Q3 2021 Sientra Inc Earnings Call
Good day, ladies and gentlemen, thank you for standing by and welcome to the CN Trust third quarter 2021 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session. That's a question. During this session you will need to press. The Star then the one key on your touched on Jos.
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I would now like turn the conference over to your speaker host.
Oliver Bennett General Counsel Chief Compliance Officer. Please go ahead.
Thanks, operator, good afternoon, and welcome to the CN trusts third quarter 2021 earnings Conference call.
I'd like to remind everyone that in our remarks today. We will include statements that are considered forward looking statements within the meaning of United States Securities laws.
In addition management may make additional forward looking statements in response to your questions.
Forward looking statements are based on management's current assumptions and expectations of future events and trends, which may affect the company's business strategy operations or financial performance.
Detailed discussion of the risks and uncertainties that the company faces is contained in its previously filed annual and quarterly reports on Form 10-K, and 10-Q and in its quarterly report on Form 10-Q that the company will file on Friday.
Actual results may differ materially from those expressed in or implied by the forward looking statements.
The company undertakes no obligation to update or review any estimate projection or forward looking statement.
I would also like to note that <unk> uses its investor relations website to publish important information about the company.
Including information that may be deemed material to investors.
Financial and other information about the mantra is routinely posted and is accessible on the company's investor Relations website at Www Dot <unk> dot.
Dot com.
Today on that call, we have Rod, Minnesota census, President and Chief Executive Officer, Andy Schmidt, Our Chief Financial Officer, and Denise <unk> Sanchez, Vice President of research and development.
I will now turn the call over to Ron Bryan.
Thanks to everyone and thanks for joining us today on our third quarter 'twenty one earnings call.
Our core mission of Sandra is to enhance lives by advancing to art of plastic surgery.
This mission is reflected in our focus on board certified plastic surgeons and our goal to become a market leader in this category.
You're going to hear today that we're making significant progress towards becoming the partner of choice to plastic surgeons by providing both reconstruction and augmentation products and services.
This focus has enabled us to deliver over 20% plus growth for the past five quarters in a row, including this quarter, which shows exceptional results and an all time high with total accounts.
Net sales grew 28% over the prior year.
For me this growth was primarily driven by a 33% increase in our reconstruction market demonstrating the strength of our product portfolio.
We saw excellent sales force execution in the third quarter, driven by dramatic growth in existing accounts for both the reconstruction and augmentation.
Matter of fact, the growth from existing accounts in the third quarter represented 75% of the overall growth.
We also added more than 300, new accounts this quarter, bringing our total number of accounts to an all time high of 2700 accounts.
We're seeing the benefit of a greater emphasis on creating patient demand where see entering plants through unique marketing initiatives.
Partnering with plastic surgeons.
Our patient acquisition efforts have been key to driving greater physician loyalty year.
Year to date, we have referred now almost 17000 patients to a plastic surgeon customers.
Our reconstruction strategy and execution is working as this quarter was the best quarter in <unk> history.
And based on the latest data obtained from IQ via <unk>.
Year to date share of hospital purchases has increased across both implants and expanders by <unk> three share points and according to this data.
The answer is due only brand so far with sequential year over year market share gains for the past three years.
Walter reached all time highs in revenue for both the tissue expanders any plants useful reconstruction.
And 75% of recon revenue came from existing accounts.
Our strategy to expand market share with existing accounts, while adding new accounts to drive future sales is working.
We will continue to accelerate our market share gains and a world well positioned to grow in this space to the demand created by the safety of our products and the strength of our GPO contracts.
Our team is focused on the highest volume hospitals in the U S. While leveraging the momentum in new account gains and increased product adoption.
We're delighted to see the addition of 130, new hospitals this quarter, which we expect to fuel future growth as it typically takes four to six months for new accounts to start generating revenue.
The reconstruction business favors products safety to provide the best possible patient outcomes and to minimize complications which can reduce re operations.
We're very pleased to share that an independent study from Stanford University School of Medicine confirmed the <unk> I'll ask two dual port tissue expander enables efficient management of Sirona and early targeted intervention the pre pectoral breast reconstruction confirming.
Confirming that we're leading the way with innovative technologies designed to improve patients' lives and procedural outcomes.
We also saw outstanding commercial execution supporting our strategy to expand our market share in medical facilities performing reconstruction surgeries.
We hosted several education events and.
Almost 90 hospitals and surgery centers represented at those events.
We believe it's important that we do more than provide superior products and services, but also we get back to the community.
We recently announced that we partner with mission plastics, a nonprofit organization to provide access to breast reconstruction surgery for women and property across the U S.
We're excited to share that almost 100 surgeons already signed up to perform pre surgery using our products.
And contrary to expectations, the breast augmentation bit market continues to flourish.
Market data shows the overall year to date breast augmentation is in four year high.
It's up 17% over 2029% over 2019 in fact, it's the highest in history.
The answers are market share continues to grow and now is estimated to be close to 11% in breast augmentation, while the comparable quarter in 2020 was estimated to be slightly over 6%.
Our customers' loyalty and stickiness is the real difference here for us when they come to us they stay with us.
In consumer enthusiasm towards breast augmentation remains very strong.
According to recent market research, 74% of women considering plans indicated they are likely to get breast augmentation within the next 12 months.
Our brand growth is fueled by our efforts to consumer is the category when consumers ask for our brand.
71% of surgeons will use that brand of implants.
34 million consumers will reach online Bart multiple digital platforms by serving up education content for those considering breast augmentation and guiding them to see interests or plus the interest surging.
Our online presence supports a message of safety and high patient satisfaction.
That assurance peace of mind is continuously opening doors for us.
We start a new program called <unk> Academy to drive pull through at the account level today.
To date, we have experienced two times revenue growth amongst surgeons that tended to program.
And based on initial success, we'll be scaling up this program next year.
The interest refocusing innovation to fuel our future growth and it's backed by our commitment to best in class safety profile.
We're on track for year end five 10-K submission for next generation tissue expander Alex to probe.
As we move through the final quarter of the year, we'll continue to see strong momentum in both our augmentation and reconstruction markets setting up for a strong finish to the year importantly, a healthy start to 2022.
Andy will now give more details on our financial performance.
Thanks, Ron.
Our third quarter was a great quarter on many fronts in terms of commercial performance and in terms of key business milestones that will set the stage for a strong 2022.
Before I dive into the financial results, let me address a key structural accounting item that is represented in our current period financial statements.
The company worked to modify our convertible loan agreement documents to allow us to employ equity accounting in terms of our $60 million convertible debt.
In essence, we no longer are required to treat alone as a derivative instrument.
The key outcome is that in Q4 and going forward there will no longer be any quarterly P&L for balance sheet fair value adjustments related to that.
The financial statements will reflect alone exactly as it should be a $60 million loan.
Our current period results do show much improved set of financial statements due to this loan modification.
The final adjustment in third quarter was a reduction of liabilities an increase in shareholders' equity and a big plus on the P&L statement somewhat offsetting prior period noncash charges associated with the past derivative accounting.
The second very positive finance driven outcome. This quarter was the forgiveness of a $6 7 million PPP loan.
This also shows as income in the quarter.
Reduction in liabilities and is a true cash positive event for the company.
And operations related big win for the period was the physical move of our distribution center from Santa Barbara, California to Franklin, Wisconsin, where we manufacture our implants.
This move will create a positive efficiency opportunity for us in 2022 and going forward. However, it does carry with it transition costs incurred in the third quarter that I will discuss shortly.
Finally, we continue our ERP system migration August 1st to include our logistics in order to cash processes.
This move will promote our ability to scale, our future business processes to address the high demand we have for our products.
Now shifting to our Q3 'twenty one financial results.
Yeah.
We recorded record plastic surgery, Q3 revenue results, which brings a running total to five consecutive quarters of record revenue performance.
<unk> posted revenues of $19 6 million as compared to $15 3 million in Q3 'twenty.
The increase of 28%.
While a period that is seasonally affected by surgeon vacations. We saw continued strong performance from our augmentation customers.
Big performance from our reconstruction customers.
Yes.
Gross margins for Q3, 'twenty, one was 54% which is consistent with Q3 of 'twenty.
As a key driver to gross margins as product and channel mix, 54% may seem to be counterintuitive, given our strong performance in the reconstruction space.
We experienced consistent price stability across our entire product line and as expected product cost performance.
What is unique for this quarter is the distribution move I mentioned earlier.
Interest expenses distribution costs in the period incurred to cost of sales and.
A natural part of our distribution center move is the additional cost of shipping inventory from Santa Barbara, California to Franklin, Wisconsin and.
In addition, we did not shut down our product shipping for a single business day in the quarter, requiring us to essentially run two distribution centers at the same time during Q3.
As Ed costs reduced our gross margins by approximately two percentage points in Q3.
In Q4, we will continue to see additional distribution costs as we expect to spend time in the quarter continuing to organize our new Franklin distribution center, while shipping to anticipated strong customer demand.
All said, we are still confident that the changes we are making in 'twenty, one will help us achieve higher gross margins in 2022.
Okay switching to operating expense.
Total operating expense for Q3, 'twenty, one was $22 3 million as compared to $17 8 million in Q3 of 'twenty.
The primary increase in expense was due to sales and marketing, which represented $2 million of the $4 $5 million increase.
The increase is as expected as the company has invested and will continue to invest in our go to market assets to capitalize on the future market opportunity that lie ahead.
The current period operating expense is comparable where their Q1 of 'twenty, one and will vary period to period, primarily driven by sales and marketing activities, which has a variable cost component.
Total GAAP profit from continuing operations for the current period was $28 4 million.
Profit includes other income of $42 2 million, which reflects the final adjustment gain of $35 6 million related to the modification of our $60 million convertible debt agreement.
And the relief of our PPP loan of $6 7 million.
Adjusted EBITDA for Q3 21.
<unk> $8 $3 million loss as compared to a $7 $2 million loss for Q3 of 'twenty.
Switching to key balance sheet items.
We ended the September 32021 period, with a cash balance of $66 million.
This compares to a balance of $55 million at December 31 of 2020.
The net increase in cash is due to our Q1 'twenty one capital raise and other financing activities.
That netted $34 3 million in cash this year.
Year to date cash used in operations was $29 6 million, however, $7 $6 million of that amount was attributed to an increase in accounts receivable due to increasing 2021 sales and our transition and ERP systems, and our current quarter, which caused a delay in <unk>.
Livery of customer statements.
We expect to recapture much of that increase in accounts receivable over the next quarter to two quarters.
We also increased inventories by approximately $12 million year to date to address increasing sales and robust product demand.
Finally, the sale of mirror dry resulted in an inflow of $11 3 million during the year, which was slightly offset by forecast capex of $4 $9 million year to date.
Total debt of approximately 76 million at September 32021 reflects the relief of the $6 7 million.
PPP loan previously discussed.
Total outstanding shares at September 32021 were $58 million.
Turning to guidance for 2021.
We are raising the lower end of our revenue guidance and now expect plastic surgery revenue in the range of $76 million to $78 million, reflecting growth of up to 41% compared to sales of $55 million in 2020.
We continue to expect 2021 annual operating expenses to be in the range of $85 million to $90 million.
Finally, looking at our Investor Relations calendar, we have a busy Q4, and we will be presenting at the Stifel Healthcare Conference next Monday.
Participating in the Craig Hallum Alpha Select conference next Tuesday, and presenting at the Stephens investment conference in Nashville on December 3rd.
At this point I'll turn the call back to Ron Thanks Sandy.
Very optimistic as we head into 2022, and very confident that we can accelerate our market share growth by leveraging our unique strengths.
It all starts with people our commercial team is focused on innovation, including patient acquisition surgeon education, and a partnership a butterfly will add two additional recon hospitals added.
During a time when the markets bouncing back we'll also have products that have unmatched safety profile would.
We believe they will become the partner of choice for plastic surgeons as we focus on enhancing lights advancing the art of plastic surgery.
And now I would like to open the call up for Q&A operator.
Thank you, ladies and gentlemen, if you'd like to ask a question at this time.
You will need to press. The Star then the one key on your Touchtone telephone to withdraw your question you May press the pound key.
Please standby, while we compile the Q&A roster.
No first question coming from the line of Alex Nowak with Craig Hallum. Your line is now open.
Great. Good afternoon, everyone I was hoping we could start out on.
On the implied Q4 guide here just given the seasonally stronger Q4 versus Q3 can you just expand on next quarter why.
Next quarter will be down to flat sequentially and then perhaps can you outline how youre thinking about growth going into 2022.
Thanks This is Andy.
Well first of all we don't think Q4 is a seasonally down quarter Q3 was a seasonally down quarter, which we thought performed quite well.
We started Q4 with a lot of momentum keeping us very busy we're very optimistic about Q4, hence why we're bringing our guidance up obviously targeting the higher end of the guidance we're off to a great start we think we're going to finish the year very strong.
And then just anything on the 2022 commentary.
We don't have guidance out at this point in 2020 to matter of fact, we will be working with our board of directors in Q4 in terms of our approval of 2022 and forward looking plans and we will look to the future to actually provide that guidance.
Okay that makes sense and then we obviously keep hearing that's drawn to that for implants in the market. So how do you think this demand plays out here over the next couple of years do you think the demand eventually rolls over or do you think there is some sort of renewed growth phase for breast implants that were that were in.
Alex.
The new normal.
Right now year to date.
<unk> has been the highest ever.
A number of augmentation in the U S and the new normal now surpassed by 9% in 2019 pre COVID-19 the expectation that as the market continues to grow in the next two years, we have not seen a slowdown this quarter, we have not seen a slowdown here today.
What are we seeing a lot the last.
Four or five months as revisions.
Women to come in when they have an implant for 10 to 12 years. They are coming in right now and getting new implants. So across both of our divisions and primary augmentation that market is very very robust, but the critical thing for us and this quarter was an all time high for <unk>.
Reconstruction business.
We saw all those strategic work that we did at the beginning of the year with results now or gaining market share across hospitals, and whether you've seen our revenue, although workday was done four or five months ago.
That's great I appreciate the update thank you.
Yeah.
And our next question coming from the line of Margaret Kaczor with William Blair. Your line is open.
Hey, good afternoon, guys. Thanks for taking my questions.
So maybe start with fee.
Which maybe you can for me up on the exact number but I think your comp base is up 25% to 35% this year or so so yes.
As those accounts come up.
So the company average in 2022, assuming they can do that is that something that you guys would.
We look forward for augmentation of breast product revenue growth or are there other factors that.
Just to get those numbers, so we shouldn't just try.
Draw lineup.
So the rate based on accounts.
Yes Margaret.
Looking at total of 3500 reconstruction hospitals, and roughly 6% to 7000 plastic surgeons now keep in mind for those searches all some of them on the same office.
There's still a lot of growth as the share we have 11% share in the augmentation and we have a 12% share in the hospital for breast implants at 15% for tissue Expanders Theres a lot of growth still ahead of US part of it will be in existing accounts as I stated we have.
Right now.
Roughly 27% accounts and those have a lot of our possibility to continue to expand our market share on the other hand, you have the ability to gain new accounts as we move forward in the next 12 months those are the things we'll be assessing from a deployment and make sure. We have the right number of representatives in some areas and also.
Just to provide a number of programs as well so there's a long ways to go still to slowdown occurred share growth. We don't expect that we expect to actually accelerate our share growth in 2022.
Okay.
That's useful commentary and then one of the things that were sort of curious.
The same thing psychology had asked before but do you have any visibility around patient surgery today versus the last few quarters, meaning our surgeons still three to four months booked out for example is that Brian is changing and is that something that you're watching your not really part of the business. Good youre seeing the underlying demand.
And over time.
They are just.
Returned from IC enter Academy, it's a program that we did.
And Austin taxes.
It was there was a lot of buzz in that meeting because some of those surgeons will be January before youre able to go in for surgery. Some of them may be sneaking right before the holidays.
Very very busy adding more surgeons to adding more staff.
I don't see that slowing down at all and again from a reconstruction were seen.
A lot of demand from the hospitals that we have contracts now and the same thing I don't see that slowing down in the next six months.
Okay, and if I could squeeze one more in.
That hospital side. So you guys I think a year ago and talked about.
Getting into the contract.
Trust purchasing group you obviously.
To add share, but still have an eight 5%.
That is driven by your existing accounts. So all of that seems pretty favorable and that was the question ultimately becomes have you really seen.
Now part of that partnership or frankly can that be a catalyst to ramp as we go out over the next four to six quarters in recon starts to come back.
And to the market.
Thanks.
I missed the beginning of your question are you referring to butterfly partnership.
The healthtrust purchasing group.
Yes, yes, yes.
Yes, all the GPO is that we have contract right now we're seeing the results that is part of our strategic investment that we did at beginning of the year to really focus on our reconstruction.
That includes all the GTO, that's one of them and we're seeing the results in this third quarter.
We had 74% of our sales, Puerto Rico construction coming from existing accounts about 17% from new accounts.
You see that happened in the third quarter with continuing to see the acceleration in the fourth quarter.
All of that is a work that was done in the first six months and supports and sustains our strategy to focus on our reconstruction and one of the critical things is in the past two quarters, we saw about 38% of total sales coming from recon and actually this quarter. It was 46% came from reconstruction.
Okay. Thanks, guys.
And our next question coming from the line of Jon Block with Stifel. Your line is open.
Great. Thanks, guys good afternoon.
Andy maybe I'll just start with you on the gross margins and I think I get the moving parts for the third quarter.
2021, and having the duplication this quarter are these headwinds fully resolved in the first quarter of 2022, I think you said there'd still be a stub in the fourth quarter and if so does that mean that we can still start next year in and around the high 50% range essentially I'm sort of up two to 300 bps from the <unk>.
22 S. We're gonna keep building this company very consistently we see the demand and we now have the right facilities right people in place.
We did see like everyone else in the Covid environment slightly increasing labor rates, but for us in terms of our high margin products and type of business or in it really doesn't affect us as it would affect a 15% to 20% gross margin type business. So.
So we see it somewhat on the labor side, but not significantly in terms of the overall equation, we do not yet see any issues with materials in terms of supply chain from that perspective, we've been consistent in very good shape.
Great. That's very helpful. As a lot of caller. Thank you and then just dependent Ron I know you're not going to give.
2022 guidance right now, but can you just at a high level talk to some of the new opportunities next year, they appear pretty Folsom, Canada, Alex to pro are there any other international opportunities that we should be thinking about it despite.
Despite the three players structure of the market typically I don't think there's really been much of any price realization maybe more headwinds. This inflationary environment can that proved to be more of a tailwind twenty-two we just love your high level of thoughts and suddenly Incrementals next year. Thanks.
I think the opportunities are still in the us when we are still with the number three player from augmentation, 11% and accelerating and market share increase and we saw that as well and a hospital environment where were quickly when.
The beginning of 2020 of a 12% share for tissue Expanders, 50% share now that's the 22 opportunity continuing acceleration share growth.
Canada, Yes, we are expecting to hear from health, Canada This quarter and in regards to Alex to our regards to Alex to pro I do have our vice president of R&D with US and ahead of regulatory then these styles.
As you noticed join Sandra back in June.
And from established lab, so Denise any comments about Alex too.
Sure. Thank you Ron while we're very excited about this upcoming submission with analytics to not only because of the innovation and all that features that aren't really this time per patient and.
And patient tasty, but also because it's a build up in our platform about like that we now have a lot of benefit and breast <unk>. The plastic surgeon. So we are building up on this platform and this will be a continuous rollout of innovation in our pipeline I like still <unk> bring.
Benefits, such as MRI compatibility less interference with imaging less interference with radiotherapy treatment, but also enhanced patient comfort and state of the art location technology. So we're very excited about this new product because again it'll be focused on innovation and you will see a constant rollout in the coming months.
That's great. Thanks, Thanks, a lot.
That's how mine listen gentlemen to ask a question. Please press star one on your Touchtone telephone.
Non next question coming from the lineup.
Anthony Binetti with Maxim could be on to something.
Thanks, Yes.
Just talk a little bit about the market share gains.
I think you said you were at around 11% Ron.
Three percentage points.
D.
Do you see as you move forward here.
What what do you think the opportunity is by the end of 22.
Terms of the ability to continue taking market share.
I know, it's not just taking market share from others, but just just growing businesses.
It's a two pronged approach, but do you do you see that trend continuing at the current pace increasing staying about the same.
Anthony slightly over 6% annualized last year, where it's like now.
Now we're above close to 11%.
Expanding the market and the market is robust right now versus what it was back in 2020, obviously is the market is growing so you have the opportunity to continue to accelerate share growth with all the programs that are we doing in regards to patient.
Physician loyalty and ensuring the physician stayed with us when they come on board when they flip to Sandra they stayed with US. So we have the opportunity to continue to accelerate that in the next year, we see.
Celebration, we've got a double from 11 to 22, I don't know, but we have very very aggressive goals for next year, because we are confident they're all products and a 10 year safety that we have for our products set us apart and you also have the R 20 year platinum warranty that our competitors did not have <unk>.
Physicians at 10 O programs, we've had over 45 surgeons.
Surgeons tend our Sandra Academy.
A mile maybe.
Saying things like this is the best program they ever been to.
This program I just came back from last weekend at searches tell me over lunch and says I've never had a company helped me help my business and do the things you guys are doing to help bring the patients. We have referred 17000 patients two different surgeons thoroughness Diandra network, but some of those patients a lost cause by the time.
Do you go to the website that baseball and understand the website. So we're teaching them. Other we do their website, we teach them how to retain those referrals. So they're not lost in space. We're very excited about next year and with the acceleration of sure growth next year.
Great. That's very helpful. And then just I know you touched on the supply chain.
Issue, a little bit it sounds like you're you're well well prepared for that but are you are you seeing any.
Cost increases in any of the in any of your products.
On the manufacturing side.
No actually we're seeing at the opposite we keep finding new efficiencies, we've made tremendous gains over the last few here and a half and continuing to make those gains and again Denise is with us here.
She is a key higher in terms as well in terms of new product, but also innovations in terms of product Productization and also in terms of what we're doing in manufacturing so I'm seeing that actually a lot of stability in the model to wear as we grow we're seeing great price stability not significant not disc.
[noise] County, just real strong price.
Stability.
Again, and we're seeing dropping costs, even though again the labor rates might be up we have volume buying opportunity to some materials, which actually is the opposite of what perhaps other people are seeing with supply chain, we see opportunities to reduce those costs.
As well as again reduce costs from efficiency perspective, so when we go into 2022, we're gonna see market expansion, but we will see you again the ability to take advantage of the efficiencies based on the infrastructure we've invested in to date.
<unk> figures are going to be 2022, 2023 and on.
Well, that's great to hear that that definitely refreshing from what we've been hearing from from other companies as they report the third quarter earnings.
Maybe just you know obviously the move from Santa Barbara to to Wisconsin and save costs.
What are the expected savings on an annual basis just from Ah.
From an S G and a perspective or.
A real estate perspective in in 22022, I know, there's some like you said, there's some charges associated with that but what would be the ongoing annual savings ask after you eliminate the one time costs with the move.
I'll start with the easy one to quantify.
Moving from.
Santa Barbara, California, The Franklin R distribution center takes roughly a million dollars of non value added shipping fees from taken finished product. That's produced in Franklin put it on a truck and the Senate at the Santa Barbara than to be distributed so that million dollars comes into play.
Next year on an annualized basis. The other part that comes into play as we now have a facility and an organization that can scale with the business.
Obviously, a big growth year for us this year again, we do not see or have any plans to slow. This growth. So we're gonna be able to grow in to basically that facility, which will then as a percentage of sales bring the cost of distribution down. So we'll be looking at that and then I don't have a specific number for ya, but we.
Do have ice site in terms of how we actually take advantage of scale.
So that will be in front of us in 22, and especially twenty-three and onward.
And otherwise in terms of SG&A, So I was talking more cogs.
We were we were in a total of four facilities here in Santa Barbara and we're bringing that down to where we will have one leafs in Santa Barbara and 2020 to be doing a lot of consolidation of our Franklin, Wisconsin site and be minimizing our presence here in southern California, but will still have a presence but that will.
Known as well produced some significant savings in 2022 and 2023.
Okay, great. Thank you very much I appreciate it.
And we have a follow up question from John what Stinks for you on this topic.
Yeah, guys, sorry for the follow up and really usually don't do this but I'm getting.
I'm sure my colleagues are as well can we just go back to the way, we let off the Q&A I mean, it's another strong quarter. There's market share gains that are very apparent you think the market's in really good shape and you have a seasonal tailwind sequentially and you have more couch and four Q going into <unk> and then you had going into <unk> I think what we're.
We're all just sort of scratching her head a little bit trying to reconcile is why would the midpoint of the range imply flat sequential revenues and if the answer is just.
It's still a comb an environment and we want to leave some room for error or a sense of conservatism. That's certainly more than five by me I just wanted to make sure we're not missing anything or they're done a message being conveyed that shouldn't be so can we just wanted to go back to that starting point and try to address that thanks.
Yeah.
Yeah, John we are not seeing any enemy now coming into November a slowdown we're seeing exactly what we saw in the third quarter and the normal patterns for Q4, and that's how I am very comfortable and somebody asked me. The upper end of our guidance are very very comfortable with that but in two you actually ended and finished the year.
You don't know, but we are very confident this is going to be by far the best year ever for the company and we're very confident has been the upper end of our guidance based on what you expect for Q4.
Fair enough thanks, guys.
And I'm showing no further questions at this time I would now like to turn the call back I'll say to Mr. Obama nieces by any closing remarks.
Well. Thank you everyone to look forward to see some of you in the next two weeks at the different investors conference ratio time. They all you have a great afternoon.
Ladies and gentlemen that doesn't call conference for today. Thank you for your participation you may now disconnect.
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Good day, ladies and gentlemen, thank you for standing by and welcome to the CN Trust third quarter 2021 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation of your question and answer session. That's a question Nuno session you will need to put the star then the one key on you touched on the telephone.
Please be advised that today's conference maybe recorded if you would go to offer assistance. Please press Star then zero.
I would now like turn the conference over to your Speaker host Oliver Bennett General Counsel Chief Compliance Officer. Please go ahead. Thanks, operator, good afternoon, and welcome to the CN Trust's third quarter 2021 earnings Conference call.
I would like to remind everyone that in our remarks today. We will include statements that are considered forward looking statements within the meaning of United States Securities laws.
In addition management may make additional forward looking statements in response to your questions.
Forward looking statements are based on management's current assumptions and expectations of future events and trends, which may affect the company's business strategy operations or financial performance.
Detailed discussion of the risks and uncertainties that the company faces is contained in its previously filed annual and quarterly reports on Form 10-K, and 10-Q and in its quarterly report on Form 10-Q that the company will file on Friday.
Actual results may differ materially from those expressed in or implied by the forward looking statements.
The company undertakes no obligation to update or review any estimate projection or forward looking statement.
I would also like to note that central uses its investor relations website to publish important information about the company.
Including information that may be deemed material to investors.
Financial and other information about Sandra is routinely posted and is accessible on the company's investor Relations website at Www Dot C Amtrust dot com.
Today on that call, we have Rod, Minnesota census, President and Chief Executive Officer.
Andy Schmidt, our Chief Financial Officer, Anthony Stargaze Sanchez, Vice President of research and development.
I will now turn the call over to Ron Bryan.
Thanks to everyone and thanks for joining us today on our third quarter 'twenty one earnings call.
Our core mission of Sandra is to enhance lives by advancing the art of plastic surgery.
The mission is reflected in our focus on board certified plastic surgeons and our goal to become a market leader in this category.
You're going to hear today that we're making significant progress towards becoming the partner of choice to plastic surgeons by providing both reconstruction and augmentation products and services.
This focus has enabled us to deliver over 20% plus growth for the past five quarters in a row, including this quarter, which showed exceptional results and an all time high with total accounts.
Net sales grew 28% over the prior year.
This growth was primarily driven by a 33% increase in our reconstruction market demonstrating the strength of our product portfolio.
We saw excellent sales force execution in the third quarter, driven by dramatic growth in existing accounts for both the reconstruction and augmentation.
As a matter of fact the growth from existing accounts in the third quarter represented 75% of the overall growth.
We also added more than 300, new accounts this quarter, bringing our total number of accounts to an all time high of 2700 accounts.
We're seeing the benefit of a greater emphasis on creating patient demand for <unk> entering plants through unique marketing initiatives and partnering with plastic surgeons.
Our patient acquisition efforts have been key to driving greater physician loyalty.
Year to date, we have referred now almost 17000 patients to a plastic surgeon customers.
Our reconstruction strategy and execution is working at this quarter was the best quarter in <unk> history.
And based on the latest data obtained from Iqs, you see interest year to date share of hospital purchases has increased across both implants and expanders by three share points and according to this data.
The answer is the only brand so far with sequential year over year market share gains for the past three years.
We also reached all time highs in revenue for both the tissue Expanders and implants used for reconstruction.
And 75% of recon revenue came from existing accounts.
Our strategy to expand market share with existing accounts, while adding new accounts to drive future sales is working.
We will continue to accelerate our market share gains and are well positioned to grow in this space. The demand created by the safety of our products and the strength of our GPO contracts.
Our team is focused on the highest volume hospitals in the U S. While leveraging the momentum in new account gains and increased product adoption.
We're delighted to see the addition of 130, new hospitals this quarter, which we expect to fuel future growth as it typically takes four to six months for new accounts to start generating revenue.
The reconstruction business favors products safety to provide the best possible patient outcomes and to minimize complications which can reduce re operations.
We're very pleased to share that an independent study from Stanford University School of Medicine confirmed <unk>, Alex to dual port tissue expander enables efficient management of Sirona and early targeted intervention the pre pectoral breast reconstruction confirming that we're leading the way with innovative technologies design.
And to improve patients' lives and procedural outcomes.
We also saw outstanding commercial execution supporting our strategy to expand our market share in medical facilities performing reconstruction surgeries.
We hosted several indication events.
Almost 90 hospitals and surgery centers represented at those events.
We believe it's important that we do more than provide superior products and services, but also we get back to the community.
We recently announced that we partnered with mission plastics, a nonprofit organizations to provide access to breast reconstruction surgery for women and poverty across the U S.
We're excited to share that almost 100 surface already signed up to perform pre surgery using our products.
And contrary to expectations the breast augmentation market continues to flourish.
Market data shows the overall year to date breast augmentation is a four year high.
It's up 17% over 2029% over 2019 in fact, it's the highest in history.
The answers are market share continues to grow and now is estimated to be close to 11% in breast augmentation, while the comparable quarter in 2020 was estimated to be slightly over 6%.
Our customers' loyalty and stickiness is the real difference here for us when they come to us they stay with us.
And consumer enthusiasm towards breast augmentation remains very strong.
According to recent market research, 74% of women considering plants indicated they are likely to get breast augmentation within the next 12 months.
Our brand growth is fueled by our efforts to consumer is the category when consumers ask for our brand.
71% of the surgeons will use that brand of implants.
34 million consumers will reach online Bart multiple digital platforms by serving up education content for those considering breast augmentation and guiding them to see interest plus the interest surging.
Our online presence supports our message of safety and high patient satisfaction.
That assurance and peace of mind is continuously opening doors for us.
We start a new program called <unk> Academy to drive pull through at the account level today.
To date, we have experienced two times revenue growth amongst surgeons that tended to program.
And based on initial success, we'll be scaling up this program next year.
The interest refocusing in innovation to fuel our future growth and is backed by a commitment to best in class safety profile.
We are on track for year end five 10-K submission for our next generation tissue expander, although X to probe.
As we move through the final quarter of the year, we'll continue to see strong momentum in both our augmentation and reconstruction markets setting up for a strong finish to the year and importantly, a healthy start to 2022.
Andy will now give more details on our financial performance.
Thanks, Ron.
Our third quarter was a great quarter on many fronts in terms of commercial performance and in terms of key business milestones that will set the stage for a strong 2022.
Before I dive into the financial results, let me address a key structural accounting item that is represented in our current period financial statements.
The company worked to modify our convertible loan agreement documents to allow us to employ equity accounting in terms of our $60 million convertible debt.
In essence, we no longer are required to treat the loan as a derivative instrument.
The key outcome is that in Q4 and going forward, there will no longer be any quarterly P&L or balance sheet fair value adjustments related to that.
The financial statements will reflect alone exactly as it should be a $60 million loan.
Our current period results do show much improved set of financial statements due to this loan modification.
The final adjustment in third quarter was a reduction of liabilities an increase in shareholders' equity and a big plus on the P&L statement.
Offsetting prior period noncash charges associated with the past derivative accounting.
The second very positive finance driven outcome. This quarter was the forgiveness of a $6 7 million PPP loan.
This also shows as income in the quarter.
Reduction in liabilities and is a true cash positive event for the company.
And operations related big win for the period was the physical move of our distribution center from Santa Barbara, California, The Franklin, Wisconsin, where we manufacture our implants.
This move will create a positive efficiency opportunity for us in 2022 and going forward. However, it does carry with it transition costs incurred in the third quarter that I will discuss shortly.
Finally, we continue our ERP system migration August 1st to include our logistics in order to cash processes.
This move will promote our ability to scale, our future business processes to address the high demand we have for our products.
Now shifting to our Q3 'twenty one financial results.
Yeah.
We recorded record plastic surgery, Q3 revenue results, which brings a running total to five consecutive quarters of record revenue performance.
<unk> posted revenues of $19 6 million as compared to $15 3 million in Q3 'twenty.
The increase of 28%.
While a period that is seasonally affected by surgeon vacations. We saw continued strong performance from our augmentation customers.
Big performance from our reconstruction customers.
Yes.
Gross margins for Q3 dollars 21 was 54%, which is consistent with Q3 of 'twenty.
As a key driver to gross margins as product and channel mix, 54% may seem to be counterintuitive, given our strong performance in the reconstruction space.
We experienced consistent price stability across our entire product line and as expected product cost performance.
What is unique for this quarter is the distribution move I mentioned earlier.
<unk> expenses distribution costs in the period incurred to cost of sales and.
A natural part of our distribution center move is the additional cost of shipping inventory from Santa Barbara, California to Franklin, Wisconsin and.
In addition, we did not shut down our product shipping for a single business day in the quarter, requiring us to essentially run two distribution centers at the same time during Q3.
As Ed costs reduced our gross margins by approximately two percentage points in Q3.
In Q4, we will continue to see additional distribution costs as we expect to spend time in the quarter continuing to organize our new Franklin distribution center, while shipping to anticipated strong customer demand.
All said, we are still confident that the changes we are making in 'twenty, one will help us achieve higher gross margins in 2022.
Switching to operating expense.
Total operating expense for Q3, 'twenty, one was $22 3 million as compared to $17 8 million in Q3 of 'twenty.
The primary increase in expense was due to sales and marketing, which represented $2 million of the $4 $5 million increase.
The increase is as expected as the company has invested and will continue to invest in our go to market assets to capitalize on the future market opportunity that lie ahead.
The current period operating expense is comparable with our Q1 of 'twenty, one and will vary period to period, primarily driven by sales and marketing activities, which has a variable cost component.
Total GAAP profit from continuing operations for the current period was $28 4 million.
Profit includes other income of $42 2 million, which reflects the final adjustment gain of $35 6 million related to the modification of our $60 million convertible debt agreement.
And the relief of our PPP loan of $6 7 million.
Adjusted EBITDA for Q3, 'twenty, one was $8 $3 million loss as compared to a $7 $2 million loss for Q3 of 'twenty.
Switching to key balance sheet items.
We ended the September 32021 period, with a cash balance of $66 million.
This compares to a balance of $55 million at December 31 of 2020.
The net increase in cash is due to our Q1 'twenty one capital raise and other financing activities.
That netted $34 3 million in cash this year.
Year to date cash used in operations was $29 6 million. However, seven $6 million of that amount was attributed to an increase in accounts receivable due to increasing 2021 sales and our transition and ERP systems, and our current quarter, which caused a delay in delivery.
Livery of customer statements.
We expect to recapture much of that increase in accounts receivable over the next quarter to two quarters.
We also increased inventories by approximately $12 million year to date to address increasing sales and robust product demand.
Finally, the sale of <unk> resulted in an inflow of $11 3 million during the year, which was slightly offset by forecast capex of $4 9 million year to date.
Total debt of approximately 76 million at September 32021 reflects the relief of the $6 7 million.
PPP loan previously discussed.
Total outstanding shares at September 32021 were $58 million.
Turning to guidance for 2021.
We are raising the lower end of our revenue guidance and now expect plastic surgery revenue in the range of $76 million to $78 million, reflecting growth of up to 41% compared to sales of $55 million in 2020.
We continue to expect 2021 annual operating expenses to be in the range of $85 million to $90 million.
Finally, looking at our Investor Relations calendar, we have a busy Q4, we will be presenting at the Stifel Healthcare Conference next Monday.
Participating in the Craig Hallum Alpha Select conference next Tuesday, and presenting at the Stephens investment conference in Nashville on December three.
At this point I'll turn the call back to Ron. Thanks, Hendi, we are very optimistic as we had in 2022 and very confident that we can accelerate our market share growth by leveraging our unique strengths.
It all starts with people our commercial team is focused on innovation, including patient acquisition surgeon education, and our partnership with butterfly will add two additional recon hospitals added.
During her time on the market bouncing back we'll also have products unmatched safety profile.
We believe they will become the partner of choice for plastic surgeons as we focus on enhancing lights advancing the Arctic plastic surgery.
Now I would like to open the call up for Q&A operator.
Thank you, ladies and gentlemen, if you'd like to ask a question at this time.
You will need to press the star agenda, one key on your Touchtone telephone to withdraw your question you May press the pound key.
Please standby, while we compile the Q&A roster.
Now first question coming from the line of Alex Nowak with Craig Hallum. Your line is now open.
Great. Good afternoon, everyone I was hoping we could start out on on the implied Q4 guide here just given the seasonally stronger Q4 versus Q3 can you just expand on next quarter why.
I think that Mexico will be down to flat sequentially and then perhaps can you outline how youre thinking about growth going into 2022.
Thanks This is Andy.
Well first of all we don't think Q4 is a seasonally down quarter Q3 was a seasonally down quarter, which we thought performed quite well.
We started Q4 with a lot of momentum keeping us very busy we're very optimistic about Q4, hence why we're bringing our guidance up obviously targeting the higher end of the guidance.
We're off to a great start we think we're going to finish the year very strong.
And then just anything on the 2022 commentary.
We don't have guidance out at this point in 2020 to matter of fact, we will be working with our board of directors in Q4 in terms of our approval of 2022 and forward looking plans and we will look to the future to actually provide that guidance.
Okay that makes sense and then we obviously keep hearing thats drawing demand for implants in the market. So how do you think this demand plays out here over the next couple of years do you think the demand eventually rolls over or do you think there is some sort of renewed growth phase for breast implants that were that were in.
Alex.
It is a new normal.
Right now year to date.
Has been the highest ever number of Augmentations in U S and the new normal now surpassed by 9% in 2019 pre COVID-19 the expectation that as the market continues to grow in the next two years, we have not seen a slowdown this quarter, we have not seen a slowdown in year to date.
What are we seeing a lot the last.
Five months as revisions.
Women to come in when they have an implant for 10% to 12 years. They are coming in right now and getting new implants. So across both the revisions in primary augmentation that market is very very robust, but the critical thing for us and this quarter was an all time high for our reconstruction business we saw.
All of those strategic work that we did at the beginning of the year with results now.
Gaining market share across hospitals, and really seen a revenue that all the work that was done four or five months ago.
That's great I appreciate the update thank you.
Okay.
And our next question coming from the line of Margaret <unk> with William Blair. Your line is open.
Hey, good afternoon, guys. Thanks for taking my questions.
So maybe start with the account base, which maybe you can you hear me up on the exact number but I think your comp base is up 25% to 35% this year or so so yes as those accounts come up to the company average in 2022, assuming they can do that.
That something that you guys look.
Look forward for augmentation of breast product revenue growth or are there other factors that that.
I'll just get those numbers so we shouldnt just.
<unk> lineup.
The rate based on accounts.
Yes, if you look at total of 3500 reconstruction hospitals, roughly 6% to 7000 plastic surgeons now keep in mind some of those start to solve some of them on the same office.
There's still a lot of growth a share we have 11% share in the augmentation.
And we have a 12% share in the hospital for breast implants at 50% of our tissue Expanders Theres a lot of growth still ahead of US part of it will be in existing accounts as I stated we have.
Right now.
<unk>.
Roughly 2700 accounts and those have a lot of our possibility to continue to expand our market share on the other hand, you have the ability to gain new accounts as we move forward in the next 12 months those are the things we'll be assessing from a deployment and make sure. We have the right number of representatives in some areas and also assess and provide number of pros.
Brambles well, while there is a long ways to go still to slow down our current share growth. We don't expect that we expect to actually accelerate our share growth in 2022.
Okay.
That's useful commentary and then one of the things that were sort of curious that this is the same thing psychology had asked before but do you have any visibility around patient surgery today versus the last few quarters.
Our surgeons till now three to four months booked out for example is that range changing and is that something that you are watching your not really part of the business. Good youre seeing the underlying demand over time.
I just returned from a central Academy, It's a program that we did.
And Austin taxes.
It was there was a lot of buzz in that meeting because some of those surgeons will be January before youre able to go in for surgery. Some of them may just sneak youre right before the holidays. They are very very busy adding more surgeons to adding more staff.
I don't see that slowing down at all and again from a reconstruction we're seeing.
A lot of demand from the hospitals that we have contracts now and.
Same thing I don't see that slowing down in the next six months.
Okay, and if I could squeeze one more in.
That hospital side. So you guys I think a year ago talked about.
Getting into the contract.
Trust purchasing group you obviously.
Unable to add share, but still 785 percentage of crashes.
That is driven by your existing accounts. So all of that seems pretty favorable and that was the question ultimately becomes have you really seen.
Now part of that partnership or frankly can that be a catalyst to ramp as you go out over the next four to six quarters in recon starts to come back full force in the market.
Okay.
At the beginning of your question are you referring to butterfly partnership.
The healthtrust purchasing group yes.
Yes, yes, yes.
Yes, all the GPO is that we have contract right now we're seeing the results that is part of our strategic investment that we did at the beginning of the year to really focus on our reconstruction that includes all the GTO. That's one of them and we're seeing the results in this third quarter.
We had 74% of our sales for recon construction coming from existing accounts about 17% from new accounts.
You see that happened in the third quarter was continuing to see the acceleration in the fourth quarter.
All of that is a work that was done in the first six months and supports and sustains our strategy to focus on our reconstruction and one of the critical things is in the past two quarters. We saw about 38% of total sales coming from recon and actually this quarter was 46% came from reconstruction.
Okay. Thanks, guys.
And our next question coming from the line of Jon Block with Stifel. Your line is open.
Great. Thanks, guys good afternoon.
Andy maybe I'll just start with you on the gross margins and I think I get the moving parts for the third quarter.
2021, and having the duplication this quarter are these headwinds fully resolved in the first quarter of 2022, I think you said there'd still be a stub into fourth quarter and if so does that mean that we can still start next year in and around the high 50% range essentially I'm sort of up to two to 300 bps from the <unk>.
Q.
I'm just curious if thats a good starting point or are there other moving parts, we hear from a lot of our companies.
Supply chain issues et cetera that have crept into the equation over the past couple of months.
John when we.
We look forward, we still see again that line of sight to getting to the highest <unk> plus as.
As you commented Q4, we'll have that stub of our D. C. Maybe part of Q1 and then we're past that and also we expect 2020 to be a growth year, we don't have guidance out yet, but we expect to be another strong growth year for us.
And we're going to grow in to that distribution center costs. The size of it based on volume based on again the efficiencies that we see ahead. So again, we don't necessarily see headwinds that way, but I think you put it the right way each quarter is going to build on each quarter as we go into 2022 as we're going.
Building this company very consistently we see the demand that we now have the right facilities right people in place.
We did see like everyone else in the Covid environment slightly increasing labor rates, but for us in terms of our high margin product and type of business. We're in it really doesn't affect us as it would affect a 15% to 20% gross margin type business. So.
So we see it somewhat on the labor side, but not significantly in terms of the overall equation, we do not yet see any issues with materials in terms of supply chain from that perspective, we've been consistent in very good shape.
Great. That's very helpful color. Thank you and then just to pivot Ron I know youre not going to give.
2022 guidance right now, but can you just at a high level talk to some of the new opportunities next year, they appear pretty fulsome, Canada, Alex to pro are there any other international opportunities that we should be thinking about despite the three players structure of the market typically I don't think theres really been much if any price realization maybe more headwind.
This inflationary environment can that proved to be more of a tailwind in 'twenty. Two we just love your high level thoughts on some of the Incrementals next year. Thanks.
Yes.
The opportunities are still in U S. We are still in the number three player and from augmentation of 11% and we're accelerating our market share increase and we saw that as well in the hospital environment or quickly when the beginning of 2020 of a 12% share for tissue expander at about 50% share now.
The 22 opportunities the continued acceleration of share growth.
And then Canada, Yes, we are expecting to hear from health, Canada This quarter and in some regards to Alex to our regards to Alex to pro.
Have our vice president of R&D with US and ahead of regulatory and these styles.
As you know I joined back.
Back in June.
From established lab, so Denise in your comments about all extra yes.
Yes sure. Thank you Ron all we're very excited about this upcoming submission with analytics to not only because of the innovation and all the features that are really designed for patient benefit.
And patient safety, but also because it's a build up on our platform of Alex that we now have a lot of benefits and resonates with the plastic surgeons. So we are building up on this platform and this will be a continuous rollout of innovation in our pipeline outlook still drove bring.
Benefits, such as MRI compatibility less interference with imaging less interference with radiotherapy treatment, but also enhanced patient comfort and state of the art locations technology. So we're very excited about this new product because again, it's a refocus on innovation and you will see a constant rollout in the coming months.
That's great. Thanks, Thanks Ross.
As a reminder, ladies and gentlemen to ask a question. Please press star one on your touched on telephone.
And our next question coming from the line of.
Anthony Vendetti with Maxim Group Your line is open.
Thanks, Yes.
Just talk a little bit about the market share gains.
I think you said youre at around 11% Ron.
Up three percentage points.
Deep.
Do you see as you move forward here.
What do you think the opportunity is by the end of 'twenty two in terms of the ability to continue taking market share.
I know, it's not just taking market share from others, but just just growing the businesses.
Two pronged approach but.
Do you see that trend continuing at the current pace, increasing staying about the same.
Yeah, Anthony it was slightly over 6% annualized last year were slightly lower.
Now we are above close to 11% Ics expanding the market and the market is robust right now versus what it was back in 2020, obviously.
The market is growing so you have an opportunity to continue to accelerate share growth with all the programs that we're doing in regards to patient.
Physician loyalty and ensuring the physician stay with us when they come onboard when they flip to Sandra they stay with us. So we have the opportunity to continue to accelerate that in the next year, we see an acceleration and we're going to double from 11 to 22, I don't know, but we have very very aggressive goals for next year.
Because we are confident there are products in our 10 year safety that we have for our products set us apart and you also have the our 20 year platinum warranty that our competitors did not have once those physicians that <unk> programs, we've had over 45 surgeons.
Surgeons attend our <unk> Academy.
Come out.
Same things like this is the best program to ever been too.
As this program I just came back from last weekend that surge is telling me over launches that I've never had a company helped me my business and do the things you guys are doing to help bring the patients. We have referred to 17000 patients to a different surgeons Darling intra network, but some of those patients are lost because by the time.
The website based on understand the website. So we're teaching them how to redo their website, we teach them how to retain those referrals. So they are not loss in space. We're very excited about next year and with the acceleration of share growth next year.
Great. That's very helpful. And then just I know you touched on the supply chain.
Issue, a little bit it sounds like youre, well well prepared for that.
Are you seeing any.
Cost increases in any of the.
And any of your products.
On the manufacturing side.
No actually we're seeing at the opposite we keep finding new efficiencies, we've made tremendous gains over the last year year, and a half and continuing to make those gains and again Denise is with us here.
She is a key hire in terms as well in terms of new product, but also innovations in terms of product and product position and also in terms of what we're doing in manufacturing so im seeing actually a lot of stability in the model to where as we grow we're seeing great price stability not significant not disk.
Tony.
Real strong price.
Stability.
Again, and we're seeing dropping costs, even though again the labor rates might be up we have volume buying opportunities on materials, which actually is the opposite of what perhaps other people are seeing with supply chain, we see opportunities to reduce those costs.
Well again reduced costs from efficiency perspective, so when we go into 2022, we're going to see market expansion, but we will see again the ability to take advantage of the efficiencies based on the infrastructure. We've invested in to date pay off years youre going to be 2022 2023 and on.
Well, that's great to hear that's definitely refreshing from what we've been hearing from.
Some other companies as they reported third quarter earnings and maybe just.
Obviously, the move from Santa Barbara to Wisconsin, and save cost.
The expected savings on an annual basis just from a.
From an SG&A perspective or.
A real estate perspective in 'twenty 2022, I know Theres. Some like you said there were some charges associated with that but what would be the ongoing annual savings ask after you.
You eliminate the onetime costs with the move.
I'll start with the easy one to quantify.
Moving from.
Santa Barbara, California, the Franklin our distribution center takes roughly $1 million of non value added shipping fees from taken finished product that's produced in Franklin.
Truck and the Senate at the Santa Barbara than to be distributed so that million dollars comes into play.
Next year on an annualized basis. The other part that comes into play as we now have a facility in an organization that can scale with the business.
Obviously, a big growth year for us this year again, we do not see or have any plans to slow. This growth. So we're going to be able to grow in two basically that facility, which will then as a percentage of sales, bringing the cost of distribution down. So we'll be looking at that and I don't have a specific number for you.
But we do have eyesight in terms of how we actually take advantage of scale.
So that will be in front of us in 'twenty, two and especially 'twenty three and onward.
And otherwise in terms of SG&A, So I was talking more cogs.
We were on we were in a total of four facilities here in Santa Barbara and we're bringing that down to where we will have one lease in Santa Barbara and 2020 to be doing a lot of consolidation out of our Franklin, Wisconsin site and be minimizing our presence here in southern California, but we will still have a presence but that will.
Loan as well will produce some significant savings in 2022 and 2023.
Okay, great. Thank you very much I appreciate it.
And we have a follow up question from Jon Block with Stifel. Your line is open.
Yes, guys sorry for the follow up it really usually don't do this but I'm getting.
I'm sure my colleagues are as well can we just go back to the way, we let off the Q&A I mean, it's another strong quarter theres market share gains that are very apparent you think the market's in really good shape and you have a seasonal tailwind sequentially and you have more intelligent <unk> going into <unk> than you had going into <unk> and I think what we are.
We're all just sort of scratching our head a little bit trying to reconcile is why would the midpoint of the range imply flat sequential revenues and if the answer is just.
It's still a COVID-19 environment, we want to leave some room for error or a sense of conservatism. That's certainly more than fine by me I just wanted to make sure we're not missing anything where there is not a message being conveyed that it shouldn't be so can we just wanted to go back to that starting point and try to address that.
Doug.
Yes, John.
<unk> seen even now coming into November.
Slowdown, we're seeing exactly what we saw in the third quarter and a normal patterns for Q4 and Thats why im very comfortable if somebody asked me the upper end of our guidance of very very comfortable with that but until you. Actually ended then finished the year you don't know, but we are very confident this is going to be by far.
<unk> is the best year ever for the company and we're very confident in the upper end of our guidance based on what we expect for Q4.
Fair enough thanks, guys.
Okay.
And I'm showing no further questions at this time I would now like to turn the call back over to Mr. Bob <unk> for any closing remarks.
Well. Thank you everyone to look forward to see some of you in the next two weeks at the different investors conference I. Appreciate your time, they all going to have a great afternoon.
Ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may now disconnect.