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Edited Transcript of CFMS earnings conference call or presentation 6-Feb-19 9:30pm GMT

Q4 2018 Conformis Inc Earnings Call

Bedford Feb 8, 2019 (Thomson StreetEvents) -- Edited Transcript of ConforMIS Inc earnings conference call or presentation Wednesday, February 6, 2019 at 9:30:00pm 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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* Bruce M. Nudell

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Joshua Thomas Jennings

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

* Kyle William Rose

Canaccord Genuity Limited, Research Division - Senior Analyst

* Robert Justin Marcus

JP Morgan Chase & Co, Research Division - Analyst

* Ryan Benjamin Zimmerman

BTIG, LLC, Research Division - Research Analyst

* Steven Michael Lichtman

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

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Presentation

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Operator [1]

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

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 law, which are made pursuant to the safe harbor provisioning 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 include without limitation statements about Conformis' strategy, future operations, future financial position and results, gross margin, product margin, operating trends, financial guidance, market growth, royalty revenue, total revenue, product revenue and revenue mix with products and geography. The anticipated timing of the limited launch of our hip product offering, the potential impact and advantages of using customized implants, business initiatives and transitions in our commercial operations are based upon current estimate 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 Conformis' public filings with 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, February 6, 2019.

I would now like to turn the call over to Mark Augusti, the company's President and Chief Executive Officer. Mark, please go ahead.

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

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Thank you, Sarah, and welcome, everyone, to Conformis' Fourth Quarter and Year-ended 2018 Earnings Conference Call. With me on the call today is our CFO, Paul Weiner. During this call, Paul and I will share our prepared remarks on a variety of topics, including our fourth quarter financial and operating performance. Following the prepared remarks, Paul and I look forward to answering questions.

From a commercial perspective, we made good progress in the fourth quarter. Our U.S. growth performance of 10% was an improvement over previous quarters, and though our international business continues to face challenges, our OUS growth results were in line with our expectations and represents a sequential quarter-to-quarter improvement.

Operationally, our gross margin improvements continued in Q4 as we realized 49% gross margin. Perhaps our biggest operational activity in Q4 was our announced operating expenses reduction plan for 2019 combined with the debt reduction and restructuring actions we took. As announced on December 13, we took significant actions in the fourth quarter that were intended to among other things optimize sales, marketing and administrative expenses to achieve greater operational efficiencies, sharpen our focus on new product development by prioritizing product segments with higher growth opportunities, continue opportunistic international expansion, streamline personnel to create a more focused organization, which did result in a headcount reduction of approximately 10% of our total workforce. And then the reduction in restructuring, as I mentioned, of our existing loan agreement to reduce the interest expense and cash needs.

We took these decisive actions to prioritize our highest impact on new product opportunities, our ConforMIS Hip System and our cementless press-fit total knee, which we believe will provide us an opportunity to build a stronger, more sustainable business. These actions included the difficult decision, as I mentioned before, to reduce our total workforce. This meant that we did have to part ways with many valued employees, but I just want to reiterate now on behalf of the entire company that I thank these colleagues for their many contributions over the years of business.

I'd like to turn the call now over to Paul so he can go through a more detailed financial review, and then I'll have some further comments to close out the call.

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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 fourth quarter revenue of $22 million, representing an increase of 6% or $1.3 million year-over-year on a reported basis and 7% on a constant-currency basis. Excluding the negative impact of changes in foreign currency exchange rates of $50,000, revenue increased 7% on a constant-currency basis. Revenue in the fourth quarter of 2018 and 2017 includes royalty revenue of $145,000 and $252,000, respectively, related to patent license agreements.

Fourth quarter product revenue was $21.9 million, representing an increase of $1.4 million or 7% year-over-year on a reported and constant-currency basis.

Sales of iTotal PS increased $2 million to $7.8 million or 34% year-over-year on a reported and constant-currency basis. Sales of the iTotal CR, iDuo and iUni decreased $1.1 million to $13.5 million or 8% year-over-year on a reported basis and 7% on a constant-currency basis.

ITotal PS represented approximately 46% of total product revenue in the fourth quarter of 2018 compared to approximately 29% for the same quarter last year.

With the limited launch beginning in the third quarter of 2018, ConforMIS Hip System sales were $556,000 in the fourth quarter. U.S. product revenue increased $1.8 million to $19.4 million or 10% year-over-year. U.S. product revenue was driven by sales of our iTotal PS, which increased 35% year-over-year, offset by sales of the base business product lines, which decreased 6% year-over-year.

Fourth quarter U.S. product revenue represented 89% of total product revenue compared to 86% for the same quarter last year.

Rest of World product revenue decreased $394,000 to $2.5 million or 14% year-over-year on a reported basis and 12% on a constant-currency basis. Rest of World product revenue was affected primarily by reimbursement challenges in Germany.

Turning to a review of our results across the rest of the P&L. Fourth quarter gross margin was 49% of revenue compared to 42% of revenue last year, a 700 basis point increase. This increase in gross margin year-over-year was driven by cost reductions as a result of vertical integration and manufacturing efficiencies. 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.

Total operating expenses decreased $1.2 million to $19.2 million or 6% year-over-year. This decrease in expenses was driven primarily by a decrease in general and administrative expense due to the reductions in patent litigation expense and lower sales and marketing and research and development costs, primarily due to a decrease in personnel costs.

Net loss was $9.9 million or $0.16 per share compared to net loss of $11.9 million or $0.27 per share for the same period last year. Net loss per basic share calculations assume weighted average basic shares outstanding of 60.8 million for the fourth quarter of 2018 compared to 43.8 million for the same period last year. Net loss in the fourth quarter included foreign currency exchange expense of $630,000 compared to foreign currency exchange income of $451,000 in the same period last year.

For 2018, we reported 12-month revenue of $89.8 million, representing an increase of 15% or $11.7 million year-over-year on a reported basis and 14% on a constant-currency basis.

Total revenue includes royalty revenue of $11.2 million of which $10.5 million came from the royalty settlement with Smith & Nephew in the third quarter of 2018.

The 12-month gross margin was 54% of revenue compared to 37% of revenue for 2017, a 1,700 basis point increase, driven primarily by cost reductions as a result of vertical integration and manufacturing efficiencies and the $10.5 million royalty settlement, which contributed 600 basis points of the increase.

Net loss was $43.4 million or $0.74 per share for 2018 compared to $53.6 million or $1.20 (sic) [$1.24] per share for 2017.

As of December 31, 2018, we had cash and cash equivalents and investments totaling $23.6 million compared to $45.2 million as of December 31, 2017.

And as previously announced, during the fourth quarter, the company has taken actions to optimize its overall operating expense structure, and in turn, paid down $15 million of its $30 million debt facility, thereby reducing the total debt outstanding to $15 million and the associated interest expense going forward.

We had previously announced in the fourth quarter our revenue, operating expenses and cash burn expectations for 2019. One area we have yet to give direction on is our gross margin expectations. We are in the final stages of off-shoring our software design manufacturing team to India at a much reduced cost. We have incurred some short-term manufacturing costs during this transition, which we expect to be resolved by the end of the first quarter. We believe this will have an impact on gross margin through the second quarter. Due to this, we expect the gross margin to remain relatively flat through the first half of 2019 and return to expanding our gross margin in the second half of the year.

With that, let me turn the call back over to Mark.

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

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Thank you, Paul. So in the fourth quarter, we continued on our journey with commercial improvement. For the full year, we achieved U.S. product revenue growth of 6%. Unfortunately, with the OUS headwinds, the overall company product growth was about 2%. Our full year expectations as I communicated in the past for 2019 was a single-digit percentage product revenue growth and that will be the basis for future higher growth rates as we kicked in with the new product launches. So we've achieved that in spite of these unplanned headwinds in our OUS business.

For gross margin, we'd indicated at the outset that we would land in the 44% to 46% range for the full year, and not including the $10.5 million royalty settlement, we actually achieved around 47%. So we feel good about the gross margin improvements we've been making. However, as mentioned earlier, in the fourth quarter, we announced that we're making significant expense reductions and organizational change to manage our cash burn. I would like to note that we do not believe any of these changes should negatively impact our revenue growth. We remain committed to continuous improvement of our commercial activities. These include new customer targeting and on-boarding, increasing agent representatives, our direct-to-consumer activities and improved medical education offerings. These activities when combined with our new product development program should provide us sustainable opportunities for growth.

As a reminder, we have a robust new product development pipeline that includes among other things the continuation of our focus on our hip system, our iTotal G3 and our cementless press-fit knee. In the second half of 2019, we do expect to achieve full commercial launch of our hip system as well as limited commercial launch of our iTotal G3 knee system. We remain on track to deliver the limited commercial launch of our cementless knee offering in the first half of 2020.

I would like to provide at this time a little more detail on our ConforMIS Hip System. We continue to progress in our limited launch. We have now over 20 surgeons that have performed over 150 implantations with our hip. We remain very positive about the status and value proposition of our hip system. And one of our goals when identifying the operating expense reductions was to ensure that the cost reductions did not affect our plans for the commercial -- full commercial launch of our commercial -- of our hip system. And so while we're still not there yet, we are -- I would like to report that we are on track for the second half launch of the full commercial releases we talked about.

Additionally, regarding the OUS business and the international expansion, we recognized that there was smaller segment of our overall OUS market. There is demand for our custom orthopedic knee implant offerings outside of the U.S. As such, we've selectively identified opportunities to expand distribution in certain international markets. This expansion into other international markets is intended to help offset the sales weakness the company has been experiencing in Germany.

So all that combined, we closed out 2018 on a strong note. 2019 will prove to be an important stepping stone in our company's future as we should realize the first launches of our new product pipeline.

That's all the comments I have for now. I look forward to answering any questions you may have about our Q4 results, our full year results or any of the other announcements we have made today. Thank you very much. Now we'll take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Bruce Nudell with SunTrust.

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Bruce M. Nudell, SunTrust Robinson Humphrey, Inc., Research Division - MD [2]

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Mark, one of the things that I've noticed here is that you grew knees around -- U.S. knees around 7%, the market's probably going to be below 1% for the quarter. So good job there. But PS is radically outstripping the Unis and CR, and they appear to be declining. So what is the basis for that? Is the PS somehow an embodiment, a more appealing thing to PS-oriented surgeons or you just establishing the base or the appropriate balance of PS and CR amongst the surgeons you have? Or are robots like more important in Unis and/or CRs than the Conformis approach? If you could just kind of explain that dynamic a little bit?

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

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Sure. Sure, thanks, Bruce. It's a little bit complex, but I'll run you through at least my thinking. I mean, we believe that PS is a little bit of a larger segment than CR. PS is our newer offering. And what we think we've done commercially is a better job targeting PS surgeons and reaching out to PS surgeons. So we're seeing good growth there. I think the CR business is under pressure because as I've said in past calls, we only have a cemented CR. And that segment is actually declining, Bruce. So while the overall market is, I think, you suggested growing at 1%, I think if you look at your data, you'd probably see that -- and come to the conclusion that the cement -- the cemented CR segment is actually declining. And that's been our biggest in legacy kind of base business, one of our biggest challenges that we have. So that's why the press-fit is so important for us. So yes, we're doing a better job targeting PS. Yes, PS is newer. I think we've been able to have a good story around our PS plus our poly is a one-piece poly and I think that's more familiar to surgeons as well as some baseplate differences. That's one of the nice things about our G3 program. It's a little bit nuanced, but we're moving to a common tibia baseplate. It's going to be more modeled on the PS baseplate as well as stem extensions. So I think that's going to help kind of revitalize our CR business. So I believe that's why we're seeing this better performance for us in PS than CR, Bruce.

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Bruce M. Nudell, SunTrust Robinson Humphrey, Inc., Research Division - MD [4]

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And my follow-up question, sir, financial in the sense that like when is the new cash burn given the $24 million in the bank? And let's just stop there.

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Paul S. Weiner, Conformis, Inc. - CFO & Treasurer [5]

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Sure. Yes, so as we had communicated in our strategic actions press release in December, we expect our cash burn in 2019 to be no more than $16 million.

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Bruce M. Nudell, SunTrust Robinson Humphrey, Inc., Research Division - MD [6]

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Okay. And if you updated projections for 2019 U.S. product revenue?

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Paul S. Weiner, Conformis, Inc. - CFO & Treasurer [7]

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We haven't -- while we gave direction, our expectation at the end of -- during our third quarter earnings call at the end of October, and that direction was at 5% of what we're guiding to for the year. We're guiding to for the year about $77.75 million for 2018. Obviously, we did end up beating that number. But we're still holding to the direction that we gave then. So the calculation at about a 5% increase on the guided number, at least the midpoint, was about $81.5 million or $81.6 million for 2019, which leaves us with about -- a product revenue growth of around 4%.

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Operator [8]

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Our next question comes from the line of Josh Jennings with Cowen.

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Joshua Thomas Jennings, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [9]

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So let me just follow up on Bruce's question about the top line high-level guidance you provided. Any help there in terms of how you're thinking about internally the U.S. versus OUS growth? And what your assumptions are there on product revenues specifically?

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

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Yes. We don't anticipate much changing as far as where we are -- where we headed, I think, as far as the split, though the difference I think it should improve. We're looking to improve our growth in U.S., and we're looking to decrease our loss, if you will, of business in Germany to some degree, but also we're expanding into other countries. So that should help offset the weakness we are seeing in Germany. So we expect to see improvement in both the U.S. as well as OUS.

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Joshua Thomas Jennings, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [11]

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Great. And just a follow-up, Paul, just -- I mean, there has been an element of kind of a financing overhang on the Conformis story. Can you help us just understand the roadmap to breakeven here, I mean, where your cash position is, your cash burn, other things you have in place maybe the ATM you can talk about? And just how you see the need for a financing shaping up or lack of a need for financing shaping up over the next 24 months?

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

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Sure. So we have about $24 million at the end of the year. We're looking to burn or use no more than $16 million of that in 2019. We have -- and we are obviously looking for that cash burn to continue to decrease as we continue through the years. So I think that based on where we are in improvements in gross margins as well as the reduction in operating spending and the growth in the top line, we're looking to hopefully not need any additional cash, but even if we do, there's a few different levers that we can pull: one, as far as our debt is concerned, we did decrease our debt from $30 million to $15 million. The interest-only period goes through to 2019. So we've always been planning on refinancing that at the end of '19 before we need to start paying down principal. When we do that, one of the possibilities is that our revolving line of credit off of our receivables potentially would allow us some more room on that. And then we do have a couple other vehicles already in place whether it be the ATM or the deal that we recently did with Lincoln Park Capital where we can sell stock either to the market or to Lincoln Park Capital, but those we're looking at more as backstops in later periods if needed.

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Joshua Thomas Jennings, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [13]

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Last question for Mark. You touched on just balancing the cost reduction initiatives along with fueling revenue growth. And maybe we could just get some more details there if you would, but primarily just in terms of sales force build-out, where you guys are sitting today in early '19 versus '18 with the kind of feet on the street? And then also, I mean, R&D, it sounds like from your commentary that you're going to continue to feel that internal development engine as well, but maybe just if you could touch on those 2 things with little bit more detail in terms of how you're balancing the cost reduction initiatives and while also fueling top line growth, that'd be great?

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [14]

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Yes. Sure. So Josh, we -- I guess, I'm pleased to report we grew our feet on the street, if you will, in '18 by about 14%, and we're finalizing final targets. But we're going to be, hopefully, at a minimum 10% or more for 2019. And just remember, we do about, let's say, between 85% and 90% of our revenue is through agents. So it's a very cost-effective way for us to gain access to the market and to geographies, and actually, as I stated in the past with our hip launch, I believe we become a much more attractive partner for experienced distribution agents that are in the business that are looking to pick up a new line or are looking to leverage their relationship. So I'm excited about working with my AVP team, my commercial team. I'm excited about the opportunities we have to really go out and get good talent. So we'll continue to do that. We absolutely are not going to be cutting our new product development. We remain committed. I'm excited about the plans we have there and the good progress my development team is making. That said, we have to balance. There's always risk. We don't believe we've got top line risk, as I stated, but anytime you change personnel and have impacts like that and you get a little leaner. You always have little concerns around that. So we will continue to report out as we go through the year, but I feel comfortable we put the right balance in place from that standpoint.

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Operator [15]

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Our next question comes from the line of Robbie Marcus with JP Morgan.

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Robert Justin Marcus, JP Morgan Chase & Co, Research Division - Analyst [16]

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Oh, great. Paul, I wanted to circle back to your comments around gross margin and the transition of some manufacturing temporarily. Maybe you could go into a little more color on exactly which items of the manufacturing you're transitioning? Is it the 3D printed items? And help us understand what we should expect for gross margin in the first and second quarter while this is happening? And then how much improvement we could see in the back part of the year and beyond?

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Paul S. Weiner, Conformis, Inc. - CFO & Treasurer [17]

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Sure. Yes, so the manufacturing portion that we are offshoring, it relates to the manual CAD labor. So the way our process works, as you well know, we get a CT scan, and we have software that automates the conversion of that CT scan into a 3D CAD image. But along the way, there is some manual CAD labor required as far as finishing up the design and quality control checks. That is the part that we have -- that's the labor -- more labor-intensive part of our process. Even though it's limited per implant, it generally continues to increase the more volume we do. So to offshore that at a much reduced cost as far as labor is concerned, and we are -- it's in the final stages of that. So that's the only part that we're moving over there. And that involves certainly training and hiring of people over in India, and in this final stage as far, we need to do some additional training of those people that are over there, which has caused minimal disruption, but some within our manufacturing process. We have sought plans to get them all up and running by the end of the first quarter. So like I said, as far as the impact on the gross margins, it would be the first quarter and second quarter of this year. And the direction is somewhere close to the gross margin that we ended up at in the fourth quarter, which is around 49%. So that's kind of the direction for the first half of the year, and then back to our improvements in gross margins in the second half of the year as we have been doing over the last couple of years.

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Robert Justin Marcus, JP Morgan Chase & Co, Research Division - Analyst [18]

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And you think that can be maybe in the low 50s in the back part of the year?

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Paul S. Weiner, Conformis, Inc. - CFO & Treasurer [19]

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Yes, yes, in that neighborhood, yes.

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Robert Justin Marcus, JP Morgan Chase & Co, Research Division - Analyst [20]

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Okay. And just as a follow-up, maybe you can just -- us on the outside, maybe you can talk about what the culture is like at Conformis now following the restructuring in terms of reps and stability and turnover and how that's trending going forward?

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [21]

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Yes. Robbie, this is Mark. I'll definitely do that. I'd just like to follow up on Paul. I think Paul gave some really good color about gross margin. But I've said this in the past, and we didn't put it in the prepared remarks, but don't forget we're also launching our hip product and that's the newer product we're going to be transitioning from the limited launch to the full launch. We still have a lot of manufacturing process and engineering that we're working on. We're going to be admittedly more efficient on that than we would be versus our knee, and that's a little harder for us to predict, especially predicting demand around that and everything. So you combine the outsourcing that Paul just talked about as well as with bringing up the new product, and I think you'd have to admit we had a really strong performance in gross margin in '18, and while we do expect improvements, as Paul just indicated, there's some of that going on as well, right. So just that's important to point out. As far as the culture, yes, look, it's always tough to make changes like this because, I guess, there's a lot of good people. Well, I think you guys all recognize, you follow a lot of other companies, companies do this and that's the nature of the environment they're in. I feel like in our commercial team, actually there's a little bit of, I know this may sound crazy, but it's actually I feel like there's like positive energy. We just had a really good quarter, people have seen kind of the U.S. performance. Obviously, I'm talking about the U.S. here. The palpable excitement around the new products, and with the hip being out and some of the feedback we've been getting around that, and frankly, with a little bit more of a flatter selling organization and a more focused marketing organization, there is this -- there's just more direct communication and maybe it is free to course. So again, I'm not going to minimize that change is tough, but I feel like people kind of really rallied around kind of what we're doing, and frankly, have been very understanding. Paul and I took a lot of opportunity to communicate, I think, in a very transparent way, I mean, in a very detailed way in the fourth quarter around what we're doing. And so I think that part is good. And like I said, that's just the commercial team. Then I talk about our new product team, and we've been able to track the talent. Again, we've made really limited -- I know it shows on the surface some reductions there, but that's really just in timing. I mean, the teams have been completely intact there on the R&D side. And we continue to remain on track as I reported on those launches. So there's really good excitement about that. So I think, generally, it's good. Little -- I can say that the people who we brought onboard that are helping internationally, I give them a lot of credit for the opportunities we've for this international expansion and probably the toughest morale place is my international team just because it's been really tough with the reimbursement changes. But from a Conformis U.S. perspective, we still have a team here that's really passionate about what we do and are excited about 2019.

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Operator [22]

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Our next question comes from the line of Steven Lichtman with Oppenheimer & Co.

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Steven Michael Lichtman, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [23]

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Mark, you just mentioned some initial feedback you've gotten on the hip. I was wondering if you could share some of the comments you've heard from surgeons with regard to the procedure itself and patient outcomes?

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [24]

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Yes. So it's a little early on patient outcomes, right, because we've got a limited amount of follow-up. But nothing -- certainly, the good news is nothing bad there. I would say that our guys are really working well, especially on the femoral side. We've gotten good report cards on the acetabulum side, but also gotten some really good feedback and opportunities to make even further improvements there. We got some initial feedback about some things around instrumentation on the reusable side that there were some small fixes that need to be done, and so we're incorporating those. Planning software, we've gotten some feedback around presentation and format on how that works. We've made some software changes. So that styled it. And overall, Steve, I think, going into the limited launch, we were -- let's just say, we were curious and thought that may be one of the more risk areas was how well we'd be dialed in on sizing the femur and that part of it because there was some real concern. Could you, using CT surgical planing to view that, and I can tell you we're knocking it out of the park. I mean, we're dialed in on that piece, and people are really getting this idea of a custom stem and a monoblock design, that combine with our iView and our iJigs and the hip. And don't forget, we're doing hip in a box and that whole efficiency thing. And so that's the part that's pretty cool. And we've got a lot of guys that are already starting to use less x-ray, which we think is a promise for us, and they really like the amount of information we're giving them. So it's like anything else. Adoption is going to be spread over, and there's things we have to do, and this is just the first stem version that we have. As you know, we'll have to do other stems or at least one other stem. But we're just excited about it because it makes sense for us to become a full kind of adult reconstructive partner with our customers, and we've got all that investment in the field and distribution. And it makes natural sense for us to do this, and I'm excited about where we're hitting the mark. It won't be a straight line, but it's a -- but it'll -- not going to lie, it's going to be a slope upward as we go forward. It's looking good.

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Steven Michael Lichtman, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [25]

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Great, Mark. And then just as my follow-up, internationally, can you talk to what are some of the countries that you're looking at in terms of the targeted expansion? And could we see some incremental revenue from those countries in 2019 or is that more of a 2020 and beyond?

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [26]

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No. As we've talked about our directional kind of communication incorporates some expansion internationally and see some more in the second half of '19, but it's in there. So really, it's a couple of things. There's the -- I think we've communicated we've started in Australia, but we're going through the approval process and we hope to do more in Australia. So technically, I think we had one actually was -- well, I'm trying to remember the exact first sale in first quarter, but Australia has been ramping, which is good for us. And it makes sense because that market likes our story and what we have to offer. And then it's really the other markets in the EU -- it's probably -- so Italy, Netherlands, Spain. These are all markets we hadn't sold to and now we've got representation in place, and we've targeted surgeons and labs and stuff. So that's the normal stuff we do. Another potential good area for us, we've signed on a couple of Middle East distributors. We really had no activity in the Middle East, and we expect to be able to do that hopefully some time towards the middle of this year. So that part is -- yes, that part is going well. So it's those markets. And again, I don't want to say this, as we -- I think as you guys know as analysts, pricing is more challenging in OUS than it is in the U.S. Having said that, in each of these markets, there is always a small segment that really wants something differentiated, wants something, for lack of better term, I'll just use premium, but wants something that's got more of this patient engagement to it. And we now finally are finding the right distributors that can help us navigate those pathways. And so it's a good opportunity for us. And our model given the lack of working capital needed, it's -- as long as we find the right people, it's easy to do it, right. So why not?

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Operator [27]

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Our next question comes from the line of Ryan Zimmerman with BTIG.

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Ryan Benjamin Zimmerman, BTIG, LLC, Research Division - Research Analyst [28]

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Great. A couple questions for me. So on the gross margin, I know a few questions have been asked on it. A while back, you guys had set out the goal to be at around, I think, 60% gross margins by end of 2020. And I just want to take a pause and see if you still feel that, that's the appropriate target for the gross margin longer term? And then I have a follow-up question actually around OUS expansion.

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [29]

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Yes. So -- yes, I'm sorry, I'll take it. Then Paul could jump in. So if I recall, and you're right, it was end of 2020 exit at 60%, and that still is appropriate. We're still committed to doing that for sure. So the answer is, I guess, yes. The full year margin will be some blend of how we enter 2020, Ryan, and then how we exit, but the goal will be to exit 2020 at around 60%.

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Paul S. Weiner, Conformis, Inc. - CFO & Treasurer [30]

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Yes, so obviously, it's a little bit of a hiccup here as far as in the first half of the year, but it's not slowing down everything else we're doing as far as driving our costs down. So we should be able to catch up once we finish with the transition to India.

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Ryan Benjamin Zimmerman, BTIG, LLC, Research Division - Research Analyst [31]

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Great. And then around OUS expansion, I appreciate -- it's just a follow-up to Steve's question, you're moving into these new countries. I think you exited this year with some new international sales, leadership or some partners there. When you're bringing on some of these distributors though, should we think that the commission rates or there may be a little bit higher in terms of your sales and marketing expense is going to come through as you move into these new countries just as you sign on some of these newer distributors?

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [32]

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Yes. So I would say that there's a few things. So internationally, as far as -- yes, when we sign on distributors, that certainly does affect the revenue because there is transfer prices in those cases. We don't see them being that material certainly in 2019 to affect the ratios. And in the United States, we've been selling mostly through agents anyway. So -- and we're going to continue to do that, continue to expand the agents, but we don't -- so we don't see much headwinds from that either or any changes from that side. So in 2019, the international expansion through the distributors, we don't see it materially affecting the -- our ratios.

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Operator [33]

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We do have a follow-up question from the line of Bruce Nudell with SunTrust.

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Bruce M. Nudell, SunTrust Robinson Humphrey, Inc., Research Division - MD [34]

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Sorry to keep you guys up, but Mark, just thinking about what you said, when you have your hip launch in 2020, when it's really available the whole year and you could appeal to both -- to surgeons who do both hips and knees and like a personalized concept, and also have a cementless knee that really is you're no longer bucking the trend, is it right to think that, that's the year you really should start seeing U.S. sales momentum? And my follow-up is regarding Zimmer CEO made a very interesting comment, they're going to introduce ROSA, and it's going to have a hefty dose of preplanning, which will let people take advantage of all the sizes and shapes of persona in a less cumbersome way. And that -- it still seems like a somewhat less elegant solution to achieve personalization, we're still benefiting from a robot, and just comment on that as well?

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [35]

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So yes, there's no doubt, if you ask me, do I think 2020 should be a good step-up, because we'll have a full year of hip sales and we'll also have our G3 and our cementless, the answer is yes. And that's why I'm excited. I mean, I think we've got now this new product. That's why I've been communicating the way I have. So as you know in this business, nothing is ever certain. You've got -- we've got to execute, but this product portfolio really makes sense of where the growth opportunities are. It helps expand what we need, and I think 2020 will be a step-up for us, and I'm excited about it. The -- then your question -- combined with that, the other thing that we all have to recognize that's going on is this move towards ASC. So while I appreciate all the things the robot companies are doing and investing in, and as I always say and I hope some of you who talked more with me recognize, I love it when people talk about robots because it means you're admitting to the fact that we can do better, which is what we say about, in Conformis' history, that we can be better, and we should do better as an industry for patient outcomes and the robot is one way to get there, and I'll be -- I'm waiting and ready for data and clinical evidence and health economics, things to justify that expense in that activity. In the meantime, as you know, there's big move towards outpatient hips and knees, and we think we've got a demonstrated solution. We've done close to 100,000 cases, and obviously, not all of those are ASC centered. But with our model which we've got a lot -- we've got studies and efficiencies on about that and people understand that, so we're getting a lot of interest from an ASC standpoint. Even I think the market is moving towards our model, and I think the other companies are going to have to think through that as well. So I think that's just another kind of tailwind for us as we head into 2020 and 2021.

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Operator [36]

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Our next question comes from the line of Kyle Rose with Canaccord.

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Kyle William Rose, Canaccord Genuity Limited, Research Division - Senior Analyst [37]

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Great. And I apologize about it if I asked something redundant. I've been jumping around a little bit this afternoon. But I just wanted to understand what the state of the underlying sales force is in the U.S.? And then any expectations from a higher net addition standpoint as we think about moving through 2019?

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

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Yes, no worries, Kyle. I'll re-comment on that. So again, remember about kind of 85% to 90% of our U.S. revenue comes through indirect agents. So it's an efficient way for us to kind of increase representation. We still clearly have opportunity to do that. We added about 14% growth in net selling feet on the street in 2018, and our target for '19 would be to do at least 10% and potentially more than that, but certainly, at least 10% in 2019. And as I've mentioned before, the addition of the hip really helps us, I think, in our quest to actually be able to get experienced talent and look for opportunities to sign our new distributors. And so we're hoping that, that's going to markedly change for us with the commercial release of the hip. So we're still actively going to be looking to do that and have some other plans in place from that standpoint, the longer relationship we have with our current distributing network, and we've got a big investment in that. And many of those U.S. sellers are actually exclusive to Conformis. So they've only got the knee products to sell right now. And so they're very excited about ability to represent a hip offering. And frankly, a differentiated hip offering at that. So we're looking forward to having those discussions with potential new agents.

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Kyle William Rose, Canaccord Genuity Limited, Research Division - Senior Analyst [39]

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And then -- I appreciate that. I wanted to follow up just a little bit on the outpatient and one additional one on the gross margin side. So I understand the dynamics of moving to the outpatient environment or the ASC environment, particularly given the Just-in-Time delivery model decreased sets. But I guess, for Conformis being positioned as maybe not a premium price product, but certainly, at the higher end of the knee market, I mean, what's your opinion as far as the overall reimbursement environment is, I mean, is that the environment that Conformis can truly compete in at the current price levels?

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [40]

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Yes. I mean, I think it is. I mean, obviously, we have to continue our gross margin improvement to give us pricing flexibility. We may have to think about different offerings, but I get asked this question a lot, and everybody says, "Oh, the ASCs, the pricing maybe isn't as good" and stuff like that. But the reality is the ASCs are going to have to think about the episode-based care, the value-based care initiatives. We've got really good data that suggests we're saving money there. And we'll continue to do that. The other thing around that is there is real cost, and frankly, they get it, maybe even more easily than hospitals do it. They don't actually have infrastructure in their facilities to handle a number of knee cases and all the sterilization and whatnot requirements, that's material. And while we typically do get a bit of a slight price premium, let's not overexaggerate. I don't think -- we're not out of the ballpark there. So we actually have really good discussions with ASC operators that understand there could be more knee cases in a day with our model than they can with a traditional model. They have less costs associated with that. So they can actually do the revenue up on a daily basis as well as limit costs on the thing. So as long as we get our pricing close to that, they're happy with that. So we can work through this thing. And then I firmly believe, and you guys could disagree with me, but I firmly believe, ultimately, in the early days of this ASC switch, it's about the patients going through the normal doctor referral channels, but as patients get more engaged and more active and as they have to actually pay for a lot of their own health care, I think these ASCs are going to want to have a competing offering on being able to offer customer experience just like what we see in Europe. That's more of reasons why those segments exist, and I think that segment is going to be much larger in U.S. I think there's going to be consumers, patients, the demand, and -- I want that custom outpatient experience and the ASC operators are going to be able to market that and help drive patients to their centers. So you're right to point it out, there is some concern around that, and it's like anything else. At the end of the day, if all their shopping for isn't priced, then maybe Conformis isn't the best choice for them, but we can be very competitive. And I think we can actually be really good partner to the ASC operators. Okay, thank you, guys. I think there is -- operator, is there any more questions?

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Operator [41]

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No, sir. This concludes our question-and-answer session for today.

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Mark A. Augusti, Conformis, Inc. - CEO, President & Director [42]

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All right. Thank you, Sarah.

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Operator [43]

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You're welcome. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.