Earnings Labs

Establishment Labs Holdings Inc. (ESTA)

Q2 2020 Earnings Call· Sat, Aug 8, 2020

$63.81

-2.54%

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Transcript

Operator

Operator

Good afternoon. Welcome to Establishment Labs' Second Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] I would now turn the call over to David Erickson, Vice President, Investor Relations. Please go ahead.

David Erickson

Analyst

Thank you, operator. And thank you, everyone, for joining us. With me today are Juan José Chacón-Quirós, our Chief Executive Officer; and Renee Gaeta, our Chief Financial Officer. Following their prepared remarks, we’ll take your questions. Before we begin, I would like to remind you that comments made by management during this call will include forward-looking statements within the meaning of federal securities laws. These include statements on Establishment Labs' financial outlook and the company’s plans and timing for product development and sales. These forward-looking statements involve material risks and uncertainties, and the company’s actual results may differ materially. For a discussion of risk factors, I encourage you to review our quarterly report on Form 10-Q that we plan to file with the SEC tomorrow and will be available on our website at establishmentlabs.com. The content of this conference call contains time-sensitive information accurate only as of the date of this live broadcast, August 6, 2020. Except as required by law, Establishment Labs undertakes no obligation to revise or otherwise update any statement to reflect events or circumstances after the date of this call. With that, it’s my pleasure to turn the call over to our CEO, Juan Jose. Juan José Chacón-Quirós: Thank you, David, and good afternoon, everyone. I hope everyone is healthy and continues to remain safe. I would especially like to acknowledge the employees of Establishment Labs and our business partners worldwide, and thank them for their hard work and dedication to our company during these difficult times. The COVID-19 pandemic has impacted businesses around the world and ours is no exception. As I stated on our last earnings call, this past quarter would be our most challenging of the year. And it certainly proved to be that. For the second quarter, our revenues were $10.5 million,…

Renee Gaeta

Analyst

Thank you, Juan Jose. Although our sales were impacted by COVID-19 this quarter, we maintained control of our overhead expenses and believe we remain in a very solid financial position overall. You can find additional details about our second quarter financials in our earnings press release and our Form 10-Q, which we plan to file tomorrow. Total revenue for the quarter was $10.5 million, with direct sales comprising nearly 2/3 of this amount. Distributor sales, which can fluctuate based on changes in inventory levels and the timing of reorders, made up the balance. The year-over-year decline was the greatest in distributor sales. And while every region was affected by lockdowns, Latin America was the most impacted. In our direct markets, Latin America was again the region hit most hard. As mentioned earlier, the second quarter saw a steady increase in direct sales each month. This was most pronounced in Europe, where revenue in June was above revenue recorded for both January and February. Our performance in July gives us further confidence about our Q3 2020 guidance we are providing and the strength of our recovery. From a regional perspective, sales in Europe comprised 60% of the global sales, Asia Pacific Middle East was approximately 27% and Latin America made up the balance. Brazil, historically, our largest single market, accounted for 8.6% of sales this quarter compared to 14.5% of sales in the year ago period. This quarter, Germany was our strongest individual country, accounting for 14% of sales. Our reported gross profit for the second quarter was $7.2 million or 69.1% of revenues compared to $13 million or 60% of revenues for the same period in 2019. The year-over-year increase was due to the benefit of geographic mix, greater operating efficiencies and enhanced manufacturing and planning capabilities. As a result…

Operator

Operator

[Operator Instructions] Our first question comes from Raj Denhoy from Jefferies. Your line is now open.

Raj Denhoy

Analyst

I’d like to start with well, first of all, I hope everyone is doing okay. But I also wanted to start with the revenue guidance for the next quarter. [indiscernible] it’s double from what you did here in the second quarter at $21 million. So I guess I’m curious your level of confidence in that outlook. And in particular, given the vagaries of COVID and kind of the ebbs and flows of that, it sounds like Europe is doing well for you. But how much conservatism have you baked into that outlook we have for the third quarter here? Juan José Chacón-Quirós: Yes. Thank you, Raj. I think that’s a really fair question. The monthly progression that we have seen during Q2 combined with what we have seen so far in Q3, has given us enough confidence to be able to estimate that guidance that we gave today of $18 million to $21 million. What we see is a resurgence in many markets, especially in Europe and Asia Pacific, of not only delayed procedures, but also new consultations taking place. What we see as well is that many women who normally at this time of the year would have traveled abroad for their vacation are deciding to stay at home, and are finding it very convenient to go under this procedure. So we think that it’s actually a good time to be able to do this, and we feel very confident on the guidance that we have given today.

Raj Denhoy

Analyst

That’s fair. Maybe just one follow-up, you mentioned the U.S. trials. You’re halfway through and you’ll be collecting data about a year from now. You know, there still is, I guess, some debate on whether two years of data is going to be sufficient to receive FDA approval. But it does sound like you’re going to be submitting [indiscernible] your data. So does that represent any sort of updated thoughts on what it’s going to take to get approval here in the United States? Juan José Chacón-Quirós: No. Actually it does not. What we are seeing is that our trial endpoint is 24 months. And we will reach that in August of 2021. And at that time, we will begin to collect the data for submission to the FDA. Of course, we are very satisfied with the progress that are making in the aesthetic cohorts, and also that we were able to close one of the reconstruction sub cohorts with enrollment. So the decision of two versus three is not a decision that is based on current situation. I think there will be time for a conversation with the FDA about the power of the data, the results and don’t forget that that three-year guidance for data is still there.

Operator

Operator

And our next question comes from Josh Jennings from Cowen. Your line is now open.

Josh Jennings

Analyst

It’s great to hear about these recovery trends. Maybe the first question is for Renee. You called out 2/3 of second quarter sales were from the direct salesforce. Can you remind us of what that ratio typically is? And were there any nuances in the quarter just on the distributor side? Clearly, we imagine that they were not stocking inventory. And then what does your guidance suggest for distributor sales in third quarter and that sequential change?

Renee Gaeta

Analyst

Yes, sure, Josh. Thanks for the question, and I hope all is well on your side. Yes, certainly direct sales are normally around that 50% mark. So we definitely saw a higher percentage this quarter as a result of us being in all of those direct markets, and certainly Europe was the pronounced region for those direct sales. As we think about Q3 and Q4, certainly the distributor sales, those orders are coming through. And so that will be a higher percentage of sales expected going forward. Because that’s just how the orders come through, and obviously those orders are usually larger bulk orders, instead of the direct markets where we see smaller orders on a per-surgery volume that indicates sort of real-time trends.

Josh Jennings

Analyst

Great, thanks for that. And then I had a follow-up, Juan Jose, on just Ergonomix2, you had some comments in your prepared remarks. But it may be underappreciated. I just wanted to sort out any help you can give us for the outlook of what it can do in 2021 in terms of supporting strong growth. It’s a premium implant price. Any sense or can you give us what type of premium Ergonomix2 will hold? And then also just on the reconstruction side, I think at the symposium last year over in Italy, we heard some surgeons talk about just the benefits of Ergonomix aesthetically and on the safety side in recon procedures, and pairing Ergonomix2 with Flora may be a big driver in terms of your ability to penetrate that recon market internationally next year. But maybe you can share some thoughts there. Juan José Chacón-Quirós: Thank you, Josh, great to hear from you. So we are super excited about Ergonomix2 because Egonomix, the original concept has been such a hit in so many different places around the world. That concept of an implant that is comfortable, that feels soft like real breast tissue, has really made an entry into the entire aesthetic market. And we are happy to see as well that it is starting to be used in very good ways in the reconstruction market. Just recently an article was published on PRS, Plastic Reconstructive Surgery Journal, by one of the most prestigious groups in Europe for breast reconstruction. And they were talking about the differences that they can get in the final results with an ergonomic implant. This paper was completely independent and done by the hospital in Ghent, in Belgium. So what’s different about Ergonomix2? It has much more enhanced mechanical properties. It has a…

Josh Jennings

Analyst

Excellent, and just to follow up, just on the recon side with Ergonomix2, is that a channel that – or can Ergonomix help drive implant penetration on the recon side? Juan José Chacón-Quirós: Well, we think that now that we have the Flora tissue expander that is the only tissue expander that is MRI-compatible out there, and with the proprietary SmoothSilk surface, that with Ergonomix implants, whether the traditional Ergonomix or the second generation, is going to be a great choice for surgeons who are trying to help patients in breast reconstruction.

Operator

Operator

[Operator Instructions] And our next question comes from Amit Hazan from Goldman Sachs. Your line is now open.

Amit Hazan

Analyst

I wanted to start by asking a question about kind of the top line prospects that you outline versus some of the expense guidance you outlined. And in particular, it kind of strikes me you’re encouragingly seeing some good trends here and maybe getting back to pre-COVID levels is back in our visibility here. But at the same time, you’re making some pretty significant expense cuts, obviously some very difficult ones, I’m sure, with the headcount cuts in particular. And so I’m wondering if that suggests that you’re going to operate more cost-efficiently when you get back to that normal top line, or are you anticipating a rebound in expenses, specifically like headcount that are now kind of being implemented here more recently?

Renee Gaeta

Analyst

Yes. Thanks, Amit. I hope all is well with you. Certainly we take headcount reductions very seriously and protecting all of our employees. So we want to make sure that we’re making the right decisions, not only for today, but the future. And I think that when you think about what’s happened in the last four to five months with the pandemic, has really allowed us to really definitely think about how to run the business more efficiently. I think it’s one of the positive notes that have come out of this pandemic and looking at companies, how they run their business. And we have done the exact same thing. Thinking about not only travel and where we’re spending that stuff, but also headcount. Do we have the right size and the right dynamic to be able to make sure that we continue to support our product pipeline, all of the future growth, be more streamlined on systems, et cetera. And so headcount is a consideration in there, and we certainly don’t want to make decisions that aren’t in line with again, not only the decisions for today, but for the future. So we would expect that we’ve rightsized our headcount accordingly for what we expect for now and into the future. You know, we commented a little bit about changes in headcount with – specific to manufacturing, where we made a decision at the end of the quarter to change the manufacturing levels there. And obviously that is something where if in future quarters we needed to continue to ramp up production, we can certainly add those headcounts back in, as necessary, but again just for production.

Amit Hazan

Analyst

Yes, that’s great color. And then kind of near term, as we think about the 3Q guide to be maybe just a second half of the year generally, I would love to hear your thoughts on both the UK in terms of just any insights you might have as to when the NHS restrictions could be mitigated or what you’re seeing there. And then back to Brazil, just how much of our rebound is implied in the third quarter? The same kind of question, if you’re assuming restrictions there are going to be further lifted in the near term, or are you taking a more conservative approach on that country? Juan José Chacón-Quirós: Yes, thank you. With regards to the UK, the latest news is that some of the centers that were taken over in a way by NHS for COVID patients have started to give time for different aesthetic surgeons to be able to do their procedures. But this is just starting. It’s going to take some time to get to any level of normalcy in the aesthetic market in the UK, although we think that there’s quite a backlog of patients in that market. When it comes to Brazil, like we said during our prepared remarks, the situation overall is not improving. However, plastic surgeons and aesthetic surgery centers have found a way to get patients into the operating room, do it safely. These people are advertising how safe their consultation is, how safe their procedure can be. And as a result, we see many patients in metro areas being able to do these. However, we are careful about what we can see in Q3 in Brazil. I think all of Latin America would be in the same trend that a recovery is taking place. But it’s going to be a slow one in Latin America, and definitely for Brazil.

Operator

Operator

And our next question comes from Marie Thibault from BTIG. Your line is now open.

Marie Thibault

Analyst

Thanks for taking the questions and I hope you’re doing well. I appreciate all the detailed commentary on the various regions. I wanted to ask one on Italy, in particular, how that major market is recovering from COVID, and whether there are any near-term dynamics we should be taking into account as you transition to a direct selling approach there. Juan José Chacón-Quirós: Thank you Marie, and great to hear from you. The situation in Italy has improved a lot. Remember that was kind of like the first country in Europe that got hit heavily by COVID. Some regions of Italy, especially the more industrialized north, was one of the worst areas in all of Europe. However, since they’ve reopened, it’s become very busy for plastic surgeons there. We had worked a timeline to without COVID do the Italy integration of the business earlier this year. But when these thing happen, we decided that we would do at some other time. And I think the fact that we’re doing this now tells you how confident we are of the recovery in Italy. So definitely we think that the conditions in Italy, just like in Germany, Scandinavia, France and Spain have much improved. There’s still some areas of Europe where there’s a lot of progress to be made, like the UK or Russia. But so far, we think that the core countries of continental Europe are really back online.

Marie Thibault

Analyst

That’s great. Great to hear. I guess my follow-up, could you remind us what’s changing with the Flora tissue expanders, the next-gen version that you’re readying for U.S. submission in 2021? Juan José Chacón-Quirós: Yes, absolutely. There’s a trend called prepectoral breast reconstruction in the U.S., and it has become the most important trend, I would say, in breast reconstruction. And the tab configuration of the tissue expander is very important there. So that is a change that we think is important to include. And there is also a self-calibrating RFID finder that we think given the complexities of hospital settings in the U.S., would help nurses and other personnel be able to do the expansion phase of the breast reconstruction with more ease. Remember, we have gotten the CE Mark for our Flora tissue expander and also are getting approvals in other geographies. So this is purely a strategic move.

Operator

Operator

And this is all the time we have for questions today. I would now like to turn the call back over to Juan José Chacón-Quirós for closing remarks. Juan José Chacón-Quirós: Thank you for joining us on today’s call. We look forward to providing our next quarterly update in November. Have a very good rest of the day, and please stay healthy.

Operator

Operator

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.