Paragon 28 Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2023

There are 11 speakers on the call.

Operator

Good afternoon, and welcome to Paragon 28 Third Quarter 2023 Earnings Conference Call. Currently, participants are in listen only mode. We will be facilitating a question and answer session at the end of today's call. As a reminder, this call is being recorded for replay purposes. And I would now like to hand the conference over to your host today, Mr.

Operator

Matthew Brinkman, Senior Vice President of Strategy and Investor Relations. Mr. Brinkman, please go ahead.

Speaker 1

Good afternoon, and thank you for joining Paragon 28's Q3 2023 Financial Results and Earnings Call. Presenting on today's call are Albert DeCasa, Chairman and Chief Executive Officer and Steve Deitch, Chief Financial Officer. Before we begin, I would like to remind you that management will make statements during this call that include forward looking statements within the meaning of federal securities laws, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward looking statements Statements made as to the company's or management's intentions, hopes, beliefs, expectations or prediction of future events, results or performance. These forward looking statements are subject to a number of risks, uncertainties, estimates and assumptions that may cause actual results to differ materially from those forward looking statements.

Speaker 1

All forward looking statements are based upon current available information and Paragon 28 assumes no obligation, except as required by law, To update these statements, additional information concerning certain risks and uncertainties that may impact these forward looking statements is contained from time to time in the company's SEC filings and in the press release that was issued earlier today. During this presentation, we will refer to the non GAAP financial measures of adjusted EBITDA and constant currency net revenue growth. A reconciliation to the most comparable GAAP financial measure, net income and reported net revenue growth is contained in our press release issued earlier today. And with that, I will now turn the call over to Albert.

Speaker 2

Thanks, Matt. Good afternoon and thank you for joining us for our Q3 2023 earnings call. I will start things off with a review of our recent performance followed by highlights from the quarter. Then I'll pass it over to Steve to provide further details on our financial results, An overview of our new and improved credit facility, which we also announced today and an update on our 2023 financial guidance. To kick things off, global revenue was $155,800,000 for the 1st 9 months of 2023, Representing 20% reported growth and 21% constant currency growth, respectively.

Speaker 2

Our balanced business model continues to drive our revenue growth Well above the estimated market growth rate of 7% with meaningful growth contributions from each of the 5 Foot and Ankle sub segments. 3rd quarter 2023 global revenue was $52,800,000 representing 15% reported and constant currency growth Compared to the Q3 of 2022, I am very pleased with this performance given the tough 30% prior year constant currency growth comparison And the short term supply chain disruption. We continue to execute on our U. S. Strategies that have and will continue to drive strong and sustainable growth.

Speaker 2

During the Q3 of 2023, we increased our U. S. Producing sales roster by almost 20% to 257 compared to the Q3 of 2022, while increasing our surgeon customer base by 9% to a record 2,061 customers. We also continue to see nice levels of year over year revenue gains From both legacy producing sales representatives and surgeon customers, driven by new product launches combined with solid sales force execution and leading medical education. Further, we have several important and exciting product launches happening in the coming months in tandem With recent launches, which will provide additional growth opportunities in the U.

Speaker 2

S. Our international business continued to perform During the Q3 of 2023, and we continue to be excited by the opportunity we have in both our most established markets as well as other increasingly important markets. Our growth is ultimately driven by our ability to bring innovative and relevant new technologies which help our surgeon customers improve foot and ankle patient outcomes. As a reminder, we typically launch 5 to 10 products each year And this year will be no different. This year, we've launched 6 products to date, including our 2nd metatarsal shortening system, The Gorilla Supramalleolar Osteotomy Plating and Wed System, the Jaws GreatWhite Nitinol Staple System, the Beast Cortical fiber bone graft and 2 soft tissue products with the reinforced Extra Osseous repair system and Bridgeline adaptive tape.

Speaker 2

I also continue to be thrilled about the depth and quality of our product pipeline with over 20 active projects in development, including several launch is planned in the next few quarters and beyond. Finally, we are closely following GLP-one developments And potential foot and ankle market implications. At the same time, we are focused 1st and foremost on executing our business strategy To improve foot and ankle patient outcomes, I'll start by saying the market that we are exclusively focused on foot and ankle is truly a gem. Today, the global foot and ankle market is estimated to be more than $4,900,000,000 growing rapidly at about 7% With potential for growth acceleration driven by new technologies such as Smart 28 that we believe have the potential to reduce current levels of foot and ankle complications. We are positioned very well in this great market, and we expect share gains to be the primary driver of our growth in the years to come.

Speaker 2

Of course, it is impossible to speculate what impact, if any, GLP-1s will have on the future foot and ankle market. But our view is that anything leading to a more active lifestyle could ultimately benefit the foot and ankle market, which is our singular passion and focus. Our experience Generally indicates that foot and ankle patients are typically younger and more active than in other orthopedic and medtech markets. And less of these patients also tend to be better surgery candidates. So we have quite a few reasons to be bullish on our market and our business.

Speaker 2

Our Q3 earnings supplement on our Investor Relations website includes additional details regarding GLP-1s and the foot and ankle market as well as a few other topics we are discussing today. With that, I will now turn it over to Steve.

Speaker 3

Thank you, Albert. Paragon 28's Q3 2023 revenue was $52,800,000 Representing 14.7 percent and 14.5 percent reported in constant currency year over year growth, respectively. Our U. S. Revenue was $44,600,000 representing 11.5% growth over the prior year quarter And a nice sequential increase of $2,500,000 from the Q2 of 2023.

Speaker 3

Our international revenue was $8,200,000 representing 36.2% and 34.7% Reported in constant currency year over year growth, respectively. Supply chain headwinds continued into the Q3 of 2023 as Expected, but to a lesser extent than those experienced in the Q2. We continue to expect Supply chain headwinds to diminish further during the Q4 of 2023. Adjusted EBITDA for the Q3 of 2023 improved by 54.1 percent to a $1,200,000 loss. On a year to date basis, our adjusted EBITDA improved by 42.4 percent to a $5,200,000 loss With gross profit margin at 81.9%.

Speaker 3

Gross profit margin for the quarter was 80.3% It was approximately 1 percentage point less than the Q3 last year due to increased inventory reserves. Despite making continued growth investments in R and D and selling and marketing throughout 2023, Quarterly operating expenses have remained consistent at approximately $51,000,000 throughout 2023, resulting in continued operating expense leverage and profitability improvements. We expect operating leverage And profitability to continue to improve in the Q4 of 2023 and beyond, which we believe will drive positive adjusted EBITDA on an Annual basis beginning in 2024. Now turning to cash flow. Our operating cash use for 2022 And 2023 year to date combined totaled approximately $100,000,000 compared to approximately breakeven operating cash flow in both 2020 in 2021.

Speaker 3

There are 3 primary drivers of the change in operating cash use. 1st, inventory purchases have been $41,000,000 above our normal operating levels due to supply chain disruptions resulting in temporary stockpiling of 2nd, we made $27,000,000 of non recurring legal settlement payments, which were paid in full earlier this year. 3rd, we made important targeted growth investments in our business, resulting in temporal negative adjusted EBITDA equaling $15,000,000 loss since the start of 2022. These three items together account for 84,000,000 Of the nearly $100,000,000 of operating cash used since the start of 2022. Each of these items created cash flow headwinds In 2022 2023, but importantly, we believe these three items will become cash flow tailwinds beginning in 2024 and here's why.

Speaker 3

With supply chain disruptions continuing to abate, over time, we expect to return our inventory balances 2020 2021 levels of operating efficiency. Our enhanced operations function has great new leadership And team members, material resource planning tools and committed vendor partners and execution plans are underway To drive significant improvements in inventory efficiency as we close 2023 and enter 2024. Finally, as previously mentioned, we expect positive annual adjusted EBITDA in 2024 and beyond, Building on the earnings momentum over the last several quarters, leveraging past investments and continuing to make important growth investments to grow our business At multiples of the market growth rate. Now I'd like to share some information on our new and improved senior credit facility. As you know, we previously had a $90,000,000 senior credit facility with $30,000,000 drawn.

Speaker 3

The new $150,000,000 senior credit facility with Ares announced today expands our available borrowings by $60,000,000 And importantly, it is non dilutive with no equity sweeteners such as warrants. Further, It's competitively and similarly priced to our previous facility. With this transaction, we drew $100,000,000 at close today, Bringing the company's total pro form a liquidity to just under $150,000,000 including approximately $100,000,000 of pro form a cash As of September 30, 2023. We believe this level of liquidity reinforces P28's pathway to cash flow breakeven, Given our expected continued improvements in earnings and cash flow into 2024 and beyond. Finally, on this topic, we are thrilled to partner with a high quality lender such as Ares as we continue to rapidly grow our business.

Speaker 3

Now turning to our 2023 revenue guidance. The foot and ankle market is strong, Our business fundamentals and leading indicators are positive, and we have great confidence in our growth prospects. Our updated 2023 revenue guidance accounts for these factors, including the improving supply chain environment, but also factors in the continued uncertain macroeconomic environment. For the full year of 2023, We are reaffirming our previous net revenue guidance range of $214,000,000 to $218,000,000 And at midpoint, This guidance range implies 19% reported and 20% constant currency year over year growth. Our net revenue guidance also assumes foreign currency translation rates remain consistent with current translation rates.

Speaker 3

That is the end of our prepared remarks.

Operator

Thank you. We will now open the line for questions. Our first question today comes from Matthew O'Brien with Piper Sandler. Matthew, please go ahead. Your line is now open.

Speaker 4

Afternoon. Thanks so much for taking the questions. I guess for starters, maybe I don't know if it's Albert or Steve, but the Q3 result of such a tough comp is really impressive to see, especially the Punch a bump when we're not getting that from a lot of ortho companies this quarter. So can you just talk about some of the improvements that you saw from a productivity Supply chain perspective, they got you there. And I guess just kind of wrapping into that question, how come you didn't take maybe the low end of

Speaker 2

the guidance range up a

Speaker 4

little bit, just given what we saw here in Q3?

Speaker 2

Yes. Maybe I'll take a start on that one, Matt, and great to hear from you. I got to tell you, we were pretty pleased with our team's performance in Q3. I think it's a couple of things that you saw there that Led to a sequential increase there. One is some of the product launches in last year and in the beginning of this year, I think started to influence us there a bit.

Speaker 2

We did start to see some improvements in the supply chain that we had discussed in the Q2 call, and I think that's we're expecting that to continue to improve Through the rest of this year. And then just executing. Our medical education plan has been going really well. We launched A second mobile lab in Q3, and I think you're starting to see some of those things paying off and Allowing us to execute nicely.

Speaker 3

Yes. Hey, Matt, it's Steve. And on the second part of the question, we really Just took a look at full year taking into account our business being very strong, fundamentals, leading indicators, etcetera, including The record number of producing sales reps that we had in the Q3 and a record number of customers again, but also balancing that with The fact that we're not completely through the challenge with the supply chain, it is getting better. It got better in the 3rd quarter. We expect it to get 4th continue to get better in the Q4, but we've taken that into account in the low range.

Speaker 3

And also Just the overall general macroeconomic environment and uncertainty. So that is the when you think about the low range, think about Supply chain potential impacts and also any kind of worsening in the macroeconomic environment.

Speaker 4

Got it. That's helpful. And then second question, Steve, is probably for you. Just specifically on the Ares Facility, I mean, that's a big step up from what you had before. Just talk maybe a little bit about

Speaker 3

The breathing room, I don't know

Speaker 4

what the right analogy is to use here, but the breathing room that provides to get you to cash flow Breakeven or positive in terms of the timeframe for that specifically after getting to adjusted EBITDA positive

Speaker 3

Yes. We're really excited to put that in place. It's a competitively priced agreement. It is a step up from what we had before. We went from $90,000,000 to $150,000,000 of available credit.

Speaker 3

And We did that for a couple of reasons. 1, it provides just a reinforcement of our pathway to cash flow breakeven. We have spent more on cash over the last 2 years than we've historically spent, particularly on things like inventory. And also, we finalized our legal settlement and we also invested in the business and We ran actually EBITDA losses over the last 2 years. And as we look forward, we expect those to reverse and really improve our cash flow.

Speaker 3

But this agreement gives us A backstop, a cushion per se, and we hope that gives investors just visibility that there is an absolutely clear path runway to Breakeven. And we felt that before, but we feel with this augmenting it, I think it's even more of a reason to believe for People that aren't potentially as close to the business is Albert and I.

Speaker 4

Got it. Thanks so much.

Speaker 5

You got it. Thanks, man.

Operator

Our next Question comes from Craig Bijou with Bank of America. Craig, please go ahead. Your line is open.

Speaker 6

Good afternoon, guys. And thanks for taking the questions. Congrats on the strong quarter on a very tough comp. So Good to see. I wanted to start with the international business.

Speaker 6

I know it's only 15%,

Speaker 7

maybe a

Speaker 6

little bit less Of your total business, but you've been putting up some pretty strong growth there. So, Albert, maybe talk about The markets, your opportunity there, is it expanding foot and ankle procedures in certain markets? Are you taking share? Just Maybe a little bit more color on the international strategy and maybe how sustainable this level of growth is for the next couple of years.

Speaker 2

Yes, great to hear from you, Craig. And maybe I'll take a stab at this. And anything I miss, Steve can shed some color on it as well. But Generally speaking, I'll tell you, when we first entered the international market, we were paying special attention to any Variances and preferences and just the style and structure of our kits being so specifically designed for the U. S.

Speaker 2

It was something that we were vetting and the response of that was really, really strong. And so the very first countries we entered like South Africa Have shown us that the setup of Paragon 28 is going to be very influential in the international market. It gave us a lot of confidence about that moving forward. On the other side of that equation, I'll tell you, our goal here is to do something powerful in the foot and ankle space, And we can't do that as a U. S.

Speaker 2

Only company and it means that we need to bring in the styles and preferences from all over the world. And that's what we're doing every day. We made some pretty significant investments in the infrastructure, The organization moving forward, we also take every single country, as a separate entity and we determine what the best structure is going to be for that Environment and who the key opinion leaders are and we start kind of feeling our way into each country. So we don't go into anything with a preconceived notion on how we And I think that's paying off. And so generally speaking, I'll tell you one, we're thrilled that This is taking us in the right direction towards fulfilling our mission to improve outcomes for Foot and Ankle and doing it from a global perspective.

Speaker 2

2, it's another piece of diversity for us, both geographically and even from a style and a preference Standpoint, so we're thrilled about that piece as well. And then 3rd, it's just building a stronger business for us from a revenue perspective and we continue to see a lot of There to continue to expand that. And so I think the runway is still really long and strong for us there.

Speaker 3

Yes. And I would just add, Greg, that When you look at our overall market share, we're at about 4% global market share in the $5,000,000,000 foot and ankle market, and we're even less than that Internationally, so we have an extensive runway. And the investments that we've made are going to continue to yield our businesses in the UK and And Australia and South Africa where we have larger businesses are just killing it right now, honestly. Thanks to those teams for the great work on the ground, but it's also in new markets as well that we're really just getting our teams going in. So A lot of runway in existing markets, new markets, markets where we've been before but haven't had that big of a beachhead And just a very large vibrant market for us as we move forward.

Speaker 6

Thanks, guys. Very, very helpful. And maybe shifting to the U. S. Market, a number of competitors So, we've been talking about launching new products.

Speaker 6

So, Albert, maybe would love to get your Kind of view of the competitive landscape. Obviously, it's always been competitive, but have you has it gotten more competitive in the U. S. So or I guess globally. And maybe just some of your thoughts on how you guys are positioned versus some of the New maybe not new entrants, but new products that are coming out into the market?

Speaker 2

Sure. Well, for starters, I'll tell you, we love competition. I think, you might hear the same thing from some of our competitors about us. But Our goal here is to improve outcomes for foot and ankle surgery. And I think the more competition we have, the more we kind of challenge each other to think about things in Different way, and I think that makes it exciting.

Speaker 2

And I think that's, just generally speaking, it's good for the entire market. From our perspective, we feel, and I could speak on our behalf, but we feel like We care so much about foot and ankle. This is all we care about, right? And so when we go to bed at night, when we wake up in the morning and When we have dinner, I mean, these are the thoughts that we're going through is how can we improve these procedures? What are we not thinking about yet?

Speaker 2

How can we support our surgeons better? How can we enhance our own offering? How can we continue to proliferate our offering in this space. I know for us that's what drives us every day. It's what keeps us motivated.

Speaker 2

And so I think that Peace creates better product. It has a sincerity to it that is pretty unique to Paragon. There's a look and feel to our development Strategy and our commitment to research and our communications with surgeons, that is pretty unique. And I think that positions us really well to compete in this space and We'll continue to benefit us moving forward. One last thing I'll add there and just Yes.

Speaker 2

I was just going to add one more piece to that. And it's just every competitor kind of has A key area that they're most excited about, I think Paragon is one of the companies that's really kind of Consistently excited about the entire foot medical market. And so from a competition standpoint, maybe to address that part of your question is there's just Different pockets of competition depending on which sub segment of the foot and ankle market we look at.

Speaker 6

Thanks, Albert.

Operator

Our next question comes from Neil Chatterjee with B. Riley. Please go ahead. Your line is now open.

Speaker 5

Hi. This is Anderson on for Neil. Thank you for taking the questions. First, could you just update us on sales force productivity in the Q3 Any plans for continued sales force expansion into 2024?

Speaker 3

Yes, happy to and thanks for the question. This is Steve. To start with, we increased our producing sales reps by almost 20% during the quarter compared to last year. And when you look at the productivity of our underlying reps, our legacy reps legacy producing reps continued to show nice gains. And overall, the actual revenue per producing rep actually came down just a touch from last year because we've added so many new reps.

Speaker 3

And that's just the nature of adding additional reps into the algebra here. But continuing to drive productivity across legacy reps, We're continuing to see new reps that are relatively new additions to Paragon 28 scale up their businesses in nice ways. So, really excited about the KPIs when we think about number of reps, producing reps and opportunities for continued gains as we go forward.

Speaker 5

Okay, great. Thank you. And then how is surgeon training progressing? And how many were trained in the 3rd quarter? And what was the Split between U.

Speaker 5

S. And OUS?

Speaker 3

Yes. We continue to roll along literally. We've got another Mobile lab that we just launched that's going across the country. So 2 labs now in place and we continue to train in excess of 500 surgeons per quarter. So strong.

Speaker 3

And one of the key things about our surgeon trainings, we've said this in the past, is it's not just new surgeons that Come to see us, here in Denver and also on the road. It's our legacy customers that have opportunities to see all of our new products and Have opportunities to see products that they may not be currently using as much as they'd like to, that they want to see it and try it again. So we're seeing new customers, we're seeing existing customers, and we're also getting a lot of our new reps the opportunity to be trained on our products at the same time, Which drives some efficiency for us from a cost perspective.

Speaker 5

All right. Thank you. That's all for us.

Speaker 3

Thank you. Thanks, Anderson.

Operator

Our next question comes from William Plovnik with Canaccord.

Speaker 5

Hi. This is Caitlin Crohn on for Bill. Thanks for taking the questions. Just on the supply issues, can you provide some color on what is hey, what's up, on what's improving? And are you really expecting these challenges to bleed into I think you talked last quarter that mainly the issues were with sterile package, which is a lot of your new products.

Speaker 5

Our newer products should continue to launch also kind of experiencing those supply challenges?

Speaker 3

Yes, Caitlin, thanks for the question. It's Steve. I would tell you that we as expected, we saw continued improvements in the availability Of all of the products that we had less availability in the Q2, including sterile packaged products. The sterile packaged products continue to be The area of our supply chain that is still slower than we would like it to be, but it's consistent with what we had planned. So while we still have some headwinds with sterile pack products, they're not inconsistent with what we had expected 3 or 4 months ago.

Speaker 3

And we do expect those to really yield and not be a headwind for us as we get into the 1st part

Speaker 5

2024. Great. Thanks for taking the question. Thank you.

Operator

The next question comes from George Sellers with Stephens Inc. George, please go ahead. Your line is now open.

Speaker 8

Hey, good afternoon and thanks for taking the question. Maybe to shift our pipeline a little bit, clearly some exciting things coming By the end of the year and then also next year, I'm just curious if you could give us some additional color on where some of those devices are in terms of the sub segments, Maybe those devices are extensions for things that are already in your portfolio or entering New indications. And then also any detail on maybe the cadence of some of those Launches. I know I'll pull on that one question. Hopefully, I can repeat anything if I need to.

Speaker 2

How are you doing, George? This is Albert, and I'll maybe take a stab at it. You know this is my sweet spot, and I love you trying to get as much information you can about Future launches, which is always hard for me not to divulge. But, look, we are As we've ever been about some of the products that we're expecting to launch next year. And the short answer to most of your questions is yes, yes and yes, right?

Speaker 2

We do have a few line extensions that we expect to introduce next year. We are expecting to cover every aspect of foot So all the sub segments, we've got some introductions going into next year. I wouldn't say that Any of my children are more special than the other children, but there are a couple of products that we think have a pretty significant opportunity. At least we're anticipating they could be pretty significant in terms of improving outcomes for patients, which you know is a tickle point for us. So, yes, we've got a couple of really exciting things launching next year, including our first module of Smart 28, which we've been Kind of letting the world know we expect to launch that early next year or at least the first half of next year.

Speaker 2

We might see some limited launches a little bit earlier than that based on some regulatory approvals, but that is something that we've got a lot of excitement around. Not to Underplay, some of the product launches we've launched this year and we still have somewhere between 24 products that we might be launching At the tail end of this year, so a lot of exciting stuff in terms of product development. And our goal is to influence everything that could possibly afflict A lower extremity patient and every time we launch one of these products, I think we get closer and closer to that goal. So we've got a lot of exciting things coming And I love that question. So product development is what really tickles me every day that I get to come to work and see what we're doing there.

Speaker 8

Okay. That's really helpful and we're looking forward to hearing some more details about those in the future. Maybe To shift back a little bit to the performance in the quarter, could you give us some additional color maybe on How some of the sub segments trended on a monthly basis and specifically relative to your expectations?

Speaker 3

Yes, maybe I'll start and then Albert can come back in, George. And thanks, looking forward to seeing you next week. Look, every one of our segments performed well in the Q3 and also on a year to date basis. That's kind of The benefit of our business having such a strong presence in each of these segments, and that's going to continue to be that way as we go forward. And Albert says he doesn't have favorite children, but other than a few things like Paragon 28 is one of his top children.

Speaker 3

So Look, everything is performing well and singling out things we typically don't do. So we don't want to break stride with that. So Each sub segment is important to us and grew for us.

Speaker 8

Okay, understood. Thank you all again for the time.

Speaker 2

You got it. Thanks, George.

Operator

Our next question comes from Brandon Vazquez with William Blair. Please go ahead, Brandon. Your line is open.

Speaker 7

Hi, everyone. Thanks for taking the question. Congrats on a nice quarter. I want to ask one on the guidance. It implies a nice rebound in Q4, I'm kind of curious if you use kind of the low end versus the high end for what's implied in Q4.

Speaker 7

It's a relatively wide range, at least for Q4 specifically. I'm doing my math right, something like low teens growth to over 20% growth for Q4. So maybe you can talk about what gets you to the low end of the high or the high end of that guidance As you go into Q4?

Speaker 3

Yes, happy to do that. And thanks for the question. It's nice to have you on the calls And picking up coverage. So I would say that we intentionally left the range at $2.14 to $2.18 just to account for Some potential uncertainties on the downside at the low end of the range related to supply chain and just uncertainties in the macroeconomic environment. There's certainly nothing that's going off plan right now.

Speaker 3

And what we're experiencing with the Supply chain is consistent with our previous expectations, but the low end accounts for potentially some additional headwind there. And also just the potential, which we're not experiencing now to be clear, but the potential for Headwinds from a macroeconomic perspective. And the high end would assume the opposite, just continued improvements in supply chain And just a really robust foot and ankle elective and non elective procedural environment.

Speaker 7

Okay. Great. And then switching gears a little bit to the pipeline, I'll take a shot too and try to get see if I can get any other details out of you, but maybe on Smart 28, if you can give any updates on where you guys are for that product, Even if you just like are you guys in a point where you have a commercial product? Are you in a regulatory filings? Anything like that would be helpful to understand And the timing of, and expectations for that first module in Spark 28.

Speaker 7

Thanks.

Speaker 2

You got it. And I appreciate the attempt, and I'll do my best to answer as much as I can. I will tell you we are in a regulatory submission point right now and We're in good conversations with the FDA there. And so we're excited about the opportunity, but we're being cautious there. We do have a product that, to be honest with you, is internally it's been exceeding our expectations and we're really Excited about that introduction.

Speaker 2

I'm also really excited because I know it's been a little bit difficult for, the investment community to really understand why we're so excited about Smart And I think when we launch that first module, people are going to start to understand, okay, that's what this means and this is what it looks like and this is how it could Influence and support surgeons in a meaningful way. And so that launch we're expecting to be in the first half of next year For more of a broad scale introduction, but we're expecting sort of a beta launch later this year just Predicated on that regulatory filing. So just making sure that the approvals come in as we would anticipate. And if they do, then we'll expect to go to A small scale launch. And at that point in time, we might be able to start communicating a little bit more freely what we've got In the pipeline there.

Speaker 2

So I appreciate the question and it's hard for me. I'm a salesperson at heart. It's really hard for me not to give you all the details that I would love

Operator

Our next question comes from Mike Matson with Needham. Please go ahead, Mike. Your line is open.

Speaker 9

Yes. Thanks for taking my questions. In the context of the comp you're up against, I think the growth was Obviously, good, but on a year over year basis, it did slow down a little from the prior quarter and first half of the year. I was just wondering if you could maybe quantify the impact of the supply chain issues in the Q3, how much that took off your growth rate? And then also I was wondering some of the other overseas companies have called out having fewer selling days in the quarter.

Speaker 9

Was that did that impact your growth at all?

Speaker 3

Hey, Mike, it's Steve. Maybe I'll start with the second part of the question because that's an easier one for us. And actually, we have for the first time an earnings supplement that's out there filed with our Earnings release 8 ks today. So you can see some of the details that we're talking about here on our Q3 performance, some of our commentary around Our new credit facility, some of our comments around the U. S.

Speaker 3

Performance, international performance, but including the impact of Selling days. So we certainly did have an impact to selling days. We mentioned that last quarter when we were giving an update for the balance of 2023. We had approximately 2 less billing days and our estimates pegged that impact at somewhere between 203 100 basis points. And so it's not insignificant.

Speaker 3

And we also do have one less billing day next Quarter or this quarter we're in compared to last year. So, so it had an impact for 3Q that was 200 basis points to 300 basis points. And then with respect To the supply chain, we haven't quantified that other than to say, and I know this isn't the specificity that It's been pretty significant for us. We've not been able to supply the product At the right place, the right time for all of the potential demand that we have. And so we're really looking forward to getting out of that and getting into next year when We expect that to all be behind us.

Speaker 3

And then finally, you mentioned the strong comp. I mean, last year, we did grow 30%. So all those things combined, we're really pleased with 15% growth and 20% year to date.

Speaker 9

Yes. Okay. Understandable. And then, just given the new credit facility And the draws that you're taking there, just in terms of modeling interest expense, can you help us out there in terms of Kind of what quarterly interest we should be modeling?

Speaker 3

Yes. So, we have 100 drawn interest rate,

Speaker 5

I guess.

Speaker 7

Yes. So it's

Speaker 3

650 is the spread on Excuse me, dollars 6.75 is the spread on the term loan and $400,000,000 is the spread on the revolver and we have $75,000,000 out On the term loan and $25,000,000 out on the revolver. And so it's Probably cash interest of $8,000,000 to $9,000,000 a year On a net basis, because we do have $100,000,000 of cash on our balance sheet that's yielding a nice level of interest income.

Speaker 9

Yes, exactly. So that offset some of it. Okay, thank

Speaker 5

you. You got it.

Operator

Our next question comes from Dave Turkaly with JMP Securities. Please go ahead, Dave. Your line is open.

Speaker 10

Okay. Good evening. Maybe one for Steve. I'm looking at the slides. Thanks.

Speaker 10

There's a Got to get info in there. In the inventory component, it looks like you're kind of saying that you think you'll get it back down to, I guess something closer to a year's worth of days, it says 817 to 463.

Speaker 2

Are we talking about inventory?

Speaker 10

Should we be thinking about that day number going specifically to that level?

Speaker 3

Yes. Look, and that's how We came up with a map there to kind of really demonstrate like the last two years have been atypical for us from A historic P-twenty eight use of capital and a lot of it's been driven by the supply chain disruptions in inventory. And we've done some Stockpiling of inventory and unfortunately we've some like we've been talking about certain inventories we don't have enough of. But absolutely, where we're at today from an efficiency Perspective on our balance sheet is not where we're going to be 3 years from now and or even next year or even this quarter we improved from last And the Q4 is going to improve compared to the Q3. So that's going to become a significant area of Cash flow tailwind for us into next year and beyond.

Speaker 3

And then we also don't have the any more legal settlement payments. And we're also going to be EBITDA positive beginning next year is our expectation compared to we've run EBITDA negative the last 2 years as we've made some really targeted investments and built a nice investment base. So So we're really happy about the progress we're making in our supply chain, this new credit facility and the visibility that we have to Being EBITDA positive in 'twenty four and beyond and also improving our operating cash flow.

Speaker 10

Thank you for that. One quick one, just

Speaker 2

I guess

Speaker 10

CapEx plans or what should we be expecting there moving forward? Is that going to be At a consistent level, I'm not sure if you have other investments to make, but where you stand on that front?

Speaker 3

Yes. So we've also if you look at our investing cash flows in the last couple of years, we've had in there Couple of unusual items. We bought our building for $18,000,000 We purchased this year in 2022 for $19,000,000 And underlying in there, we've had about probably call it $30,000,000 of instrument purchases, about $15,000,000 per year. That's sort of the high end of the range for us for instruments. So I would think about instruments, if you want to use that in your model, that's what But I think we can do better than that on an annual basis.

Speaker 3

And then other PP and E has been somewhere between $15,000,000 $16,000,000 over the last two years. That's going to come down. We launched SAP, which a lot of that was capitalized over the last year and a half. So we expect not only operating cash improvements Compared to the last couple of years, but also the investing cash line will get look a lot more interesting next year too and beyond.

Speaker 10

Thank you.

Speaker 3

You got it. Thanks, Turk.

Operator

We have no further questions. So I'll turn the call back to the management team for any closing comments.

Speaker 9

Thank

Speaker 3

you. Sorry, thank you for joining the call and in all of your

Operator

Thank you everyone for joining us today. This concludes our call and you may now disconnect your line.

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Earnings Conference Call
Paragon 28 Q3 2023
00:00 / 00:00