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Paragon 28, Inc. (NYSE:FNA) Q1 2024 Earnings Call Transcript

Paragon 28, Inc. (NYSE:FNA) Q1 2024 Earnings Call Transcript May 11, 2024

Paragon 28, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon. And welcome to Paragon 28’s First Quarter 2024 Earnings Conference Call. Currently, participants are in listen-only mode. We’ll 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. I would now like to hand the conference over to your host today, Mr. Matthew Brinckman, SVP of Strategy and Investor Relations. Mr. Brinckman, please go ahead.

Matthew Brinckman: Good afternoon. And thank you for joining Paragon 28’s first quarter 2024 financial results and earnings call. Presenting on today’s call are Albert DaCosta, Chairman and Chief Executive Officer; and Krissy Wright, Interim 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 include statements made as to the company’s or management’s intentions, hopes, beliefs, expectations or predictions of future events, results or performance.

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These forward-looking statements are subject to a number of risks, uncertainties, estimates and assumptions that may cause actual results to differ materially from these forward-looking statements. All forward-looking statements are based upon current available information and Paragon 28 assumes no obligation, except as required by law, to update those 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 measure 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.

Albert DaCosta: Thanks, Matt. Good afternoon and thank you for joining us for our first quarter 2024 earnings call. I am pleased to have our Interim CFO, Krissy Wright, joined us for today's call. Krissy has been an incredible partner on our Board since 2021, serving as our Audit Committee Chair and as a member of our Nominating and Governance Committee. I'm now going to kick things off with a review of our first quarter performance, followed by recent highlights. After that, I'll pass it over to Krissy to provide further details on our first quarter financial results and guidance. Global revenue for the first quarter of '24 was a record $61.1 million, representing 17.4% reported and constant currency growth in line with the top end of our preliminary revenue results reported on April 4.

Overall, we are pleased with our growth through the first quarter of '24 compared to our strong growth comps in the first quarter of '23 despite one less billing day this year. We also saw a modest step up from the fourth quarter of 2023, which is typically the seasonally highest revenue contribution of any quarter each year. Importantly, we continue to see balanced top-line performance across all five foot and ankle subsegments. Looking at the U.S. business performance, net revenue for the first quarter of '24 was $51.1 million, representing 13.5% reported growth. During the quarter, we increased our US producing sales rep roster by 6% to 261 reps compared to the first quarter of '23 and saw an 8% increase in productivity across our rep base.

Over the same period, we grew our surgeon customer base by 12% to a record 2,275 surgeons. Medical education remains a core part of our commercial strategy, and our two mobile labs have been important drivers of surgeon adoption to start the year. We are excited to see solid growth in these leading commercial indicators and expect to see continued momentum in these areas throughout the year in line with our typical seasonal trends. First quarter international net revenue was $10 million, representing 42.2% and 42.5% reported and constant currency growth, respectively. International growth was driven primarily by the United Kingdom and Australia. Overall, I am thrilled with our international momentum. Our foundation is set for sustainable growth as we drive further investments to clear and launch additional products and new markets outside of the United States.

An orthopedic surgeon performing a surgery while using ankle plating systems.
An orthopedic surgeon performing a surgery while using ankle plating systems.

Turning next to our product portfolio, 2024 is off to an incredible start with six four product launches and one limited market release in the first quarter of '24. We remain focused on innovating across all segments, but it's important to note that all products launched so far in '24 are in high-growth Foot and Ankle segments like bunion, soft tissue and minimally invasive surgery. Ultimately, these most recent launches will help advance Paragon 28's portfolio in the fastest growing subsegments in our market and position the Company well for sustainable long-term growth. Most recently, we launched the Grappler R3INFORCE Repair System, adding to our suite of novel centers, most U.S. repair solutions and broadening our rapidly growing soft tissue portfolio.

As a reminder, early in the first quarter, we launched three other soft tissue solutions with the Grappler Knotless Anchor, Bridgeline Tape and Mister Tendon Harvester, all of which will typically be used in conjunction with other products and are highly complementary to our existing plating and screw systems. Another solution is our FJ2000 Power Console and Burr System designed specifically for the extremities and MIS surgery. Lastly, we launched the PRECISION MIS Bunion System and have our Lapidus clamp, the Bun-Yo-Matic, which is on limited market release with full release expected later this year. We continue to see strong momentum from our 2022 and 2023 product launches, which have continued to be significant drivers of growth for the first quarter of this year, especially in areas of external fixation and hindfoot fusion, where we launched our Monkey Rings, Monkey Bars in Phantom Hindfoot now in 2022.

Our product launches in 2024 are still relatively fresh and have not yet contributed materially to the revenue in the first quarter, but they've been generating a ton of buzz with our rep base and within the surgeon community. These launches give us confidence in our guidance for 2024 and P28’s ability to drive further growth later this year and beyond. As we look further into 2024, we expect to continue investing in our commercial and educational opportunities to enable P28 to realize the full potential of our new product launches as well as legacy products, both in the US and internationally. In closing, when we founded Paragon 28 in 2011, we set out with the mission to continuously improve the outcomes and experiences of patients suffering from foot and ankle conditions that remained our mission through our IPO in 2021 and continues to be our top priority today.

Everything we do and every decision we make is to advance P 28 along that mission and I attribute our success to the team's dedication to that unified goal. This is a long-term journey. And while I am incredibly proud of what we've achieved in the past several years, I could not be more excited about the Company's future. With that, I will now turn it over to Krissy.

Krissy Wright: Thank you, Albert. Turning to the rest of the P&L, beginning with gross margin, gross profit margin for the quarter was 80% compared to 82.9% in the first quarter of 2023. The decrease in gross profit margin is primarily the result of higher prices from suppliers as well as product and geographic mix shift. First quarter research and development expenses were $7.6 million or 12.4% of net revenue compared to $7 million or 13.5% of net revenue in the prior year period. We continue to invest in new product development to improve patient lives through our product pipeline, which remains robust with over 25 active projects in development, including several tied to Smart28. Selling, general and administrative expenses in the quarter were $54.2 million, a $10.4 million or 23.7% increase from $43.8 million in the first quarter of 2023.

As a percentage of net revenue, SG&A was 88.8% compared to 84.2% in the prior year period. The increase in SG&A was primarily driven by increased headcount annual merit increases. Investments in the commercial team, increased variable sales representative commission expenses related to net revenue growth, an increase in professional services fees and an increase in depreciation expense. Adjusted EBITDA for the first quarter of 2024 was a $5.5 million loss compared to a $1.4 million loss in the prior year period. The decrease in adjusted EBITDA is primarily attributable to an increase in operating expenses. While we remain laser focused on driving operating leverage across the P&L in the months and quarters ahead, the impact of investments made in Q1 has slightly pushed out our expectation for EBITDA breakeven in 2024.

Importantly, we are prioritizing initiatives directly associated with our growth strategies and top line performance. Operating cash flow for the first quarter of 2024 was negative $11 million compared to negative $5 million in the prior year period after adjusting for the $9 million legal settlement payments made in Q1 2023. The increase in cash used is attributed to higher operating costs and net changes in working capital items. We ended the first quarter 2024 with $108 million of total liquidity, consisting of $58 million of cash on the balance sheet and $50 million available through our credit facility. Now turning to our 2024 revenue guidance. For the full year 2024, we are reaffirming our previous net revenue guidance of $249 million to $259 million, representing reported growth of 15.1% to 19.7% through the rest of 2024, on a quarterly basis and anticipate the impacts of seasonality to be consistent with 2023.

Our net revenue guidance assumes foreign currency translation rates remain consistent with current translation rates. That is the end of our prepared remark.

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