Establishment Labs Holdings Inc. (NASDAQ:ESTA) Q4 2023 Earnings Call Transcript
Establishment Labs Holdings Inc. (NASDAQ:ESTA) Q4 2023 Earnings Call Transcript February 28, 2024
Establishment Labs Holdings Inc. beats earnings expectations. Reported EPS is $-0.79, expectations were $-0.95. ESTA isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon. Welcome to Establishment Labs’ Fourth Quarter 2023 Earnings Call. At this time, all participants will be in a listen-only mode. At the end of this call, we will open the line for a question-and-answer session. Instructions will follow at that time. As a reminder, today’s call is being recorded. I will now turn the call over to Raj Denhoy, Chief Financial Officer. Please go ahead.
Raj Denhoy: Thank you, operator, and thank you everyone for joining us. With me today is Juan José Chacón Quirós, our Chief Executive Officer. Following our prepared remarks, we’ll take your questions. Before we begin, I would like to remind you that comments made by management during this call will include forward-looking statements within the meaning of federal securities laws. These include statements on Establishment Labs’ financial outlook and the company’s plans and timing for product development and sales. These forward looking statements are based on management’s current expectations and involve risks and uncertainties. For discussion of the principal risk factors and uncertainties that may affect our performance or cause actual results to differ materially from these statements, I encourage you to review our most recent annual and quarterly reports on Form 10-K and Form10-Q, as well as other SEC filings which are available on our website at establishmentlabs.com.
I’d also like to remind you that our comments may include certain non-GAAP financial measures with respect to our performance, including but not limited to sales results which can be stated on a constant currency basis or the company’s earnings, which can be stated as adjusted EBITDA. Reconciliations to comparable GAAP financial measures for non-GAAP measures, if available, may be found in today’s press release which is available on our website. Please also note that Establishment Labs receive an investigational device exemption from the FDA for Motiva Implants and is undergoing a clinical trial to support regulatory approval in the United States. We continually seek to expand the geographies in which our products are regulatory approved.
Please check with your local authority for specific product availability. The content of this conference call contains time-sensitive information accurate only as of the date of this live broadcast, February 28, 2024. Except as required by law, Establishment Labs undertakes no obligation to revise or otherwise update any statement to reflect events or circumstances after the day of this call. With that, it is my pleasure to turn the call over to our CEO, Juan José.
Juan José Chacón Quirós: Thank you, Raj. And good afternoon, everyone. Revenue in the fourth quarter of 2023 totaled $31.6 million in line with the range we pre-announced in early January. While our second half results reflected lower demand for breast procedures globally, our markets are stabilizing and we are seeing improving demand, including from our distributors. Our global market checks suggest that we will have continued improvement throughout 2024. Given this, we are setting guidance in a range of $174 million to $184 million, representing growth of 5% to 11%. This guidance does not include the launch of Motiva Implants in the United States, which would significantly improve both our revenue and growth. 2024, the 20th anniversary of our founding, is a pivotal year for Establishment Labs.
With the approval of our implants in China and our pending approval in the United States, we are becoming a true global player in our industry. We are well-positioned for multiyear growth and poised to take global market leadership in an industry that has not brought any meaningful innovation to market in more than two decades. 2024 is also the year in which we will achieve the necessary scale to become EBITDA positive, with a clear path to cash flow positive. Since we launched Motiva 14 years ago, we have been in the most price-sensitive markets with low-ASPs and gross margins. Our entries into China and the United States provide the necessary market dynamics for a healthy business model with significant growth. We have taken and continue to take a number of steps to reduce cash burn and expect cash use to be less than $48 million.
It is worth reiterating that we remain focused on achieving positive EBITDA by the end of this year and turning cash flow positive in 2025. As we prepare for our growth ahead, we have taken tangible steps to focus our business on the areas of highest returns. In this process, we have reduced global headcount by approximately 28% and have reprioritized our operating spending. The impact of these initiatives can be seen in the reduction in cash use in the fourth quarter to $12.2 million. This was less than one-third of our cash use in the second and third quarters of 2023. This focus on improved efficiency and cash use is core to our budgeting process and is a significant part of how management will be compensated this year. In early January, we added to our balance sheet with a $50 million private placement, bringing our pro forma cash position to approximately $90 million.
Last week, we announced an amendment to our existing credit facility with Oaktree Capital. The amendment updated the terms under which we can draw an additional $50 million in non-dilutive financing. The first $25 million is available in FDA approval of Motiva in the United States. While we are committed to achieving cash flow breakeven with the cash we have, the availability of this capital, should we need it, helps further de-risk the full execution of our U.S. launch strategy. Raj will provide additional details on our fourth quarter performance and our outlook in a moment, but I would like to provide some additional detail on the most important near-term initiatives, the United States, China, and Mia Femtech. In the United States, the first case with our Motiva Flora tissue expander was performed in late December by a surgical team led by Dr. Mark Clemens at the University of Texas, MD Anderson Cancer Center in Houston, Texas.
Flora is initially being made available to a limited number of Centers of Excellence in the United States. We are working through the back process with a first list of 15 Centers for Excellence across the country. As these premier cancer centers have taught Flora, the benefits of this unique expander are making clear that there is a new standard in breast reconstruction. Flora includes our patented SmoothSilk surface technology, as well as an RFID enabled non-magnetic port and is labeled as MRI conditional by the FDA. By being magnet-free, Flora avoids the interference that magnets cause during MR imaging and can improve the precision of radiation oncology treatments. This is a distinct advantage to Flora, as all other commercially available breast tissue expanders include magnets.
Flora defines a new era for breast reconstruction, and it will help further transform breast cancer into a treatable disease from which women can fully recover. For our Motiva Implants, our PMA remains under review by the FDA. Our interactions with the agency on Motiva remain very positive and we continue to make progress. We do not yet have a date for GMP inspection, but given our regular interactions with agency, we expect to receive notification very soon. Our team is ready for the inspections, and we have over a decade of experience in audits from high vigilance authorities. So far this year, we have had our MDSAP surveillance audit, which includes compliance with medical device regulations from the United States, Canada, Europe, Brazil, Japan, and Australia, for our three manufacturing sites in Costa Rica.
We also had our quality management system surveillance audit for the latest MDR European medical devices regulations. These audits resulted in the renewal of our certifications and the recommendation for inclusion of our latest manufacturing unit at the Sulàyöm. Mia Femtech is creating an entirely new true minimally invasive category within breast aesthetics and the list of countries where Mia is available continues to grow. We have partner sites in Japan, Spain, France, Sweden, Switzerland, Germany, and Costa Rica and we have partnered with distributors in the United Kingdom, Turkey, Poland, and the Middle East to begin opening sites in those regions in 2024. We now have 17 centers certified to offer the Mia experience across 15 cities in Japan, Switzerland, Spain, France, Germany, and Sweden, with 39 certified plastic surgeons performing Mia.
We are in the process of onboarding an additional 15 new centers across Europe and the Middle East with 31 additional plastic surgeons. We have also signed 20 new centers, which will begin the process of onboarding in the first half of this year. On top of that, we have a lot of interest from the best plastic surgery clinics who see the business opportunity with the expansion into minimally invasive breast aesthetics. And we are in advanced negotiations with 16 such clinics. Mia is gaining appeal with a new consumer. Of the women who experience Mia, so far 38% were not considering breast augmentation prior to Mia. The average consideration time among these women was less than 2 months versus 3 to 7 years for traditional breast augmentation and the average price paid for Mia was 70% or more higher than the traditional procedure.
Moreover, the testimonials from women reinforced the value proposition based on convenience, quick recovery and excellent aesthetic outcomes. It is still early in the launch of Mia, but we are seeing proof points that we’re creating and capturing new consumer demand in this new category in breast aesthetics. In China, we held a series of events during the first week of January to formally launch Motiva with our exclusive distribution partner. We held special events in Shanghai, Guangzhou, Shenzhen, and Hainan. Supported by our partner, additional medical education events have been taking place in different cities in China and will continue throughout the year. China is the second largest market for breast augmentation and has among the highest ASPs in the world.
Our research confirms that there is a large segment in a Chinese market willing to pay significantly higher prices for the perceived value of the highest quality products. We expect our share in the Chinese market will mirror the success we have seen in surrounding markets of Asia. In markets like South Korea, Japan, Thailand, Vietnam, Singapore, Hong Kong and Taiwan, we hold the number one market share position, and China should match this success over time. I will now turn the call over to Raj.
Raj Denhoy: Thank you, Juan José. Total revenue for the fourth quarter was $31.6 million, a decline of 28% from the year ago period. Currency had a positive impact of approximately 2% in the fourth quarter. Direct sales in fourth quarter were approximately 49% of implant sales, while distributors made up the balance. From a regional perspective, sales in Europe, Middle East, and Africa were approximately 53% of the global total, Asia Pacific 19%, and Latin America 27%. Brazil, which is our largest market globally, accounted for approximately 10% of total quarterly sales. A gross profit for the fourth quarter was $20.6 million, or 65.2% of revenue, compared to $28.2 million or 64.3% in revenue for this same period in 2022. A gross profit in the fourth quarter was negatively impacted by an obsolescence charge, without which gross margins would have been approximately 66%.
A gross margin was also impacted by higher overhead and labor costs. Costs were higher in part from changes in foreign exchange rates between the U.S. dollar and the Costa Rican colón. As we report in U.S. dollars, the strengthening of the colón over the last year resulted in higher reported costs. Average selling prices in fourth quarter were up from the third quarter of 2023 and year-over-year. SG&A expenses for the fourth quarter increased approximately $2 million to $36.9 million, compared to $34.99 million in the fourth quarter of 2022. The increase in SG&A in fourth quarter resulted in part from our investment in new growth initiatives like Mia and preparations for our launch in U.S. These were offset by the significant cost reduction initiatives we undertook in quarter.
SG&A declined $3.1 million sequentially from the third quarter. R&D expenses for the fourth quarter declined approximately $700,000 from the same quarter year ago to $5.8 million and were down $1.3 million, sequentially. Total operating expenses of the fourth quarter were $42.7 million, an increase of approximately $1.4 million from a year-ago period. Operating expenses declined at approximately $4.4 million in the third quarter due primarily to cost reduction initiatives in the quarter. The net loss from operations for the fourth quarter was $22.1 million compared to a net loss of $13.2 million in the same period in 2022. Our cash position as of December 31 was $40 million dollars, compared with $66.4 million at the end of 2022. Our cash use in the fourth quarter was $12.2 million, which compared to $38 million in the previous quarter.
With the $50 million private placement in January, our pro forma cash position increased to $90 million. Last week, we also amended our credit facility with Oaktree. The milestones under which we can access the two remaining tranches on our debt facility was total $50 million were amended to allow us to access the first $25 million on U.S. FDA approval of Motiva Implants, and the second with the additional milestone of achieving $195 million in trailing 12-month sales. For 2024, our guidance excludes the contribution of Motiva Implant approval in the United States. We’re guiding to a revenue range of $174 million to $$184 million, representing growth of 5% to 11%. We expect currency to have a minimal impact on our sales results this year.
We expect gross margins in 2024 to be approximately 100 basis points higher than 2023 to a range of 65.5% to 66%. We’ve taken a number of steps to lower cash use in 2024. These efforts include the reduction of global personnel by approximately 28%, targeted reductions in operating expenses, and management of inventory levels. As a result, we expect cash used before financing in 2024 to be less than $48 million. With these actions, we expect to achieve positive adjusted EBITDA in 2024 and positive cash flow in 2025. I will now turn the call back to Juan José.
Juan José Chacón Quirós: Thank you, Raj. Establishment Labs was founded on bringing differentiated technology to an industry that has seen little innovation for decades. Unlike our competitors, we have grounded our products in true science and innovation, and the clinical and scientific data clearly demonstrate our technologies have no parallel in this industry. We are now launching our technologies into China and the United States, the two largest highest priced and highest gross margin markets in the world. In our current markets, Flora is constructing a new standard in breast reconstruction, and Mia is creating an entirely new and higher value category in breast aesthetics. We are acutely focused on creating shareholder value, and a significant piece of this is to get to cash flow positive as soon as possible.
We are confident in our ability to do this early next year and have model or cash spent accordingly. With the cash we have on hand and the amendment to our credit facility, we are in an excellent position to fund our growth initiatives while meeting our profitability targets. 2024 will be one of the most important in our 20-year history. We are entering this year with a solid foundation and with the clear path to become the leading global company in breast aesthetics and reconstruction. I will now turn the call over to the operator for your questions.
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