Paragon 28, Inc. (NYSE:FNA) Q3 2023 Earnings Call Transcript November 11, 2023
Operator: Good afternoon. And welcome to Paragon 28’s Third Quarter 2023 Earnings Conference Call. Currently, participants are in listen-only mode. We will 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. And I would now like to hand the conference over to your host today, Mr. Matthew Brinckman, Senior Vice President of Strategy and Investor Relations. Mr. Brinckman, please go ahead.
Matthew Brinckman: Good afternoon. And thank you for joining Paragon 28’s third 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 those 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 these 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 measures 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 third quarter 2023 earnings call. I will start things off with a review of our recent performance, followed by highlights from the quarter. Then I will pass it over to Steve to provide further details on our financial results, an overview of our new and improved credit facility, which we also announced today and an update on our 2023 financial guidance. To kick things off, global revenue was $155.8 million for the first nine months of 2023, representing 20% reported growth and 21% constant currency growth, respectively. Our balanced business model continues to drive our revenue growth well above the estimated market growth rate of 7% with meaningful growth contributions from each of the five foot and ankle sub-segments.
Third quarter 2023 global revenue was $52.8 million, representing 15% reported and constant currency growth compared to the third quarter of 2022. I am very pleased with this performance given the tough 30% prior year constant currency growth comparison and the short-term supply chain disruption. We continue to execute on our U.S. strategies that have and will continue to drive strong and sustainable growth. During the third quarter of 2023, we increased our U.S. producing sales roster by almost 20% to 257 compared to the third quarter of 2022, while increasing our surgeon customer base by 9% to a record 2,061 customers. We also continue to see nice levels of year-over-year revenue gains from both legacy producing sales representatives and surgeon customers, driven by new product launches combined with solid sales force execution and leading medical education.
Further, we have several important and exciting product launches happening in the coming months in tandem with recent launches, which will provide additional growth opportunities in the U.S. Our international business continued to perform exceptionally during the third quarter of 2023 and we continue to be excited by the opportunity we have in both our most established markets, as well as other increasingly important markets. Our growth is ultimately driven by our ability to bring innovative and relevant new technologies to market, which help our surgeon customers improve foot and ankle patient outcomes. As a reminder, we typically launch five to 10 products each year and this year will be no different. This year, we have launched six products to-date, including our second Metatarsal Shortening System, the Gorilla Supramalleolar Osteotome Plating and Web System, the JAWS Great White Nitinol Staple System, the BEAST Cortical Fiber Bone Graft and two soft tissue products with the R3INFORCE Extraosseous Repair System and Bridgeline Adaptive Tape.
I also continue to be thrilled about the depth and quality of our product pipeline with over 20 active projects in development, including several substantial launches planned in the next few quarters and beyond. Finally, we are closely following GLP-1 developments and potential foot and ankle market implications. At the same time, we are focused first and foremost on executing our business strategy to improve foot and ankle patient outcomes. I will start by saying the market that we are exclusively focused on, foot and ankle, it’s truly a gem. Today, the global foot and ankle market is estimated to be more than $4.9 billion, growing rapidly at about 7%, with potential for growth acceleration driven by new technologies such as Smart 28 that we believe have the potential to reduce current levels of foot and ankle complications.
An orthopedic surgeon performing a surgery while using ankle plating systems.
We are positioned very well in this great market and we expect share gains to be the primary driver of our growth in the years to come. Of course, it is impossible to speculate what impact, if any, GLP-1s will have on the future foot and ankle market, but our view is that anything leading to a more active lifestyle could ultimately benefit the foot and ankle market, which is our singular passion and focus. Our experience generally indicates that foot and ankle patients are typically younger and more active than in other orthopedic and med tech markets and less of these patients also tend to be better surgery candidates. So we have quite a few reasons to be bullish on our market and our business. Our third quarter earnings supplement on our Investor Relations website includes additional details regarding GLP-1s and the foot and ankle market, as well as a few other topics we are discussing today.
With that, I will now turn it over to Steve.
Steve Deitsch: Thank you, Albert. Paragon 28’s third quarter 2023 revenue was $52.8 million, representing 14.7% and 14.5% reported in constant currency year-over-year growth, respectively. Our U.S. revenue was $44.6 million, representing 11.5% growth over the prior year quarter and a nice sequential increase of $2.5 million from the second quarter of 2023. Our international revenue was $8.2 million, representing 36.2% and 34.7% reported in constant currency year-over-year growth, respectively. Supply chain headwinds continued into the third quarter of 2023 as expected, but to a lesser extent than those experienced in the second quarter. We continue to expect supply chain headwind to diminish further during the fourth quarter of 2023.
Adjusted EBITDA for the third quarter of 2023 improved by 54.1% to a $1.2 million loss. On a year-to-date basis, our adjusted EBITDA improved by 42.4% to a $5.2 million loss with gross profit margin at 81.9%. Gross profit margin for the quarter was 80.3%. It was approximately 1 percentage point less than the third quarter last year due to increased inventory reserves. Despite making continued growth investments in R&D and selling and marketing throughout 2023, quarterly operating expenses have remained consistent at approximately $51 million throughout 2023, resulting in continued operating expense leverage and profitability improvements. We expect operating leverage and profitability to continue to improve in the fourth quarter of 2023 and beyond, which we believe will drive positive adjusted EBITDA on an annual basis beginning in 2024.
Now turning to cash flow. Our operating cash use for 2022 and 2023 year-to-date combined totaled approximately $100 million compared to approximately breakeven operating cash flow in both 2020 and 2021. There are three primary drivers of the change in operating cash use. First, inventory purchases have been $41 million above our normal operating levels due to supply chain disruptions resulting in temporary stockpiling of inventory. Second, we made $27 million of non-recurring legal settlement payments, which were paid in full earlier this year. Third, we made important targeted growth investments in our business, resulting in temporal negative adjusted EBITDA equaling a $16 million loss since the start of 2022. These three items together account for $84 million of the nearly $100 million of operating cash used since the start of 2022.
Each of these items created cash flow headwinds in 2022 and 2023, but importantly, we believe these three items will become cash flow tailwinds beginning in 2024, and here’s why. With supply chain disruptions continuing to abate, over time, we expect to return our inventory balances to 2020 and 2021 levels of operating efficiency. Our enhanced operations function has great new leadership and team members, material resource planning tools and committed vendor partners and execution plans are underway to drive significant improvements in inventory efficiency as we close 2023 and enter 2024. Finally, as previously mentioned, we expect positive annual adjusted EBITDA in 2024 and beyond, building on the earnings momentum over the last several quarters, leveraging past investments and continuing to make important growth investments to grow our business at multiples of the market growth rate.
Now I’d like to share some information on our new and improved senior credit facility. As you know, we previously had a $90 million senior credit facility with $30 million drawn. The new $150 million senior credit facility with Ares announced today, expands our available borrowings by $60 million, and importantly, it is non-dilutive with no equity sweeteners such as warrants. Further, it’s competitively and similarly priced to our previous facility. With this transaction, we drew $100 million at close today bringing the company’s total pro forma liquidity to just under $150 million, including approximately $100 million of pro forma cash as of September 30, 2023. We believe this level of liquidity reinforces P28’s pathway to cash flow breakeven, given our expected continued improvements in earnings and cash flow into 2024 and beyond.
Finally, on this topic, we are thrilled to partner with a high quality lender, such as Ares, as we continue to rapidly grow our business. Now turning to our 2023 revenue guidance. The foot and ankle market is strong, our business fundamentals and leading indicators are positive and we have great confidence in our growth prospects. Our updated 2023 revenue guidance accounts for these factors including the improving supply chain environment, but also factors in the continued uncertain macroeconomic environment. For the full year of 2023, we are reaffirming our previous net revenue guidance range of $214 million to $218 million, and at midpoint, this guidance range implies 19% reported and 20% constant currency year-over-year growth. Our net revenue guidance also assumes foreign currency translation rates remain consistent with current translation rates.
