Paragon 28 Inc. Q1 2023 Earnings Call
Any growth of 27% for the first quarter was almost four times the estimated slip ankle market growth rate.
The investments, we've made are paying dividends and our positioning us well for long term success, including our exciting and innovative product pipeline at surgeon customers have come to expect from Paragon 28.
Thank you for the extraordinary contributions made by all of our team members around the world. The <unk> 2018 has an incredible ability to deliver results and is committed to our mission to improve foot and ankle patient outcomes.
I'll now turn it over to Steve.
Thank you Albert expanding on your earlier comments on the first quarter of 2023, Paragon 28, net revenue was a record $52 million, representing 25, 8% reported growth.
And 27, 1% constant currency growth, respectively, compared to the first quarter of 2022.
Foreign currency headwinds reduced reported quarterly net revenue and net revenue growth by approximately $600000 and one three percentage points respectively.
As we communicated in early March 28 was in the midst of a great quarter and the quarter ultimately finished very strong.
Most profit margin for the first quarter of 2023 was 82, 9% compared to 83, 6% in the first quarter of 2022.
This small percentage decrease was primarily due to an increase in excess and obsolete inventory costs.
Research and development costs were $7 million, an increase of 22, 1% compared to the first quarter of 2022.
<unk> continues to expand its investments to improve foot and ankle patient outcomes, including new product development efforts and clinical studies.
Selling general and administrative expense was $43 $8 million or <unk> 84, 2% of revenue for the first quarter of 2023 compared to $37 2 million or 90.
Percent of revenue in the first quarter of 2022.
This margin improvement of greater than 500 basis points demonstrates the strong leveraging of our past investments in sales force expansion marketing and medical education and company infrastructure.
Adjusted EBITDA for the first quarter of 2023 was a $1 $4 million loss, representing a 57% improvement compared to the $3 $3 million loss in the first quarter of 2022.
On a dollar basis, we have experienced sequential quarterly improvements in adjusted EBITDA every quarter since the start of 2022.
<unk> revenue growth rates are expected to continue well above market growth rates and this expected revenue growth combined with steady increases in operating margin will bring P 28 closer to breakeven adjusted EBITDA on an annualized basis throughout the year.
Operating cash use for the first quarter of 2023 was $14 1 million, which included a $9 million legal settlement payments nor.
Normalized for this payment operating cash used for the first quarter of 2023 was $5 million or $4 $4 million improvement or 47% compared to the prior year.
Investing cash use for the first quarter of 2023 was $7 $6 million compared to $42 million in the prior year quarter.
The prior year quarter included two significant onetime items.
The Disney or acquisition for approximately $18 million and the purchase of our Denver headquarters building also for approximately $18 million.
We ended the first quarter of 2023 with approximately $146 million of liquidity.
<unk> $86 million of cash and short term investments and up to $60 million of cash available via our senior credit facility.
We are very comfortable with our liquidity position, which we expect will enable us to reach cash flow breakeven as a result of continued above market revenue growth coupled with continued improvements in operating leverage and free cash flow.
Turning to our 2023 net revenue guidance.
<unk> is off to a fantastic start in 2023.
2023 quarterly revenue seasonality appears to be shaping up more in line with pre Covid historical trends.
Including for example, the return of more normal spring and summer vacations with revenue concentration more heavily weighted in the first and fourth quarters of each year.
And the procedural trends through today continue to validate our thinking.
For the full year of 2023, we are reaffirming our previous net revenue guidance of $214 million to $218 million, representing reported growth of approximately 18% to 20% respectively.
Our revenue guidance also assumes currency translation rates remain consistent with current translation rates.
That is the end of our prepared remarks.
Operator, please open the lines for questions and answers.
Perfect.
Ladies and gentlemen, if you would like to ask a question. Please press star followed by one on your telephone keypad.
Star followed by one on your telephone keypad.
To withdraw your question press the Star followed by two and pleased to also remember too and mutual microphone when it's your turn to speak.
Okay.
Our first question comes from Dave <unk>.
From JMP Securities.
Your line is now open. Please go ahead.
Yeah.
Thank you and congrats guys.
I appreciate the color about the return to normal maybe pre COVID-19 season.
Seasonality, that's great to hear.
But just as we look at the guidance.
And given how strong this quarter came in.
Youre not seeing anything in <unk> that concerns you.
And we should probably think of this as being somewhat conservative given that it is still early in the year, but theres nothing that youre seeing that would cause you to believe that.
Theres any deceleration coming.
Hey, Eric it's Steve Thanks for the question. It's a great question, we're really excited to see more normal seasonality.
And look we're off to a terrific start in 'twenty three top line growth, 27% against the tough comp last year of 25% better EBITDA better cash flow. So we're really hitting on all cylinders and when we look at our guidance for the full year, we decided to reaffirm simply due to.
The fact that we are in continued macroeconomic uncertainty and use the word conservatism I would say just we're being prudent when we look at the uncertainties in the macroeconomic environment, we're operating in but our business is hitting on all cylinders were as strong as we've ever been we continue to expand our sales force and record.
<unk>, we continue to drive productivity across our sales force and our international business is humming as well so all good with $2 28.
I like the prudent time to.
Just to reaffirm that I think you said.
Five divisions or categories in the U S for over 20 in the past I think you said they were all up double digits I don't recall over 20%. So again that implies that something even accelerated in <unk> versus the past correct.
Yes, I mean look this was a great quarter and this was we specifically called it out that way our U S business grew 20% or greater in every foot and ankle category.
And that is the balance that the business was designed with.
Truly the preeminent foot and ankle specialists, serving all of the needs of foot and ankle surgeons around the around the globe honestly and it's working well.
Thank you.
Okay got it thanks, Dave.
Our next question comes from Kyle Rose from Canaccord.
Your line is now open. Please go ahead.
Hi, This is Caitlin answer Kyle Thanks for taking my question and great quarter.
Just to start off.
Speaking to the sales force to soften strong ambitions in the Q1 what are your plans for the rest of this year and do you continue to expect that.
The factors of sales.
Sales rep productivity and sales force additions will really kind of equally drive growth.
Hey, Caitlin nice to hear from you and yes, we had really nice contribution from producing reps really in the first quarter. We grew our producing rep count 18% to 247, which was also not just a nice increase year over year for the <unk>.
<unk> sales rep sequential increase so the investments that we've been making are really starting to deliver like we had expected them to it does take it does take 12 to 15 18 months, sometimes to really get an experienced reps up and running at their potential and so we're really starting to see that.
So as you drive up the number of producing reps youre productivity tends to go down a little bit just because of the math youre, bringing in newer reps, but in this quarter. We saw a nice single digit mid single digit increase in productivity. So we expect over time that those will sort of balance out again, but this quarter was more.
Heavily influenced by.
The expansion of our sales force in the U S.
Got it.
And then just quickly on smart 28, do you still expect the first module launch this year and when do you think the potential longer term contribution from.
Tony It could be.
Yes, Thanks Kaitlin.
We're expecting a limited launch later this year early next year one of the first modules really a reflection of more of a <unk> type platform.
And I think it is going to give us pretty good visibility to what that type of enabling technology is going to look like.
I would tell you on a long term basis, we have made no secret that we think.
Enabling technologies, giving us better visibility in the planning phases of surgery, and the diagnosing phases of surgery, and even predicting outcome phase.
We expect that to contribute in a meaningful way to improved outcomes for patients and we think the foot and ankle market desperately needs that we still have higher complication rates and compare it on 28 has always been on a mission to improve those outcomes and we think this is one of the most significant opportunity to do that.
Awesome. Thanks, so much.
Of course, thank you.
Our next question comes from George Sellers from Stephens, Inc. George Your line is now open. Please go ahead.
Yeah.
Hey, Thanks for taking the question and congrats on a great quarter.
I just wanted to ask about the new device launches expected this year so the cadence.
As we think about.
The rest of this year and any new devices may be up in the pipeline and then can you also just remind us.
Some of the recent launch of <unk>, you've made maybe last year as we think about sort of the year over year comps.
We're modeling the rest of this year.
Got it thanks for the question George.
I'll actually start in reverse right. So last year, we called out a few key product launches and particularly because.
Because they were in areas, we werent totally participating at ex fix was a great example of that we launched earlier in the year, we launched a pin to bar system, which is primarily used for more of the fracture fixation and then later on we launched a circular fixated, which is more an ankle deformity and in the <unk> segment of foot and ankle those were pretty.
Significant contributions for us and great to have more participation in more of the indications around foot and ankle which has been a goal and we also launched a couple of soft tissue products last year and I've I've called out one that we although we have some products there we see soft tissue, playing a pretty heavy role in the future of foot and ankle and we were proud.
The launch of a few key products like the react stabilization system, which is.
We used in the fracture fixation market again and.
That product.
Put a spotlight on the fracture fixation product line in particular angle fracture for us. So we had a really nice complementary effect there for some of those launches this year. So far we've really launched so.
So far two products.
The first being the met shortening product.
As a complimentary product to the Bunyan segment, and I've always said that foot and ankle procedures tend to be a tandem or two in three different indications in each surgical procedure and our goal is to make sure that we can address with meaningful technology address every one of those indications in the med shortening product is exciting for that reason it gives us a <unk>.
More soft tissue balanced solution to address shortening of the second and potentially been the lesser metatarsals following or in tandem with bunion surgery. We also launched in a limited respect we launched the Supervalu roller system late last year early this year.
Which if you remember is more of an ankle realignment procedure on that procedure can be done just by itself to realign the ankle and make sure that we're parallel to the ground when we're walking but it's also a really nice complement for things like total ankle replacement, where we need that alignment to prep us for the total ankle replacement. So another really nice complementary products.
And I'd expect to see a couple of more additions to that supervalu older product later this year.
And then the second half of this year is probably going to be a little heavier weighted with product introductions.
And I've always said all of our product introductions are meaningful to us.
Don't have favorites.
But it is really nice to continue to address more and more indications in the foot and ankle market needs that so we're pretty excited about what's going to happen later this year.
Okay. That's really helpful. Thank you and then.
Steve maybe maybe one for you.
Previously talked about profitability and sort of the timeline there just curious your updated thoughts on.
How youre thinking about Paragon 28, returning to profitability. Thank you.
Yes, George it's still the same from what we had talked about last quarter, where we said, we expect a $5 million to $10 million improvement in our adjusted EBITDA. This year, which would have us approaching breakeven. So so it's going to be soon.
Paragon sort of pierce's the profitability on an EBITDA basis.
Continue to make great progress on driving high quality growth, which drives strong gross margins as you saw we delivered 83% again this quarter. So it all starts there and then just making investments where they matter continue to make investments in things like sales force expansion new product development.
International expansion and so on so that's where we focus our time energy and money and we leverage everything else and so excited about our pathway to continued profit improved profitability and cash flow over time.
Okay perfect.
Thank you again for the time and congrats again on a great quarter.
Thanks George.
Our next question comes from Craig Bijou from Bank of America. Craig. Your line is now open. Please go ahead.
Okay.
Good afternoon, guys. Thanks for taking my questions. Congrats on another strong strong quarter.
I wanted to follow up on.
The revenue cadence.
Steve.
I recognize I.
I heard your comments on.
Where the revenue concentration will will.
We will be.
Your comps are a little bit.
Variable I guess when you look at Q2.
Sorry, 'twenty two so.
Just maybe if you guys could provide a little bit more color on how to think about maybe Q2 in relation to Q1 and then the back half.
In relation to the to the first half.
No great question, Craig and Great to see you and we're looking forward to seeing you next week at your conference in.
We are we are pleased to see a more normal seasonality for the foot and ankle business that we operate within and and really what that means is we have a concentration of revenue in the fourth quarter.
During the first quarter.
After that so the first quarter.
For US obviously was really strong 27% you did mentioned some some strange comps.
As we roll through the year for us last year than the first quarter was a 25% comp so.
Really pleased with that when you think about like the actual distribution of revenue, though typically the second and third quarters are the lowest on a dollar basis each year.
And in the third quarter begins to ramp up into as we get out of the vacation schedules and then the fourth quarter is really a bolus of procedures in a normal environment, which I think that we're in now you would see a second quarter step down from the first quarter levels.
We think our second and third quarters are going to have similar growth rates. This year year over year due to some strange comps that you meant you mentioned in last year. Our second quarter was was larger than our first quarter in the third quarter was quite a bit larger than the second quarter, which is pretty unusual. So we're expecting more of a normalized trend this year.
For the first quarter is strong we see a bit of a step down on a dollar basis, but still good year over year growth rates and then building into the third quarter and then a really really strong fourth quarter from an overall revenue perspective.
Got it that's helpful and.
Albert or Steve you talked about the 20% growth across all your categories.
We've heard other ortho.
Procedure revenue or other ortho procedure growth in Q1 is the strong as there might be some recovery or catch up so.
Would love to get your take on what what Youre seeing in the foot and ankle market and I know part of it is trauma and not necessarily elective but for.
An underlying perspective procedure perspective would love to just kind of get wood.
I understand what Youre seeing and how do you see.
Procedures play out over 23.
And Craig I'll start and then Albert has some perspective here as well for sure.
First quarter.
Like in a typical first quarter a normal seasonality first quarter you do see some some spillover of patients that were scheduled into the fourth quarter, but were unable to get their procedures done.
Because of just the heavy surgical volumes not just in foot and ankle in orthopedics in med tech, but across med Tech and so you typically see January is a very very strong procedural month and then February is pretty good and then when you get into March you start seeing some seasonality with spring breaks and things of that and then that continues.
To the second quarter, but look the underlying markets are strong and we're excited about our position to take advantage of those markets.
That's right I think just to add to that and outside of seasonality step I feel like our teams. This executing really well on the fundamentals there right. The sales force additions medical education product launches I feel like everything really is playing a part in contributing to some nice growth rates there.
Great. Thanks for taking the questions guys.
Thank you.
Our next question comes from Mike Matson from Needham <unk> Company.
Your line is now open. Please go ahead.
Yes. Thanks, just wanted to ask one on <unk>.
Training.
Didn't really give any kind of metrics there and I think he may be a <unk>.
Away from giving a lot of detail, but I was just curious if you could give us any kind of updates or even if it's more qualitative in nature.
Surgeon training right.
Yes happy to Mike.
The FAA training.
Programs are really strong again in the first quarter, our mobile lab, it's really really doing well for us we trained almost 250 surgeons in the mobile lab alone in the first quarter. So that's really exciting for us.
As adding a different avenue for us to get to these surgeons in.
We didn't really train a whole lot of surgeons internationally this quarter, but in the U S. We trained over 600 surgeons so.
We're really happy with the continued interest in our product lines and our ability to get to these.
Surgeons for training and it really is becoming a more cost effective way to with the mobile lab and then the added benefit of all of this training as we get to train and work with our reps more and they get to spend more time with their existing doctors and potentially new doctor customers. So it's a really nice program for us and it was again in the first quarter.
Okay got it and just a couple of financial questions. So.
The opex in the quarter was a little higher than what we were modeling.
Just wondering if you expect it to kind of stay around the $50 million, sorry, $51 million kind of run rate from here.
For the year.
So we would expect to continue to see leverage on on our total opex as we move forward throughout on a quarterly basis.
We're going to continue to invest in R&D and sales force and medical education and in terms of the apps.
Actual dollars of expectations per quarter.
Really ready to talk about that but.
Of course, we're going to continue to drive leverage in <unk>.
As we continue the path to EBITDA positivity.
Okay got it thanks, and then just gross margin kind of the same thing it was a little bit higher than what we were modeling.
Was there any kind of one offs in there or anything that it to be maybe I think we were kind of more in the.
81% sort of range.
It was 83 that you did.
No one offs.
Good solid.
Contribution from a lot of very strong products that yes.
We're able to secure for a pretty reasonable pricing from our partners. So.
Our team works really hard to get product at reasonable price and then our sales teams and our contracting teams work to make sure we get paid appropriately and so nothing unusual in the 83% margin we do we do.
Continue to recommend and think about our business is an 80% plus.
Margin business.
Comfortable with that level as you think about your models going forward.
Okay, great. Thank you.
Thanks, a lot Mike.
Our next question comes from new chatter from the Kelly B.
B Riley Neil Your line is now open. Please go ahead.
Hi, good afternoon, thanks for taking the questions.
Most of mine have already been asked but just maybe coming back to the international.
If you could just talk about what's kind of driving that strength on the international side, whether it's.
Anything specific and I guess, the U K or South Africa, or Australia, or just kind of be at the state and distributors.
Hey, Neal Thanks, and look we're really pleased with our international business.
Similar to our U S business, we've been making some really key strategic investments in certain markets.
And they keep delivering so we will continue making investments there and.
Our U K business, our Australia business performed extremely well again in the first quarter.
Just really really doing well for us and really really excited about the momentum there our south Africa business continues to perform and then in new markets, we're starting to see.
Increased penetration in areas like Germany.
In Italy, and Spain, as well as in Canada. So we've got a lot of opportunities for growth there and.
It's an area that we're going to continue to focus on going forward.
Great and then as far as expansion countries.
You can call out there in terms of.
Sizing those opportunities.
Look I would tell you our existing markets can get a lot bigger.
Including our victory.
Those are going to get bigger for us and then the markets that we're just getting into.
They have a nice opportunity to grow the foot and ankle market as you know is.
It's very large internationally over over $2 billion and so.
We want to make sure that we continue to focus there not just for the revenue, but also just so that we can be a truly globally focus, but an ankle company taking into account the best practices and procedures out of three.
Foot and ankle patients and improve outcomes. So it's important to help drive revenue, but it also helps us develop better products.
Got it.
And not to belabor the point on just the.
The quarterly cadence I think you gave some pretty good color here, but just.
I just wanted to ask just a delay I guess about the vacations.
Returning to pre pandemic levels I mean is that yes.
Does that imply that that say for like April or July August vacation are picking up versus say 'twenty two or just.
How is <unk> 22 versus expectations for 'twenty here.
Yes, it's really interesting Neil to look at it.
Obviously look at this very carefully and talk to customers and our sales force about it and.
And we just youre seeing more normal vacation schedules, where surgeons and patients are actually taking things like spring break and scheduling summer vacations again.
And so that's great to see.
Theres been practices that have in hospitals.
The past not allow the physicians to travel as much as they would have liked to and then put some sorts of restrictions on their ability to do procedures. When they would return and those have been lifted by and large and so so we're happy to see our customers be able to take vacation, but we can't wait for them to get back into the or I'll tell you that.
Yeah.
Got it thanks, guys that's it for me.
Thanks, Dan Thanks Neal.
Our next question is from Matt O'brien from Piper Sandler.
Your line is now open. Please go ahead.
Hi, This is Amanda on for Matt. Thanks for taking our question and congrats on the quarter.
And I guess.
First question is about maybe.
What new products and <unk>.
Q1, and maybe how do you expect those to continue to impact our business moving forward.
Yes, thanks for the question Samantha maybe I'll hit that.
I mentioned, we had a couple of key launches I'm really hesitant to say that because.
Again, I don't want to.
Glamorized, one piece over the other but sometimes newer products could be in an earlier cycle of growth.
And can lean more on their contribution but.
I really think if you look at our ankle portfolio and that includes ankle fusion total ankle replacement, we launched a lot of those key products on the back side of Covid, alright, and with medical education being a pretty high demand for those products, we're still seeing a really nice influence from those.
But every sub segment of foot and ankle.
Meaningful growth in Q1 right.
We've had impact from new products and fractured fixation.
Flat foot, which is <unk>, the bunyan marketer with a four foot market, which we call it <unk> co.
At an equal rate Charcot saw really nice influence from our external fixation.
Yes, so just.
I feel like I'm, giving you a more broad answer to that question, but I feel like a lot of our products and all of the segments really contributed nicely to Q1 success.
Perfect. Thanks, So much and then just one more question on international.
Obviously it.
Meaningful growth rate and maybe what are you seeing there and how durable is that thank you.
It's very durable Sam we've got a lot of room to keep growing.
The international market is comparable in size to the U S market. So a lot of opportunity there like I mentioned in the markets. We're already established and have a strong beachhead lots of room to grow there and.
In markets, where we don't really have a significant presence those are going to become important for us more important over time. So it's an important part of our growth plan going forward and we're excited to keep investing in those markets.
Maybe I'll add one thing to that Samantha too.
Lot of the new products, we launched here in the United States have a little bit of a delayed reaction with the international market just given regulatory.
Procedures there.
And so we're still really excited about the opportunity with some of the products. We launched in the last two years or three years and seeing the impact those could have on the international success.
Perfect. Thank you so much.
Thank you.
Yeah.
We currently have no further questions. So I would like to hand, the call back to Alberta Costa from final remarks. Please go ahead.
Thank you again for your time today, we look forward to seeing many of you at future investor and industry conferences, including next week in Las Vegas at the Bank of America Healthcare Conference on May 9th and 10th have a great day.
Ladies and gentlemen. This concludes today's call. Thank you for joining you may now disconnect your lines. Thank you.
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