Good afternoon. Welcome to Establishment Labs' Third Quarter 2023 Earnings Call. At this time, all participants will be in a listen-only mode. At the end of this call, we will open the line for questions-and-answers session and instructions will follow at that time. As a reminder, today's call is being recorded. I will now turn the call over to Raj Denhoy, Chief Financial Officer. Please go ahead.

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 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 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. 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 authority for specific product availability. The content of this conference call contains time-sensitive information accurate only as of the data this live broadcast, November 7, 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. Revenue in the third quarter of 2023 totaled $38.5 million in line with the third quarter of 2022. Our results this quarter reflect that lower demand for breast procedures globally. This lower demand developed over the quarter in our direct markets and was also reflected in orders we received from our distributors, and we expect this trend will persist in the fourth quarter. As such, we are lowering our full-year guidance to approximately $165 million, representing annual growth of 2% over 2022. I would note that while we still expect China approval by the end of this year, we have removed it from our guidance as we have less than two months remaining in this year. This is a meaningful portion of our reduction in guidance. However, even in this period, we continue to gain accounts around the world. This slowdown seems fairly broad across aesthetics and does not seem to be related to anything specific in the breast implant industry. While anecdotal, in international markets, both plastic surgeons and dermatologists report to us, they have seen a noticeable slowdown in their practices across all procedure types, both surgical and non-surgical. This is, of course, not a first for the aesthetics industry, and both precedent and our experience suggests that this will be transitory and relatively short-lived. That said, we are being very careful in this environment and we have taken steps to make sure our business is spending a relation to the current demand among the steps we are taking are a reduction in global headcount and a reduction in operating expenses. We are also prioritizing our main growth initiatives, the United States, China and Mia, as well as cautiously managing our global inventory levels. Even as we take these steps, we…

Thank you, Juan Jose. Total revenue for the third quarter was $38.5 million, which was growth of 0.8%. From a regional perspective, sales in Europe, Middle East and Africa were approximately 61% of the global total, Asia Pacific was 6% and Latin America 33%. Direct sales were approximately 54% of implant sales while distributors made up the balance. Brazil, which is our single largest market globally, accounted for approximately 16% of total quarterly sales. Our gross profit for the third quarter was $26.1 million or a 67.7% of revenue, compared to $26 million or a 68.1% of revenue for the same period in 2022. Our gross profit in the third quarter was positively impacted by increased contribution of Mia revenue. This was partially offset by higher overhead and labor costs. Costs were higher in part from changes in exchange rates between the U.S. dollar and the Costa Rica colon. As a report in U.S. dollars, the revaluation of the colon over the last year resulted in higher costs in the period. Average selling price is in the third quarter up from the second quarter of 2023 and year-over-year. SG&A expenses for the third quarter increased approximately $8.7 million to $40 million, compared to $31.3 million in the third quarter of 2022. The increase in SG&A in the third quarter resulted in part from our investments in new growth initiatives like Mia and preparations for a launch in the U.S. R&D expenses for the third quarter increased approximately $1.8 million in the same quarter a year ago to $7.1 million. Higher personnel costs and increased activities related to our U.S. approval processes contributed to the higher spending this period. Total operating expenses for the third quarter were $47.1 million, an increase of approximately $10.5 million from the year-ago period. Net loss…

Thank you, Raj. Establishment labs is taking share and we expect to continue to do so. The clinical and scientific data supporting the use of our products is unprecedented and only grows stronger, and you are seeing this affect many of our competitors. With our entries into the U.S. and China, we will double our addressable markets and we are poised to become the leading global company in breast aesthetics and reconstruction. Over the next few years, we will continue to transform and expand our markets by creating new categories with innovations like Mia. We are very excited about our future and expect strong growth for many years to come. Our 2026 target of $500 million in revenue remains a key long-term corporate objective and everything I see suggests we will be successful. I will now turn the call over to the operator for your questions.

[Operator Instructions] Your first question comes from the line of Matt Taylor from Jefferies. Please go ahead.

Great. thank you. Ahis is Mike Sarcone on for Matt. thanks for taking the question. Just to start, you mentioned you expect growth to resume in 2024. I was hoping you could comment on that and just talk about your visibility and your confidence there. and if you could, maybe parse out growth expectations for existing markets versus the growth that you'd be expecting for newer markets that you're entering into like China and the U.S.

Yes, of course. First, I'll say that we are seeing the slowdown across aesthetics and in many markets globally. And surgery is often the tip of the spear as a procedure are more costly and require more of a commitment. However, our experience in precedent does show that these trends are usually transitory and the demand for the procedures will tend to grow over time. Now, if you think about like this softness in all of aesthetics and you think about the position of Establishment Labs. In front of us, we have many growth opportunities that are real; the approval in China, the approval in the U.S., both of those are ASP and gross margin accretive. And we are, thanks to both of them, doubling our total addressable market. We received already the approval for Flora in the United States. That's an $180 million market. And Flora is unique in its technology and can truly transform this market in the United States. And on top of that, we have Mia, which continues to expand and we will see Mia in more geographies next year. So, beyond what we are seeing in terms of the softness, there is all the greenfield that we see ahead of us in terms of these new opportunities. There may be a time, where like the softness starts to clear out and then we see growth in the traditional market. But I think between all of it, we're poised to come back to a percentage of growth, like we had seen in the past, of 30% plus.

Got it. That's helpful. Thank you. And Raj, I think you mentioned, a 20% reduction in global personnel costs, reducing certain opex. Could you talk about how quickly you plan to implement that and then what would the ramp back look like when you do get approval in China and the U.S., and you might need to increase headcount again?

Sure. So, we've actually already undertaken a lot of these initiatives in the last couple of weeks. So, we did have a reduction in force last week. So, a lot of this is already happening. I think as Juan Jose noted in his remarks, what we are doing at this point is prioritizing the growth objectives in front of us. So, things like Mia, the United States, China, so we are making sure that we are committing our resources into those areas, which provide the best opportunities for growth. And so, you mentioned the U.S., for instance, in our prepared remarks, we also talked about how we have hired ahead of the U.S. business at this point and we're building out the teams there. And so, we really think about it as sort of a reduction in certain areas of the business that are a little slower right now and emphasizing areas, where we still have a lot of growth ahead of us. As these markets recover, which we expect they will, our core markets we will continue to add back there. We expect, as Juan Jose mentioned, to get back on a nice growth trajectory in these markets. We're just trying to be judicious in this period, where things are slower.

Got it. Thank you very much.

Your next question comes from the line of Allen Gong from JPMorgan. Please go ahead.

Hi. Sorry, it's a little bit loud where I am. I'll try to skip both questions in the same time. But just one question on your EBITDA and cash flow targets, right with kind of the market a little bit softer than expected and China coming a little bit later, and U.S. potentially being a challenge market as well next year. What are you really assuming for these new markets to get to those targets? And then just as a quick follow-up, when I think about Mia, it's great to see, Mia is having set [ph] internationally, but actually think about the pipeline to the U.S. Thank you.

So, yes, Allen, I can take the first question. I mean, when we look at the outlook for 2024, we're preparing for a number of potential outcomes there, right, where the markets don't recover for a period of time, we're relying upon the growth of the new initiatives, which Juan Jose mentioned. In most scenarios with Mia ramping, with China coming online, with Flora now approved, we expect that growth will pick up next year, even based just upon those three things that we already know about, even if the core markets remain soft for a period of time. However, we are preparing our budgets and spending for the eventuality that things don't improve for a period of time. And so, we expect to be EBITDA-positive, even in a market, where these core markets remain soft for a period of time. And then I think your second question, which was on Mia. So, I think Juan Jose.

Yes. could you clarify the second question? It's very hard to hear you.

I think we might have lost Allen operator. Allen, your line is open.

Allen, your line is open.

Oh, sorry. My question is just -- it's great to hear Mia doing really well internationally, but just curious, once you get the Motiva approval in the U.S., how quickly do you think you will be bringing Mia to the U.S. as well?

Yes. it's too early to give you a lot of precision on that, because we first need to gain the approval of Motiva Implants and based on that approval, seek a supplement for the implant that is necessary for the Mia procedure. And then there's the additional tools. So, as a result, what I can tell you is that our regulatory experts believe that this is a supplement. Supplements usually used to take around 18 months. So of course, we're very committed to the first approval, which is the one of Motiva implants, so that we can then bring the rest of the pipeline of innovation that is already available in the international market.

Your next question comes from the line of Anthony Petrone from Mizuho Group. Please go ahead.

Thanks and good afternoon. We will start with the global demand comments and Establishment Labs numbers are following some similar comments from Sientra, a player that's no longer going to be in a marketplace in mode previously as well, talked about weakening demand. And I guess when we kind of pinpointed it, is it that the underlying demand, because -- has been impacted here, because generally, the consumers tapped out and there's no indications of interest in the funnel? Or conversely, you see the reports today, credit card debt hit over $1 trillion. And if you think of in the U.S. here, folks like credit care, all the rates on lending just have they gotten too high and that's impacted demand. So, is there still underlying demand for the procedures, but is it more funding issue? Or is the demand simply gone away while there's a prioritization of spend here and all the couple of follow-ups?

Yes. thank you, Anthony. And what I'll tell you is that the slower demand developed over the quarter in our direct markets and eventually was reflected as well in the order that we received from our distributors, in the first half of the year, around 60% of our orders came from distributors. So, we normally do see a slowdown in procedures in late summer and then they tend to recover once the seasonality disappears and in September, we see it pick up again. Well, that did not happen this year. What we hear from doctors is that many patients are basically delaying the procedures is not because of lack of interest. I think there is a lot of uncertainty, both macroeconomic and geopolitical, and it is having an impact in all of aesthetics. However, in the past, we have seen this many times, in which periods like this in the international markets for whether one type of crisis or another, they do come back. And in our case, I think what makes us even more confident is that for that growth, we don't depend on the current market. We have new markets opening up. We've recently had the approval of Flora here in the United States with $180 million market opening to us. And we're going to see in the next few months, the approval in China and further after that, the approval in the United States. So, all of that is potential growth for us. And that's what makes us confident. because not all companies have these type of milestones ahead of them.

Fair enough. And then just -- one on cash preservation and just how we should be thinking about a Motiva launch under a scenario, where we get FDA clearance. So first on cash, Raj, you mentioned that the burn rate would be limited to $15 million in 4Q. Just want to clarify that, that the cash burn is limited to $15 million. So, is that kind of level we should be thinking about for the first half of '24? And then when you think about putting funding toward a potential U.S. Motiva launch year, should we get FDA clearance? Is it more of a gradual launch now where you're not really going to go full tilt or is that unchanged where it would be a full market clearance next year? Thanks.

Yes. your question, Anthony, I think that $15 million level in the 4Q, again, you've seen the guidance reduction that we've given, right. It's going to be a very slow top-line growth quarter and we're guiding to about $15 million of cash. So, as we move into next year and some of these opportunities, China, flora in the United States, the continued growth of Mia, we're looking at keeping our cash use at that level, if not lower going forward. And so, we did talk about getting to be EBITDA-positive by the end of next year and then ultimately, getting to cash flow-positive on the cash we currently have access to. And so, the preservation of cash is going to continue to be a big focus of ours. But I would look at it more as sort of the use of it in areas that provide us with the best growth. And so, we talk about the United States, the biggest opportunity in front of us. And we will not underfund that opportunity, but we'll look to find areas in the other parts of the business that we can lever and devote the capital to again, to the United States.

Thanks. I'll get back in queue.

Your next question comes from the line of Josh Jennings from TD Cowen. please go ahead.

Hi. good afternoon. thanks for taking the questions. I was hoping to just ask about China approval timeline. It sounds like the team's still optimistic that the approval could be at hand by the end of this year. Any signals from China regulators or process updates that you can share that driving that, that's optimism or is it just the process has moved forward, you've done your job on your side and the approval will come. It's just a matter of time.

Yes. thank you, Josh. I think that we have enough signals in front of us to understand that the work on the final labeling is done and usually, by that time, that you're going to get the letter from the NMPA and I think this is going to happen before the end of the year, at least that is our expectation. However, we now expect to begin recognizing revenue from that market in 2024. and as such, we are preparing for it. We have been on calls with our team there on a weekly basis and we are preparing for a launch that should happen early next year if everything goes according to plan.

Thanks for that. And just to follow up on the -- I wanted to ask you a question about the process of the over Flora 510(k) approval now have SmoothSilk cleared in the United States. Was the 510(k)-process independent of the PMA review process by the FDA and did the FDA have to visit the manufacturing facilities prior to that Flora 510(k) approval? Thanks for taking all the questions.

Yes. on that, Josh, it is not the same process. One is a 510(k) that leads to a clearance and the other one is a PMA that leads to an approval. However, it is the same division that is looking at both. And as such, as part of the conversations for the clearance of the Flora Tissue Expander, they had to include people that have to do with the approval, potential approval of the Motiva Implants. So definitely, we have cleared an important hurdle when it comes to one of the most important things in the approval process for the Motiva Implants, which is surface biocompatibility. The surface is an important driver of safety. And as such, by having the clearance of flora, we have a lot of confidence that we will finish the process as we expect with the Motiva Implants. And no, they did not inspect our manufacturing facilities for the flora Tissue Expander, but it is the same manufacturing facilities, equivalent processes that are used for the manufacturer of Motiva Implants.

Your next question comes from the line of Neil Chatterji from B Riley. Please go ahead.

Hey, guys. good afternoon. Thanks for taking our questions. just on the demand slowdown, I mean, as far as I guess, are you seeing any nuances, I guess, between just the general aesthetic slowdown versus specifically the breast augmentation market and any indications that could come back faster for implants?

So, like we said, you tend to see it first in, surgical aesthetic procedures, because they tend to be more expensive and they usually require more of a commitment. So that's why I think we're seeing it first there. When you look at the size of the impact, I think it is very important to understand that in direct markets, we are seeing an impact that is not more than 10%, for instance, in Europe. but in distributor markets, we are seeing a lot bigger of an impact. But that is related to the fact that distributors are very careful with their cash management. So, if they think that they can get through a softer market by ordering less, they will do so. So, the impact, as a percentage in our total revenue, is a lot stronger. And until we get to the U.S., the majority of our sales are going to go through the distributor channel. So far, this year has been, like in the first half, it was around 60% and now, you saw that turn around completely with close to 55% of our revenue coming from direct markets. So, it kind of like amplifies the impact. But I think, as we get through the rest of this year and the situation starts to resolve with our distributors, what I think you're going to see is a resumption of ordering patterns, because they are going to consume those inventories and they will need to come back.

Great. Thanks for that color. Maybe, just switching gears to Mia. Just curious, on any more updates on just the progress for the clinic partners there and the DTC efforts. How much is the two-year initial Mia feasibility study results kind of helping generate leads and update?

Yes. I think that's a really good point, because the two-year study, which has 0% caps or contractures, 0% rupture, 0% leading, all these things that people care about when they think about an innovative procedure like Mia, well, they tend to dissipate as term of questions and concerns. But I think what we see is two things. The number of clinics that are interested in becoming partner clinics is increasing. Actually, we're having almost a difficulty in onboarding and training fast enough these clinics, so that they can begin transferring the awareness into leads. The second part is what we are doing with the clinic that have been already onboarded and are speaking to consumers. And what we began with our awareness campaign is now turning into many leads coming to these clinics. And I think that is something that is very much appreciated in the period of softness is that these clinics are seeing leads and many of these leads are women, who had not thought about a traditional breast augmentation. So, I think, Mia is going to be a shining light in the middle of this period of softness.

Great. That's it for me. I'll just hop back in queue.

Your next question comes from the line of Joanne Wuensch from Citibank. Please go ahead.

Thank you very much for taking the questions. The last time, you experienced this was when and how long did it take you to, for lack of a better term, dig out of it? And my second question has to do with the FDA process. Where are you with that? Have they come in to inspect the facility? Anything you can sort of give us granularly, yes, that's the right word, to help better understand where that is? Thank you.

Yes. thank you, Joanne. I think from an industry perspective, probably '08-'09 was the deepest recession ever experienced. And procedures, at least for the U.S., where you have the best figures, fell for two years, but then recovered back pretty strongly. And within a year after that, they were back to pre-recession levels. In the international market, actually, we see it a lot more often. We see countries like Brazil, Venezuela, Argentina, Mexico, who have periods in which they go through recessions or political instability and that period tends to last a couple of quarters. And then they tend to resume. We've seen similar situations in Asia, where growth stopped for a bit in certain markets, like Thailand or in Southeast Asia. But they do tend to recover. So that gives us the confidence to tell you that although this may be transitory. we are also taking the steps necessary, so that it was to last longer, we are prepared for it. So that is perhaps one of the most important things that we are trying to convey today is that based on the past, we know they will come back. We cannot predict the future. So, we are getting prepared for it. And when it comes to the approval process for the PMA of Motiva Implants, remember, we went from a modular PMA to full PMA. We have provided all the answers to all the questions for every module that the FDA gave us and we are now awaiting for the manufacturing inspection. So, as soon as we have that inspection, I think it will be a major milestone towards the approval. But once again, I do think that it was quite important to receive the clearance of the Flora Tissue Expander, because it is a good equivalent in terms of many of the characteristics that are part of the breast implant as well.

Thank you.

Your next question comes from the line of Marie Thibault from BTIG. Please go ahead.

Hey, good afternoon. This is Sam on from Marie. Thanks for taking the questions. Maybe, I can start on the Flora approval that you guys just got here last month. I'm wondering if you guys can use that to essentially introduce the Motiva technology to customers that maybe are newer to Establishment Labs considering it has similar properties like the SmoothSilk surface technology as the regular Motiva implant.

Yes. I think that's very important to us, because if you think, for the last few years, basically whatever interaction U.S. plastic surgeons had with Motiva came through international conferences that may have attended, friends of them in plastic surgery that have used the device and had told them about it. But basically, many of the things that they heard was through the eyes of our competitors. So, it is very important to us that now we have the possibility to introduce Establishment Labs to talk about our commitment to science and technology. We can talk about the surface technology, which is one of the most important things when it comes to biocompatibility and definitely about our RFID technology, because it is equivalent to what we have also available in the final implant. So, all of this is going to give us many opportunities to begin talking about what this company is about, which is women's health and the introduction of this concept into the U.S. market for breast aesthetics and reconstruction eventually.

Okay, very good. And maybe, I can use my follow-up here for Raj. I know it's difficult right now to figure out how long this transitory environment could be, but assuming the implied Q4 guidance, $31.5 million. Would that be an appropriate run rate to, I guess, use for the core markets going forward in 2024 and then layering on top of that some of the new markets as you guys open them up?

It's not a bad starting point. I mean, as Juan Jose noted, we've seen a much bigger slowdown in our distributor markets than we've seen in our direct markets. And so, we don't expect that that's going to continue at that period of time, but as a conservative base to start from, that's not bad. But then you start to layer on top of it things like Mia flora in the United States. As Juan Jose mentioned, we're very close to the Chinese approval. That should contribute next year. So, we have a lot of good things that build on top of that. And we do expect that the fourth quarter should really be the low watermark in terms of the demand we see for these products.

Got it. Thanks for taking the questions.

Your next question comes from the line of George Sellers from Stephens. Please go ahead.

Hey, good afternoon and thanks for taking the question. Maybe, to start with Flora, I apologize if I missed this. but I'm just curious what that commercialization might look like, what you're anticipating and including in your guidance in the fourth quarter and how we should think about maybe the cadence of that in 2024. And then also, I'm curious on the market in the U.S., do you need to have Motiva approval for Flora to see or to really take off that physicians typically use the same tissue expander as the implant that they're going to use or how does that -- what does that market look like in the U.S.?

Yes, of course. So first of all, just as a reminder, the market for tissue expanders in the U.S. is approximately $180 million and it has the highest average selling prices in the world. We will start generating revenue from Flora in the U.S. in 2024. And with the technology that we have based on science, the unique technology with no magnets, which really changes things for these centers. because now, they can do MRIs, they can potentially reduce the amount of radiation oncology, it opens up new opportunities for them in many different ways. So, it is an important change for these centers in the United States. So, as we look forward, if you think about what does Flora do, it creates this very nice interaction with tissue inside a patient that is recovering from breast cancer. So that tissue is going to define the type of capsule that you have and thereafter, that capsule can be the host for an implant that is already approved for breast reconstruction in the United States or eventually for our motiva implants. But there is no reason to believe that surgeons, who understand this would not see it as a benefit that the initial capsule is created in such a healthy manner by our flora Tissue Expander.

Okay. that's really helpful. And then maybe, on the Motiva FDA process, you touched on the manufacturing inspection, just curious what steps are left after that manufacturing inspection. And have you seen or been given any timeline on when you should expect that?

No. we have not given any timeline, because it is not in our hands. But we continue to make progress week to week in terms of the question-and-answer process with the FDA. Like I said before, we have provided answers to every single one of their questions now. And that tells you that the process is coming along quite well. They have not yet scheduled that inspection, but we have all the questions of module three, which is manufacturing that have been answered. So, we expect that to happen hopefully sooner than later.

Okay. that's really helpful. Thank you all again, for the time.

That is all the time we have for questions today. I will now turn the call back over to Juan Jose Chacon Quiros for closing remarks.

Thank you for joining us on today's call. We will be attending the Jefferies London Healthcare Conference and the Stephens Annual Nashville Conference next week. We look forward to providing our next quarterly update in the New Year and we wish everyone continued good health.

This concludes today's conference call. Thank you for your participation and you may now disconnect.