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Edited Transcript of CFMS earnings conference call or presentation 1-Aug-18 8:30pm GMT

Q2 2018 ConforMIS Inc Earnings Call

Bedford Sep 12, 2018 (Thomson StreetEvents) -- Edited Transcript of ConforMIS Inc earnings conference call or presentation Wednesday, August 1, 2018 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mark A. Augusti

Conformis, Inc. - CEO, President & Director

* Paul S. Weiner

Conformis, Inc. - CFO & Treasurer

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Conference Call Participants

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* Adam Carl Maeder

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Brandon Vazquez

Canaccord Genuity Limited, Research Division - Associate

* Bruce M. Nudell

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Christian Diarmud Moore

JP Morgan Chase & Co, Research Division - Analyst

* Joshua Thomas Jennings

Cowen and Company, LLC, Research Division - MD and Senior Research Analyst

* Ryan Benjamin Zimmerman

BTIG, LLC, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good afternoon. My name is Jimmy. I will be your conference operator today. At this time, I would like to welcome everyone to the Conformis Second Quarter 2018 Earnings Conference Call. (Operator Instructions).

Before we begin, I would like to remind you that the management will make statements during this call that include forward-looking statements within the meaning of federal securities law, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical facts should be considered to be forward-looking statements.

All forward-looking statements, including without limitation, statements about Conformis' strategy, future operations, future financial position and results, gross margin, product margin, operating trends, financial guidance, market growth, total revenue and revenue mix by product and geography, the anticipated timing of the limited launch of a hip product offering, the potential impact and advantages of using customized implants, business initiatives and transitions in our current commercial operations are based upon current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements including those discussed in the risk factors section of the Conformis' public filings within the Securities and Exchange Commission. Accordingly, you should not place undue reliance on these forward-looking statements.

While Conformis may elect to update these forward-looking statements at some point in the future, Conformis disclaims any obligation except as required by law to update or revise any financial projections and forward-looking statements whether because of new information, future events, or otherwise.

This conference call contains time-sensitive information and is accurate only as of the live broadcast today, August 1, 2018.

I will now turn the call over to the Mark Augusti, the company's President and Chief Executive Officer. Mark?

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [2]

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Thank you, Jim, and welcome, everyone, to Conformis' second quarter 2018 earnings conference call. With me on the call today is our CFO, Paul Weiner. During the call, Paul and I will share prepared remarks on a variety of topics, including our second quarter financial and operating performance. Following the prepared remarks, Paul and I look forward to answering your questions.

We are pleased with our second quarter results. From a commercial perspective, although we continue to face headwinds in our OUS business, primarily due to reimbursement-related challenges in Germany, we note that second quarter U.S. growth performance of 7% represents a meaningful step up in growth compared to previous quarters. This suggests that we are starting to see the impact of the commercial investments we have outlined over the last 4 quarters, mainly sales management changes, field representative investments, digital marketing activities, favorable insurance policy decisions, and importantly, continued publication of positive clinical and health economic outcomes using our products.

For instance, this quarter, we were pleased to see the publication of a paper showing that patients treated with iTotal CR knee replacement system achieved better tibial fit and tibial rotation alignment compared to patients treated with 3 different off-the-shelf total knee arthroplasty products. Results of this Conformis-funded study were published in the May 2018 issue of the Journal of Knee Surgery, a leading peer-reviewed orthopedic journal.

I'm also pleased to report that yesterday we performed our first 2 Conformis total hip procedures. In case you haven't had a chance to read it yet, we did issue a press release on this achievement just prior to the call. As anyone who follows Conformis is aware, to date we have only been a knee arthroplasty company. Our entry into the $7 billion total hip market segment provides a significant growth opportunity.

Without offering too much in advance of our full market launch, I would like to outline a few of the key concepts we have incorporated into our system that are consistent with the Conformis brand. Namely these are we will offer proprietary iView patient-specific surgical plan that utilizes CT-driven 3D planning with the ability to adjust 7 key factors of the surgical planning. Our hip system incorporates a custom stem including neck length and angle and acetabular cup, the industry's most comprehensive patient-specific cutting guide based on each surgeon's plan. We again have developed the hip-in-a-box concept like we have done in knees without the need for multiple instrument trays and large [tub] of implants, our hip is ideal for use by surgeons to meet the growing demand for outpatient joint replacement. These features combined with others I won't mention now have the potential to provide the surgeon with a more efficient and reproducible hip procedure compared to off-the-shelf.

In addition to the large growth opportunity total hip arthroplasty will help us leverage the fixed cost investments we have made to build our knee franchise. Most importantly will be the leverage we should realize in our field selling organization and customer base. Our field sales management and representatives are very excited to be able to offer Conformis Total Hip solution. I'm pleased that our surgeon interest is high as well, as evidenced by the interest from our clinical evaluators.

The fact that we have been able to achieve our limited market release early in this second half gives us more time in 2018 to evaluate our product performance. To confirm our previous statements, we estimate the revenue impact of total hip not to be material in 2018 and we will, of course, provide more color around our 2019 guidance early next year as usual.

At this time, I would like to personally thank all of my Conformis colleagues for this incredible time and effort they have put into the total hip program. While much work still remains, their dedication is what has allowed us to achieve this significant milestone for the company.

With that, let me turn the call over to Paul for a detailed review of our second quarter 2018 financial results. Paul?

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Paul S. Weiner, Conformis, Inc. - CFO & Treasurer [3]

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Thank you, Mark, and thank you all for joining us. We reported second quarter revenue of $19.1 million, representing an increase of 3% or $616,000 year-over-year on a reported basis, excluding the positive impact of exchanges in foreign currency exchange rates of $248,000. Revenue increased 2% on a constant-currency basis. Revenue in the second quarter of 2018 and 2017 includes royalty revenue of $192,000 and $438,000, respectively, related to patent license agreements. The decrease in royalty revenue in the second quarter of 2018 compared to the same quarter in the prior year reflects the timing of payments received in the second quarter of 2017.

Second quarter product revenue was $18.9 million, representing an increase of 5% or $862,000 year-over-year on a reported basis and 3% on a constant-currency basis. This is the first quarter in over a year that we have shown year-over-year growth in product revenue. We believe this trend will continue with a sequentially flat third quarter and a seasonally strong fourth quarter.

Sales of iTotal PS increased $1.1 million to $6 million or 23% year over year on a reported basis and 22% on a constant-currency basis. Sales of the iTotal CR or iDuo and iUni declined $252,000 to $12.9 million or 2% year over year on a reported basis and 3% on a constant-currency basis due to weakness in our OUS business. iTotal PS represented approximately 32% of total product revenue in the second quarter of 2018 compared to approximately 27% for the same quarter last year.

U.S. product revenue increased $1.1 million to $16.4 million or 7% year over year. This is the first quarter in over a year that we have shown year-over-year, high single-digit percent growth in U.S. product revenue. U.S. product revenue was driven by sales of our iTotal PS, which increased 21% year over year as well as a 2% year-over-year increase in sales of the base business product lines. Second quarter US product revenue represented 87% of total product revenue compared to 84% for the same quarter last year.

Rest of World product revenue was $2.6 million, a decline of $275,000 or 10% year over year on a reported basis and 19% on a constant-currency basis. Rest of World product revenue was affected by sales of a base business product line including the Germany reimbursement challenges and the U.K. change from direct sales at end customer prices to a distributor at transit prices.

Turning to a review of our results from the rest of the P&L. Second quarter gross margin was 48% of revenue compared to 34% of revenue last year, a 1,400 basis point increase. The increase in gross margin year over year was driven mostly by cost reductions as a result of vertical integration and manufacturing efficiencies as well as 69 basis points favorable foreign exchange currency impact and 50 basis points higher average selling prices. Gross margin improvement has been a point of emphasis and we continue to see the positive impact from the hard work that has gone into the cost reduction programs.

Second quarter operating expenses increased $300,000 to $20.5 million or 2% year over year. The increase in operating expenses was driven by higher sales and marketing, primarily in connection with variable expenses related to the increase in revenue and research and development, primarily related to commercialization of our hip product, offset by lower general and administrative costs due primarily to reductions in patent litigation, business insurance, personnel costs, and other administrative expenses.

Net loss was $14.1 million or $0.24 per share compared to $12.1 million or $0.28 per share for the same period last year. Net loss per basic share calculations assume weighted average basic shares outstanding of 59.8 million for the second quarter of 2018 compared to 43.2 million for the same period last year. Net loss in the second quarter included foreign currency exchange expense of $2.1 million compared to foreign currency exchange income of $2.1 million in the same period last year, a $4.2 million negative noncash impact.

As of June 30, 2018, we had cash and cash equivalents and investments totaling $46.6 million. Second quarter change in cash and cash equivalents and investments was $10.7 million. In addition to our gross margin improvements, we have developed a plan to reduce operating expenses starting in 2019. We believe this new plan will extend our cash runway and significantly lower our future financing needs, creating the possibility of achieving profitability without the need to pursue another large-scale equity offering.

With that, let me turn the call back over to Mark, who will comment a bit more on our expense savings plans and thoughts about cash requirements.

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [4]

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Thank you, Paul. As mentioned earlier, I am pleased with our commercial results in the US and our overall operational performance. One area of pressure continues to be our OUS business due to reimbursement challenges. We have actions in place to address these issues but expect OUS performance to continue as a headwind, certainly for Q3 and probably Q4 as well, likely landing us in the lower half of our full-year guidance.

If you recall, in early 2017, I indicated my expectations that 2017 would be a transition year for Conformis and then 2018, we'd begin to deliver the first results from our investments in a new growth framework. In turn, our expectation was that we would see accelerating performance in 2019. Now with our US growth performance in the second quarter, I believe we are starting to realize some initial returns from those investments. Combined with our total hip launch, we have the opportunity to realize the journey I laid out back in early 2017.

To that end, I would like to comment on our new product development plans over the next few years. New product development is a critical ingredient to the long-term growth we anticipate for Conformis. In the past, we have disclosed that our iTotal G3 and our iUni G3 programs and indicated limited market releases were scheduled for 2018. Today, we're announcing a change in our product development activities due to evolving market opportunities. We've decided to put our parts from the iUni G3 product on hold in order to fast-track an iTotal cementless option for total knee arthroplasty. We believe we can have a femur cementless or press fit option in limited market release in early 2020.

Taking into account the hip launch and these program changes, our new anticipated launch schedules are as follows. For the second half of 2019, we have the iTotal G3 in limited market release and the Conformis Hip coming into full market release. In the first half of 2020, the iTotal G3 cementless or press fit would be in limited market release. In the second half of 2020, we would see iTotal G3 in a full market release and a second Conformis Hip stem in limited market release. Then for the first half of 2021, iTotal G3 cementless for the femur would be in full market release, and we would have a tibia option as well in limited market release for iTotal G3. And then we would see the Uni G3 project come back in, in limited release and then the second half of 2021 is where we would have the full market release of our second Conformis Hip stem. We believe this new product launch schedule will provide the necessary fuel to support growth into 2022.

Turning to operational performance, we have previously detailed much of our gross margin improvement activity. Our performance in Q2 yet again continues to support the journey towards our longer-term goal of greater than 60% gross margin. Once again, I would like to express my appreciation for the significant progress the operational teams at Conformis are making in this area.

In addition, we've undertaken a comprehensive, company-wide expense review. I'm pleased that the Conformis team has identified material opportunity for increased operating efficiency that will roll into our 2019 planning. These operational expense reductions, combined with our continued gross margin improvement, lead us to anticipate, barring any unforeseen operational or financing challenges, that we will have enough cash to fund operations without the need to pursue another large-scale equity offering, as Paul mentioned earlier.

That's all the comments Paul and I have for now. We look forward to answering any questions you may have about our 2Q results and any of the announcements we've made today. Thank you. Operator, I'll turn it back over to you. Jim?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Josh Jennings with Cowen.

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Joshua Thomas Jennings, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [2]

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Congratulations on the 7% U.S. growth and the initial iTotal Hip procedures. Was hoping to just start with the U.S. franchise's growth. PS sales seemed to be a nice tailwind. Can you talk about any other puts and takes in the quarter? And I was just wondering specifically if you saw any headwinds that were -- if they weren't in play you may have been able to do even better than that? Not complaining about 7% U.S. growth but just thinking about the setup for the back half of the year and what could get better to drive some acceleration in the fourth quarter outside of seasonality.

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [3]

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Well, obviously, Josh, thanks for the question. This is Mark. Seasonality, of course, big one. I think Paul had commented a little bit on that. I don't see any particular headwinds. I instead would like to say as I see that slight step up as I indicated for our performance and there's still a bit of patchiness. I think you guys have talked to me about this before. I still have -- you know 7% is our overall U.S. growth so I have some areas of the country obviously doing much better than that. Because I have other areas that -- where the change out of the management team and some of the changes we have made are lagging behind. So I really think the only -- I don't see a unique across-the-board, knock on wood, headwind now. What I see is just still a little bit of let's just say varied operational performance across the regions as we try to get all of them growing at that higher rate.

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Joshua Thomas Jennings, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [4]

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And just thinking about the improvement that's baked into the guidance, particularly in the fourth quarter as Paul laid out. Should we be thinking about more feet on the street coming in the back half of the year? It sounds like iHip, we really shouldn't be thinking about any material contribution there in the second half as well. But any other, I guess, tailwinds that you could help us think through as we go through into the fourth quarter?

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [5]

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Yes, you bring up a good point. The rep investment is probably the biggest tailwind. So if you recall, we were a little bit short in the first quarter of where we wanted to be. But we have put out there a goal to you guys that we would have 20% growth in our feet on the street or selling representatives. We were a bit behind that goal but kind of still on the way in Q1. We did get a lot of people in the seats, if you will, and we are at I think just shy. We're like at 18%, 19% growth at this point with feet on the street, year to date. And so that tailwind you talk about, to the extent we have it, would be some of those early additions and taking root, if you will, maybe in the fourth quarter. Again, we all know in orthopedics, a rep doesn't really become productive for 4 to 6 quarters. But we have added some people earlier along the way. And as I mentioned just previously, some of the managers that we replaced in some of our underperforming areas really only came in at the end of '17, early part of '18. So they still need a little more time to turn their areas around. So that would be the biggest thing that I think would help us to continue to leverage off that normal seasonality, Josh. Okay.

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Operator [6]

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Our next question comes from Bruce Nudell with SunTrust.

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Bruce M. Nudell, SunTrust Robinson Humphrey, Inc., Research Division - MD [7]

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Mark, I have 2 questions, or actually 3. First, with regards to the change in the development priorities, could you just highlight how important you think each of the knee iterations are in terms of I thought I heard cementless tibia and femoral as well as a new design? That's my first question and we could go from there.

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [8]

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Sure, Bruce, thanks. So just to that first question, new product development, I think this is an important point. Previously, we had talked about basically we're working on the G3 or generation 3, third generation of our iTotal system and our iUni system. The iTotal I've outlined some of the things that are incorporated on there. There are some software changes, but the big thing around it for us is stem extensions, so tibia stem extensions, which is something that's desirous in the market and will help with surgeon conversion as well as the change in the guides where we offer some metal inserts into the guides that give our patients specific guides, more of a feel of metal guides. So there's a few other small things and nuances, but those are probably the biggest things around iTotal G3. Bruce, in the back of, if you will, in our parking lot, we had been looking and noodling on a cementless option for iTotal, realizing that the market was moving that way. It was desirous and frankly really consistent with our brand because it's seen as kind of a more advanced, if you will, feature to have. And really, when we finally got to the point where it felt from a feasibility standpoint, we can move quickly and we started to look at the various investment options, we realized that it really made more sense from a shareholder perspective to move quickly to the iTotal cementless 'cause we felt like we could get to market on a femur version earlier, which is what I laid out. So it's a little disappointing but, as you know, the iUni market is not as robust as the Total market. I think there's a great opportunity with cementless Totals and the fact that we'll be able to get into a femur offering of that in limited market release in a year, or maybe slightly more than a year, I think is a big deal and so I'm really pleased with kind of the reshuffling and what we're able to do. In getting the hip out -- I mean it's on time, but it's early into the time we gave, as you can imagine. So by doing that, it freed up some resources and allowed us to make some of the expense saving changes we talked about but also some of the R&D changes.

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Bruce M. Nudell, SunTrust Robinson Humphrey, Inc., Research Division - MD [9]

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And so there's no cementless tibia or there is?

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [10]

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No, I'm sorry. There is. It'll fast follow the cementless, whereas we're talking kind of early 2020 for the limited release of the femur. We would be talking anywhere from 3 quarters to 4 quarters after that, so probably say early 2021 for the tibia with the femur.

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Bruce M. Nudell, SunTrust Robinson Humphrey, Inc., Research Division - MD [11]

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And the other thing that really struck me was you talked about an ASP uptick and I think this is one of the strategic values of the things you're doing. And I don't know of anybody else talking about ASP strength in the major joint market, even in the US. And so could you just comment on that and how a company can maintain ASPs probably above the average for a primary knee in a pretty hostile environment?

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Paul S. Weiner, Conformis, Inc. - CFO & Treasurer [12]

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Yes, I mean -- so Bruce, this is Paul. Yes, so our ASP did go up year-over-year this quarter. It also did the same thing last quarter. So we're now at a point where we've had 2 quarters in a row of not just getting premium price but also getting price increases year over year. Some of that has to do with mix as far as which hospitals are ordering during a particular quarter. I'm not sure if I would expect that trend to continue where year over year our average selling prices are going to continue to increase. We'd be happy if they'd stay flat or even decrease slightly. But we do have a very strong national accounts team, we have that works with the C level executives at hospitals. Our implants have a lot of advantages as far as cost savings within the hospital system. And we work hard to be able to maintain or even increase prices where we can.

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [13]

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Well, this is Mark. I just want to just add to that because we recognize, obviously, the industry's got a price headwind. And I think, a, it's a demonstration to the performance of our national accounts team, some of the work we've all done to support them because people are recognizing, especially the customers, that really have the experience with Conformis that there are operational savings. I mean they are realizing operational savings and they're seeing it. Now look, I'll be the first one, you know I want growth and we evaluate our opportunities every day and we work it hard. And if we think we can get the right tradeoff to get some unit volume growth for pricing concessions, we're happy to engage in those discussions. So I don't want anybody leaving this call thinking that we're somehow putting price to people. But on the other hand, we're also very wise about it. You know the other products, our competitors are, I'll say a little more commoditized and for those customers out there that are only interested in price as the deciding factor and driving volume that way, at the end of the day we have to be pretty diligent and steadfast that they're probably not a good Conformis customer. I go from there.

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Bruce M. Nudell, SunTrust Robinson Humphrey, Inc., Research Division - MD [14]

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I guess my only question remaining is I saw the tibial fit and rotation paper, and I'm just wondering how you would respond if the majors counter detailed and said, well, if you'd put the Stryker knee in with robotic assistance and planning and used all the optionality and persona and put it in with a robot, you'd wind up in the same place.

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [15]

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Yes. So the answer to that is I disagree wholeheartedly, and I'll take them to the Pepsi challenge. And there's no way. You know a robot may cut with less surgeon-to-surgeon variation the tibia slope. But at the end of the day, all you've got to look at Stryker's packages. There's only one shape of tibia that the Triathlon has and it hasn't changed. And at the end of the day, if you look at our tibias, we are matching the cortical surfaces to the patient's anatomy per the surgical plans. And building into that, most and fortunately, the rotation they want. So there is no compromise the surgeon has to make between size and alignment with the Conformis system. And they have to make that compromise every day in the off-the-shelf world.

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Operator [16]

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Our next question comes from Robbie Marcus with JPMorgan.

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Christian Diarmud Moore, JP Morgan Chase & Co, Research Division - Analyst [17]

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This is Christian on for Robbie. Maybe the first one just on what you're seeing in the outpatient setting. Any color as knee continues to do well and your product being better suited there? Have you seen a larger shift this year in the market than expecting? And then how much of that $7 billion hip market do you see as being outpatient that you're going to target at least earlier on?

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [18]

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Christian, nice question. It's hard as markets -- I'm seeing all kinds of estimates and unfortunately we don't have a good crystal ball as far as really being able to give you a number that I would want to stake analytically as outpatient. I can tell you anecdotally we're seeing a lot more interest in outpatient and we're seeing a lot more of national accounts agreements, pricing requests around that. And we feel good about it because we have a great story to talk to that. So the interest is there. As you know, it's still a commercial patient kind of opportunity versus a Medicare one for true AFC outpatient at this point. And then as far as hip, we're going to get after that the same way and I feel really good because we know we've got our Conformis paradigm with the knee-in-a-box for outpatient knee and we've done the same for outpatient hip.

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Christian Diarmud Moore, JP Morgan Chase & Co, Research Division - Analyst [19]

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And then, yes, maybe just touching one on the quarter, 48% gross margin was I think much better than people were expecting. How much of that was driven by lower international sales and then how much was driven by greater percentage of iTotal PS? And then building off that, should we expect continued sequential improvements in gross margin, which would bring you well above your initial outlook for the year?

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Paul S. Weiner, Conformis, Inc. - CFO & Treasurer [20]

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Sure, yes, so OUS sales, yes as far as gross margin, they are naturally higher in the United States, so by selling more in the United States that does help in overall gross margin. But keep in mind that highest percentage of our sales are in the U.S. so that was to be expected. As far as your question on iTotal PS, with the increase of iTotal PS, that's actually a headwind in our overall gross margin. We factor that in when giving guidance, because the iTotal PS today does cost more than our iTotal CR. As we develop more software and going into next year, the iTotal PS will come closer as far as cost to where our CR is right now, but it is a bit of a headwind. And as far as the outlook for the year, our guidance was on the high side, 46%. As I said last quarter, we would expect to be near the higher end certainly than the lower end of the guidance. We're already for the year at around 46%. So it's possible to even exceed that as we continue throughout this year.

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Christian Diarmud Moore, JP Morgan Chase & Co, Research Division - Analyst [21]

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And then just one more on kind of the product development pipeline that you laid out. It does sound that the timelines are getting pushed slightly from what we were hearing earlier in the year. If you just could provide any more color on how much of that is driven by your desire not to have to raise incremental capital and then how much is just on the marketing opportunity that you're seeing in the field? Just any more color on how you came to that decision would be great and that's it.

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Paul S. Weiner, Conformis, Inc. - CFO & Treasurer [22]

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Yes. So as far as timing, I think we talked about the iTotal G3 coming out the second half, what was it, Mark, the second half of?

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [23]

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'19, yes.

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Paul S. Weiner, Conformis, Inc. - CFO & Treasurer [24]

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'19. So we're still on schedule for that, as far as that's concerned. The iUni G3 was scheduled to come out in the first half of '19. That is the product that we're now holding back on, not to save cost but only because our bandwidth, we've replaced that with the cementless press fit because of the potential market size. So that was just a decision to exchange products. So we are still on schedule with the timeline that we had laid out. You have anything to add to that?

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [25]

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Well, I think Paul answered the question perfectly and if somehow we had a different schedule, we'd certainly look at that. But that's what we have. And actually this call we've tried to be more detailed than we have in the past and certainly we can address that. So no decision necessarily was made around delaying projects due to expense savings. Clearly, we don't have unlimited funds, obviously, so we can't just keep adding projects. If that was the case, there'd be a much longer list of stuff certainly that we'd go after. It's just that we tried to be balanced about things and we were committed to the hip. We're committed to the iTotal G3 and didn't want to change any of our plans around that.

The real question we had to ask ourselves just from an investment standpoint is what was a better opportunity and I think given what's going on in the market, for those of you that analyze and follow knee arthroplasty would agree, a cementless option makes a lot of sense. We had gotten questions about it before, not a lot. And like I said, we had been noodling on it. We just weren't ready to make an announcement. Here we are today ready to make an announcement and I'm pretty excited that the team was able to do it. And frankly, the good bit of news in this is by getting ahead of ourselves in a sense of getting the hip out, that in a sense opened up some room and some bandwidth for us to be able to move quicker on the femur version of cementless for G3. And it's only going to be for G3. So there is a little gating around this as well, just to clarify. Then that's one of the reasons why the limited release is there. It'll be a femur option available for our G3. So we had to track it that way. We're not going to kind of waste resources doing a femur option for our current G2 product.

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Operator [26]

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Our next question comes from Larry Biegelsen with Wells Fargo.

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Adam Carl Maeder, Wells Fargo Securities, LLC, Research Division - Associate Analyst [27]

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It's Adam Maeder in for Larry. My first question is on U.S. reimbursement. I didn't hear an update on Cigna. So I was just hoping you could provide some color. I think before you said that it might take some time for that to operationalize. So are we there? And how should be thinking about the impact? And then I had a follow-up.

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [28]

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Yes, good thing. I will comment on that cause we did announce the Cigna piece before and your memory is exactly right. I did say it would take a while to operationalize and we're seeing that, frankly. Some Cigna sites are fine. There have been a couple where we've had to go back and actively work to change that. So that part is good news and it remains the policy for Cigna and as we made before. We also have seen some positive movement in the Blues. The Blues have updated their national policy to reflect a positive coverage of Conformis. We haven't specifically called that out because the Blues have a more de-central option, but I'm happy to mention that here as another positive force. But that, I forget the exact date, that literally just happened within the last month. And so we're still waiting to kind of see how that is from an operational standpoint. But it just goes to continue positive coverage of the Conformis technology and continued results help economic. And as I've indicated before, we'll continue to have more good news we would expect over the coming months around our health economic story.

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Adam Carl Maeder, Wells Fargo Securities, LLC, Research Division - Associate Analyst [29]

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That's helpful. And then on iTotal Hip, what are some of the key learning's you're looking for during the limited launch period? I think if I heard correctly that's -- the full launch is coming in the second half of 2019. So just kind of wondering what you guys are focusing on in the interim?

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [30]

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Yes, yes, exactly. So look, at the end of the day, we want to make sure that the validations and things we've designed for and are in our clearance are working. And you want to make sure that in the hands of the surgeons across the board we can get the kind of results we want. So things like we have a very specific customized stem that's based off our planning software. And we want to make sure that's matching up. We want to compare it surgical time and things like that. So we're collecting data as we go to standard off-the-shelf. Make sure we're able to fit and fill the femur with the right kind of performance the surgeons expect. We're very excited about our jigs on the acetabulum side. We just want to make sure that we kind of have that technique down and done because the hip is a pretty good procedure for surgeons now. So to incrementally make it better, we've got to be that much better than what they're doing. And I won't go into some of the other things we're doing on the acetabulum, but we are offering a true innovation. And it's just making sure all that stuff works and we have to get enough surgeries so that we are sure that it works kind of in all patient types. So and as I said, I'm very excited that there's been a lot of surgeon interest to become clinical evaluators. So we feel pretty comfortable we're going to be able to get the kind of feedback that we need. Now the other question is something -- in product development, something always has to be tweaked a little. The question is, is it something that we can tweak and maybe be only about a year from now, which is on average, so kind of the middle of the year or is it some stuff that maybe has some lead time to it. As I said last call, so as a result, the full market launch might end more towards the second half, which is where we've kind of put it. So more to come. I mean we know we're going to get a lot of questions on this. As I said in my prepared comments, we expect to answer those and we certainly expect to give each of you kind of our color, our best guess around how to think about the hip in your models in 2019.

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Operator [31]

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Our next question comes from Kyle Rose, Canaccord Genuity.

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Brandon Vazquez, Canaccord Genuity Limited, Research Division - Associate [32]

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This is actually Brandon on for Kyle. First, I just wanted to focus a little bit on the OpEx reduction plans that you guys had mentioned. I was hoping you could give us a little bit of color and maybe what kind of cadence we should expect for operating expense reductions moving through 2019? It sounds like that's going to start as we move into the new year. And then maybe as duck tailing off that on that same subject, maybe speak to your confidence that reducing any operating expenses right at maybe an inflection point in the base business won't be disruptive to the ongoing turnaround?

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [33]

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Yes, I'll let Paul noodle on the numbers here. He'll get to you and again we would expect in the future to give you much more detailed guidance around our 2019 OpEx. But obviously it's an important point. And frankly your question is really insightful cause that's a big debate we had around the fact that we've just reached a potential inflection point and where we're at. So that's probably the toughest thing from the business leaders' standpoint. You try to balance it. But I feel comfortable that the investments that we've made, some of the systems we've brought in house, the things we've done, we've made the right decisions. We'll be able to get the benefit of those going forward. The people that we hired, the plans we have to still add feet on the street, but some of the other things we've cut have been maybe some of the more discretionary spend as well as I said we've got some of these things behind us. So, yes, I can't say that you can't think about that when you're doing it. But we feel comfortable that in balancing those interests, that we'll be able to achieve kind of the performance we want given on the investments that we have.

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Paul S. Weiner, Conformis, Inc. - CFO & Treasurer [34]

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Yes, we did develop a very detailed plan all the way through, you know not just for '18 but all the way through '19 and then carried that forward to the rest of the years. And we feel comfortable that we can achieve cost reductions that we have outlined internally. As far as communications, like I said, in 2019 when we start to really see the reductions in the cost and we'll break those out in a little bit more detail when we go through the detailed guidance for 2019.

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Brandon Vazquez, Canaccord Genuity Limited, Research Division - Associate [35]

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Just my second question is focusing on international for a second. It sounded like you, the team had made some -- was taking some actions to help stem some of the reimbursement headwinds, particularly in Germany. Can you speak to maybe what some of those actions were and maybe we can -- when we can start to expect an inflection point in that international business or at least when some of those losses might plateau?

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [36]

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Yes. So specifically, if you recall, some of the stuff we had the, obviously the partial decline but the impact that our totals and, in particular, as I've mentioned in the past, we've got the reinsurance/reimbursement review organization that's called MPK in Germany that is challenging the medical necessity on a case-by-case basis with many of the Conformis surgeries that are done. And so that's created a headwind for us in some hospitals.

We've been very successful in dealing with them after the fact. But nevertheless, it's, as you can imagine, a challenge to deal with it after the fact, and support the hospitals that way. So just to give you an example of one of things we're doing is given our fit and rotation alignment, we actually are providing data to help the surgeon in advance justify the medical necessity and have it in the file that's reviewed by MDK. So as a result, the documentation is there in advance. And we're working with the surgeons to provide that based on their iView or their Conformis plan if you will. And actually we think that is at least from our local team thinks that that is going to be a significant impact on helping to reverse the trend in this if you will. So we'll see. We're literally putting that in place. So we'll see probably the first effects of that sometime in the fourth quarter, probably not, if I had to guess I'd have to say maybe there's opportunity to see a change in fortunes in Q1. But it's, any time you're talking reimbursement, it's a challenge. But we're on it cause it continues to maintain a significant part of our business so.

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Paul S. Weiner, Conformis, Inc. - CFO & Treasurer [37]

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To help and also to help offset any of the headwinds we have in Germany, as we mentioned last quarter, we are international sales and marketing manager who's now working on expanding to other countries. So there's countries like Australia that we're starting to go into and there's a number of other countries that we're actively looking to start selling into. And I think that should help us again in 2019 and beyond as far as entering additional countries.

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [38]

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Okay. Any questions?

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Operator [39]

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The next question comes from Steve Lichtman with Oppenheimer.

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Unidentified Analyst, [40]

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Yes, this is [Gia] on for Steve. Just on the gross margin front, you mentioned you expect vertical integration to be complete this year. Could you just give us an update on the progress of the remaining pieces of your cost reduction programs such as 3D printing and CAD design offshore? And when you expect to realize the full impact from those initiatives on gross margin?

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Paul S. Weiner, Conformis, Inc. - CFO & Treasurer [41]

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Yes, so like you said, yes, so we're getting towards the end of the vertical integration. We've got a couple more components like the partial poly inserts. Those are still -- those still need to be vertically integrated and that will be done the second half of this year. As far as the CAD offshoring, that will also be done by the end of this year but it's a continuous process, started last year and it's going through this year. So that's also helping us in the improvement. Also, software revisions to reduce the amount of CAD design time that's needed. We just recently launched -- released, a big release for the iTotal CR. So that'll help us towards the end of the third quarter into the fourth quarter. And at the end of this year, we're looking to release, do the next software release on iTotal PS. So that will help us really towards the first half of next year. So that's kind of the cadence of some of these improvements as we move on. And then above and beyond that, we continue to lean out the manufacturing process.

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Unidentified Analyst, [42]

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Then just a question on the sales force growth. I think last quarter, you talked about seeing perhaps just a little more sales force attrition than you expected. Can you just provide an update on the trend there as things stabilize?

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Paul S. Weiner, Conformis, Inc. - CFO & Treasurer [43]

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Yes. So last quarter, we did bring in new reps but at the same time we also terminated or released a number of reps. We're really trying to obviously strengthen our sales force and we don't want to lose opportunities in geographies and we want to have the strongest reps there. So we're not just adding but we're also replacing. So the first quarter net again, we were behind but we were bringing in a number of new reps. The second quarter we got to the point where we did almost achieve 20% that were targeted for the full year. And we're not stopping at this point. So I know we'll continue to bring on additional reps or feet on the street throughout the second half of this year.

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Operator [44]

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Our final question comes from Ryan Zimmerman with BTIG.

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Ryan Benjamin Zimmerman, BTIG, LLC, Research Division - Research Analyst [45]

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I apologize if this has been asked. I've been hopping between calls. But the sales force additions that you have added through the first half of the year thus far, when do you anticipate those to make material impacts to the growth rate? And how we should be thinking about that just given kind of where you're guiding for the rest of the year? And can that eclipse the headwinds that you're indicating outside the U.S.?

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [46]

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Yes, Ryan, as I stated a little bit earlier, it takes -- look on average it takes kind of 4 to 6 quarters I think for a guy at a minimum to become productive and that's in the tradition model. And I think our model's probably a little harder to detail and represent. So I think we're talking about probably 6 to 8 quarters with us. So I think they're going to provide opportunities more in the second half, excuse me, more in next year. And depending on when they came in, some will hit in the first half and some will hit in the second half, but it's really more of a '19 impact.

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Ryan Benjamin Zimmerman, BTIG, LLC, Research Division - Research Analyst [47]

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Understood. Thank you, guys.

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Operator [48]

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Thank you,, and I am showing no further questions in the queue at this time. Ladies and gentlemen, this does conclude your program for today. And thank you for participating in today's conference. You may all disconnect. Everyone, have a great day.