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spk01: Good afternoon, and welcome to the Cientra Second Quarter 2023 Financial Results Conference Call. My name is Keith. At this time, all participants are in listen-only mode. After the Cientra executives provide their business updates, there will be a question and answer session. As a reminder, today's conference call is being recorded. I now would like to turn the conference over to the host, Oliver Bennett, Cientra's Chief Legal, Compliance, and Corporate Development Officer. Mr. Bennett, you may begin.
spk06: Welcome, and thank you for joining us on today's call to discuss Cientra's second quarter 2023 financial results. On our call today, we have Ron Menezes, Cientra's President and Chief Executive Officer, Dr. Denise Dylas, Cientra's Chief Technical Officer, and Andy Schmidt, Cientra's Chief Financial Officer. We are pleased to have reported earlier today another quarter of record results for revenue, EBITDA, and pre-cash flow performance. we achieved our 12th successive quarter of year-over-year revenue growth, with revenues of $23.1 million, representing 7.5% growth over the prior period. Significantly, we achieved these results while also attaining a 63% year-over-year improvement in non-GAAP EBITDA and a 95% improvement in free cash usage of under $700,000 this quarter. As Ron and Andy will describe, these results give us confidence of meeting our goal of positive free cash flow performance by Q4 of this year. Before I turn the call over to Ron, I must remind everyone that we will include forward-looking statements in our prepared remarks and in response to any questions you may ask. These forward-looking statements are based on management's current assumptions and expectations of future events and trends. Our actual results may differ materially from those expressed in or implied by the forward-looking statements. The company undertakes no obligation to update or review any estimate, projection, or forward-looking statement. For more detailed discussion of the company's risks and uncertainties, I would refer you to our SEC filings, including our Form 10-K and Form 10-Q to be filed later this month, available on the company's website. With that, I'll ask our President and Chief Executive Officer, Ron, to comment on our second quarter results.
spk07: Thank you, Oliver. Sientra has reached a critical inflection point that supports a strategic direction of becoming a profitable and diversified surgical aesthetics company. As we reported earlier today, we recorded the lowest ever free cash flow usage in the history of the company. With this near break-even performance, combined with a continued market growth and disciplined financial management, we're confident we'll achieve positive free cash flow in the fourth quarter of 2023. Entering the second half of 2023 with a fully built-out leadership team and a new product suite of high-value products, Sientra is in the best fundamental position in our company's history. Importantly, for investors, we're committed to rewarding their patients. Here at the midpoint of the year, I'm confident that Cientra is a tipping point with market-leading top-line revenue at a scale where it can be leveraged to generate highly attractive, sustainable operating profit growth. It was just last year when Cientra was reporting an average of $10 million free cash flow usage each quarter. As we explained at that time, some of this was tied to necessary investments in Cientra's infrastructure and operations to support our path to profitability. Today's results are the product of those investments combined with the disciplined financial management that we have instilled as we have consistently reduced the free cash flow usage over the past several quarters, and in the most recent quarter, we reduced it again, coming in under $700,000, representing a 95% year-over-year improvement. A strong financial performance has not come at the expense of growth, and we have reported another record quarterly revenue result representing a 12-consecutive quarter of year-over-year growth. What is exciting about these results is that the growth was fueled by our core business, implants and expanders. It does not yet reflect the acceleration of growth we expect to see in the coming quarters from the new products we're introducing to the market. We're single-minded in our drive for long-term profitable growth. Our success is driven by three areas that differentiate Cientra in the market. our comprehensive product platform to serve the needs of board-certified plastic surgeons, our transformative products backed by robust clinical data, and a clear strategy for growth and disciplined financial management steering us to profitability. Let me elaborate. Cientra is a surgical aesthetics company with a platform of high-value products focused on board-certified plastic surgeons. We're positioning ourselves as a preferred partner for plastic surgeons, with a platform of products and services to meet their needs in both augmentation and reconstruction. We know that plastic surgeons value partners who can meet their needs, and Sientra has demonstrated its agility and capacity to evolve alongside them. This has shown Cientra's evolution of the past several years from a single product company to one that has expanded rapidly into reconstruction with interesting leading expanders, hat grafting, and other technologies to assist plastic surgeons in this complex area of care. A focus in reconstruction shows that we are not driving growth at any cost, but we are driving profitable growth, creating a clear line of sight to positive free cash flow performance by next quarter. I'm extremely proud of our accomplishment this quarter in obtaining FDA clearance of our AlloX2 Pro Tissue Expander, the first and only FDA cleared tissue expander that is MRI compatible. We expect that this product will be a game changer in the standard of care for reconstruction patients, as Denise will explain a little bit later in the call. This clearance, which is the first new tissue expander cleared by the FDA in many years, demonstrate Cientra's commitment to innovation and bringing transformative products to the market. While other companies may talk about getting products to the FDA, Cientra is one of the select companies with a proven track record of doing so, having had three new products cleared or approved by the FDA in the past 15 months. We have also introduced two new products to the market, Violity and SimplyDerm, and have additional new products launches planned for 2024. This level of innovation set us apart from the competition and will fuel our growth and profitability going forward. One example of that growth would be our fat grafting product, Violity. We began the early commercial launch of this product in the past quarter. While we continue to work through the contracting process of getting this product into hospitals, we're encouraged by what we're seeing in the early stages of the launch. Most hospitals that had placed their first orders for violin at the beginning of the quarter have already reordered products. We expect to see an acceleration of orders in the coming quarters as more hospitals begin ordering and reordering. In addition to this innovation, we have also expanded to three new international markets in the last 12 months. We're seeing solid growth in these new markets as we take share away from the existing companies in those countries. Physician interest in our products continue to grow internationally, as demonstrated by the recent scientific presentation on sanitary implants held at the ICOPLAST conference in Dubai. The event earned two Guinness World Records, one for the most attended plastic surgery lesson ever, and another for the most nationalities present at a plastic surgery conference. Looking forward to the balance of 2023, it is important to remember that augmentation and reconstruction are two different segments in plastic surgery with very unique market dynamics. The augmentation segment is cyclical and more sensitive to changes in consumer buying behavior. As a result, we're seeing softness in the augmentation segment this year, But as is typical of a cyclical market, we expect to see an upswing in augmentation in the future as our market research continues to indicate that interest in breast augmentation remains strong. The reconstruction market, on the other hand, is less sensitive to market fluctuations. Reconstruction cases also represent a higher revenue opportunity per procedure given the price points and use of multiple products. As a reminder, with the recent launch of Violet and Simpliderm, Sientra has more than doubled its total addressable market from more than $600 million to close to $3 billion. Our focus in both reconstruction and augmentation has been the foundation of our growth. We continue to add new accounts, and just this quarter, added close to 240 new accounts. During the past three years, we have doubled our market share in our core business of implants and expanders. Moving forward, we aim to enhance our penetration with existing accounts as they are more productive and drive most of our growth. As we look forward to the balance of the year, we're revising our full-year revenue guidance to $98 million to $102 million from the previous announced of $104 million to $109 million. The new guidance is an increase of 8% to 13% over 22 full-year revenues. This revision reflects our expectation that we'll see continuous softness in the augmentation segment. While we expect the softness to be offset by our continued double-digit reconstruction growth, we're also seeing the cadence of adoption of our Violet and SimplyDerm products follow the normal hospital contracting process. Achieving steady adoption in a hospital can take up to six months from getting the product or contract before we start to see meaningful revenue contributions. Given the number of accounts that are adding both products to their contracts, we believe that this will set us up for strong acceleration as we head into 2024 and beyond. As we continue to leverage our infrastructure and generate operating efficiencies, we're revising our no-gap operating expense guidance to $75 million to $78 million, a decrease of 16.5 at the midpoint versus 2022. On a gap basis, our guidance is $84 million to $87 million, a decrease of 23% versus last year at the midpoint. This reflects our confidence that Sanford can be cash flow positive by the end of this year. I'll now turn the call over to Denise Dials, our Chief Technology Officer, to share more about our product and clinical data.
spk00: Thank you, Ron. Ron has already spoken to you about how our platform is designed to serve the needs of augmentation and reconstruction patients and plastic surgeons. As we continue to expand our portfolio, transformative innovation continues to be top of mind. We continue to add products and solutions to support total body transformation, and we are excited about the groundbreaking products and clinical research we have. One example of that innovation is our Allox 2 Pro tissue expander, the first and only FDA-cleared MRI-compatible tissue expander. This is a significant advancement in the standard of care for reconstruction patients because it helps remove the limitation for women undergoing tissue expander-based reconstruction who cannot presently have MRIs. An MRI may be needed for these patients to test for recurrence of the cancer that led to the reconstruction in the first place. or to screen for other underlying conditions and injuries because the magnetic infusion ports of tissue expanders were considered unsafe for MRI. Before Allox-2 Pro, women were left with a choice of foregoing MRI screening or having an additional surgery to remove the tissue expander. Once on the market next year, Sientra's Allox-2 Pro will provide a new option that not only does not interfere with MRI, but also has negligible interference with radiotherapy, and allow for faster filling, which we believe will be groundbreaking for women and plastic surgeons. We are committed to transparency and accountability in our product development, which is evident in the clinical research data we share. We have significant depth in our research, and we believe that we provide more relevant and transparent data in our presentations and publications than anyone in the market. I will remind you that our breast implants were evaluated over a 10-year clinical trial with unparalleled safety and clinical results. Our implants have been clinically shown to have one of the lowest rates of capsular contracture and the lowest rupture and reoperation rate in the industry. Our ongoing post-approval study, nearing its 10th year, continues to provide data that reinforces our safety profile with real-world evidence. As we shared at the Aesthetic Society Annual Meeting in Miami in April of this year, our post-approval study six-year data continues to show impressive results. The study, which has over 5,000 patients and over 10,000 implants across more than 130 sites, demonstrates our implant efficacy in a wide range of patients and surgical sites, rather than hand-picked patients and procedures for the best outcomes. This is part of our commitment to accountability, and it is also why Cientra provides an industry-leading warranty that far surpasses similar products in the market. Importantly, we are not selective in the data that we present, but provide the data for all complications across all cohorts. We believe that this openness and transparency in the presentation of clinical data is critical and provides more meaningful information for physicians and patients than highly curated and selective self-reported post-market surveillance data or incomplete presentation of clinical data that excludes cohort and omits presentation of relevant complications. Our new products are also supported by deep and transparent research. We continue our ongoing 13-site long-term volume retention clinical study with Vialis. As we have previously stated, preliminary results from this study shows that viality yielded over 80% volume retention at both the three-month and six-month time points post-breast augmentation and reconstruction. This preliminary data makes viality the first and only system to have clinically demonstrated such high retention results. We expect to provide more data from this study in the early fourth quarter. It is our goal to seamlessly bridge the gap between innovation and safety. We know these procedures are life-changing for patients, and they trust our products to help them with self-confidence and self-respect as they transform and rebuild their bodies, completing their journey and helping them feel feminine and good about themselves. That is a responsibility we take very seriously as we bring products to market that we believe will transform the aesthetics industry. And now I will turn the call over to Andy Schmidt, our Chief Financial Officer, to discuss the financials.
spk04: Thanks, Denise. As Ron mentioned earlier, our Q2 2023 financial results showcased our continued trend of strong revenue performance, disciplined expense management, and exemplary EBITDA and free cash flow results. All of these elements support our path to cash flow positive performance which we expect to achieve by Q4 of this year. Our key Q2 2023 financial highlights include record Q2 revenue of $23.1 million as compared with $21.5 million for the prior year period, an increase of 7.5%. Non-GAAP operating expense of $17.5 million as compared to $22.3 million for the prior year period at 22% reduction. Non-GAAP EBITDA, of a $3.4 million loss as compared to a $9.2 million loss for the prior year period, a 63% improvement. Free cash flow usage was $693,000 as compared to free cash flow usage of $13.2 million for the prior year period, a $12.5 million or 95% improvement. Our core product revenues continue to build with market share gains across both augmentation and reconstruction with a key focus on new hospital wins. Our current period revenue does not reflect the launch and expected revenue contributions from SimpliDerm and only includes a small contribution from Viality as we began our early launch programs in Q2. Our free cash flow performance is a spotlight is our operating expense discipline combined with efficient working capital management combined for a near free cash flow break-even performance this quarter. This is the fourth consecutive quarter of improved cash flow performance. During the past four quarters, we saw free cash flow usage decrease from $50.5 million to $14.8 million from a year-over-year perspective. a 71% improvement. This trend is the result of the hard work we had been communicating to the street over the past year, and we expect this trend to continue over the next several quarters. Completing the P&L view, our pro forma gross margin of Q2 2023 was 61%, which compares to 61% for the same period last year. The current year's performance includes viability launch costs, which will decrease over the second half of the year. GapGrowth's margin of 55% was negatively affected by a non-cash depreciation and amortization charge of $1.5 million. This charge is primarily due to the inclusion of amortization of viability manufacturing know-how and developed technology and cost of sales. Prior to product launch, this non-cash expense was charged a G&A expense, This cost is fixed in nature, hence will not impact GAAP margins as significantly in future periods as viability sales continue to increase. Total GAAP operating expense per Q2 2023 was $19.7 million compared to $28.7 million in Q2 2022, a $9 million or 31% decrease. Total GAAP loss from continuing operations For Q2 2023, it was $9.5 million as compared to an $18.2 million loss for the prior year period, a 48% year-over-year improvement. Switching to key balance sheet items, cash at June 30, 2023, was $18.6 million, a decrease of only $0.8 million from the previous quarter. Given our improving free cash flow performance and growing revenues, We feel that we have sufficient cash to drive the business to free cash flow positive performance exiting fiscal year 2023. We continue to focus on working capital efficiencies. We see consistent strong performance in our inventory management with ending inventories at June 30, 2023 of $39.4 million, down from year-end December 31, 2022 of $42.7 million. This performance includes building viability inventory. Accounts receivable also is performing well. At June 30, 2023, our AR balance was 31.8 million, down from 36.9 million at year-end 2022. In all, We've seen a strong first half of 2023 in all facets of our financial model and look forward to continuing our trend of improving financial performance. At this time, I'll turn the call back to Ron. Thank you, Andy.
spk07: Our progress would not have been possible without a clear strategy for long-term, sustainable, profitable growth. As I said in my earlier remarks, we have reached an inflection point in our business model. we have remained singularly focused on providing the safest and most innovative solutions for the best aesthetic outcomes. At Cientra, we seek to empower patients during every step in their journey, innovate for their needs, and reduce the potential for risk and guide them in making informed decisions about their health. We have invested in the areas with the most potential for future growth and profitability, and it has helped us transform Sandra into a company that offers a diverse portfolio of transformative products and services. And with that, I'll turn the call over to the operator for Q&A. Operator?
spk01: Yes, thank you. At this time, we will begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble the roster. And the first question comes from Anthony Vendetti with the Maximum Group.
spk02: Hi. Good evening. Thank you for taking the question. This is actually Jeremy on for Anthony. So, I just first want to start with the macro environment. You said that softness, you've seen softness in the augmentation market. Do you think that's due to higher interest rates or maybe just customers have a fear of a pending recession, so they're just hesitant to invest now in that type of surgery?
spk07: This is Ron. I don't know if I would speculate what the reasons were, but one of the great things about where we're at now as a company is that augmentation obviously is important. It was 47% of our business this past quarter. But soon, sometime in late next year, in 2025, will be a smaller part because at the end of the day, as it will become a diversified company and we've started entering new TAMs, close to $3 billion TAM from $650 million, that will change. Now, what are we seeing in the augmentation market? Even though there is a softness there, there's still a much higher interest. by prospective patients. We did a market research in March of this year, and the same market research we did in 2022 had about 13% of patients thinking about getting breast aug within seven to 18 months, and now it's 53%. So there is a high interest of still getting breast augmentation, much higher than last year, but I think between the second quarter and all the different travels, whatever everyone's thinking, it's hard to measure There's a softness during augmentation, but there's still a very high interest for getting that surgery done in the next seven to 18 months.
spk02: Oh, yeah, I understand. So it seems like it's a cyclical, more cyclical, and then it should rebound, you know, healthy rebound when the market rebounds the macro environments. Okay. And then just actually switching to the vitality, the symbols. I know you said you're in the middle of this. There's a six-month-long hospital contract process. What percentage of the hospitals and what does that represent of the accounts that you currently have? Are you in the middle of this process?
spk07: We're just introducing. We actually just introduced vitality beginning of the quarter. And Simply Derm in the process of reaching out to some accounts, trying to do contracting. We're very encouraged with what's happening in the beginning. As I stated earlier, we actually have seen the hospitals that came on board in March, April, they are ready to reorder. At the same rate, they're ordering tissue expanders and implants. Now we're going through that process of getting more accounts. It's happening weekly for Simply Derm. We're introducing the product to hospitals and products to GPOs. So we're seeing some good, very good feedback on that discussion as well. We're very excited about some of the networks that are experiencing and trying viability. And we've seen as well, an example is a well-known hospital that has a very high interest in Simpliderm. So we're in the introduction part or very early stages for Simpliderm. And the same thing for a violator, but very excited about what's happened to a violator of the hospitals that came on board.
spk02: Okay, great. Yeah, it sounds really great. I think it's going to really be a nice contributor to revenue. And then just the last question from us, you – sorry, excuse me, yeah. What – oh, sorry. Yeah, I don't know if you could – oh, sorry, I just lost the question here. Sorry, yeah, I'll hop back into the queue. If I pull up the question again, I'll jump back in. Okay, thank you.
spk01: Thank you. And the next question comes from John Block with Steeple.
spk03: Hey, it's Jordan Bernstein on for John. I guess my first question is on new account growth. You reported 240 in the quarter. Where would you expect further new account growth to come from? Is that viality in some of the newer products opening new doors for the business? And then if you could just break that down, the 240 between AUG and reconstruction for us. Thanks.
spk07: Yeah, about 75% to almost 80% of our revenue comes from existing accounts. Those accounts really drive our business. Obviously, the new accounts is future revenue coming in. And right now, the 240, 125 are augmentation, and 115 came from reconstruction accounts. So still much higher for augmentation, which we find to be exciting for the future, as we were discussing before. The market is cyclical. The great thing is we'll continue to gain share. I don't have the data for second quarter, but data that we already share in first quarter continue to grow share in both augmentation and reconstruction.
spk03: Great, thank you. And then I guess my follow-up would just be on the demand environment in general. I am hearing from some of your aesthetic peers a bit more hesitancy on the purchasing side. That said, now that we are into August, would you say there's some seasonal summer demand that you're experiencing in the augmentation side? And how would you anticipate the second half of the year progressing cadence-wise, 3Q versus 4Q, with the fourth quarter being the strongest of the year, if I have that correct? Thanks.
spk07: Remember, keep in mind that as we're becoming a surgical aesthetic company, focusing on the hospital environment as well, There is no cyclical impact there. We continue to grow extremely well on the reconstruction side, and as we roll new products in the hospital environment, we'll be entering new markets that we're not even discussing right now. So we're really excited about the future of the company, the timing of the launch of our two products that I just said that we're introducing, and there's acceleration of new accounts and hospitals adopting both Violet and Simpliderm. And then beginning next year, we have AlloX2 Pro that will be introduced to the market, which is a complete game changer. And we already have requests by hospitals to want the product, and we try to tell them we're setting up manufacturing and everything in the next five months. So that's going to be our big focus as well. Now, on the augmentation side, you'll see more of a cyclical. Usually in the summer, it's a little softer in augmentation, and then it picks up again in late fall and definitely in the fourth quarter. The critical thing is the interest by the patients is still very, very high and has not changed, independent of what's happening in a microeconomic area.
spk03: Great. And then last question for me, just on viality, the fat grafting system. It seems like the contracting processes are ongoing with the hospitals, but would you still think that the revenue stream would account for 5% to 10% of revenues exiting 23? How would you characterize that moving forward? That's the last thing.
spk07: Yeah, I think, yeah, we still think it would be in that range, exit Q4 this year, yeah.
spk03: Great. Thanks for the call.
spk01: Thank you. And the next question comes from Alex Nowak with the Craig Howland Group.
spk05: Hey, great. Good afternoon, everyone. Ron or Andy, do you expect to remain cash flow positive after Q4, so in Q1 2024, or do you think throughout 2024 the cash flow positivity might jump around a little bit as you're rolling out the new products?
spk04: Sure. This is Andy. Yes, we're modeling it. It's going to be variable depending on the launches. However, it's not unusual for us to see a seasonal Q1 where cash flow usage is higher than the other quarters. That has a lot to do with paying our key vendors. It has to do with manufacturing coming off of a very, very strong Q4. Again, our seasonally best quarter has to do with just basic corporate structure of paying commissions, paying year bonuses, and so on. So that's the one piece of it. Again, we're not concerned at all about our cash balance going into the Q1 and into Q2, but that's the only quarter where we see seasonality on cash. The other quarters are pretty predictable.
spk05: That's helpful. And when you think about how the bundling strategy is working so far this early in the and using biology fat grafting one-to-one with a Cientra implant, or maybe is it being used maybe one-to-two? Like, how to think about how often the biology is being used with another Cientra product?
spk07: Yeah, it's too early on that, and we do have a strategy that we're not going to get into details for obvious reasons, but we do have a strategy. We have a plan, and we have discussions with hospitals about vetting all products, There is obviously an advantage for the hospital. As I stated before, most hospitals prefer to deal with one vendor. And now we have the ability to walk into the hospital and offer almost everything that a surgeon needs in their reconstruction from obviously implants, tissue expanders, an ADM, and also a fat grafting. But we are seeing some wins already in some of those hospitals based on this multiple product strategy.
spk04: And let me kind of add to the modeling side of that. As Ron said, we've got the complete suite now, the ADM, the expander, the implant, and the fat grafting. When you look at that, and if you look at how procedures are done, a single procedure utilizing a full suite can be as high as $19,000 of revenue for Sientra for one patient. That compares to an augmentation patient that basically might be $500 or $600. Again, getting back at that suite, that hospital suite, the gross margin dollars are 20 times greater for one patient than basically one augmentation patient. So it's a tremendous multiplier on this model.
spk05: It certainly makes sense. And then, obviously, the FDA came in and gave you the approval on Allerax Duo Pro. There's obviously the talk about them stepping, you know, putting that as a PMA potentially product line. So I guess what is, what's the background? Why did FDA step away from going the PMA route?
spk00: Hi Alex, this is Denise. Actually, we're very excited with the recent clearance for Alex 2 Pro because it's a nod of confidence to the strength in our product, the strong data that we have around it, and that we've gotten really, really good in our regulatory strategies to work with them and have quick turnaround. Right now, we're getting ready and focused on launching. We know that overall there's recent data that shows that FDA is taking over 160 days for 510K clearances, and over two and a half years for PMA approval. So we are very excited that now we have the opportunity with this clearance to move on, launch the product, and introduce it because there's a huge need in the market and a lot of excitement around it. The other interesting thing is if they ever decide to go PMA route, which at the moment there are no active conversations, All products that are already available on the market will have an expedited pass for PMA approval. That's what they have publicly said before.
spk05: Got it. Okay, very helpful. And then just lastly, just the status and competition in the market, those who are already in the market, those who want to come to the market for implants, just what's the latest take on the market out there?
spk07: I'll start moving over to, actually, I'll let Ali address as well. In the current market environment in the U.S., you have two competitors that still own the majority of the market. So we're very, very excited about the future as well in both AUG and RECON. We have growth opportunities in reconstruction, and I announced in the first quarter that we are about 23% share in recon, so we've got a long ways to go to be a leading company there. And then we're in the mid-teens on the other side in augmentation. They are great competitors. They are still very much focusing on their key products. And then from a new entry right now, I don't expect anyone anytime soon, but I'll let Ali make any comments on that.
spk06: Yeah, just to follow Ron's cameras, obviously the existing competitors, you know, we're seeing aggressive responses in the market. So it's credit to our products and our sales force that we're continuing to gain market share. And then as for the FDA, you know, we're obviously not privy to those conversations, but as Denise alluded to, there's recent data from BTIG that showed, you know, it's on average two and a half years, actually almost closer to three years for the FDA to approve a PMA. So that suggests that, you know, any new entrant, you know, has a significant path to getting approval in the marketplace.
spk05: All right. Appreciate the update. Thank you.
spk01: Thank you. As I ask, I know further questions this time, and we have no closing remarks. That concludes our session. Thank you for participating in today's meeting.
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