Earnings Labs

Establishment Labs Holdings Inc. (ESTA)

Q3 2024 Earnings Call· Sat, Nov 9, 2024

$63.81

-2.54%

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Transcript

Operator

Operator

Good afternoon. Welcome to Establishment Labs Third Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. I will now turn the call over to your host, Raj Denhoy, Chief Financial Officer. Please go ahead.

Rajbir Denhoy

Analyst

Thank you, operator, and thank you, everyone, for joining us. With me today is Juan 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 meanings 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. I'd also like to remind you that our comments may 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 or profitability of the company's business, which can be stated as EBITDA or adjusted EBITDA. Reconciliations to comparable GAAP financial measures for non-GAAP measures, if available, may be found in today's press release, which is available on our website. The content of this conference call contains time-sensitive information accurate only as of the date of this live broadcast, November 7, 2024. Except as required by law, Establishment Labs undertakes no obligation to revise or otherwise update any statements 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.

Juan Jose

Analyst

Thank you, Raj, and good afternoon, everyone. The approval of Motiva Implants on September 26 was a watershed moment for our company and for the plastic surgery industry. The launch has exceeded even our high expectations. The pace at which we are onboarding new accounts and the orders we are seeing validates what we have shown in many other countries around the world that safer and better technology that offers new options can move markets. I'll provide some additional details in a moment. With the launch in the United States going so well, we have taken this opportunity to strengthen our balance sheet. Following FDA approval, we accessed $25 million under our existing credit facility. Today, we are also announcing that we have completed a registered direct offering to invest $50 million at a 5% discount to our closing price. This equity raise was done in conjunction with an amendment to the Oaktree credit facility, where we can now access the remaining $25 million until the end of 2025. With the capital infusion, our pro forma cash position at the end of the third quarter was $114 million. And with the amendment, we have access to an additional $25 million through the end of next year. This will allow us to fully invest in our U.S. growth initiatives as well as fund other programs that support the long-term vision of our company. The third quarter, we again saw the tangible results of the efforts we've undertaken over the past year to reduce our operating expenses and cash use. Our cash loss in 3Q was $14.9 million, down more than 60% from a year ago. This is all the more significant considering that we have been stepping up our investments in the United States. Among the recent initiatives was the decommissioning…

Rajbir Denhoy

Analyst

Thank you, Juan Jose. Total revenue for the third quarter was $40.2 million, an increase of 4.5% from the year ago period. Foreign exchange had a negligible impact on sales results in the quarter. From a regional perspective, sales in Europe, Middle East and Africa were approximately 49% of the global total; Asia Pacific, 27%; Latin America, 24% and North America was 1%. Latin America and in particular, Brazil remained challenging. As we noted in previous calls, the Brazilian market continues to suffer from softer underlying demand, and we do not expect to see improvement this year. Our gross profit for the third quarter was $25.7 million or 63.9% of revenue compared to $26.1 million or 67.7% of revenue for the same period in 2023. Our gross profit in the third quarter was impacted by the revaluation of our euro-denominated inventory at quarter end, which had a negative impact on our cost of goods. This lowered our reported gross margin by approximately 80 basis points. Average selling prices in the quarter were similar to last year. SG&A expenses for the third quarter declined approximately $5.9 million to $34.1 million compared to $40 million in the third quarter of 2023. R&D expenses for the third quarter declined approximately $2.3 million from the same quarter a year ago to $4.8 million. Total operating expenses for the third quarter were $38.9 million, a decrease of approximately $8.2 million from the year ago period. The decrease in operating expenses in the third quarter was primarily the result of cost reduction initiatives we undertook in the second half of 2023, which we have continued into 2024, offset by increasing investments in our U.S. commercial operation. Net loss from operations in the third quarter was $13.1 million compared to a net loss of $21 million in…

Juan Jose

Analyst

Thank you, Raj. The FDA approval of Motiva has opened the door to the next phase of growth for our company. Not only do we have access to the largest global market, but the U.S. commands among the highest gross margins in the world. As such, we expect to not only see growth accelerate meaningfully in 2025 and sustain at a high level, but with the spending discipline we have shown over the past year and with the economics of our business in the United States, we are on a clear path to profitability. Our balance sheet has been strengthened to where we are fully funded to take advantage of our U.S. launch and to continue to launch innovations for years to come, all of which will create value for our shareholders. When we founded this company 20 years ago, we always knew that entering the U.S. market was the ultimate validation for our technology. We now have the entire global market open to us, and we look forward to many years of very strong growth ahead. I will now turn the call over to the operator for your questions.

Operator

Operator

[Operator Instructions] Our first question comes from Allen Gong with JPMorgan.

Allen Gong

Analyst

Hi, thanks for the question. I had the first question on the U.S. launch. It's great to hear that it's off to a stronger-than-expected start. When we think about the $30 million, $35 million plus expectations for next year, what does that really contemplate when it comes to the ramp this quarter and your ability to kind of sustain momentum next year?

Juan Jose

Analyst

Thanks, Allen. And if I hear you correctly, I think you want to get our view on how we ramp this business. And I think I will point out to the fundamentals. Number one, the quality of our sales reps. These are the best in the industry. We have now 32, and we'll have 40 by the year-end. The speed at which we are onboarding new accounts, basically an average between 15 and 20 per day, already onboarded 250 accounts, 70 have ordered more than 25x. Social media, PR, everything that is going on speaks of the shift -- the paradigm shift that we are seeing in the U.S. market. So of course, the first few months, you're building your base of accounts. But these accounts are already ordering and reordering. And that tells you where this is going. So I think when we speak of our ability to bring at least $35 million next year, it shows our conviction that this is a market that we can take based on the quality of our technology and the differentiation.

Allen Gong

Analyst

Got it. And then kind of my follow-up is on the other 2025 commentary that you gave, the kind of 5% OUS growth. Should I basically be thinking about that as your current business minus the $3 million that you expect to generate from the U.S. in fourth quarter and growing that mid-single digits? If so, I think that's kind of a good bit slower than us on the street we're thinking, especially with China still in the early stages of launch, and that looked like the rest of APAC and EMEA doing better even if LatAm is going to continue to be weak. So one, is that the right way to think about it? And two, why would that be the case? Why wouldn't you be able to do better than mid-single digits?

Rajbir Denhoy

Analyst

Yes, Allen, thanks for the question. As we noted in the commentary, this is really a first cut at 2025 for us, right? And we're setting a conservative outlook to start the year. But importantly, we're also building our budget against that, our expense budget against that because we've also commented about the goal, we have to have an EBITDA positive quarter next year, right, to break into that profitability phase of the company. And so for us to start with a conservative view on the top line and then build an expense base against that is what we're trying to accomplish. But absolutely, it's a conservative number to start the year. And everything you're describing will play out, I think, for us next year. But again, we want to just start at a place where we can build a reasonable expense base against that.

Operator

Operator

Our next question comes from Matt Taylor with Jefferies.

Matt Taylor

Analyst · Jefferies.

HI, thanks for taking the question. I was hoping to get a little bit more color on China. If you could talk about how you're progressing against your goals this year to get the initial stocking orders and reordering there and understand anything that you can give about China growth in '25 and really want to dig into what this $50 million investment does. What do you think it's going to do for the ramp of Motiva products in China?

Juan Jose

Analyst · Jefferies.

Yes. Thanks, Matt. So one of the important things is that China, in general, when it comes to consumer spending, it's been a tough year in China in 2024. But as you well know, the Chinese government is undertaking a series of measures to really prop up consuming consumers across all of China. And we think it's the right time for this type of investment into the Chinese market. So we are very happy to see Motiva China, our partner, joining our bridge fund, part of CBC for this investment. And this investment is to basically advance the growth of Motiva in China and also, more importantly, bring the Ergonomix2 platform and Mia to China. When it comes to Mia, China was the number one market in our market studies. So as we look at what we have done this year, we're very happy with the things that we have undertaken in terms of the deployment of inventories into Tier 1 and Tier 2 cities, medical education across the board and continuous improvements that we are seeing in the pace of our marketing activities. So as we go into 2025 and beyond, we think that this level of investment shows the commitment of our partners into making China, just like the other countries in the periphery in Asia, a leadership market for Motiva.

Matt Taylor

Analyst · Jefferies.

And that's good. I guess just to help with the modeling, could you be any more specific on how China has done this year? You talked about a $10 million stocking over the course of the year. Are you going to go beyond that with reordering? And can you give us any color on how China could contribute next year?

Rajbir Denhoy

Analyst · Jefferies.

I think it's a little bit early to talk about next year. But clearly, we're on track to do the $10 million that our distributor there has committed to doing. As we move into next year, we'll start to see the pace of reordering. But as Juan Jose noted, this investment that they're receiving from CBC and the excitement we're seeing about the products there. We have high hopes for what they'll do next year. But I think it's a little bit early to talk about the contribution in 2025.

Operator

Operator

Our next question comes from Marie Thiebault with BTIG.

Sam Eiber

Analyst · BTIG.

Hey, good afternoon. Thanks for taking the question. This is Sam on for Marie. And formal congratulations on the U.S. approval. Maybe I can start on some of the non-LatAm markets. I want to better understand maybe what you're seeing in Europe and maybe some of the non-China APAC markets. And then as I think about direct versus distributor, are we at a point where maybe distributors are back to normalized inventory levels? Or do you think maybe there's still some more catch-up that needs to happen?

Juan Jose

Analyst · BTIG.

Yes. Thank you. So over the course of this year, we have been talking about markets stabilizing at different speeds across the world, but we continue to see macroeconomic pressures, notably in LatAm and especially in Brazil. And the environment is not deteriorating further in that region, but our hope for a rebound in the second half of this year has not really taken place. Now to your question, when you look at EMEA, that's a region in where we have seen markets stabilizing with actually some markets even growing. And that's a region in which we have a combination of both direct markets and distributor markets. Then when you look at APAC, APAC has also been stabilizing. but we believe there is still room for improvement in certain markets in the region. And that is a pure distributor region for us. I also want to point out that there's no structural change to the demand for breast aesthetic procedures. The economic picture has made it harder for women to access it at this time in some regions in the world. But I really want to emphasize something. Make no mistake, we will grow this year in the EMEA region and APAC regions in our core business compared to 2023, and we continue to gain market share across the globe. So it is important that we say these things because we don't want the picture of our business to be one that is not based on growth, as we have pointed out in the script and now.

Sam Eiber

Analyst · BTIG.

Really helpful, Jose. Maybe just a follow-up question on some of the short-term supply challenges. Just want to clarify, is that going to have any impact on your ability to maybe meet near-term demand? Or is that something that should be worked through without any impact?

Juan Jose

Analyst · BTIG.

Yes, I think that's an important point. We had planned for a long time, the decommissioning of our B15 manufacturing facility. That facility had been manufacturing for the last 15 years, and it had a date for decommissioning. So we are moving capacity into our 2 other manufacturing units. So in that process, there are some pressures. So there will be an impact into Q4 so hence, the change in the guidance for this year. But we think that this will abate by Q1. We are adding manufacturing capacity in both of these sites in one of them, including a third shift. So we will be ready.

Operator

Operator

Our next question comes from Joanne Wuensch with Citi.

Anthony Pettinari

Analyst · Citi.

Hey, good afternoon. This is Anthony on for Joanne. Thanks for taking our question. Do you -- in the U.S., do you have a target U.S. account number you're hunting towards that we should be thinking about? And then on the 40 reps, do you think that's sufficient to serve the U.S. market? Or how should we be thinking about potentially the expansion of that sales force in 2025?

Juan Jose

Analyst · Citi.

Yes. Thank you. Well, not long ago, we were talking about having 12 sales reps, and you've seen how fast we've moved to 32. And these are not just any sales reps. These are the best in the industry. As you can see by the speed and the quality of the accounts that we are onboarding, the speed at which they are ordering for the first time and then reordering. And then when we look at from now to the end of the year, we will be adding 8 more sales reps. And we will be adding more sales reps next year as our base of accounts expands, we will be having more sales reps. And that is natural. On top of that, I think that our entire infrastructure in the U.S. continues to get strengthened. We are adding people in the back office. We will be adding inventories necessary for the growth. And that's what the company is focused on because if you look at next year, our plan is to take significant market share in the U.S. market, and it will be one of the key factors for our growth next year.

Operator

Operator

Our next question is from Josh Jennings with TD Cowen.

Josh Jennings

Analyst

Hey, question on the, I wanted to focus on the recently held Ergonomic Symposium that you guys announced Mia 3-year data. Can you just talk about whether or not that those data will be enough to submit to the FDA for -- through a supplemental PMA pathway? And have you had any discussions on the Mia pathway with the FDA? And then the second question is just if you could maybe just give us some color on what occurred out over in Barcelona. Any new pipeline updates that you can relay or anything else, maybe even just the buzz that was out there from the clinical community.

Rajbir Denhoy

Analyst

Yes. Thank you, Josh. And Barcelona was once again a phenomenal opportunity for Establishment Labs to showcase its latest technological improvements. And the 3-year data of Mia is what we are about, showing with data that not only we can improve device-related complications, but now with Mia, which is changing the way surgeons are doing breast augmentation and breast harmonization because of breast tissue preservation. And that what it does and the results for the study show it, is that basically you are also almost eliminating technique-related complications. And that is a very powerful combination. Our future is based on breast tissue preservation across the board. You will see us talking more and more about it. We had more than 500 people in attendance, and that included not only some of the best plastic surgeons around the world, but also our business partners. So I think everyone is powered up not only by the FDA approval, which, of course, has an effect on the image and the credibility of our entire platform across the world, but also on the things that we are bringing to market because Mia will continue to expand. We talked about 29 cities now, which is 7 more cities than last quarter, 15 more plastic surgeons, 47 clinics in the pipeline. And I think most importantly, and I think that gets perhaps a little bit lost is that this year, it's only been 12 months really since the first clinic is launched and only 6 months and 3 months since a big chunk of those clinics have launched. And yet, what we see is that so far in this first 12 months, more than 40% of patients getting Mia are new to the category, which means they were not looking for a breast augmentation. Premium pricing, 30% to 50% over the same price in the same clinic for traditional breast augmentation, 2 months versus 3 to 7 years consideration time. So that's what we wanted to show that this is really a new category. 2025 will be about expanding the number of clinics, bringing the capillarity of Mia across the board by adding cities and countries. So we will be seeing, engaging and giving more data about how we grow the number of clinics and the number of procedures per clinic in 2025 because that will be the focus.

Josh Jennings

Analyst

Great. And just maybe anything you can share just on the Mia U.S. regulatory path and whether supplemental PMA is a possibility and any discussions with the agency?

Rajbir Denhoy

Analyst

Yes. I'm sorry for not answering before. We are looking at having a conversation with the agency regarding not only Mia, but the Ergonomix2 platform. And Mia has other components in addition to the breast implant that is part of it. So we are working hard with our regulatory team to have this conversation soon enough. So we're not trying to rush things, but at the same time, we do want to get it done.

Operator

Operator

Our next question comes from Anthony Petrone with Mizuho Group.

Anthony Petrone

Analyst · Mizuho Group.

I was muted. I apologize for that. I appreciate that and thanks for fitting in here for a question. I know a lot has been asked, but just a couple maybe on -- as we think about sales force build in the United States and the cadence, if you could maybe just give us an update on where you sit in the U.S. for the sales force exiting the quarter. And as you think about building that out through 2025, how should we be thinking about that from a headcount addition and just layering that into the SG&A line? And then secondly, maybe just a little bit of an update on next catalysts. -- next catalysts for additional FDA clearances following Ergonomix, following round in Ergonomix, when could we expect Ergonomix2? And anything you can share on Mia in the U.S.? I know it's a little bit further in the calendar, but any other color there would be helpful.

Juan Jose

Analyst · Mizuho Group.

Yes. Thank you, Anthony. I think it's important to realize that we've really been speeding up the number of sales reps. Not long ago, we were at 4, then eventually 12. In the last 2 months, it's gone to 32, and we'll be at 40 by the end of the year. So we will continue to add more sales reps throughout next year, quarter-to-quarter. And we will do so at the speed that is required. It is important to understand that Motiva is -- it's a special type of game-changing technology, and it requires the time and the quality of the surgeons. So for us, it is important to be mindful of how we grow. So we talk about -- we've done in the last 14 years, over 85 countries launch. So that's a lot of experience. So we really know how to do this. And if you look at the team that we have in place with Jeff and Ann leading that team and all of their experience, they know exactly what they are doing. And if you look at what's coming over the next few years, we're going to see a super cycle of innovation in the United States. We're going to get the breast reconstruction approval indication for breast reconstruction. On top of that, we will be working towards getting the Ergonomix2 platform. And from there, not only do you get the program related to Mia, but also the program related to joy and breast tissue preservation. And of course, we have other things coming that we've talked about before with GEM, which is for ergonomic modeling of the gluteal area and also our sensor technology. So a lot of things will be coming to plastic surgeons in the United States. But I'll also point out something else that I think people should not forget, and that's part of what we are talking about today is the road to profitability. If you look at the improvements over the last 12 months, not only we talked today about an increase in revenue, but also the improvement in EBITDA 58% cash use, 60% improvement; OpEx, 18% improvement. And we've done this while reducing our entire employee base by 20% and adding U.S. employees and investing in the U.S. market. So I think that's a pretty impressive way to describe what this company has been doing. And now that we have the FDA approval, we will be getting into the market with the highest gross margins. And I think that's what signals not only our first EBITDA positive quarter next year, but eventually how we get to cash flow positive as a company.

Anthony Petrone

Analyst · Mizuho Group.

Helpful. And one follow-up just on the OUS commentary, guiding to 5% OUS growth. Maybe when we think about just the inputs into that forecast and potential areas of risk, but also on the flip side, where it potentially can be conservative. And really where I'm going is trends on the ground in China versus trends on the ground in Brazil, what gives you some encouragement in each of those regions? And where is there a potential risk? Congratulations on the U.S. Motiva clearance.

Rajbir Denhoy

Analyst · Mizuho Group.

Yes. I mean, as I noted earlier, Anthony, I mean, it's a conservative start to the year, right? It's really a budgeting number for us. And so as you described, there's lots of puts and takes into next year, right? We're not expecting anything heroic out of China, but certainly, the size of that market and the investment that our partner there has received really sets that up for a nice potential run in that market. Certainly in the U.S., right, which I guess you're asking about OUS, but the U.S. is going to be the big driver for us next year overall for growth. And then outside, we continue to see pockets of macroeconomic softness, but things can improve, which we expect they will. As Juan Jose mentioned, we are seeing decent growth in EMEA right now, pockets of growth there. APAC is stabilizing, but there's still room for improvement. And LatAm has been the big weak spot for us this year. And so there's a lot of room for that to start to step up. And so for us, I think the -- what we're setting up for 2025 is really just a conservative way to start the year, and we absolutely expect to do better.

Juan Jose

Analyst · Mizuho Group.

Yes. And Anthony, to give you more precision on path for EMEA in the U.S., I just want to like reinforce that we are in discussions with the FDA on pursuing the quickest pathway for it. And of course, we're going to leverage the already completed data globally like the one we showed at the World Ergonomic Symposium. And we will target via a supplement, of course.

Operator

Operator

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.

Juan Jose

Analyst

Thank you for joining us on today's call. We will be at several conferences over the next couple of months, including the UBS Global Healthcare Conference, the Jefferies London Healthcare Conference, the Stephens Investment Conference, the Citi Global Healthcare Conference and the Mizuho Healthcare Conference. We look forward to seeing you at any of these events. We wish everyone continued good health and happiness.

Operator

Operator

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.