking distributor.
But really it wasn't just the size it was the contracts the legal contracts that were in place as well and so we'll evaluate each one of them independently as we move forward to make the right decision.
But they're all going to be at a much smaller nature for share.
Thank you.
Thanks, David.
Your next question is from Matthew O'brien with Piper Sandler.
Good morning, Thanks for taking the call for questions and Mark I know you're going to stay involved in the in the business I just wanted to recognize our outstanding stewardship at the company since joining.
Well.
I appreciate that very much.
Okay of course.
If we could just deconstruct the Scully performance in Q4.
It was obviously eyecatching, how strong it was and David talked a little bit about the you know the elongated.
Scully season, this time around but could you deconstruct what we saw in Q4 as far as you know maybe some of that backlog of cases app effects kicking in and then more importantly, or not I guess not more importantly, but.
Other underlying dynamics that are durable going forward in terms of new accounts.
Capture going deeper in existing accounts things like that because it's growing market is obviously enormous and that's a huge opportunity for you over the next couple of years.
Yes. Good question, so yes to deconstruct fourth quarter I think we saw about what a number of the other spine companies saw was this.
Almost a whiplash effect and we're seeing a bit of that now here again in the first quarter, where we have a backlog of surgeries throughout throughout the early fall than we saw October November really reasonably strong scoliosis demand.
It's all elective demand across the board in those periods, we had a really solid December but it was at a slowing rate of demand for solar and then that kind of continued here into the first early part of the first quarter. So I think what we've seen from a demand standpoint, its pretty consistent with what I have been reading at least from some of the other companies on this.
Scoliosis side or on the spine side.
I think what we're really pleased about is the numbers that we had 23 new users.
That we captured in 2020 and again Theres only.
200, 300 children's hospitals, so on only a certain number of pediatric orthopedic surgeons that regularly do scoliosis. So that 23, new users is a very substantial and concrete representation of share gain for us and we have.
Kind of a goal of that order of magnitude again for this year and feel like we're off to a really really good start so I think thats whats durable. There's no question, we're getting a larger percentage of the tape.
Some of our accounts already so some of the accounts that we had before these 23, new users I think we're getting deeper penetration.
But adding new users that are consistently calling for the responsibility system I think is a very concrete.
The thing we're resting on for growth next year, obviously, we're extremely excited about ethics, and we continue to see accelerated interest and being a part of being a part of the IRB sites. Although as you know we have our <unk> and will remain there until we fill those 200 patient registry, what I will say, though is that we can.
Very clearly.
We're very clearly deriving revenue and new customers from our acquisition of <unk> and people being connected to this non fusion technology you know not every patient as you well know is a candidate for non fusion surgery and so a number of patients are being driven to these clinics that have access to the site and ultimate.
And some of those sites there are places, where we didnt have previous fusion business and we're definitely seeing an increase in fusion business with our response system at locations, where that have access to the X technology. So like the synergies there and as that continues to expand and become a bigger part of our business in 2021 2022, we would.
Expect to see that synergies I only get better.
Got it that's great day.
And then following up on one of <unk> questions on.
Just the kind of core domestic business.
You've got those 10 accounts I think you said that your target how sizeable are those 10, I mean im assuming youre in some of that really big.
Chosen centers around the U S already are there some areas, where you just haven't historically been able to penetrate or are you able to get into some bigger places you hadn't been.
In the past are you going deeper I guess the question just to sum. It all up is can you keep growing the domestic business around 20% in the future in more normalized times.
There is no question that we are on the early start we are in we are still in the early innings of.
This growth curve.
We are present in every major children's hospital here in the United States, but as you as we've said in the past I mean, this is a surgeon by Virgin product by product conversion and with 35 implant systems and a lot of these accounts that have a lot of surgeons.
Matt We may have one or two surgeons out of 10, let's say that use all of our products.
That's obviously only accounts for 2000, and so our sales percentage of the volume and that accounts and so we're measuring those accounts.
On an individual basis by their Tam and I would say that most of those accounts that we are measuring our accounts that are worth and access certainly in excess of $1 million in some accounts in excess of a few million dollars, particularly for T&D and again, we're just in the early phases of moving more and more accounts into that.
Kind of 50% to 80%.
Share range, but again, we like the pace with which this is happening and feel like we can maintain that pace for a really long time in the future.
Excellent. Thank you.
Thanks, Matt.
And there are no further questions at this time.
Alright, very good well, let me thank everyone for joining today's call. We certainly expect 2021 to prove to be a pivotal year, although a more normal year for the company and we'd like to thank all of you for your continued interest and support of our mission to help children throughout the world.
Have a good day.
Okay.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Are you guys going to call me back then when we make the first call. So I think we can just.