Conformis, Inc.
Q2 2018 Earnings Call Transcript

Published: 2 Aug 2018

[Operator:]

Good afternoon. My name is Jimmy. I will be your conference operator today. At this time, I would like to welcome everyone to the ConforMIS Second Quarter 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Before we begin, I would like to remind you that the management will make statements during this call that include forward-looking statements within the meaning of federal securities law, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical facts should be considered to be forward-looking statements. All forward-looking statements, including without limitation statements about ConforMIS' strategy, future operations, future financial position and results, gross margin, product margin, operating trends, financial guidance, market growth, total revenue and revenue mix by product and geography, the anticipated timing of the limited launch of 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 estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements, including those discussed in the Risk Factors section of 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, August 1, 2018. I will now turn the call over to Mark Augusti, the company's President and Chief Executive Officer. Mark?

[Mark Augusti:]

Thank you, Jim, and welcome everyone to ConforMIS' second quarter 2018 earnings conference call. With me on the call today is our CFO, Paul Weiner. During the call, Paul and I will share our prepared remarks on a variety of topics, including our second quarter financial and operating performance. Following the prepared remarks, Paul and I look forward to answering your questions. We are pleased with our second quarter results. From a commercial perspective, although we continue to face headwinds in OUS business primarily due to reimbursement-related challenges in Germany, we note that second quarter U.S. growth performance of 7% represents a meaningful step-up in growth compared to previous quarters. This suggest that we are starting to see the impact of the commercial investments we have outlined over the last four quarters, mainly sales and management changes, field representative investments, digital marketing activities, favorable insurance policy decisions and importantly continued publication of positive clinical and health economic outcomes using our products. For instance, this quarter we were pleased to see the publication of a paper showing that a patient treated with the iTotal CR knee replacement system achieved better tibial fit and tibial rotation alignment compared to patients treated with three different off-the-shelf total knee arthroplasty products. Results of this ConforMIS funded study were published in the May 2018 issue of the Journal of Knee Surgery, a leading peer-reviewed orthopedic journal. I’m also pleased to report that yesterday we performed our first two ConforMIS total hip procedures. In case you haven’t had a chance to read it yet, we did issue a press release on this achievement just prior to the call. As everyone who follows ConforMIS is aware, to-date we have only been a knee arthroplasty company. Our entry into the 7 billion total hip market segment provides a significant growth opportunity. Without offering too much in advance of our full market launch, I would like to outline a few of the key concepts we have incorporated into our system that are consistent with the ConforMIS brand. Mainly these are; we will offer proprietary iView patient-specific surgical plan that utilizes CT-driven 3D planning with the ability to adjust seven key factors of the surgical plan. Our hip system incorporates a custom stem including neck length and angle and an acetabular cup. The industry’s most comprehensive patient-specific cutting guide is based on each surgeon’s plan. We again have developed the hip in a box concept like we have done in knees without the need for multiple instrumentation trays and large type of implants, our hip is ideal for use by surgeons to meet the growing demand for outpatient joint replacement. These features combined with others, I won’t mention now, have the potential to provide the surgeon with a more efficient and reproduce [ph] total hip procedure compared to off-the-shelf. In addition to large growth opportunity, total hip arthroplasty will help us leverage the fixed cost investments we have made to build our new franchise. Most importantly will be the leverage we should realize in our field selling organization and customer base. Our field sales management and representatives are very excited to be able to offer ConforMIS total hip solution and pleased that our surgeon interest is high as well, as evidenced by the interest from our clinical evaluators. The fact that we have been able to achieve our limited market release early in the second half gives us more time in 2018 to evaluate our product performance. To confirm our previous statements, we estimate the revenue impact of total hip not to be material in 2018 and we will of course provide more color around our 2019 guidance early next year as usual. At this time, I would like to personally thank all of my ConforMIS colleagues for this incredible time and effort they have put into the total hip program. While much work still remains, their dedication is what has allowed us to achieve this significant milestone for the company. With that, let me turn the call over to Paul for a detailed review of our second quarter 2018 financial results. Paul?

[Paul Weiner:]

Thank you, Mark, and thank you all for joining us. We reported second quarter revenue of $19.1 million, representing an increase of 3% or $616,000 year-over-year on a reported basis. Excluding the positive impact of changes in foreign currency exchange rates of $248,000, revenue increased 2% on a constant currency basis. Revenue in the second quarter of 2018 and 2017 includes royalty revenue of $192,000 and $438,000, respectively, related to patent license agreements. The decrease in royalty revenue in the second quarter of 2018 compared to the same quarter in the prior year reflects the timing of payments received in the second quarter of 2017. Second quarter product revenue was $18.9 million, representing an increase of 5% or $862,000 year-over-year on a reported basis and 3% on a constant currency basis. This is the first quarter in over a year that we have shown year-over-year growth in product revenue. We believe this trend will continue with a sequentially flat third quarter and a seasonally strong fourth quarter. Sales of iTotal PS increased $1.1 million to $6 million or 23% year-over-year on a reported basis and 22% on a constant currency basis. Sales of the iTotal CR iDuo and iUni declined $252,000 to $12.9 million or 2% year-over-year on a reported basis and 3% on a constant currency basis due to weakness in our OUS business. iTotal PS represented approximately 32% of total product revenue in the second quarter of 2018 compared to approximately 27% for the same quarter last year. U.S product revenue increased $1.1 million to $16.4 million or 7% year-over-year. This is the first quarter in over a year that we have shown year-over-year high single digit percent growth in U.S. product revenue. U.S. product revenue was driven by sales of our iTotal PS, which increased 21% year-over-year as well as a 2% year-over-year increase in sales of the base business product lines. Second quarter U.S. product revenue represented 87% of total product revenue compared to 84% for the same quarter last year. Rest of world product revenue was $2.6 million, a decline of $275,000 or 10% year-over-year on a reported basis and 19% on a constant currency basis. Rest of world product revenue was affected by sales of the base business product line, including the Germany reimbursement challenges and a weekday change from direct sales at end customer prices to a distributor at transit prices. Turning to a review of our results across the rest of the P&L. Second quarter gross margin was 48% of revenue compared to 34% of revenue last year, a 1,400 basis point increase. The increase in gross margin year-over-year was driven mostly by cost reductions as a result of vertical integration and manufacturing efficiencies, as well as 69 basis points favorable foreign exchange currency impact and 50 basis points higher average selling prices. Gross margin improvement has been a point of emphasis and we continue to see the positive impact from the hard work that has gone into the cost reduction program. Second quarter operating expenses increased $300,000 to $20.5 million or 2% year-over-year. The increase in operating expenses was driven by higher sales and marketing, primarily in connection with variable expenses related to the increase in revenue and research and development primarily related to commercialization of our hip product offset by lower general and administrative costs, due primarily to reductions in patent litigation, business insurance, personnel costs and other administrative expenses. Net loss was $14.1 million or $0.24 per share compared to $12.1 million or $0.28 per share for the same period last year. Net loss per basic share calculations assume weighted average basic shares outstanding of 59.8 million for the second quarter of 2018 compared to 43.2 million for the same period last year. Net loss in the second quarter included foreign currency exchange expense of 2.1 million compared to foreign currency exchange income of 2.1 million in the same period last year, a $4.2 million negative non-cash impact. As of June 30, 2018, we had cash and cash equivalents and investments totaling $46.6 million. Second quarter change in cash and cash equivalents and investments was $10.7 million. In addition to our gross margin improvement, we have developed a plan to reduce our operating expenses starting in 2019. We believe this new plan will extend our cash runway and significantly lower our future financing needs creating the possibility of achieving profitability without the need to pursue another large scale equity offering. With that, let me turn the call back over to Mark who will comment a bit more on our expense savings plan and thoughts cash requirements.

[Mark Augusti:]

Thank you, Paul. As mentioned earlier, I am pleased with our commercial results in the U.S. and our overall operational performance. One area of pressure continues to be our OUS business due to reimbursement challenges. We have actions in place to address these issues but expect OUS performance to continue as a headwind certainly for Q3 and probably Q4 as well likely landing us in the lower half of our full year guidance. If you recall in early 2017, I indicated my expectations that 2017 would be a transition year for ConforMIS and then 2018 we’d begin to deliver the first results from our investments in the new growth framework. In turn, our expectation was that we would see accelerating performance in 2019. Now with our U.S. growth performance in the second quarter, I believe we are starting to realize some initial returns from those investments. Combined with our total hip launch we have the opportunity to realize the journey I laid out back in early 2017. To that end, I would like to comment on our new product development plans over the next few years. New product development is a critical ingredient to the long-term growth we anticipate for ConforMIS. In the past, we have disclosed that our iTotal G3 and iUni G3 programs and indicated a limited market releases were scheduled for 2019. Today, we are announcing a change in our product development activity due to evolving market opportunities. We have decided to put our approach on the iUni G3 project on hold in order to fast track an iTotal cementless option for total knee arthroplasty. We believe we can have a femur cementless or press-fit option in limited market release in early 2020. Taking into account the hip launch and these program changes, our new anticipated launch schedules are as follows. For the second half of 2019, we have the iTotal G3 in limited market release and the ConforMIS hip coming into full market release. In the first half of 2020, the iTotal G3 cementless or press fit would be in limited market release. In the second half of 2020, we would see iTotal G3 in the full market release and a second ConforMIS hip stem in limited market release. And then for the first half of 2021, iTotal G3 cementless for the femur would be in full market release and we would have a tibia option as well in limited market release for iTotal 3G. And then we would see the iUni G3 project come back in, in limited release. And in the second half of 2021, we would have the full market release of our second ConforMIS hip stem. We believe this new product launch schedule will provide the necessary fuel to support growth into 2022. Turning to operational performance. We have previously detailed much of our gross margin improvement activity. Our performance in Q2 yet again continues to support the journey towards our longer-term goal of greater than 60% gross margin. Once again, I would like to express my appreciation for the significant progress the operational teams at ConforMIS are making in this area. In addition, we have undertaken a comprehensive companywide expense review. I’m pleased that the ConforMIS team has identified material opportunities for increased operating efficiency that will roll into our 2019 planning. These operational expense reductions combined with our continued gross margin improvement lead us to anticipate bar any unforeseen operational or financing challenges that we will have enough cash to fund operations without the need to pursue another large-scale equity offering, as Paul mentioned earlier. That’s all the comments Paul and I have for now. We look forward to answering any questions you may have about our 2Q results and any of the announcements we have made today. Thank you. Operator, I’ll turn it back over to you.

[Operator:]

Understood. [Operator Instructions]. Our first question comes from Josh Jennings with Cowen. Your line is now open.

[Joshua Jennings:]

Hi. Good afternoon. Thanks for taking the questions. Congratulations on the 7% U.S. growth and the initial iTotal hip procedures. Was hoping I’d just start with the U.S. franchises growth. PS sales seem to be a nice tailwind. Can you talk about any other puts and takes on the quarter? And I just wondering specifically if you saw any headwinds that if they weren’t in play you may have been able to do even better than that? Not complaining about 7% U.S. growth but just thinking about the setup for the back half of the year and what could get better to drive some acceleration in the fourth quarter outside of seasonality.

[Mark Augusti:]

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

[Joshua Jennings:]

Great. And then just thinking about the improvement that’s baked into the guidance particularly in the fourth quarter as Paul laid out, we should be thinking about more feet on the street coming in the back half of the year. It sounds like [indiscernible] any material contribution there in the second half as well but any other I guess tailwinds that you could help us think through as we go through into the fourth quarter?

[Mark Augusti:]

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

[Joshua Jennings:]

Great. Thanks for the answers and we’ll catch up. Thanks a lot.

[Mark Augusti:]

Thanks.

[Operator:]

Thank you. Our next question comes from Bruce Nudell with SunTrust. Your line is now open.

[Bruce Nudell:]

Hi. Thanks for taking the question. Mark, I have two questions or actually three. First, with regards to the change in the development priorities, could you just highlight how important do you think each of the knee iterations are in terms of – I thought I heard cementless to be at femoral as well as a new design? That’s my first question and won’t you go from there.

[Mark Augusti:]

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

[Bruce Nudell:]

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

[Mark Augusti:]

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

[Bruce Nudell:]

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

[Paul Weiner:]

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

[Bruce Nudell:]

And --

[Paul Weiner:]

Go ahead Bruce.

[Mark Augusti:]

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

[Bruce Nudell:]

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

[Mark Augusti:]

Yes, so the answer to that is I disagree wholeheartedly and I’ll take them to the [indiscernible] challenge and there is no way a robot may cut with less surgeon variation in the tibia slope [ph]. At the end of the day all you got to do is look at Stryker’s packages. There is only one shape of tibia that the triathlon has and it hasn’t changed. And at the end of the day if you look at our tibias, we are matching the cortical surfaces to the patients’ anatomy per the surgical plans and building into that most importantly the rotation they want. So there is no compromise the surgeon has to make between size and alignment with the ConforMIS system and they have to make that compromise every day in the off-the-shelf world.

[Bruce Nudell:]

Thanks so much.

[Operator:]

Thank you. Our next question comes from Robbie Marcus with JPMorgan. Your line is now open.

[Christian Kern:]

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

[Mark Augusti:]

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

[Christian Kern:]

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

[Mark Augusti:]

Sure. Paul?

[Paul Weiner:]

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

[Christian Kern:]

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

[Paul Weiner:]

Yes, so as far as timing I think we talked about the iTotal G3 coming out in the second half of – or was it, Mark, the second half of next --

[Mark Augusti:]

'19

[Paul Weiner:]

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

[Mark Augusti:]

I think Paul answered the question perfectly and if somehow we had a different schedule, we’d certainly look at that. But that’s what we’re having. Actually in this call we’ve tried to be more detailed than we have in past and certainly we can address that. So no decision necessarily was made around delaying projects due to expense savings. Clearly we don’t have unlimited funds obviously, so we can’t just keep adding projects. If that was the case, there would be a much longer list of stuff certainly that we’d go after. It’s just that we try to be balanced about things and we were committed to the hip, we’re committed to the iTotal G3 and didn’t want to change any of our plans around that. The real question we had to ask ourselves just from an investment standpoint was what was a better opportunity? And I think given what’s going on in the market for those of you that analyze and follow and knee arthroplasty would agree a cementless option makes a lot of sense. We’ve gotten questions about it before, not a lot and like I said we had been noodling on it and we just weren’t ready to make an announcement. And here we are today ready to make an announcement. And I’m pretty excited that the team was able to do it and frankly the good or better news in this is by getting ahead of ourselves in a sense of getting the hip out that in a sense opened up some room and some bandwidth for us to be able to move quicker on the femur version of cementless for G3. And it’s only going to be for G3. So there is a little gating around this as well, just to clarify and that’s the only reason why the limited release is there. There will be a femur option available for our G3, so we had to track it that way. We’re not going to kind of waste resources doing a femur option for our current G2 products.

[Operator:]

Thank you. Our next question comes from Larry Biegelsen with Wells Fargo. Your line is now open.

[Adam Maeder:]

Hi, guys. It’s Adam Maeder in for Larry. Thanks for taking the questions. My first question is on U.S. reimbursement. I didn’t hear an update on Sigma, so I just hoping you could provide some color? I think before you said that it might take some time for that to operationalize, so are we there and how should we be thinking about the impact? And then I have a follow up.

[Mark Augusti:]

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

[Adam Maeder:]

That’s helpful. Thank you. And then on iTotal hip, what are some of the key learnings you’re looking forward during the limited launch period? I think if I heard correctly that the full launch is coming in the second half of 2019. So just kind of wondering what you guys are focusing on in the interim? Thanks for taking the questions.

[Mark Augusti:]

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

[Adam Maeder:]

Thank you.

[Operator:]

Thank you. Our next question comes from Kyle Rose with Canaccord Genuity. Your line is now open.

[Brandon Vazquez:]

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

[Mark Augusti:]

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

[Paul Weiner:]

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

[Brandon Vazquez:]

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

[Mark Augusti:]

Yes, so specifically if you recall some of the stuff, we had obviously the parts of the client but the impact in our totals and in particular, as I’ve mentioned in the past, we’ve got the reinsurance slush reimbursement or review organization that’s called MDK in Germany that is challenging the medical necessity on a case-by-case basis with many of the ConforMIS surgeries that are done. And so that created a headwind for us in some hospitals. We’ve been very successful in dealing with them after the fact, but nonetheless it’s as you can imagine a challenge to deal with it after the fact and support hospitals that way. So just to give you an example of one of the things we’re doing is given our fit and rotation alignment, we actually are providing data to help the surgeon in advance to justify the medical necessity and have it in the file that’s reviewed by MDK. So as a result the documentation is there in advance and we’re working with the surgeons to provide that based on their iView or their ConforMIS plan, if you will. Actually we think that is at least from our local team thinks that that is going to be a significant impact on helping to reverse the trend on this, if you will. So we’ll see – we’re literally putting that in place. So we’ll see probably the first affects to that sometime in the fourth quarter, probably not. If I had to guess, I’d had to say maybe there’s an opportunity to see it change in fortunes in Q1. But any time you’re talking reimbursement it’s a challenge but we’re on it, because it continues to maintain a significant part of our business.

[Paul Weiner:]

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

[Mark Augusti:]

Okay. Any questions?

[Operator:]

Thank you. Our next question comes from Steve Lichtman with Oppenheimer. Your line is now open.

[Jia Min:]

Hi. This is Jia on for Steve. Just on the growth margin front, you mentioned you expect vertical integration to be complete this year. Could you just give us an update on the progress of the remaining pieces that your cost reduction program suggests 3D printing and CAD design offshore and when you expect to realize the full impact from those initiatives on gross margin?

[Paul Weiner:]

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

[Jia Min:]

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

[Mark Augusti:]

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

[Jia Min:]

Great. Thank you.

[Operator:]

Thank you. Our final question comes from Ryan Zimmerman with BTIG. Your line is now open.

[Ryan Zimmerman:]

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

[Mark Augusti:]

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

[Ryan Zimmerman:]

Understood. Thank you, guys.

[Operator:]

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

[Mark Augusti:]

Thank you.