Greetings, and welcome to the Establishment Labs Fourth Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to our host, Raj Denhoy, Chief Financial Officer. Thank you. You may begin.

Thank you, operator, and thank you everyone for joining us. With me today is Juan Jose Chacon-Quiros, our Chief Executive Officer. Following our 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 from the meaning of federal securities laws. These include statements on Establishment Labs' financial outlook and the company's plan to timing for product development and sales. These forward-looking statements are based on management's current expectations and involve risks and uncertainties. For a discussion of the principal risk factors and uncertainties that may affect our performance or cause actual results to differ materially from these statements, I encourage you to review our most recent annual and quarterly reports on Form 10-K and Form 10-Q as well as other SEC filings, which are available on our website at establishmentlabs.com. I'd also like to remind you that our comments will include certain non-GAAP financial measures with respect to our performance, including but not limited to sales results, which can be stated on a constant currency basis. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release, which is available on our website. Please also note that Establishment Labs received an investigational device exemption from the FDA for Motiva Implants and is undergoing a clinical trial to support regulatory approval in the United States. We continually seek to expand the geographies in which our products are regulatory approved. Please check with your local authorities for specific product availability. The content of this conference call contains time sensitive information, accurate only as of the date of this live broadcast February 27, 2023. 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 is my pleasure to turn the call over to our CEO, Juan Jose.

Thank you, Raj, and good afternoon, everyone. Record revenue in the fourth quarter of 2022 totaled $43.8 million, a 24% increase over the fourth quarter of 2021. Excluding the negative impact of foreign currency changes, our growth in the fourth quarter would have been approximately 28%. For the full year of 2022, revenue totaled $161.7 million, a 28% increase over 2021. Excluding changes in currency, growth in 2022 would have been 32%. These results are at the midpoint of the pre-announced ranges we provided in early January. We are growing well in excess of our underlying markets, and the key to these market share gains is our singular focus on building a new breast aesthetics and reconstruction industry on the fundamental pillars of women's health. This focus has allowed us to develop a 12-year track record of excellent clinical and aesthetic outcomes since we first commercialize Motiva Implants. Over that period of time, we have elevated standards for breast aesthetics and reconstruction by bringing to market a number of meaningful innovations based on science and patient-centric design and this will continue into 2023 and beyond. For 2023, we are providing revenue guidance in the range of $200 million to $210 million. This outlook represents estimated growth of 24% to 30% over 2022. Raj will provide additional detail on our fourth quarter performance and our 2023 guidance in a moment. Last week was another big moment at Establishment Labs. And I'm pleased to report that we filed module four of our modular PMA with the FDA. This is a significant step toward Motiva being approved for sale in the United States. The submission of the final module also represents a transition in the approval process where the FDA will now begin their formal review of our full PMA. Our interactions with…

Thank you, Juan Jose. Total revenue for the fourth quarter was $43.8 million. Reported revenue growth in the fourth quarter was 24.1%. Foreign currency changes reduced our fourth quarter revenue growth by approximately $1.3 million. Excluding the impact of currency, revenue growth in the quarter would have been 27.7%. Direct sales were approximately 37% of sales this quarter, while distributor sales made up the balance. From a regional perspective, sales in Europe were approximately 28% of global sales; Asia Pacific and Middle East, 40%; and Latin America made up the balance. Brazil, which is our single largest market globally, accounted for approximately 14.6% of total quarterly sales. Our revenue distribution this quarter reflected rebound in sales in Europe from the seasonally slower third quarter as well as strong sales to our distribution partners across multiple geographies. Our gross profit for the fourth quarter was $28.2 million or 64.3% of revenue. This compared to $24.2 million or 68.6% of revenue for the same period in 2021. Our gross profit in the fourth quarter was negatively impacted by approximately 300 basis points from foreign currency rate fluctuations. Average selling prices in the fourth quarter were also down from the third quarter of 2022. We see regular fluctuations in gross margin and mix and other factors, however, the overall trend in our gross margin continues to be positive over time. SG&A expenses for the fourth quarter increased approximately $7.3 million to $34.8 million. This compared to $27.6 million in the fourth quarter of 2021. The increase in SG&A in the fourth quarter resulted from continued normalization of business practices and our investments in new growth initiatives like Mia and preparations for our launch in the U.S. R&D expenses for the fourth quarter increased approximately $400,000 from the same quarter a year ago to…

Thank you, Raj. 2022 was a year of tremendous progress for our company, and we are preparing for a busy 2023. Among the events we have coming are the commercial launch of Mia, our Motiva launch into China and the approval process for Motiva in the United States. In 2023, we will also finish the initial phases of construction of our new Sulayom campus, and begin producing commercially sellable units out of the facility. As a reminder, the new manufacturing capacity at Sulayom more than doubles the number of implants we can produce per year, and it allows us to provide over half the current world demand. We are also planning for the presentation of the three-year data from our U.S. PMA study. With the PMA now submitted to the FDA, we will look for an appropriate forum to share this data with the scientific community. As impactful as each of these initiatives will be, they are all part of a broader strategy we have to: continue to heal the relationship that women have with the legacy breast implant industry by offering innovative and safer options backed by science and supported by clinical data, which could expand the existing market; normalized breast aesthetics with valuable new categories so that new groups of women will be open to our technologies; and finally, and perhaps most importantly, democratize access to breast reconstruction so that the restorative benefits of reconstruction after breast cancer can be available to women globally to at least the level of access that is available in the United States. If we are successful in these initiatives, we will be able to achieve and even exceed the recent long-term revenue goal we provided of $500 million in revenue in 2026 and much more beyond. We are better positioned than we have ever been to transform our markets and to make a meaningful change in the lives of women around the world. I will now turn the call over to the operator for your questions.

Thank you. And ladies and gentlemen, at this time, we will conduct a question-and-answer session. [Operator Instructions] Our first question comes from Matt Taylor with Jefferies. Please state your question.

Hey, thanks for taking the question. This is Zach on for Matt. I was just curious if you could talk about the infrastructure you're putting in place to support the U.S. launch and then also the Mia launch in Europe? Thanks for taking the question.

Yes. Thank you, [Matt] (ph). And we couldn't be more excited today with this news of the submission of module four, which basically means that we are now in the full PMA approval phase. For competitive reasons and because we are getting closer to the timing of approval, we are not going to give details on exactly what we are going to do. But make no mistake, we will be prepared. And this year, we are continuing, just like we did last year, to put in place systems. We continue to work through what our logistics strategy is going to be like in the United States. And as we get obviously closer, then we will be willing to share more. When it comes to Mia, in Europe, and I would also mention in Japan, it's very important to understand that Mia is done through a business model without sales reps. It is done in a completely different way. It's a partnership that we create with selected clinics that can be good partners, that they have already good marketing assets that can be mixed with our amazing technologies that are embedded in Mia. So, when we think about like what we can do with Mia in the first half of this year, with launches in Japan and Europe, it's super exciting because it is really a different type of business model. So, we are looking to this year as one of the most exciting ones in the history of our company.

Thanks for taking the question.

Our next question comes from Josh Jennings with Cowen. Please state your question.

Hi, good afternoon. Congratulations on a strong finish to the year and on the submission of the fourth PMA module. I wanted to ask about 2023 guidance. And I think, Raj, you mentioned that there were some modest contributions baked in from Mia and China. Just wanted to make sure I was clear, that we are all clear, that this guidance range does not assume any revenues from the United States or that does not preclude any type of approval in 2023.

Yes, I think that's a fair way to put it, Josh. I mean, we haven't endorsed the timeline for U.S. approval, so we haven't included it in our 2023 guidance. But as you mentioned, Mia and China, we do expect contribution from those to build as the year unfolds.

Great. Thanks for that. And Juan Jose, maybe to -- just wanted to -- just with the fourth module being submitted and the [formal] (ph) review going on, you mentioned that three-year data may be presented in the appropriate form at some point. I know you're not giving that timeline or I'm assuming that you're not. But maybe it would be helpful just to -- as a refresher to remind us of the pathophysiology of capsular contracture, rupture and maybe just reoperation rates as a whole. And in terms of precedent data sets in the breast implant sector, just the increase of capsular contracture, rupture, reoperation rates from year two to year three would just be helpful to review and understand. Thanks for taking the questions.

Yes. Thank you, Josh. As you well noted, we are always looking forward to showing our numbers, let the data speak for itself and for the safety of the Motiva Implants. When we published in Nature Biomedical Engineering about the mechanism by which our surface design creates higher biocompatibility. What we wanted to highlight is that when you see the numbers, whether in our 10-year post-market surveillance data with more than 2.5 million implants, when you look at the different data sets, when you look at our two-year data, what you're looking at is the downstream effect of that design. And of course, we do track numbers year to years. We've been in the market now for 12 years internationally. And what we see is that, of course, complications get aggregated over time. but capsular contracture is a phenomenon that takes place mostly in year one and two. Of course, you can continue capturing some of those numbers as patients come back for their checkup. But overall, these additions tend to be modest. Same thing with rupture over time. For the first few years, you will see things that may have happened inadvertently during the procedure or things that may happen towards the tail end of the life of those implants, but that would be many, many years later. So, overall, I think based on all the data sets that we have, we are extremely confident on our ability to gain approval for Motiva Implants in the U.S.

Great. Thanks a lot.

Thank you. And our next question comes from George Sellers with Stephens. Please state your question.

Good afternoon, and congrats on a great quarter. Maybe sticking with Mia in Japan, could you just give us some additional color on how that launch is progressing and maybe some early feedback from surgeons and patients? And also, maybe timing for expanding that launch to the additional clinics that this group sells through?

Yes. Thanks, George. And to be clear, we have signed up our first group of clinics, which is the Seishin Plastic and Aesthetic Surgery Clinic, which manage 10 high-end clinics overall in Japan. We are planning to launch soon. Our medical education and practice development teams are working hard with them to put everything in place. So, as soon as we start doing commercial cases with Seishin, we will let you know. And of course, we are very happy to do this in Japan. Japan is at the genesis of Mia. That's where we had the original idea of the need for this type of procedure. And eventually, we realized that there were these type of customers all over the world. So, what we plan to do with Mia this year is to prove that we have new consumers that were not seeking for a traditional breast augmentation. We want to be able to show how these clinics basically scale up, because as we bring Mia out to different geographies, this is the type of information that I think is going to get everyone excited about the market expansion that it can create.

Okay. Got it. That's really helpful. Maybe switching gears a little bit to margins. There's obviously a lot of moving pieces this year with the launch of Mia in Japan and in Europe as well, hopefully, Motiva in China and then potentially the U.S. at the end of the year. So, could you just maybe help us with how we should think about the quarterly cadence for gross margins? It sounded like there were some -- maybe some ASP headwinds here in the fourth quarter, but how should we think about that as the year progresses and these additional markets start to contribute more significantly?

Yes. Good question, George. So, you noticed in the quarter that the gross margin was down in the quarter. As we said in the prepared remarks, it was currency with the revaluation of the euro in the fourth quarter, and the fact that a lot of our inventory is denominated in euros, we had to revalue it and so that translational effect flow through our COGS. But overall, as we said, the trend in our gross margin is positive over time. And everything we're doing in terms of launching into these new geographies, the Mia system, these are all positive to gross margin over time. And so, the trend there is definitely to the upside. As you think about 2023, there are some puts and takes. The early launch of Mia as well as standing up the new facility and the lower yields out of the new facility initially will be slightly negative to gross margin, but the things like China, continued new products flowing through will be positive to gross margin. And so, the guidance is we really expect it to remain sort of flattish year in 2023. But over time, we should definitely see that margin going higher.

Okay, great. Thank you all for the time.

Our next question comes from Anthony Petrone with Mizuho Group. Please state your question.

Great. Good afternoon. Congratulations on the submission of the clinical module. Maybe just a little bit on guidance, $200 million to $210 million. How should we be thinking about contribution from Japan from the Mia launch in January as that flow through in the $200 million to $210 million? And then, when we think about Mia in China in the second half potentially being launched upon receipt of regulatory clearances, how should we be thinking about that contribution in the top-line guidance? And I have a couple of follow-ups.

Sure. Hey, Anthony. When we think about guidance, right, there are a lot of moving parts, as you suggested, here in 2023. When we think about providing numbers, though, we're looking at different scenarios around when we could see the timing of these, the contribution of them. And when we started looking at kind of risk adjusting the various pieces of that, that's how we kind of come up with that $200 million to $210 million number. Certainly, different analysts, yourself included, will have different expectations for that, and it's difficult for us to provide exact numbers. But I think you will see the contribution from those new things build as the year unfolds with the underlying business still posting really strong growth as we saw in 2022.

And then, maybe a couple of follow-ups here. One would be on the near -- the sort of medium-term sort of outlook on manufacturing, if you will. If I'm not mistaken, the new manufacturing site brings you from about 700,000 implants to, I think, nearly 2 million per year in terms of production capacity. And fully understand in the early days, maybe it's margin dilutive, but as you get out into year two, three and four, how does the new facility play into gross margins specifically of the Mia implants? And then, I'll have one last follow-up. Thanks.

Overall, the new facilities, you mentioned the volumes at that facility is capable of producing and the efficiencies that we can get out of that facility is definitely a positive to our margin over time. You couple that with things like the United States, China, which are ASP accretive, Mia, which is ASP accretive, the margin profile of our company on the gross margin line is going higher over time. As we mentioned, 2023, there's some moving parts here, but overall that margin is well supported by a lot of different factors over time.

And last, and I'll hop back in. Just the $500 million in 2026, when we think about, how we should be sort of modeling that from a geographic standpoint? Any kind of directional point if you can give us would be helpful. Thanks.

Yes. It's an interesting -- or a good question, right? Because there's a lot of layers to how you get to $500 million for us over time. And the number of permutations that can get you there is infinite, right? When we look at a number like that though, and all the different supports we have underneath it, Juan Jose mentioned, it's not only well supported, it could even be proven conservative over time. But in terms of breaking out individual contributions to that number, I think it's a little bit early for us to do that. As we get further into it, we'll certainly provide more visibility into what contributes to it and then ultimately also kind of how we look at the margin profile over time as we move through that. So, we'll be providing more over time on that number.

Thank you. And our next question comes from Neil Chatterji with B. Riley Securities. Please state your question.

Hi, guys. Thanks for taking the questions. Maybe since we haven't touched on it yet in Q&A, just curious if you could provide maybe some additional color just on the kind of traction you're seeing with Flora for the breast recon market and maybe the pipeline that you're planning for that market?

Yes, of course. I'm glad you asked about breast reconstruction, because it is, to us, one of the most important things. This is such an underpenetrated market globally, and Flora is the first of a series of technologies that we will bring to market to make sure that we democratize access to breast recon. What we mean by that is that the current market may be considered of appropriate size in the United States, but when you look at outside of the United States, if you were to take those same access numbers and move that to the rest of the world, that market would be substantially higher. Now when we look at Flora, we continue to make gains quarter-to-quarter. However, this is a market that is based on tenders. It takes time. There are regions around the world that do this on an annual and even biannual basis. So, we have to wait for them as they happen. However, we do plan to make sure over the next few years that we become the market leaders in breast reconstruction as we see it today. But more than that, that we are able to create the kind of market that we see in the United States for breast reconstruction.

Great. Thanks for that. And maybe just one quick follow-up. Maybe you've already kind of talked about the launch partner for Mia, but just kind of curious how might that launch partner in Japan kind of serve as a model for future clinics that you're either prospecting or targeting?

I think, Seishin is a great model for what you will see in the future, because you're talking about the chain of 10 clinics with marketing assets, with a professional staff on the business side that can scale this to the right level. So, we will be looking for partners like Seishin around the world. And again, it's not a buy-sell relationship. This is a true partnership.

Great. Thanks. I'll just hop back in the queue.

Thank you. [Operator Instructions] Our next question comes from Marie Thibault with BTIG. Please state your question.

Hey, good afternoon, Juan Jose and Raj. This is Sam Eiber on for Marie. Thanks for taking the questions here. Maybe I can start on OpEx cadence for this year, and I appreciate the commentary on the outlook for this year. But maybe in terms of cadence, would we expect maybe some leverage more towards the back half of the year? It sounds like maybe you're front-loading some investments here. And then, as you get the contribution on the top-line, that's when we might start to see leverage towards the back half and then more so in '24?

Yes, I think that's the right way to think about it. I mean, as we've described here, right, in 2023, there's just so many opportunities for us to support between the launch of Mia, preparation to the United States, the standing up of the new facility, moving into an operational capacity there. The early days in China, which, again, we're using a distributor there, but there're some efforts we'll be supporting. And as we move into those initiatives, you'll start to see the leverage flow out of them. But this year is a year where we're investing. And as you get into '24 and beyond, you should start to see that leverage materialize in our model.

Okay. Really helpful. And then maybe I can ask a follow-up here on the regulatory environment in the U.S. I guess, any updates on if you're expecting an Ad Comm? How soon might you be able to figure that out? And is there even potential for a faster approval process considering you've had this modular submission process for a number of months now?

Yes, I think it's a little bit early for that. And the most important thing is that we focus on the final stage of the regulatory process. I think as this unfolds, there may be opportunities, but I think we just have to keep ourselves to the proprietary of the trial and making sure that we answer every single question that comes our way from the FDA.

Okay. Really helpful. Thanks for taking the questions.

Thank you. There are no further questions at this time. I will hand the floor back over to Juan Jose Chacon-Quiros for closing remarks. Thank you.

Thank you for joining us on today's call. We look forward to providing our next quarterly update in mid-May, and we wish everyone continued good health and happiness.

Thank you. This concludes today's conference. All parties may disconnect. Have a great day.