Good afternoon and welcome to Establishment Labs Third Quarter 2020 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, David Erickson, Vice President of Investor Relations. Please go ahead.

Thank you, operator, and thank you, everyone, for joining us. With me today are Juan José Chacón Quirós, our Chief Executive Officer; and Renee M. 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 filed with the SEC today and is 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, November 9, 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 José.

Thank you, David, and good afternoon, everyone. I hope everyone is healthy and continues to be safe. As we guided to in October preannouncement, total revenue in the third quarter was $22.8 million, which is comparable to the $22.9 million reported in the third quarter of 2019 and more than double the sales reported for the second quarter this year. With a strong recovery from the pandemic well underway, we are comfortable issuing full year 2020 revenue guidance of $80 million to $82 million. While we are now back to our 2019 revenue levels, we believe we are actually recovering faster than our global industry. Our success at returning to prepandemic levels is actually indicative of continued market share gains, which can be attributed not only to the superior aesthetic and safety profile of our implants but also in how our digital efforts have amplified how we communicate both patients and doctors. In addition to strong top line sales this quarter, our focus on lowering expenses and driving efficiencies led to a continued decrease in our operating cash burn. During the third quarter, our cash burn was $3 million, giving us a cash position at September 30 of $81.4 million. This keeps us in a strong financial position and affords us the flexibility to continue managing our business for continued growth and market share gains. Importantly, in the quarter, we continued to advance the technologies in our R&D pipeline that will contribute to our sales growth in 2021. Equally important, our submission time line to gain regulatory approval and enter the U.S. market remains on track. Like most of the world, our business and industry have not yet returned to normal, but we are on a clear path towards doing so. Of course, we are seeing country-to-country volatility as COVID-19…

Thank you, Juan José. Not only did we see strong sequential growth in sales this quarter, we aggressively controlled operating expenses, and I'd like to thank the team for helping to keep Establishment Labs in a very solid financial position. You can find additional details about our third quarter financials in our earnings press release and our Form 10-Q, which we filed today. Total revenue for the quarter was $22.8 million. Direct sales were approximately 40% of this total, while distributor sales, which can fluctuate based on changes in inventory levels and the timing of reorders, made up the balance. Our direct/distributor sales mix this quarter has returned to a more typical pattern and was similar to the same period a year ago. From a regional perspective, sales in Europe comprised approximately 45% of global sales; Asia Pacific, Middle East was approximately 35%; and Latin America made up the balance. Brazil, which is our single largest market globally, accounted for approximately 10% of total quarterly sales even though the Brazilian real has depreciated approximately 40% this year. As Juan José mentioned, both direct and distributor sales in Latin America were down year-over-year as the region continued to recover. By comparison, year-over-year growth was strongest in Asia Pacific and Europe as those regions recovered more quickly. Our reported gross profit for the third quarter was $15.1 million or 66.6% of revenues compared to $14.2 million or 62.3% 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. Total operating expenses for the third quarter was $17.7 million, a decrease of $5.3 million or 23%, compared to $23 million in the same period a year ago. SG&A expenses for the third quarter declined $4.2…

Thanks, Renee. Before we open it up for questions, I'd like to express my gratitude to our plastic surgeons and business partners for their ongoing commitment to Establishment Labs. I also want to acknowledge and thank the employees of Establishment Labs for their tremendous effort and resilience, which has enabled us to successfully navigate a challenging year while meeting our operating and financial commitment. Establishment Labs has a very bright future, and we are excited about our ability to grow and create value for our shareholders. As we look to 2021, we have truly differentiated technologies coming that will expand our comprehensive portfolio. We expect continued market share gains, both from expanding our presence in breast reconstruction and also developing new product categories, like minimally invasive augmentation. These will help support our growth next year and for many years to come. We continue to plan for our entry into the U.S. and Chinese markets while staying committed to controlling expenses and increasing our efficiency to maintain the strong financial position. Finally, in honor of breast cancer and breast reconstruction awareness month in October, as part of our global campaign, Establishment Labs was privileged to partner with plastic surgeons and medical personnel in Brazil, who volunteered their time to perform more than 60 reconstruction surgeries for breast cancer survivors. Many of these women have been waiting for a long time for their surgeries, and being able to help them in their journey is an important and powerful reminder of our commitment to women's health and well-being. We thank you for your support as we continue to transform this industry while improving women's health. With that, I will turn the call over to the operator for Q&A.

[Operator Instructions] Your first question comes from the line of Chris Cooley with Stephens.

Can you hear me okay?

Yes. We can hear you.

Well, congratulations on the very impressive results in light of an extremely challenging environment. Maybe just two quick ones for me. First, when we think about just what you saw in the third quarter and the exit rates here as we're going into 2021, curious what you anticipate seeing most specifically in the European theater in terms of growth here in the fourth calendar quarter. Do you think that we'll see additional spikes, and is that kind of what we need to bake in? Or is it an environment now that can manage through any flare-ups that you're seeing there? Just curious, again, a little bit more about what's built into the expectations for the fourth quarter from a top line perspective. And then similarly, if I could, maybe just as my follow-on with Renee in terms of your cash flow breakeven commentary. Could you just update us again when you expect to achieve those levels? I mean, clearly, you're getting much better leverage now, have done a great job of expense management. Just curious if you plan to spin some of those savings or that initial target on cash flow breakeven could be pulled forward somewhat.

Chris, thanks for the questions, and thanks for joining us today. Certainly, as we went through the third quarter, we saw strong performance in Asia Pacific and Europe as those countries responded well to the pandemic and came back online. And Latin America was certainly behind that, but we've seen improvements and well -- as well and sort of month-over-month improvements. As we think about the guidance that we gave for the fourth quarter and full year, we're factoring in a variety of things that we're juggling at the moment and the fact that we're in over 80 countries. Our guidance represents our best estimate for Q4 based on everything that we presently know, and we're obviously actively monitoring the situation in Europe. But it's nice to see that most of the governments that are providing restrictions, they aren't doing full lockdowns. And so we've continued, as of today, to continue to see procedures continue to operate. But as your question implies, we're watching it closely, and we'll have to see how the rest of the quarter plays out. As you, in your second question, asked about cash burn, I'm very happy with the team's response to this year and everything that we've been juggling. And it's great to see that we can restrict cash burn when needed, but we also fully appreciate that we will want to continue to invest in research and development and new product innovation so that we can continue to bring amazing products to this industry. So I'm not going to specifically comment on when I think the cash burn is going to turn profitable or turn positive, but I'm extremely excited with what we've done this year and look forward to getting there.

And our next question comes from the line of Matt Taylor with UBS.

So Renee, maybe one for you. I was wondering on the Q4 guidance, if you could help us understand between Q3 and Q4, how much stocking do you think there was for some of your distributors? Did that help you in Q3? And are you expecting a similar, more or less, benefit in Q4?

We -- our Q3 results, most of our distributors are ordering based on sales forecast for future quarters. I would not indicate that there was restocking or replenishments there. I think we're very happy to see the activity that's coming from our distributors, and we're talking with them on a monthly basis. So when I look back at Q3 and look back at it in comparison to the prior year Q3, sort of gave some commentary where we're really seeing it sort of return to normal, both not only the balance of direct versus distributor but then also some of the geographic stuff. So we're happy to see business returning that way.

Okay. And can you speak a little bit to the outlook for surgical schedules? Have you talked to your customers? Do you have any beat on how things are looking early into next year relative to the pre-COVID baseline?

Yes. Matt, what we are seeing is that the business continues to progress well. And while we continuously have seen as well these flare-ups in different areas of the world, what we have found is that surgeons have gotten really good at adapting to the situation. So the way they are conducting online consultations, the way they are providing very safe protocols for patients to come in when they need to, everything they're doing around providing safe protocols for the surgery procedures to take place, so all of that is going on. So the situation is very different from last spring. And what we are seeing now in Europe, we have seen in other places at different times. So I think by now, the plastic surgery community is well adapted to the situation. So of course, we're monitoring things literally week-to-week over those 80 countries, but we feel confident of where we are in terms of patient demand, and the online search activity supports that confidence.

And our next question comes from the line of Raj Denhoy with Jefferies.

I wonder if maybe, Juan José, I could start with you on Flora rolling out, I guess, CE Mark later this year -- by the end of this year and then the U.S. at some point next year. Maybe you could give us some -- your thoughts around how quickly this could start to take share. And that $225 million market opportunity you described, what would be a reasonable expectation for you over the next, say, call it, 12 to 18 months?

Yes. Thank you, Raj. Well, look, we are, of course, super happy that we got the CE Mark for Motiva Flora earlier this year. We are conducting premarketing activities, and we're doing that in preparation of a broader commercial launch in 2021. What we have seen so far in the different centers where they are using Motiva Flora is that they are commenting on its ease of use and patients reporting overall satisfaction and comfort with the device. Now we need to educate surgeons about the unique features of Flora, including what this bioengineered surface means if you pair that surface in the tissue expander ahead of the use of our Motiva implants. And then also, there's that integrated RFID port that is MRI compatible. So we're doing a lot of good work to measure the benefits because, of course, what we want to be able is to bring to market, once we fully launch this, at the right price point. So I think that we're not in a hurry to do this. I think when we see the sales of -- in the past that we've had of breast implants in reconstruction, it's been very low for us because we've been focused mostly on aesthetics. But the plan is next year that as we start bringing to market this Motiva Flora, we're also going to be bringing to market the Ergonomix implants, for instance, for breast reconstruction. Now remember, most of the countries in Europe for reconstruction, you're talking about government contracts, hospital contracts, and that takes time. So although we may do a broad launch in the first half of next year, do remember that we have to go through the process of how contracting takes place.

That's helpful. And maybe just also on Europe, maybe as a follow-up there, there was a report, which I'm sure, I think you guys actually sent around, out of European Commission recently on -- again, on textured implants and their association with ALCL. It's not something that seems to be getting a lot of focus, at least not as much as it used to get, but maybe you could describe a bit about what you're hearing on the ground in terms of how much are these issues with textured implants still pushing surgeons to move towards Motiva? Is that still a very active process, you think? Or it's sort of through the worst of that in the sense that people have sort of already voted where they want to be in terms of their implant choice, and these reports are really just sort of nothing new in maybe physician's minds?

Yes. As you well know, we were the company that saw this coming a decade ago, and that's why we created that proprietary bioengineered surface. What I would say is that what we have seen last month is more of the same. What we are talking is about regulators placing another set of restrictions. So first, we saw earlier last month, the TGA in Australia taking out of the market 2 microtextured devices and polyurethane implants completely out of the market in Australia. And then this committee report, the SCHEER Committee, which is basically a committee of the European Commission that looks at safety issues, what they are highlighting and what's particularly interesting there is that they are calling out on the association between textured implants and ALCL. And as you know, according to ISO 14607, we are a smooth surface. So we do think that this purge of unsafe devices is good for the industry. It's going to bring us closer to the patients and closer to women who were worried about these devices. And just like we've done over the last few years, we will continue to push the message of safety and trying to gain as much market share that we can because of that superiority.

And our next question comes from the line of Josh Jennings with Cowen.

I want just two questions. First, on the FDA trial, I think with your symposium and the stellar data that was presented there, it's catalyzed some questions from investors around when we could see data from the augmentation cohort. The aesthetics cohort, to your follow-up, should be completed by next August. Should we be expecting the initial look at that augmentation cohort data before the end of 2021? Or could it come sooner? Just wondering if you could help investors think about timing of when we could see the initial data from the FDA trial?

Yes. Thank you, Josh. One of the really good things in terms of the progress is the fact that half of the patients in the aesthetic cohorts have now reached their 2-year anniversary of their surgery, so that shows the progress that we are making. Now we are -- of course, we're looking very much forward to showing our data because we believe that data will be consistent with what we have seen outside of the United States. However, all of these things are ongoing. The conversations with the FDA are a part of that. And we do plan to show our progress as soon as it is possible. But those conversations keep on going with the FDA. We'll let you know as soon as we know some of the, I would say, clear images regarding this.

Understood. And then just thinking about China, I mean, huge market opportunity you're going to unlock. I was hoping you could just share this. What's left in the regulatory process for China FDA approval, if that's the pathway you guys are taking? And should we be expecting approvals in China, when they happen, for Ergonomix2, Mia and Flora? Or what will be the initial implants or devices that will be approved with that initial opening up of the China gate?

Yes. Thank you. And of course, for us, the opportunity in China is super exciting. Already, many patients fly from China to places like South Korea, Japan or Vietnam to get Motiva implants, at least they were doing so before the pandemic. And out of those, in countries like South Korea, 25% of patients used to come from China. So we know that our technology is going to fit very well into that market, which is said to be the fastest-growing breast aesthetic market in the world and the one with the highest average selling prices. So we just passed our latest round of testing earlier in last quarter, and we continue to make progress. We are going to continue working on that product testing that is coming and then complete the remaining regulatory steps. We are expecting approval in the first half of 2022. Those are for Ergonomix and round SmoothSilk implants. But we are planning all of the work that we are doing now with the Chinese regulators to allow us to build on that so that we can bring, of course, Ergonomix2 and especially Motiva Mia because we do believe that Motiva Mia is particularly well-suited for the Chinese market. And some of the early experience work that we are doing with Ergonomix2 and some of the patient series that we are planning with Mia, they all will be in that same line to eventually use that information for the Chinese market.

And our next question comes from the line of Marie Thibault with BTIG.

I wanted to ask one here, recalling the symposium you hosted last month and that excellent 10-year data. In line of that, I wanted to hear sort of the feedback you've been hearing from industry. And on a related note, any details you can tell us about Establishment Labs' ability to pick up new surgeons during the COVID?

Yes, of course. So I think we've talked about this before, is that for many years, our competitors spoke about Motiva implants not having been in the market for long enough to really measure the safety profile of our devices. And because the FDA establishes the studies as a 10-year study, then surgeons tend to look at that 10-year mark very carefully. So of course, we have received very good feedback from the plastic surgery community, but also from patients that have these devices now for 10 years. So we were very happy to show in that symposium, for instance, the results of patients who've had the devices for that long. So that's definitely very helpful for us. And it also allows us to really go into our medical education platform and to MotivaEdge with that message of 10 years in the market with that amazing safety data. And just to remind everyone, so far this year, we've had over 19,000 plastic surgeons trained using MotivaEdge, and out of those, thousands of new accounts. So I think that, of course, we want to get those new accounts to start using Motiva as quickly as possible. We are working towards that. But it does show that there is a strong connection between the safety data, our ability to conduct online education and eventually turning that into new accounts.

That's great. I wanted to ask a follow-up on Motiva Mia. Good to hear that you'll be expanding into a patient series in Latin America. But I wondered where is this taking us in terms of sort of the time line for Motiva Mia? When might we see kind of data from that patient series? And then what is the plan for, I guess, formal trials and the regulatory process?

Yes. Thank you. And what we want to be able to do with these patient series is to not only expand the number of patients who have received Motiva Mia but also look at different geographies. So we started the series in Asia with some patients being -- getting Motiva Mia in Japan. And the plan now is to turn those series also to Latin America so that we can learn how fast can plastic surgeons begin doing this procedure because, in a way, it's a simpler procedure but it's different. So we want to learn about that, how can we make this procedure replicable because we're setting a new standard for minimally invasive breast augmentation? And of course, we do plan to expand our series in Asia to Thailand so that we can also see in another market in Asia how does that relationship between the education, the standard can take place in a way that we can capture as much value with Mia. Now because this technology is so promising, we are being patient, and we are being patient because we want to get it right. There's also a strong direct-to-consumer part of this that we are also working very hard on. And this is going to be perhaps the other building block that we're going to begin talking about more and more, which is how can we get women who are currently using padded bras but not thinking about a breast augmentation because that's not what they want to eventually see this as an option. And I think that's one of the key things in this whole equation and one that we are working on very hard. So I would say, Marie, is we will show data as soon as we can. But most importantly, we already have the safety data of the surface. We are talking about implants manufacture under the same conditions as the rest of our products. So we are fairly confident on that side. It is mostly about getting to the final details of the surgical procedure and then how do we teach this to surgeons all over the world.

And our last question comes from the line of Amit Hazan with Goldman Sachs.

This is Phil on for Amit. I thought I should start maybe for Renee. It's a question around cost controls and the great job you guys have done with OpEx so far this year. I'm wondering how durable some of those cost savings might be as we look out to 2021 and maybe how those are going to be related to a resumption in procedures and a ramping back up of sales next year.

Yes. Thanks, Phil. Yes, I mean, we've been very pleased with this year and how the team has worked diligently across all departments of the organization, thinking about different ways to do things differently. I think not unlike many other companies, sort of reevaluating how we do business in the most efficient manner and yet -- while still delivering on our growth targets and our innovation product pipeline. So we will -- obviously, costs will come back in as growth continues to ramp, but I think we've learned a big lesson this year, and I'm hopeful that some of those are going to stick. Some of the cost controls that came in, you have to keep in perspective that they are volume-based, so they will just automatically come back when revenue continues to grow. But again, I think things like travel or events or, again, just different ways of working with our vendors or consultants, I'm really pleased to see the sort of new culture that we've adopted.

That's great color. I appreciate it. I think the second one, looking to 4Q, certainly appreciate the conservatism you guys are taking given all the question marks ahead. I'm wondering if a 30% growth number on '21 right now from The Street is an appropriate place to start as you guys think about the recovery and the visibility that you have maybe in light of some of the developments today.

Yes. It's a good question, and I totally appreciate it. I think we're still finalizing our 2021 annual operating plan, which includes real-time assessment of business conditions in all of the countries that we operate and how the pandemic is happening and flowing through. So at this stage, I'm not going to be able to give too much more color to that, but we're trying to be really thoughtful in this process, and we're just excited with the results that we've seen today.

Thank you. And this does conclude today's question-and-answer session. I would now like to turn the call back to management for any further remarks.

Thank you for joining us on today's call. We look forward to providing our next quarterly update early next year. Have a very good rest of the day, and please stay healthy.

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