Paragon 28, Inc. (NYSE:FNA) Q4 2023 Earnings Call Transcript

Paragon 28, Inc. (NYSE:FNA) Q4 2023 Earnings Call Transcript February 29, 2024

Paragon 28, Inc. misses on earnings expectations. Reported EPS is $-0.19 EPS, expectations were $-0.1. Paragon 28, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon. And welcome to Paragon 28’s Fourth Quarter 2023 Earnings Conference Call. Currently, participants are in listen-only mode. We’ll be facilitating a question-and-answer session at the end of today’s call. As a reminder, this call is being recorded for replay purposes. I would now like to hand the conference over to your host today, Mr. Matthew Brinckman, SVP of Strategy and Investor Relations. Mr. Brinckman, please go ahead when you’re ready.

Matthew Brinckman: Good afternoon. And thank you for joining Paragon 28’s fourth quarter 2023 financial results and earnings call. Presenting on today’s call are Albert DaCosta, Chairman and Chief Executive Officer; and Steve Deitsch, Chief Financial Officer. Before we begin, I would like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements made as to the company’s or management’s intentions, hopes, beliefs, expectations or predictions of future events, results or performance.

These forward-looking statements are subject to a number of risks, uncertainties, estimates and assumptions that may cause actual results to differ materially from these forward-looking statements. All forward-looking statements are based upon current available information and Paragon 28 assumes no obligation, except as required by law, to update those statements. Additional information concerning certain risks and uncertainties that may impact these forward-looking statements is contained from time-to-time in the company’s SEC filings and in the press release that was issued earlier today. During this presentation, we will refer to the non-GAAP financial measure of adjusted EBITDA and constant currency net revenue growth. A reconciliation to the most comparable GAAP financial measure, net income and reported net revenue growth is contained in our press release issued earlier today.

And with that, I will now turn the call over to Albert.

Albert DaCosta: Thanks, Matt. Good afternoon. And thank you for joining us for our fourth quarter 2023 earnings call. I will start things off with a review of our recent performance, followed by highlights from the quarter and I’ll pass it over to Steve to provide further details on our fourth quarter and full year financial results and an overview of our 2024 revenue guidance. Before diving into the results, I want to acknowledge our team’s amazing work throughout 2023. This was a transformative year for Paragon 28 and we made significant progress in our transition into a more scalable organization for our next phase of growth. I want to thank this team for their unwavering resilience and teamwork to get us where we are today and for advancing our mission to improve foot and ankle patient outcomes.

Now turning to results, global revenue for the full year 2023 was $216.4 million, representing 19.3% reported growth and 19.7% constant currency growth, in line with the top end of our preliminary revenue results provided on January 8th. Once again, we saw balanced growth across all the five foot and ankle sub-segments, growing the entire business at nearly 3 times our overall market growth rate of 7%. Fourth quarter 2023, global revenue was $60.6 million, representing 17.6% reported growth and 17.3% constant currency growth compared to the fourth quarter of 2022. We saw a nice 14.7% step up compared to the third quarter of 2023, reflective of the normalized seasonality we expected this year. This compares favorably to the 11% third quarter to fourth quarter net revenue step up we saw in 2022 and reflects the improving supply chain environment.

Looking at the U.S. business performance, I am pleased to say that our growth accelerated nicely compared to the third quarter. We have a lot to be positive about beyond the fourth quarter topline performance. In the fourth quarter of 2023, we increased our U.S. producing sales roster by almost 14%, 266 reps compared to the fourth quarter of 2022 and grew our surgeon customer base by 9% to a record 2,215 surgeons. Both our rep roster and surgeon base are larger than ever and these metrics are strongly indicative of our future growth potential as we expect to continue driving productivity increases on legacy products and new product launches. We have done a lot to bolster our medical education program including the launch of a second mobile lab late in 2023 specifically designed for more metro markets.

With this new mobile lab, we are able to cover more ground in the U.S. meeting our surgeons and reps at their respective sites of care for highly focused and efficient training. Our international business continues to do very well. We have invested heavily in our core market and have established a direct or directly managed commercial model in 13 of our 22 international markets. We still have positive runway for P28 internationally as we continue to drive regional investments in our teams and infrastructure, as well as regulatory initiatives like EU MDR to clear and launch more new products. In short, we continue to build momentum and I’m excited for what the future holds for FNA and the surgeon community internationally. Now I want to shine a light on our innovation which is critical to our growth and our mission to improve foot and ankle outcomes.

In the fourth quarter of 2023, we launched two new solutions with the JAWS Great White Nitinol Staple System and the BEAST Cortical Fiber Bone Graft which were both great additions to our portfolio. And now we are off to the races to start 2024 with five meaningful product launches and one limited market release announced already in the first quarter. It’s important to note that these products launched so far in 2024 are in high growth foot and ankle segments like bunion, soft tissue, and minimally invasive surgery. In soft tissue, we have launched three solutions with the Grappler Knotless Anchor, Bridgeline Tape and Mister Tendon Harvester, all of which will typically be used in conjunction with other procedures and are highly complementary to our existing plating and screw systems.

Another solution is our FJ2000 Power Console and Burr System designed specifically for the extremities and optimized for MIS surgery. This system features disposable hand pieces and instruments that help streamline workflow and minimize the need for sterilization between cases which allows surgeons to turn more cases in a day. Lastly, we launched the PRECISION MIS Bunion System and have our new Lapidus clamp, the Bun-Yo-Matic, unlimited market release. With these two solutions, P28 boasts a substantial range of offerings for treating bunions. Ultimately, our goal as a leader in foot and ankle and a real partner to our surgeons is to give surgeons multiple options to treat each patient’s unique condition. We expect that these early 2024 product launches will generally start having a nice impact on topline in the second half of the year and substantially contribute in 2025.

I am so proud of the design teams and engineers that brought these truly innovative solutions to life and we are excited to see them all hit the market. Of course, it’s only February and we have a lot more to look forward to in 2024 on the product front with over 25 active projects including our first reveal of the Smart28 platform expected mid-year. The Smart28 software has already been incredibly beneficial for our internal development and we are excited to share it once ready. Our balanced and innovative portfolio galvanizes P28 as a strong partner to the surgeon community and an ideal home for the most passionate foot and ankle salespeople. In closing, I am pleased with the progress we made in 2023, but even more excited about 2024 and beyond.

We made significant investments in 2023 to enhance our infrastructure teams and processes to enable P28 to realize its full potential. We also fortified our balance sheet and combined with our focus on profitability and cash flow improvements, we have plenty of liquidity to get us to cash flow break even. Underlying demand in foot and ankle continues to be very strong, and we are in a great position to execute on our mission to improve foot and ankle patient outcomes across the globe. With that, I will now turn it over to Steve.

Steve Deitsch: Thank you, Albert. Paragon 28’s fourth quarter 2023 revenue was $60.6 million, representing 17.6% and 17.3% reported in constant currency year-over-year growth, respectively. Our U.S. revenue was $51.7 million, representing 14.1% growth over the prior year quarter. Our international revenue was $8.9 million, representing 43.1% and 40.7% reported in constant currency year-over-year growth. Importantly, we continue to see solid, balanced growth from each of our foot and ankle segments. Supply chain headwinds continued into the fourth quarter, but were in line with our expectations and were far less significant than the impacts we experienced during the second and third quarters of 2023. Importantly, our supply chain environment continues to improve.

Gross profit margin for the quarter was 74.5%, compared to 81.5% in the fourth quarter of 2022. For the full year 2023, gross profit margin was 79.9%, compared to 82.1% for the full year 2022. Related to the recent inventory stockpiling, the company recorded non-cash inventory write-downs, totaling $4 million during the fourth quarter of 2023, which reduced fourth quarter and full year 2023 gross profit margins by 6.6 percentage points and 1.8 percentage points, respectively. This adjustment had no impact on our operations during the fourth quarter and we expect our annual gross profit margins to continue to be approximately 80% going forward. We’ve also continued to drive significant operating leverage. Fourth quarter 2023 SG&A and R&D expenses combined were $56.4 million, a 10.5% increase compared to the fourth quarter of 2022.

Importantly, the increase from the prior year was driven by increases in R&D and sales and marketing initiatives. Adjusted EBITDA for the fourth quarter of 2023 was a $4.4 million loss, compared to a $1.5 million loss in the prior year period. For the full year 2023, adjusted EBITDA was a $9.7 million loss, an improvement of $1 million compared to the prior year period. Both fourth quarter and full year 2023 adjusted EBITDA included the $4 million inventory write-down. We expect operating leverage to continue to improve in 2024 and we are committed to driving positive adjusted EBITDA on an annual basis beginning this year. Now turning to cash flow and liquidity. Our operating cash use for 2022 and 2023 combined totaled approximately $113 million, compared to approximately break-even operating cash flow in both 2020 and 2021.

On our last earnings call, we noted three specific items contributing to most of the operating cash use during 2022 and 2023, including inventory stockpiling, a non-recurring legal settlement and negative adjusted EBITDA. We believe the cash flow headwinds associated with each of these items will become a tailwind throughout 2024 and beyond. We have approximately $125 million of total liquidity, consisting of $75 million of cash on the balance sheet and $50 million available through our credit facility. As we continue to lever our growth investments made in 2022 and 2023, and continue to execute on our plans to improve inventory efficiency, we expect our liquidity will allow us to reach cash flow break-even. Now, turning to our 2024 revenue guidance.

We feel great about our start to 2024 and the first quarter is developing in line with our expectations. Among other things, our revenue guidance takes into consideration the improving supply chain environment and an expanded sales channel armed with several exciting and high impact new product launches. Further, it assumes the foot-and-ankle market continues to outpace broader orthopedic market growth, which is consistent with the demand we have seen to start the year. And of course, our view is also balanced with respect to what we can’t control, including the macroeconomic environment. For the full year of 2024, we estimate net revenue to be between $249 million and $259 million, representing a range of 15% to 20% growth. P28 grew net revenue 25.8% reported and 27.1% constant currency in the first quarter of 2023, making the first quarter of 2024 our toughest growth comparison of the year.

Additionally, we have one less billing day in the first quarter of 2024, which creates a 100-basis-point to 200-basis-point headwind. Beyond the first quarter, we anticipate seasonality will continue to be more normal. We also expect quarterly growth rates for the rest of the year are likely to be higher than in the first quarter of 2024, given dynamics of the year-over-year growth rate comparison and the timing of our new product launches. Lastly, our net revenue guidance also assumes foreign currency translation rates remain consistent with current translation rates. That is the end of our prepared remarks.

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Q&A Session

Operator: [Operator Instructions] Our first question today is from the line of Matthew O’Brien of Piper Sandler. Matthew, your line is now open.

Matthew O’Brien: All right. Thanks for taking the questions. Maybe just talk a little bit about, for starters, Q4, and especially domestically. I know it was a nice step up sequentially from Q3, but we have been kind of flat lining a little bit in terms of two-year stack growth. So what are you seeing in the marketplace domestically? How big of a headwind was the supply chain issues still in Q4 and is that behind you now at this point as we head into 2024?

Steve Deitsch: Hey, Matt. It’s Steve. Thanks for the question. And we continue to see our U.S. business strengthen, and importantly, we continue to see the supply chain headwinds lessen. And as we begin the year, we’re largely through the headwinds and we’re really pleased to see that. We still have a few select SKUs, but by and large, we are in really good shape and really pleased to see that U.S. business improved so much sequentially compared to the third quarter. And it was, I think, a record sequential improvement into the fourth quarter for us at 14%. So really, really happy about that and also our supply chain team has done a really nice job of rectifying the challenges that really impacted us heavily in the second and third quarters of last year.

Matthew O’Brien: Got it. And then on the guidance side, nice to see that high end of the range still touching 20 off of a pretty difficult comparison here. So maybe just talk a little bit about the range here that we’re seeing, low end to high end, what’s embedded in there as far as market growth? And then, Steve, I didn’t hear you talk about adjusted EBITDA this year. I thought we were expecting break-even this year. Is that right? Thank you.

Steve Deitsch: Yeah. Happy to answer both of those. So I would start with, and then Albert will come in here on our guide for this year. We’re incredibly confident in this business. We’ve really gotten off to a strong start this year, and we’ve consistently said this is a 20% or better topline growth business. So the top end of our guidance reflects that. And what drives that, the tip of the spear, as we’ve said before, is our innovative and broad product portfolio and we also have some really exciting new launches to add to that broad portfolio that we’ve just put in place and are just getting going. So the products, and then, also our growth is enabled by our incredible commercial team, which grows in size and quality every quarter.

So it’s exciting to have this terrific portfolio and an expanding portfolio and that gets us to the high end of the range, which is consistent with what we’ve talked about in the past. When you think about the low end, we’ve typically said, we can’t control certain things like the macro economic environment. So consistent with the way we’ve done this before, the 15% takes into account certain things that are outside of our control. So 15% to 20%, it’s 2 times to 3 times the market growth rate of 7%. So pretty pleased with that kind of a guide going into this year as we start the year. And then, Albert, I know has some comments on the tech.

Albert DaCosta: Yeah. No. Absolutely. And hey, Matt, how you doing? It’s interesting, just coming off a conference season, we got to showcase some of the new products there and the energy was pretty amazing surrounding that. I think it’s just kicking this year off with a wonderful push. We launched several new products in the bunion space. We had a couple of soft tissue introductions, a couple of things on beta launch, but, wow, we had a really, really good reception on that. The products are kind of jazzing up our internal teams as well. So we’ve got a lot of positivity and good momentum going into the year.

Steve Deitsch: Yeah. And I didn’t answer your second question, Matt. So positive EBITDA, absolutely. We will have a positive EBITDA on an annual basis this year.

Matthew O’Brien: Great. Thanks. Appreciate that.

Steve Deitsch: You got it. Thank you.

Operator: Thank you. Our next question today is from the line of Craig Bijou of Bank of America. Craig, your line is now open.

Craig Bijou: Good afternoon. Thanks for taking the questions. Maybe to follow up on some of the products, Albert or Steve, and how to think about the contribution from, especially the bunion products. You guys mentioned how well that market is growing? And then you also mentioned Smart28. So we’ve been hearing a lot about it. I think there’s a lot of excitement around it. We’d love to understand kind of how you’re monetizing that and what exactly you are going to bring to the market this year?

Albert DaCosta: You got it. And hey, Craig, good to hear from you. It’s great to see a lot of you at the AAOS Conference as well. I know I talked a lot of your ears off just getting into some of the technology that we’re so excited about. On the bunion space, there’s — I think I’ll start off by saying, we’ve always been a company that respects that there’s easily four, maybe five different pathologies that relate to bunions and each one of those pathologies really have different considerations for surgeons. And so we’ve been the company that’s trying to give surgeons meaningful opportunities to address the unique aspects of each of those different pathologies. And you could see that with some of the products we launched during this conference season, right?

We — the Bun-Yo-Matic to start is addressing more severe type cases where we tend to go further back into the toe to correct it. The guide gives surgeons a sense of comfort that even though the patient’s not in a weight bearing position, we can replicate some of those important aspects so that our correction is giving surgeons the correction that is really important when the patient’s going to bear weight. So that system, the ability for surgeons to create such reproducibility with that has been pretty exciting. And I think when surgeons get their hands on it, they immediately understand that aspect and they’re pretty excited. The other part, we just introduced minimally invasive surgery for bunions. It’s the PRECISION MIS Bunion product.

That product is pretty exciting as well. In Europe, they really started doing this probably 10 plus years ago. So the U.S. is a little bit late to the game there, but it did give us a chance to really learn about the complexities of that procedure, the benefits, how to perfectly address it. And so we’ve got the PRECISION MIS system that has a really unique guide that gives surgeons the ability to kind of dial in the correction in every single plane. That’s really nice when you’re going through a small incision and you don’t have the visibility that you’re used to in the operating room. This guide can give you a good sense of comfort and the single surgeon can do that by him or herself. The other thing, the drawback to some of these MIS surgeries is we tend to use burrs and not saw blades.

And so we’ve launched the first ever completely disposable handpiece that has the perfect combination of torque and speed to allow surgeons to comfortably burr the joint and prepare that for, and not the joint, sorry, their osteotomy and prepare that for fusion with the comfort that we’re not overdoing it on the speed and we’re not going to burn and char the bone, which compromised some of the healing characteristics there. So just a really amazing compliment. We also launched a product and I won’t go too deep on the rest of these, but this is my sweet spot. We also launched a first of its kind. It’s a Tendon Harvester for flat foot reconstruction or PCFD. That product is really, really unique. It allows the surgeons to not have to do such a dramatic incision and to access the real bottom side of the foot to get that tendon harvested.

It really is a first of its kind. I’ll tell you every surgeon that’s put their hands on that product so far has been pretty excited to use it. So we’re optimistic about all of that and I’ll leave the soft tissue stuff maybe for another conversation, but we’ve got some really exciting things on the soft tissue side as well. So thank you for the question. Really excited about that. You did ask a question about Smart28. We still expect to launch our first module of Smart28 near about the mid-mark of the year. That product, how excited I am about that. Our general theme around a lot of these procedures is, how important the millimeters of correction are and we’re really working on systems that are going to give surgeons the sense of confidence that they’re going to have those millimeters addressed in every single procedure they do.

So when we see that system, that module, I think it’s going to create an aha moment for a lot of the market there that might not totally understand what Smart28 means. But when we introduce that, we’re pretty excited that it’s going to make a lot of sense to you all and that’s coming about the mid-mark. We’ve got a bunch of products slated for the end of the year. I will tell you, this year in particular has a lot of big key product launches that makes this a pretty exciting time for us.

Craig Bijou: Great. Thanks. And maybe to follow up on one of Matt’s questions earlier on U.S. and OUS, and really how to think about those growth rates going forward. And if you had your 20% growth target or what you guys consider your revenue growth longer term or just how to think about the growth of the company, what’s a split in U.S. and OUS? And in 2023, we saw it a little bit lower in the U.S. So should we assume that the U.S. growth is slightly below that 20% level or would be less than the overall company? Just maybe a little bit of color on how to think about that in 2024 and maybe beyond?

Steve Deitsch: Yeah. Happy to help with that. I think it’s clear to us that our 2023 growth rate in the U.S. was impacted by the supply chain issues that we have managed largely through at this point and we posted a 16% growth rate. Into the fourth quarter, we accelerated 300 basis points from the third quarter. So we were pleased to see that. We expect this business in the U.S. to be a 20% grower. And we talk about the overall business is 20% or greater, but this U.S. business is that type of a performance and it’s a very, very large market. We still have a very large or small market share and we think we have the most innovative portfolio in the marketplace and an expanding portfolio. So we’re going to continue to grow this thing at multiples of markets and we’re excited to get the supply chain challenges behind us.

Operator: Thank you. Our next question today is from the line of George Sellers of Stephens, Inc. George, your line is now open.

George Sellers: Hey. Good afternoon and thanks for taking the question. Maybe looking at the international piece of the business, I’m just curious if you could help parse out a little bit some of the growth drivers there. How much of that growth is related to increasing your direct sales exposure versus adding new surgeons or getting your existing surgeons to use more of your device portfolio? What are some of the puts and takes that are really driving that 40% plus growth that we’ve seen?

Steve Deitsch: Hey, George. It’s Steve. I’ll start and then Albert will talk about this. This has been a really exciting year in time for our international business and we expect that momentum to continue. A 44% constant currency growth rate in 2023 is on a pretty good size number as that business has scaled. We’ve invested there, George. So we’ve invested in teams, systems, medical education, in a lot of areas post-IPO to really give us some firepower there to take advantage of the market. We talk about our U.S. market share being small, but it’s even smaller internationally. So this is an area of focus for us and specifically where the growth came from in 2023 was a lot of different places. Our big three markets of the U.K., Australia and South Africa had amazing years.

And maybe specifically I’ll call out the U.K. They were awarded our Country of the Year at the recent international sales meeting and they’ve just done an amazing job. It’s a big market. We’ve got a big business developing there and we’ve got great leadership and a great sales team. So a lot of good things going on there. And then we also have markets that aren’t new to us, but markets that we’ve invested more in and we put new teams in place and more folks on the ground places like Germany, Italy, new relationships in Spain, Canada. We’re looking at later in this year at Japan, maybe early 2025. So a lot of exciting things on tap outside the U.S.

Albert DaCosta: And one thing, and hey, by the way, great to hear from you, George. But one other thing I’ll add to that is, there’s a regulatory delay that we sort of experienced in the international market. So it’s a little bit different than what we have here in the U.S. So what you tend to see is that when we launch a product here, it could take one years, two years plus before we might have access to some of those products internationally. So it really is a combination. One, we’re very selective when we look at new countries and opportunities there. We want to make sure we’re a very clinically oriented organization. Our product development strategy is typically very clinically oriented and we want to make sure we find partners and territories that match that, very academic type countries.

And so we’re very selective about where we go, but so far the reception everywhere we have gone has been overwhelmingly positive. The second piece of that is, like I mentioned, you tend to see some of the legacy products go into these territories and then you see a staggered introduction of subsequent products. And so that for us is pretty exciting because we continue to have opportunities to grow, even those more established territories that we’ve been in really since 2017, 2018, which was when we started focusing on some of the international opportunities. So just a really good combination of all of those things together, and like Steve mentioned, the investments that we’re making there are really paying off. We’re getting quality people representing our product, the best way that we would envision and it’s a real partnership.

And then the last piece that I always tell our team is, if we’re going to be in a country, we want to be there. We don’t want to just sell products into these countries. We really want to participate. We want to meet the key opinion leaders. We want to hear what they’re saying on the podium when they’re having discussions about technology and approaches to different procedures. We want to actually be present there. And so that means a lot to us that we’re having the successes we’re having in this international market, because we can’t be a meaningful change to the foot and ankle market unless we’re a global company and this is our chance to do it.

George Sellers: Okay. Thanks. Really appreciate all that color. And then on the product side of things, obviously, some exciting things here that have been talked about in the first quarter so far. As we think about the remainder of the year, how are you all, how should we think about the sort of, what percent, I guess, of the new devices or how significant of the new devices you’re expecting throughout the remainder of the year will be more of the sort of single-use type devices, like the Mister Tendon Harvester versus the CapEx spend type devices?

Albert DaCosta: Yeah. That’s a great question, George. And we’ve got a few products throughout the year. By the way, this year, one of the things that’s most exciting is I think it’s really less line extensions type introductions this year and some real new introductions in areas we haven’t really participated in yet, absent some of the bunion areas, but a lot of really exciting areas. And it’s balanced across all the sub-segments of foot and ankle. So you’re going to see some things in the trauma arena. You’re going to see some things in the Charcot arena. You’re going to see some things scattered throughout all the five sub-segments, which has always been our strategy. I will highlight that we still have 25-plus projects still being developed and we anticipate, at least for the next three years, a cadence of five to 10 new products hitting the market.

I’d probably say that, when we think about some of the soft tissue products, those tend to be more of the sterile pack type products that you’re asking about. We have a few pretty big launches later this year that are going to be hardware, but maybe not as dramatic on the CapEx side as you would expect from like a large joint, like an ankle replacement or some of our counterparts in orthopedics. So some modest CapEx associated with those products, but generally speaking, I think, we’ve got really good products hitting the market this year, which is going to drive a lot of momentum, even starting the year, but ending the year as well. We expect to start to see a real contribution to the growth of this company, second half of the year and even into 2025 from some of the products we’re launching now and even launched in Q4 of last year.

So a lot of good stuff there.

George Sellers: Okay. Great. Thanks again for taking the questions.

Steve Deitsch: You got it.

Operator: Thank you. Our next question today is from the line of Dave Turkaly of Citizens Bank. Dave, your line is now open. Please go ahead.

Dave Turkaly: Hey. Good evening, guys. How are you?

Albert DaCosta: Hey.

Dave Turkaly: You can hear me, right?

Albert DaCosta: Yes.

Steve Deitsch: Yeah.