Earnings Labs

Orthofix Medical Inc. (OFIX)

Q1 2020 Earnings Call· Fri, May 8, 2020

$11.90

-3.41%

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Transcript

Operator

Operator

Good morning, ladies and gentlemen, and welcome to the Orthofix First Quarter 2020 Earnings Results Conference Call. [Operator Instructions] As a reminder this conference call is being recorded. I would now like to turn the conference over to your host Mr. Mark Quick, Senior Director of Business Development and Investor Relations.

Mark Quick

Analyst

Thank you, operator, and good afternoon, everyone. Welcome to the Orthofix first quarter 2020 earnings call. Joining me on the call today are President and Chief Executive Officer, Jon Serbousek; and Chief Financial Officer, Doug Rice. I'll start with our Safe Harbor statements and then pass it over to Jon. During this call, we'll be making forward-looking statements that involve risks and uncertainties. All statements, other than those of historical fact, are forward-looking statements, including any earnings guidance we provide, and any updates about our plans, beliefs, strategies, expectations, goals or objectives. Investors are cautioned not to place undue reliance on such forward-looking statements as there is no assurance that the matters contained in such statements will occur. The forward-looking statements we make on today's call are based on our beliefs and expectations as of today, May 8, 2020. We do not undertake any obligation to revise or update such forward-looking statements. Some factors that could cause actual results to materially different from the forward-looking statements made by us on the call include the risks disclosed under the heading Risk Factors in our Form 10-K for the year ended December 31, 2019, and our Form 10-Q as expected to be filed later today as well as additional SEC filings we make in the future. If you need copies of these documents, please contact my office at Orthofix in Lewisville, Texas. In addition, on today's call, we will refer to various non-GAAP financial measures. We believe that in order to properly understand our short-term and long-term financial trends, investors may wish to review these matters as a supplement to financial measures determined in accordance with U.S. GAAP. Please refer to today's press release announcing our fourth quarter 2020 results for reconciliations of these non-GAAP financial measures to our U.S. GAAP financial results. At this point, I'll turn the call over to Jon.

Jon Serbousek

Analyst

Thanks, Mark. And good morning, everyone. I appreciate you joining us on today's call. On today's call, I'll start by discussing the impact that COVID-19 is having on our business after which provide an update on the first quarter performance. I will then review the progress we have made within our strategic initiatives before handing the call over to Doug, who'll provide financial updates. At the end of the call, I'll provide our perspective on the business going forward before opening the line for questions. Beginning with the COVID-19 update as we work through this pandemic. Our first priority is the health and safety of our employees and their families, as well as our sales partners, surgeons, patients and customers. I'd like to start by saying on behalf of everyone at Orthofix how thankful we are for the tireless work being done by our coalition partners in the global healthcare community to address this crisis. I'd also like to thank each and every one of our employees who have executed incredibly well in the face of uncertainty and adversity. The adaptability, creativity, resourcefulness and dedication we have shown as an organization is special. It speaks volumes to the quality of the people at Orthofix, and how dedicated they are to improving the lives of patients around the world. I'd also like to thank our investors for their continued support as we navigate uncharted market dynamics. As noted in our April press Release, we are experiencing a material impact to our business. Governmental directives and recommendations from surgical societies and healthcare organizations to delay certain surgeries to conserve resources for COVID care are having a material impact on surgery broadly, including elective surgeries, which make up the majority of our case volumes around the world. We believe that given our sales…

Doug Rice

Analyst

Thanks, Jon. So I'll now provide additional details into our net sales and earnings results and then discuss some of our other financial measures including certain liquidity matters. As Jon noted, total net sales for the quarter were $104.8 million down 3.9% on a reported basis and 3.4% on a constant currency basis when compared with the first quarter of 2019. There was a material impact beginning in March on our business as a result of COVID, which causes significant revenue headwind at the end of the quarter. Gross margin in the first quarter of 2020 was 77.7% compared to 78.3% in the prior year period. The primary drivers of this decrease were lower fixed cost absorption and deleverage the lower revenue from the COVID impact. Based on our historical sales mix, please keep in mind that approximately one third of our historical cost of goods sold are fixed costs. Accordingly in the short term, we expect to see lower gross margins associated with the lower revenues. Sales and marketing expenses were 51.8% of net sales in the first quarter of 2020, an increase of 2.6% compared to the first quarter of 2019. This increase was primarily a result of a loss of leverage from lower revenue in the quarter that resulted from COVID-19 as well as increased training and education costs related to the launch of M6 in the U.S. It is worth noting that about half of our historical sales and marketing costs are variable, so we would expect to see short term de-leveraging associated with the anticipated lower revenue in the near term. This deleverage will be personally offset in the second quarter by our near term expense savings initiatives. However, the savings will be partially offset by support for our direct sale representatives. GAAP G&A expenses…

Jon Serbousek

Analyst

Thanks, Doug. I would now like to spend a moment, discussing our outlook for the remainder of the year. Due to the uncertain scope and duration of COVID-19 pandemic, and the general uncertainty around the timing of the global recovery, we’ve previously withdrew our full year 2020 financial guidance. While we have suspended guidance for the full year, and we will not be providing formal guidance for the second quarter. We believe it would be helpful to provide some qualitative information as we can give a sense of our thoughts for the second quarter. In the month of April, 2020 our top line performance was approximately 40% of our April, 2019 results. I want to provide additional detail with respect to our product categories. Bone growth therapies and biologics volumes reached approximately 35% of 2019, while spinal implants was roughly 50% of 2019. Spinal implants was supported by double digit growth in motion preservation. Global extremities was approximately 40% of 2019. We would expect these results to be indicative of the impact to Q2 consolidated net sales as the current situation is too fluid to predict the timing of a rebound intellect to procedures. While the slope with a broad recovery curve is focused on macro events such as reopening of cities states and countries, the recovery of our business will be determined by a series of hundreds of individual and local decisions. As with state and municipality directives, it falls under individual hospitals to decide to begin easing restrictions and on individual surgeons to decide to begin performing cases. In addition, patients need to feel comfortable heading to the hospital or ASC for the surgical procedure. Given all these variables we are not in a position to be able to provide specific guidance for the second quarter or for…

Operator

Operator

[Operator Instructions] Your first question comes from Raj Denhoy with Jeffries.

Raj Denhoy

Analyst

Hi, good morning. I appreciate there's a lot of fluidity on COVID, so I won't belabor sort of the outlook here. But there was a couple of things I wanted to ask about. One you highlighted M6 again and you saw still decent growth in the first quarter in some of the shifts you've had in your training around that. And then my question is really when you think about what it's going to take to get surgeons to use that product? Is didactic training enough or you're going to have to see sales reps able to go back into hospitals to really start to get physicians on board with that product?

Jon Serbousek

Analyst

Raj, thank you for question. On M6, we have an obligation to not only didactic for the hands on training through the FDA requirements, so we will be doing hands on training. We actually have started even remote hands on training, because we have training representatives dispersed throughout the country, we're able to do that regionally as well. And so we're well positioned to basically address that training for M6. As far as our desire to use the product, we're seeing continued strong interest in the utilization of M6 and the surgeons actually to highlight the interest. Even in one virtual call, we had over 40 surgeons trained on a didactic on the evening call, which in normal circumstances, you would not get 40 surgeons to come to an even called whether it be locally directly or virtually.

Raj Denhoy

Analyst

Understood. I know you're not going to give - you had previously given some outlines for what you thought that product could do this year. But I guess all that's been taken off now because of COVID. My next few questions, one is on I guess the bone growth stimulation FDA panel meeting that was supposed to take place in April. Appreciate that's been postponed now. But had there been any updates or have you heard anything about how that was tracking? Any update you can give there?

Jon Serbousek

Analyst

Now it was it was tracking towards an April panel meeting and that has been indefinitely suspended at this point in time. So we're, in a great position. We believe in that regard, because the highlights we provided the past as far as the strength of our sales channel, contracts, the customer service and the order to cash and compliance programs as we feel will strengthen us going forward regardless of what the termination of a re-class might put forward to us. But in the end, we did not know when that panel would go forward, or if it will be.

Raj Denhoy

Analyst

Understood. And it is my last question, Jon, you mentioned in your prepared remarks about looking for new leadership and extremities. And I'm curious what your thinking is there, it's been an area where there is a significant amount of opportunity, I think. But you guys haven't done a lot there yet. And so I'm curious what you envision, what do you think the opportunity set is for you and extremities and what are you trying to accomplish by changing leadership?

Jon Serbousek

Analyst

Well, we have an interesting program there as far as with product that has diversity of not only external fixation, but also internal fixation, and it works also in the foot and ankle space, as well as pediatrics. And we wanted something that had a more diverse view on the commercial front and so we're looking to basically bring in somebody who has a view of driving commercial - commercial acceptance and access inside geographic regions specifically in the US as well.

Raj Denhoy

Analyst

But in terms of the opportunity in terms broadening perhaps the footprint view and extremities, right do you go broadly into small joints to think about other areas you could potentially go into is it really more about commercializing what you currently have?

Jon Serbousek

Analyst

Well, it's not like commercialize what we have currently. But based on our acquisition of FITBONE, it's about expanding in those particular areas. FITBONE use provides a very unique access to get into the deformity business and the limb correction business that we didn't have in the past. And specifically in the US, it's a high demand for internal limb deformity correction. And so will still expand within the scopes of pediatrics and foot and ankle, as well as look for new opportunities exploring that space that are synergistic and we can leverage our existing technologies.

Raj Denhoy

Analyst

Okay, thank you.

Jon Serbousek

Analyst

Thank you.

Operator

Operator

Your next question comes from Jeffrey Cohen with Ladenburg Thalmann.

Jeffrey Cohen

Analyst · Ladenburg Thalmann.

Hi, Jon and Doug. How are you?

Jon Serbousek

Analyst · Ladenburg Thalmann.

Well Jeffrey, how are you?

Jeffrey Cohen

Analyst · Ladenburg Thalmann.

I'm doing fine. So, firstly, could you go back to what you were discussing for April from the first two segments biologics and both are caught the implants and the extremity portion as far as outlook and kind of viewpoint at this time for April?

Jon Serbousek

Analyst · Ladenburg Thalmann.

What we provided for the month of April as far as the percentage of revenue versus prior 2019 and for BGT is 35% and biologics is 35% and then spinal implants was 50%. Spinal implants including both fixation and motion. And lastly the extremities at 40% of 2019 levels. Totally it combines for 40% versus 2019.

Jeffrey Cohen

Analyst · Ladenburg Thalmann.

Can you give us any additional color on what you found over the past couple weeks on May? And could you also provide you some additional colors for as by geography or by continent where you've been seeing over the past couple of weeks?

Jon Serbousek

Analyst · Ladenburg Thalmann.

Let's start on geography, this is really difficult because different regions are starting and they're starting at different ramp level. So we are currently monitoring it from our sales channel. And typically in the southern part of the of US things were more open and that's been publicly stated. And it's consistent with our view as well. As far as the first couple of weeks of May it's too early to tell in that regard. We just really just closed our April books and we provide that information for you. So, that's really where our lens is based on right now.

Jeffrey Cohen

Analyst · Ladenburg Thalmann.

Okay, got it. And getting back to a couple of Raj's questions on M6. Could you give us a sense of how many physicians were in planting, call it in early March and since that time, how many more have been trained?

Jon Serbousek

Analyst · Ladenburg Thalmann.

So, we have now provided the numbers of implanting surgeons. We have been consistently training, even the first January and February, not only virtually, but also in person. And those classes were full that we put together. And as we got into virtual training, I highlighted it's even, we've had a better response than we ever could have imagined as far as attending virtual training. And that training continues on and even now as surgeons are going back to work, we see a continued interest in doing those virtual trainings, which will continue to amplify. I couldn't be more proud of our training and education program for putting together those programs, turned from in-person to didactic, our virtual training. And we didn't really miss a beat as far as our ability to attract surgeons to M6 training and train those surgeons.

Jeffrey Cohen

Analyst · Ladenburg Thalmann.

Okay. Got it. And then lastly for Doug, as far as some of the cost cutting initiatives and leveraging efficiencies. Talk a little bit about the sales and marketing expense and how that may look, as some of that is under your control on the leverage side and some is not being through distribution partners.

Doug Rice

Analyst · Ladenburg Thalmann.

Yes, good question, Jeff. Thank you. We've been just as proactive as we can be with regards to our liquidity and capital structure. We're fortunate to be in a very strong position from a balance sheet perspective and trying to preserve that as much as we can. From a sales and marketing perspective, you saw that line item impacted by the tail off at the end of the quarter in revenue. In terms of the deleverage, we also continue to invest in training and education for the M6 U.S. launch. And so in my script I did try to provide some color around the fixed nature of some of those costs, roughly half of our historical sales and marketing has been a fix. We will get some benefit from some of the project delays and cuts in spending areas like salaries and marketing and travels and meetings and so on. So that's the way I would look at it. But as our revenue decreases, the sales and marketing as a percentage of sales will certainly look very inflated, but hopefully on a short term basis.

Jeffrey Cohen

Analyst · Ladenburg Thalmann.

Okay. And as it relates to the income tax benefit for the quarter, was that all accrued during 2019?

Doug Rice

Analyst · Ladenburg Thalmann.

It was on the balance sheet at the end of 2019 and it has to do with the closing of the statute to uncertain historical tax positions where we had reserved for tax contingencies and no, it was accumulated in more than just 2019.

Jeffrey Cohen

Analyst · Ladenburg Thalmann.

Okay. But is the tax contingencies now at zero or that was a partial off of the tax contingencies?

Doug Rice

Analyst · Ladenburg Thalmann.

It's all a non-cash entry and benefit to our tax provision this quarter.

Jeffrey Cohen

Analyst · Ladenburg Thalmann.

Okay. So the issue is closed?

Doug Rice

Analyst · Ladenburg Thalmann.

Correct. Yes. With the statute expiration, we consider that particular the largest issue on our tax provision closed. We had some other things going on, right. With the CARES Act and our ability now to carry losses back. And so that tax provision has benefited with that as well. But the largest item the benefit that we received as is now closed.

Jeffrey Cohen

Analyst · Ladenburg Thalmann.

Okay, great. Thanks for the thoughtful readout. It looks like you're taking good advantage of the hiatus to kind of improve the company's stature out there in the marketplace. Thank you very much.

Jon Serbousek

Analyst · Ladenburg Thalmann.

Thank you, Jeff.

Operator

Operator

[Operator Instructions] And your next question comes from Jim Sidoti with Sidoti and Company.

Jim Sidoti

Analyst · Sidoti and Company.

Good morning. It's good to hear your voice. I hope you guys are all well.

Jon Serbousek

Analyst · Sidoti and Company.

Thanks, Jim. Same to you.

Doug Rice

Analyst · Sidoti and Company.

Jim, appreciate it.

Jim Sidoti

Analyst · Sidoti and Company.

So, kind of a big picture question. Obviously, procedures are going to get pushed out in Q2 and Q3. But will these patients - they weren't doing this on a whim, they must've been in pretty significant pain if they were scheduled to have a fusion or a spinal procedure. Don't you think that at some point in the fourth quarter or possibly 2021, these procedures come back?

Jon Serbousek

Analyst · Sidoti and Company.

Jim, thanks for the question. You hit a very important point. Spine patients are in pain. They're reaching out because they hurt, not that other areas with total joints don't hurt, but these patients hurt and oftentimes they're having neurological impact. And so as we look at the elective side of the case, spine patients are in the middle. I mean, the less electives are total joints to more electives. And CMS has given some pretty good guidance on this. So we see the spine cases as those that need to be done sooner than others on the elective scale. And the other side of that is that we know that hospitals want to get back to providing these elective cases, surgeons want to get back to providing elective cases excuse me cases. And we know the patients want to get pain relief. So we see that as a good indication for how those lectures will come back, that it's just very difficult to talk about the cut timing cadence of that, but there will be no there is good pressure for those that come back and for the reasons I just highlighted.

Jim Sidoti

Analyst · Sidoti and Company.

So if they do start to come back by the fourth quarter. Are you in a position to ramp up capacity to meet demand?

Jon Serbousek

Analyst · Sidoti and Company.

Jim, as I highlighted my prepared remarks, we never closed our production facilities. We kept them working, we balanced our inventory, and we actually to keep people engaged and trained on the production of our products that we kept. We built a little extra inventory. Not remarkable from a financial standpoint that allowed us to prepare for any type of spikes in demand that we can clearly recover from quickly. So we are in a very good position to basically manage any amount of recovery in the second, third, and even fourth quarters from based on where our product positioned is. And also as we highlighted, having our sales organization trained and ready to go, and basically ready to service those cases, as well as our preparations for getting them back into the hospitals and ASC safely.

Jim Sidoti

Analyst · Sidoti and Company.

All right, and then just one more on the sales force. I know the second half of last year there was a lot of transitions going on, you were in the process of bringing on new salespeople. Have you been able to get the sales force to the place you want it to be at this point or have these disruptions caused you to let people go again?

Jon Serbousek

Analyst · Sidoti and Company.

We might answer it this way. We're in a great place from where we are from building our management team and we're also getting very positive attraction. People coming to our company wanting to engage this is from a distribution standpoint. Are we where we want to be at? No. I mean we have work to do. And as I highlight my prepared remarks, this will go on over a number of quarters and years as far as getting the optimum level. But we're in a great place for where we are for management, attracting talent, and basically getting some structure underneath that That is one of the key initiatives we had going forward. So I'm pleased with our position that right now.

Jim Sidoti

Analyst · Sidoti and Company.

All right, and then last one for motion preservation. I'm sorry, I missed what you said. How much was that up in the quarter?

Jon Serbousek

Analyst · Sidoti and Company.

Well, what I highlighted in the prepared remarks is that our spinal implants were 50% of 2019 results. And it was buoyed by the motion preservation, because our spinal implants call out is for both fixation and motion products.

Jim Sidoti

Analyst · Sidoti and Company.

Okay, I thought you gave a number for that increase year-on-year.

Jon Serbousek

Analyst · Sidoti and Company.

Yes, Jim. It was $2.9 million.

Jim Sidoti

Analyst · Sidoti and Company.

And how does that compare to last year?

Doug Rice

Analyst · Sidoti and Company.

What last year was up about a million dollars Jim, because we were just OUS. We had gotten the approval by the FDA in the first quarter last year and just started to have our first procedures in the second quarter last year.

Jon Serbousek

Analyst · Sidoti and Company.

I think it was 84% increase over prior quarter.

Jim Sidoti

Analyst · Sidoti and Company.

And that's in the US or is that global?

Jon Serbousek

Analyst · Sidoti and Company.

That's a global number.

Jim Sidoti

Analyst · Sidoti and Company.

Okay. All right. Thank you.

Operator

Operator

[Operator instructions] At this time, there are no further questions. I will now hand the call back for closing remarks.

Jon Serbousek

Analyst

Thank you, operator. Appreciate it. We appreciate everybody dialing in and listen to the prepared remarks and also the Q&A and we look forward to a good quarter and look coming back to you that following that to report out. Thank you very much. Have a great day.

Operator

Operator

That concludes today's conference. Thank you for your participation. You may now disconnect.