Tornier's CEO Discusses Q4 2012 Results - Earnings Call Transcript

| About: Tornier BV (TRNX)

Tornier B.V. (NASDAQ:TRNX)

Q4 2012 Earnings Call

February 21, 2013 4:30 pm ET


Shawn McCormick - CFO

Dave Mowry - President & CEO


Bob Hopkins - Bank of America

Mike Weinstein - JPMorgan

Matthew O’Brien - William Blair

Matt Miksic - Piper Jaffray

Larry Biegelsen - Wells Fargo


Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Tornier Fourth Quarter and Fiscal Year 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded.

I would now turn the conference over to our host for today Mr. Shawn McCormick, Chief Financial Officer. Sir, please go ahead.

Shawn McCormick

Thank you. Good afternoon everyone. Thank you for joining us today for the fourth quarter and fiscal year 2012 investor conference call. Dave Mowry, President and CEO will start the call by reviewing key operating and financial achievements for the quarter. I will then discuss fourth quarter financial performance and provide financial guidance for the first quarter and fiscal year 2013. Finally, we will open the call for your questions.

Before we begin our detail discussion I would like to remind you that during the course of this call we will make forward-looking statements regarding our future financial operating results and business plans, objectives and expectations. These forward-looking statements are covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and Tornier desired to avail itself of the protections of the Safe Harbor for these statements.

Please be advised that actual results could differ materially from those stated or implied by our forward-looking statements due to certain risks and uncertainties, including those described in our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q.

We suggest that you read these risk factors and our SEC periodic reports and other future filings that we may make with the SEC. You should also know that Tornier disclaims any duty to update or revise our forward-looking statements.

On this call today we will also disclose certain non-GAAP financial measures. We use non-GAAP financial measures as supplemental measures of performance and believe these measures provide useful information to our investors in evaluating our operations period over period.

For each non-GAAP financial measure that we use on this call we have included a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP financial measure in our press release or on our website. Please note that non-GAAP financial measures have limitations as analytic tools and should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP.

Before I turn the call over to Dave, I am very excited and pleased to note that Dave has been named President and CEO of Tornier as announced in our press release today. On behalf of myself, the entire management team and all the employees of Tornier I wish to extend our congratulations to you, Dave, and to assure you that we are behind you 110% in our journey to make Tornier the number one extremities company in the world. Congratulations, Dave.

Dave Mowry

Thank you, Shawn. I would like to acknowledge the board as well as the senior management team at Tornier for their support and confidence throughout this process. Additionally, I would like to thank the entire Tornier team for their commitment to our vision of becoming the global leader in extremities. We are building on 70 years of Tornier tradition and experience delivering innovation to the orthopaedic device industry. It’s truly an honor and privilege to be asked to guide this talented organization to market leadership starting with the return to double-digit constant currency revenue growth on a pro forma basis during the back half of 2013.

Now, let me provide you some of the details regarding our performance. Fiscal 2012 was another milestone year in Tornier’s history from both an operational as well as financial standpoint as we continue to strengthen our position in the extremities market and to expand our universe of extremities specialists treating orthopaedic conditions of the shoulder, elbow, hand, wrist, foot and ankle.

Our revenue for the fourth quarter of 2012 reached $79.0 million compared to fourth quarter of 2011 revenue of $69.0 million, an increase of 14.5% as reported. On a constant currency basis, our fourth quarter revenue grew 16.0% over the same period in the previous year.

Fourth quarter revenue generated by Extremity product categories totaled $64.7 million compared to $54.4 million a year ago, an increase of 18.9% as reported. On a constant currency basis, our extremity revenue was up 19.8% as our products continue to gain acceptance around the world with each of our extremities product categories posting year-over-year growth.

Tornier’s Extremity revenue for the fourth quarter includes $8.0 million of revenue generated from the acquisition of OrthoHelix, which closed in October of 2012. As a percentage of our global revenue, extremity products comprise 82% of reported global revenue for the fourth quarter of 2012.

Giving pro forma effect to the OrthoHelix acquisition to include OrthoHelix revenue in prior periods, Tornier's 2012 fourth quarter and full year constant currency revenue growth was 6.7% and 8.2%, respectively, and Tornier's fourth quarter and full year extremities constant currency revenue increased 7.9% and 10.0% respectively.

Now let me provide you with some more detail on our extremity revenue by product category. Revenue from our Upper Extremity, Joint and Trauma category was $45.8 million, an increase of 6.4% in constant currency over the same quarter in 2011. This growth was primarily led by our Shoulder Arthroplasty Product portfolio, including the Aequalis Reversed Shoulder and Aequalis Ascend, which continue to be widely accepted by shoulder specialists around the world.

We continue to be encouraged by the progress of our Simpliciti stemless shoulder system, an extension of our design philosophy of bone sparing products. The Simpliciti is now being offered in 15 countries and we plan to expand its presence by introducing into three additional markets during 2013. Bringing Simpliciti as well as market expanding products and technologies to the U.S. continues to be a key focus for Tornier.

As you may recall, we completed the enrollment of our Simpliciti IDE trial in October of 2012. This 157 patient study is part of the 510-k FDA approval pathway. We anticipate feeding the follow-up of these patients in late 2014 leading toward our U.S. approval for Simpliciti in the first half of 2015. To our knowledge, Simpliciti is the first and only stemless shoulder system in process with the US FDA clinical study.

We are very proud to continue the Tornier tradition of leadership in innovation supported by evidence-based medicine and clinical rigor.

The Ascend product line continued to exhibit strength during the fourth quarter as well. At the end of the second quarter, we had launched the Ascend PTC, a porous coated version of the Ascend stem to be used as cementless or Press-Fit primary shoulder.

Additionally, during the fourth quarter of 2012, we began selling the new convertible version of the Ascend shoulder line, the Ascend Flex. This product has the unique biomechanical design, which allow the stem to be used as a primary or reverse shoulder. This innovative design also permit surgeons to convert the construct from primary to reverse without the removal of the stem, providing better and less invasive options for future revision.

Ascend Flex is being offered in both cemented and Press-Fit versions as well as in short and long stem designs. The addition of this key product provides Tornier with access to the large and growing Press-Fit reversed market segment increasing our U.S addressable market opportunity by approximately 30%.

Finally, during the fourth quarter, our upper extremities category benefited from the full U.S commercial release of our new Latitude UV Elbow prosthesis. We are encouraged by the surgeon feedback received thus far as we remained focused on increasing this product share of the U.S market and expanding into key international markets throughout the course of 2013.

Turning our attention to Lower Extremities, fourth quarter revenues for lower extremity joint and trauma category more than doubled to $14.8 million, driven by their acquisition of OrthoHelix which contributes $8.0 million of revenue. Excluding OrthoHelix revenue from the lower extremity products were flat compared to the fourth quarter of 2011.

The market leading Salto and Salto Talaris ankle arthroplasty products continued to demonstrate solid market acceptance on a global basis. Gains from these products offset the declines from older legacy Tornier lower extremity lines. Within the OrthoHelix product portfolio, the IFS Hammer Toe product demonstrated early market acceptance following its fourth quarter launch. We expect that the IFS product will continue to grow and gain market share throughout 2013 and is greater than $100 million Hammer Toe correction market.

Fourth quarter revenue for Sports Medicine and Biologics was $4.2 million, an increase of 4.8% in constant currency over the fourth quarter 2011. This growth was led by our biologics portfolio products specifically BioFiber synthetic scaffold while the Conexa product stabilized during the quarter making positive contributions to our top line growth.

We remain highly committed to developing our biologics portfolio and participate in this exciting high growth orthopaedic segment. One of the key elements of our effort is the expansion of our BioFiber product lines. This expansion includes the introduction of larger sizes, the addition of our collagen coated version and providing a high-strength resorbable suture configuration, all of which have already received FDA clearance. We used the new collagen coated product, BioFiber CM clinically during the second half of 2012 and we have recently initiated a full commercial release of the BioFiber CM in the U.S. We plan to enter into limited user release of our novel high-strength resorbable suture later in 2013.

Regarding the Large Joint and Other product category, revenues grew 1.7% on a constant currency basis over the fourth quarter of 2011 to $14.3 million, representing 18% of our global revenue during the fourth quarter for 2012. During the quarter, we saw minor benefits from the introduction of our new minimally invasive instrumentation as well as from the initial engagement with our designing surgeons on patient-specific cutting-edge both of these programs are early in their limited user release.

I’m also pleased to report that our R&D team made progress on our new cementless KneeTec design, which we plan to introduce into the existing market during the second half of 2013. While pressures in this product segment remain, we expect to see a reversal of our market share losses in the second half of 2013 with the further deployment of our MIS instruments, the expanded launch of this patient-specific guide and the introduction of our cementless knee.

Looking forward, we intend to continue to enhance the position of our large joint business in certain European markets, most notably France, through targeted development efforts. Additionally, we intend to continue to use these product lines, where appropriate to provide critical mass to our independent distributors for helping Tornier gain access to and develop new international geographies outside traditional European markets for our extremity lines. As we drive towards the return to double-digit constant currency revenue growth on a pro forma basis during the second half of 2013, we believe the investments in new product developments are critical to sustaining this growth going forward.

Research and development as well as clinical affairs remain fundamental areas of focus for Tornier as our investments are directed towards strengthening our competitive position within current markets and continuing our expansion into trauma, sports medicine and biologic extremity market segments.

In 2012, we launched all of our planned new products and expect that these will contribute to our 2013 growth rate. The most critical of these new products from 2012 is our Ascend Flex convertible shoulder system. At the end of December we had 10 physicians trained and performing procedures as part of our limited user release. We have continued to execute on our product introduction plans and now have 28 physicians trained on this product.

The full commercial release of this product is planned for the third quarter of 2013 following the completion of our limited user release. We anticipate having over 100 physicians trained and performing procedures with the Ascend Flex by the end of 2013. This metric will be a key measure of our success throughout 2013 regarding this critical product introduction.

We are also highly focused on the delivery of our OrthoHelix product line to our international geographies. We have completed the compilation of our regulatory materials and submitted them for CE Mark registration. The CE Mark is expected late in the second quarter with an international launch of our OrthoHelix products into France and Germany expected during the third quarter of 2013. We will continue to expand into other international markets with the OrthoHelix products during the fourth quarter of 2013.

Over the long-term, we will continue to focus our resources on the development of game-changing technologies which expand our markets as well as increase our market share providing solutions for unmet clinical needs. One of these market shifting technologies is our pyrolytic carbon humeral head designed for our Ascend product family. This ultra-low friction material has the potential to expand the shoulder market by providing an early intervention humeral replacement without requiring the more complicated glenoid replacement.

We expect to have first clinical use of this novel humeral head component in late 2013, while we work with the FDA to create a future pathway for U.S. market approval.

Other highly anticipated new product developments from Tornier in 2013 will include patient specific image driven glenoid replacement, BioFiber resorbable high-strength sutures and bone anchors and the cementless KneeTec product previously mentioned.

We also plan to submit our IDE request to the FDA for the novel ligament and tendon growth factor we’ve developed during 2013. As I stated earlier we have already received FDA approval for the scaffold for BioFiber with collagen coating and we are now focused on designing and gaining approval for our U.S. clinical study.

Before I conclude my remarks I would like to briefly review some of our operating achievements during fiscal year 2012 and provide insight on how they position Tornier for the future. As you know, we completed the acquisition of OrthoHelix in early October of 2012 and have successfully moved forward with both the integration process and the orientation of our internal sales management to support both the Tornier and OrthoHelix sales channels.

We believe the OrthoHelix transaction further positions Tornier to achieve consistent and sustained growth across our extremity product lines. The acquisition has also strengthened our connectivity with lower extremity customers and provided Tornier with increased access to a large and growing customer pool providing increased potential for combined lower extremity product sales. The revenue growth generated by OrthoHelix during the fourth quarter of 2012 is a positive first indication of our execution focus of the integration activity. We look forward to the opportunity to achieve the long-term strategic and financial objectives of this business combination.

During the fourth quarter, we made considerable progress in the development -- in developing the plan for our U.S. distribution channel with dedicated sales representation aligned to upper or lower extremity specialists. This transition is a natural evolution of Tornier’s Specialists Serving Specialists philosophy and is consistent with our product line expansion plans as well as the trend towards further medical practice specialization. The objective of our dedicated sales alignment to upper and lower extremity specialists is to achieve more consistent above market growth in each of our market segments.

The execution of our transition plans involve a combination of new distributors from the OrthoHelix organization focused upper and lower extremity specialization of the current Tornier distributor organization and the development of direct channels in selected territories such as Florida. In just the first few months following the OrthoHelix acquisition we have agreements for dedicated upper and lower extremity sales representation in territories representing 12% of our U.S. revenue.

We believe this transition revenue metric is the leading indicator of our sales channel stability and future revenue growth performance. We expect to exit 2013 with this metric at 60% and we intend to track and share this critical metric with you going forward.

I’m also pleased to share with you that we have completed the conversion of our Canadian distributor channel to a direct sales model operating with dedicated Tornier sales representation and Tornier sales management now firmly in place. We have also completed the final steps in becoming 100% direct in the U.K as we have successfully converted our lower extremity business over to a direct sales force.

I am confident that our execution of the U.S sales channel initiatives, international sales strategies, OrthoHelix revenue expansion and key new product launches will have a significant impact on our financial performance and will result in Tornier’s return to double-digit constant currency revenue growth on a pro forma basis during the back half of 2013.

Furthermore, our focus on selecting and executing the projects and programs aligned to our specialist serving specialist strategy provides Tornier with the platform for sustained growth into 2014 and beyond.

And now, I would like to turn the call over to Shawn to review our fourth quarter financial results and outlook for 2013.

Shawn McCormick

Thank you, Dave. As Dave has already reviewed the components of our revenue I will focus on components of our earnings and the balance sheet and discuss our financial guidance for the first quarter and fiscal year 2013. Our adjusted EBITDA for the fourth quarter of 2012 increased 31.5% to $11.0 million compared to $8.3 million a year ago.

As a percentage of revenue, our adjusted EBITDA was 13.9% compared to 12.1% for the fourth quarter of 2011. The increase in our adjusted EBITDA margins was attributable to improvements as a percentage of revenue and gross margin excluding acquisition related charges and selling, general and administrative expenses excluding special charges.

Gross margin in the fourth quarter of 2012 was 65.9% as reported compared to 70.8% in the fourth quarter of 2011. Excluding approximately $4.5 million of charges related to inventory step up and excess and obsolete inventory specifically triggered by our acquisition of OrthoHelix, our gross margin expanded 80 basis points over the fourth quarter of 2011 to 71.6%. The excess and obsolete inventory component of the $4.5 million acquisition related charge was associated with excess inventories of certain Tornier foot and ankle fixation and repair products that overlap with the acquired OrthoHelix product lines.

Looking forward over the next three quarters, we expect to continue to record cost of goods sold charges relating to inventory step up totaling approximately $5.5 million to $6.0 million. In addition to the acquisition related charges recorded in the fourth quarter of 2012, we also recorded higher than normal obsolescence expense relating to existing shoulder inventories in anticipation of the launch of Ascend Flex.

We believe that through a combination of manufacturing efficiencies, additional in-sourcing activities and contribution from OrthoHelix gross margins, we are well positioned to continue to increase our gross margins over time to the mid 70s as a percent of revenue.

Operating expenses in the fourth quarter of 2012 excluding special charges and intangible amortization increased 12.2% to $52.5 million or 66.4% of reported revenue. This compares to operating expenses of $46.8 million or 67.8% of reported revenue in the fourth quarter of 2011.

This increase as a percent of revenue was driven by strategic investments in our U.S. sales organization including sales leadership, going direct in certain U.S. territories, new product training and education, expansion in Japan in anticipation of product launches such as the Reversed Shoulder and converging to a direct distribution channel in Belgium.

Now that our U.S. sales management team is largely in place, our focus has turned to execution of our strategy to create both a dedicated upper and lower extremity sales channel in the U.S. in conjunction with the integration of the OrthoHelix sales channel. As Dave mentioned, we have also recently completed our transition to a direct model in Canada and we will continue to invest in Japan as well as other geographic expansion opportunities.

During the fourth quarter of 2012, we recorded special charges totaling $9.8 million as operating expenses. These charges relate to the acquisition of OrthoHelix, facility consolidations, U.S. distribution channel transition and management exit costs. The specific amount for each of these charges is detailed in a schedule to the financial statement in our earning release.

We expect to continue to record special charges in 2013 primarily related to inventory step up, the integration of OrthoHelix and transition of our U.S. distribution channel. We estimate that these charges will total between $10 million to $12 million in 2013.

In the fourth quarter of 2012, we also recorded non-operating charges of $600,000 and an income tax benefit of $10.7 million from the reversal of a portion of our tax valuation allowance as a result of reporting deferred tax liabilities in conjunction with the OrthoHelix acquisition.

Looking to our balance sheet, we ended the fourth quarter of 2012 with cash and available credit of $60.1 million. This amount was comprised of $31.1 million of cash and cash equivalent and $29 million in available debt. You may recall that we utilized $100 million of our available cash and new debt financing in the acquisition of OrthoHelix. As a result, our outstanding debt increased to $120.1 million.

During the fourth quarter of 2012, non-GAAP adjusted free cash flow was negative $12,000. The fourth quarter included $2.8 million of investments in implant and $3.4 million of additional property, plants and equipment.

Now, let me provide the financial outlook for the first quarter 2013. As I do this, we’re taking into account recent currency exchange rates, European market dynamics, our efforts to strengthen our U.S distribution channel, holidays and the number of selling days, product launches and our acquisition of OrthoHelix.

As you have seen from our past results with a meaningful percentage of our business based in the international markets, currency exchange rate fluctuations can create a significant difference reported and constant currency growth rates. For this reason we continue to focus on communicating the revenue of our business on a constant currency basis. In calculating our reported estimates, when it comes to projecting the value of the dollar versus the euro we assume exchange rates similar to current levels. That said, we do expect to see continued fluctuations in currencies in 2013.

For the first quarter of 2013 we project constant currency revenue to be in the range of $79 million to $82 million inclusive of revenue from OrthoHelix of $7.5 million to $8.5 million representing constant currency growth of 6.1% to 10.1% over first quarter 2012 revenue. Based on recent currency exchange rates, first quarter of 2013 reported revenue is also projected to be in the range of $79 million to $82 million inclusive of OrthoHelix revenue.

First quarter 2013 extremities product category revenue inclusive of OrthoHelix is expected to grow 11.2% to 15.3% in constant currency. We project our adjusted EBTIDA, as described in the GAAP to non-GAAP reconciliation provided in our earnings press release, for the first quarter of 2013 to be in the range of $5.3 million to $6.8 million or 6.7% to 8.3% of reported global revenue.

Now, moving to our annual guidance. We project 2013 constant currency revenue inclusive of OrthoHelix to be in the range of $310 million to $322 million representing constant currency growth of 11.7% to 16.0%. Based on recent currency exchange rates, 2013 reported revenue inclusive of OrthoHelix is projected to be in the range of $312.3 million to $324.3 million representing reported growth of 12.5% to 16.9% over 2012 revenue.

Revenue from our extremities product categories in 2013 is expected to grow 15.6% to 20.1% in constant currency. We project 2013 adjusted EBITDA to be in the range of $33 million to $38 million or 10.6% to 11.7% of reported revenue. Although we only provide guidance for revenue and adjusted EBITDA, I’d like to provide additional information relating to the impact of our acquisition of OrthoHelix, our U.S sales channel effort, going direct in certain geographies such as Canada and our new debt facilities.

As we look forward to 2013, adjusted EBITDA guidance the initiatives Dave and I have discussed primarily impact selling, general and administrative expenses, which we expect will increase as a percentage of revenue until the benefits of these initiatives are reflected in our revenue growth. In addition, as mentioned previously, we expect to record operating costs, special charges totaling $10 million to $12 million in 2013. Of this, we expect $1.5 million to $3 million in the first quarter.

We also expect to record approximately $5.5 million to $6 million of inventory step up charges in cost of goods sold during 2013 of which approximately $1.6 million to $1.8 million is expected in the first quarter.

Amortization expenses are estimated to increase by approximately $3.4 million to $3.9 million in 2013 over 2012. We anticipate interest expense to increase in the range of $4.3 million to $4.8 million and we anticipate recording interest accretion charges of $1 million to $1.5 million relating to the contingent consideration for the OrthoHelix acquisition.

One final comment regarding the Affordable Care Act. We expect the medical device excise tax to have a 100 to 110 basis points negative impact on our 2013 adjusted EBITDA.

With that update we would like to open the call to your questions.

Question-and-Answer Session


(Operator Instructions). Our first question comes from the line of Bob Hopkins from Bank of America.

Bob Hopkins - Bank of America

Dave, can you hear me okay?

Dave Mowry

Sure, we can, Bob.

Bob Hopkins - Bank of America

Great. Good afternoon and congratulations on the announcement, David. First question I want to ask is just a couple on upper extremities. Can you just give us a sense and I’m sorry if I missed this for what you expect the upper extremities growth rate to be for 2013 and if you could give us an update on pricing trends because I remember last quarter you said they got a little bit weaker.

Dave Mowry

Yeah, thanks Bob. That’s a great question. With the upper extremities we have had a chance to kind of look at our model and also gathered some data from Eucomed Society in which we participate and as we’ve looked at that we’ve basically taken our model to a 7% to 9% upper extremity growth and we’ve reflected that in our recent Investor Day that we presented in the couple of conferences. So in essence we think that this probably about one percentage point of growth lost from previous estimates and that’s what we’ve used on a go-forward basis.

In terms of pricing in the fourth quarter we saw a little bit of a negative set back in pricing typically that’s come from the U.S. and specific some of the IDNs in particular that we’ve been participating in.

Bob Hopkins - Bank of America

So previously you disclosed that they gone from or that it had gone to negative 1% and I think Q3 was it much worse than that in?

Dave Mowry

No, in Q4 it was a little bit less it was under 1%.

Bob Hopkins - Bank of America

Okay. And then could you just also talk about obviously you’re giving some confirming what you guys have said earlier about the back half and on a pro forma basis getting the double-digit constant currency growth and can you just talk about the main drivers of that? What do you assume for your core businesses in terms of growth rates and how much they accelerate in the back half especially upper extremities as you get into that Press-Fit reverse rocket?

Dave Mowry

Well I think that’s a great question, and we’ve been hitting this pretty hard as you’d imagine. Shawn and I along with the entire management team have really had a chance to kind of look under the hood and really challenge some of the initiatives and programs that we’re going on, and as a result we’ve realty focused ourselves on three key areas that we think are vital to that return to double-digit growth.

And you’ve heard us kind of hammered this over and over, it's the sales organization transitions of getting to direct representation for upper and lower, it’s the ongoing kind of press forward with OrthoHelix not only in continuing their U.S growth but also expanding to the international markets and it’s the Ascend Flex, and all three of these things in essence culminates towards the second the end of the second quarter and early third quarter leading to that return in the back half of 2013.

So our focus has been on the execution of those three things and we’ve aligned our resources to execute. So in terms of driving our growth I would say it’s going to come from both upper and lower extremities as we continue to kind of push forward with those sales force and those dedicated resources. Additionally, the Ascend Flex represents and access to that Press-Fit reversed market that represents about 30% of the U.S market. So gaining traction their will be critical to us as well.

Bob Hopkins - Bank of America

And lastly, is there any chance for you guys like consider an equity capital raise in 2013 or do you feel like you got you know plenty of flexibility with your balance sheet and you don’t have to do that?

Dave Mowry

Well, this has been an area that we’ve actually been very focused on in terms of cash management for 2013 and at this point we believe that we have all our ducks in a row and we have everything we need to execute. So there is nothing that’s pressing us to or forcing our hand at this point, Bob, we think we have what we need.


Thank you. And our next question comes from the line of Mike Weinstein from JPMorgan.

Mike Weinstein - JPMorgan

And let me start, Dave, congratulations. I think as what would be helpful is as we started to really track that pro forma progress for the company is to get the OrthoHelix numbers pre-closing, just to get people a better sense of how OrthoHelix is doing from a growth standpoint and how the overall company is doing because that’s really what we’ll be looking and obviously once we anniversary to the closing of the deal. So, as you kind of think through ways for us to detract the progress of the company and really it’s a new company that you have created here both with the acquisition of OrthoHelix and what we’re doing on the distribution side. Having that dataset would probably be helpful for people because that’s ultimately what we all will be looking at.

Dave, let me start on the distribution side. I think the 12% number you gave out there in the call is for how you want to exit the year I thought was helpful and I think interesting. I want to maybe just spend a little bit more time diving into the strategy here and what the sales force will look like if we’ve got 4 or 12 months and how you wanted to be both from a size standpoint and from coverage if we think about both your lower extremities and upper extremities businesses in the U.S. going forward?

Dave Mowry

So Mike, thanks for the insight as well as the question. As we think about the sales organization, there is a lot of metrics we could put out there that may seem more or less meaningful in terms of number of reps etcetera. But frankly those become meaningless to us until we’ve dedicated sales folks that are driving our business.

And so, putting out number of sales reps out there, we think it’s premature however we could see getting there at some point later in 2013. What we thought was most critical was tracking the amount of our distribution network that we’re able to make transition to and get under kind of the agreement if you’ll that they are moving forward with that dedication. So, that was kind of our thought process.

The strategy continue to be the same and what’s different now versus what was the case in probably early 2012 is we’ve the flexibility of I guess, leaning into the OrthoHelix distribution network for a group of very talented and focused lower extremities specialist. So, the benefit now is that rather than forcing some folks that maybe more heavily weighted to upper extremity sales, we’re able to I guess, have the contribution of the OrthoHelix distribution network in that consolidation if you will.

On a go forward basis, I think, what you’ll find is exactly what we laid out, which is a combination of Tornier legacy upper and lower distributors with focused sales reps as well as the complement of OrthoHelix in key territories and probably a larger footprint of direct sales channel as well.

Mike Weinstein - JPMorgan

And when somebody is, if I want to separate the terminology here when someone is committed to Tornier, we use to talk about the percentage of your distributor’s revenues that were coming from Tornier products. So, if someone to be fully committed and how you are looking at today it has to be 100%?

Dave Mowry

What we are suggesting is that that rep is 100% dedicated to either upper or lower, and so it’s not a complete Tornier only product family. So, it’s not an exclusive agreement with the sales channel but rather a dedication to serving either upper or lower.

Mike Weinstein - JPMorgan

That’s very helpful and that makes a lot of sense. So, let me come back to the Convertible launch and the Flex launch. And did you put some metrics out there for us to track as well, put that, that 100 plus goal at the end of the year and some context in terms of your customer base, if we were to think about that, that 100 plus customers that you hope to do have trained and planning at the end of the year. What would that represent of your overall customer base?

Dave Mowry

That’s a difficult measure and I’m not sure I’m prepared to share with you in that context, Mike; I need to kind of think through that a little bit more. I would think about it more in terms of the breakout of what that 100 represents. We recognize that obviously this we’ve lost some business to competitive product on our Press-Fit reverse, we also know that some of our customers have moved just a portion of their business to somebody else’s reversed and we also know that a lot of our current customers have stuck with this in the hopes of us completing this project. So, that 100 represents probably a group of recovery of lost business kind of a conversion of competitive business and the cannibalization of some of our existing business.

Mike Weinstein - JPMorgan

Okay, understood. And then maybe last question just before I jump off here and let some others jump in. I want to just get a sense of the elbow launch I think I was a bit confused in terms of where you are on that timing and how we should think about that Latitude too?

Dave Mowry

Yeah, so, we actually entered into our LUR with that Latitude earlier in 2012 and we extended kind of the length and the training because elbow is a little bit more complicated in terms of doing an implant, its also got kind of a combination if you will a specialist working in that space, you’ve got shoulder specialist that kind of migrate into the elbow and you also have some hand and wrist physicians or surgeons that are doing elbow. So, we’ve actually taken our time to build the right training programs as well as build the appropriate kind of staged launch. So, we’ve actually only physically fully launched that product towards the very end of the fourth quarter and into the early first quarter.

At a recent shoulder and elbow course we actually we’re able to kind of if you will, use all 10 of the stations allocated for elbow and train a number of physicians at the course. So we’re very pleased with the feedback we got from the physicians as well as the up-tick we’ve seen post that course. We expect to also take Latitude into the international markets towards the second half of 2013.

Mike Weinstein - JPMorgan

And that, I knew that will start in the Europe in the second half of 2013 that we….

Dave Mowry

Yes, that’s correct.

Mike Weinstein - JPMorgan

Okay, okay. I’m sorry I did up one at, one final one just because the people that’s picking me on that so. The first quarter guidance and Shawn jumped in here, is there the assumption because that we are you haven’t basically guide into a bit of a step down from what was the good fourth quarter, is that, are you assuming some disruption on the distributor side in the first quarter, or are you just being conservative or want to see how the business plays out?

Shawn McCormick

Yes, Mike, there is a couple of things that play into the first quarter. First, as I mentioned we take into account the selling days and especially in the international markets we officially have one left selling day. If you look at the way the holidays fell this year in, in January we’d actually really estimate that we have more or like a half a week impact from the holiday season, the first week of January. So that’s part of the explanation. And then the other explanation is we really are looking at the totality of our initiatives obviously the U.S sales channel is part of that and, taking all of our inputs looking at that everything in total when we establish our guidance for the quarter.


Thank you. And our next question comes from the line of Matthew O’Brien from William Blair.

Matthew O’Brien - William Blair

Good afternoon, maybe I also reiterate my congratulations today. Couple of questions, first of all and I know it’s a smaller piece of the business right now but it looks like the core low extremity business were still down in the fourth quarter, and is that more a function of just some competitive dynamics that are going on or just a little bit of a luck that focus given what you’re doing with OrthoHelix?

Dave Mowry

So Matt, let me kind of but first there just a minor correction. We saw the Tornier legacy products as flat year-over-year in the fourth quarter. And as I had indicated, we saw Salto being up offsetting some declines in some of the other products. So the enterprise that we’re declining were more the legacy, older, Tornier products some of which overlap with OrthoHelix others that probably are in need of being refreshed and have products in our current pipeline of new product development programs to be addressed.

Matthew O’Brien - William Blair

Okay that's helpful. And then I know everybody is kind of focusing on the Flex but it would be helpful for me if you can run through I think you talked about it a little bit in terms of the percentage of the market that's using convertible shoulders it looking like its writing off quite a bit of your inventory elsewhere in upper extremities because you’re going to sell this shoulder primarily is that basically just in the U.S or is it also U.S that it will be your main product? And then can you just give us a sense I know you don’t want to disclose for competitive reason the pricing premium but just some kind of qualitative commentary on the pricing premium you should enjoy from that product?

Dave Mowry

Okay. Good series of questions. So, first of all when we look at Ascend and I’ll answer these in reverse order we believe that it is a significant technologically improvement from a biomechanical perspective in particular. In addition we know that the reversed the market in the U.S is very revision sensitive. So having a convertible product gives the surgeon the opportunity or the option if you will of converting from primary to reverse without the removal of the stem and that's so that's the benefit.

I think what we've seen historically is very few times that has actually happened when we talk to physicians. So it’s not so much the number of times it happens as much as having that option when you really need it. And I think that's kind of the differentiator. So, as a result it’s a very revision sensitive market in the U.S and if I can present an option that allows conversion without removal of the stem that scene is a very favorable outcome.

I think the other convertible stems that are out on the market have enjoyed kind of similar benefit of being perceived as kind of a bailout or improvement of future revision opportunity. And we’d expect that we would see the same in addition we believe that the biomechanics and alignment of our device and ultimately what’s called lateralization of the device presents a preferred anatomic alignment. So we’re very, very pleased with our outcome very pleased with what our engineers and designing surgeons have developed and believe it will have significant uptake.

In terms of the pricing premium its two-fold one we think that we’ll get some mix improvement as we continue to enter more of the reversed market with this solution we also believe that in certain cases because of allowing the convertibility we think that there is several contracts and several accounts we will be able to show a benefit to them of reduced inventory, reduced instrumentation that allows us to share a profit or share an improvement. So I would expect to get some pricing premium by enlarge.

Matthew O’Brien - William Blair

Okay, and just one more from me. And there is a lot of moving pieces that you have going on with the Flex rollout the investments you’re making internationally and then OrthoHelix outside the U.S and then pulling to the legacy Tornier products here in the U.S. through that distribution networks but just can you help us kind of frame some of those market opportunities that are out there and then when they should really start to – we should start to see the need of those, of those new offerings.

Dave Mowry

Well, the OrthoHelix opportunity internationally is exciting for us because it’s a greenfield and we’ve seen significant uptake if you will of the OrthoHelix product in the U.S. and would expect to see similar. I think that what I would caution you is that there is a lower ASP perspective on these products in some of the international markets that we have to consider and that has driven some of our prioritization of which project and products we’re pushing through our regulatory filings. So, I think it’s a open playing field for us however I don’t think it has quite the same level of profitability OUS that the U.S. represents.

That being said we also know that there is huge opportunity in very profitable markets such as Japan and Australia provided that we move through those regulatory pathways but they are little bit further out mainly about 12 months further out than the international than the CE Marking. So, it’s all being staged appropriately against prioritization and resources are being applied to basically optimize the benefit that can be provided in that.

Matthew O’Brien - William Blair

Okay. Thank you.

Shawn McCormick

So, and Matt I just want to chime in a little bit you made a comment about D&O, I just want to make sure we’re clear. In my prepared remarks I made a comment that we saw a little bit higher excess and obsolete charges in the fourth quarter relating to our shoulder product, but I absolutely don’t want to give the impression that we’ve written off a significant portion of our shoulder product. We’re very focused on a disciplined launch, we are very focused on utilizing our current inventories either with a phase-in, phase-out in our current geographies or redeploying current system into other geographies. So, it’s a factor for the fourth quarter but I don’t want to leave the impression that, that we took a significant or the majority of our other shoulder product line D&O.

Matthew O’Brien - William Blair

Okay. I was more talking Shawn about the commentary about 2013 I think you said $5.6 million to $6 million of COGs charges maybe I over interpreted the impact to the shoulder business?

Shawn McCormick

Yeah, in that, that $5.5 million to $6 million math released to inventory step up that gets recorded into our inventory with the acquisition primarily OrthoHelix.


Thank you. And our next question comes from the line of Matt Miksic from Piper Jaffray.

Matt Miksic - Piper Jaffray

Hi, thanks for taking our questions. Dave, I guess I would say congratulations but I don’t know that there was ever any doubt, so, thank you for that. On - I don’t want to get too further, too much further into the (weeds) on the implants and the technologies and the features and the designs that you are rolling out, but I did want to ask just kind of one basic question about the comments that you’ve made about these new products one is sort of the Flex and the convertibility, I think as most folks have recognized this was a - an area that you needed to, need to flush out in your lineup? And then the other is you’ve talked about a number of times is this Press-Fit reverse category. Could you sort of talk about where, which one of those is really the one that sort of the fat part of the bat if you will like which one of those things really does more damage and gets you more, gets you back deeper into a competitively stronger position if you will and then I have one follow-up?

Dave Mowry

Okay. So Matt it’s a great question and I think it’s a little confusing because Ascend Flex basically addresses both segments. As you recall and by the way it’s by and far away the reversed, Press-Fit reverse opportunity that represents 30% of the market that we are not playing in. And we have been on these ends for quite sometime with the existing products trying to keep our reverse business. So, this Press-Fit option that Ascend Flex offers those up toe-to-toe with any other Press-Fit reverse option that’s on the market. So we are really, really delighted with its performance. The convertibility of the Ascend Flex also addresses that market segment that a couple of our competitors have been able to leverage and kind of a appealing to the market specifically in the U.S of convertibility or revision future revision capabilities. The Ascend Flex services both of those needs but buying far away the market issue is really the reverse Press-Fit reverse opportunity.

Matt Miksic - Piper Jaffray

That’s helpful and then on the work that you’re doing with lower extremities in the integration and distribution changes that you’re making you know that the there is a fairly steady flow of larger competitors that are looking into get into the lower extremities market. Can you talk a little bit about what that environment is like you know for securing and holding down contracting with these key distributors just as I would imagine there is a lot of other players now bidding for some of those very same resources?

Dave Mowry

Yeah I know I think that’s an insightful question you know as we deal with not only the Tornier legacy distributors but also the OrthoHelix folks on you know really there is kind of an increased interest if you will not only from the large strategics but also from some small players as well. What we think really appeals to the distributors is the ability to make money frankly and that comes from having a cadre and cadence of new product introductions and be able to serve the complete portfolio. So the alignment of the sales reps on their end is had to be equally met by our ability to create and provide to them a competitive portfolio products which we believe through the OrthoHelix and Tornier combinations we now serve you know the vast majority of procedures and have options that represent you know something north of 50 of the different 60 get 50 of the different 60 product categories used in that space.

We also believe that having the ability to serve not only the orthopaedic surgeon but also the DPM market is critical and this is where we think OrthoHelix has some considerable strength in their appeal and in alignment to both the orthopaedic specialist as well as the DPM. And this is something we are learning from their team. So I think we are providing our distribution network with best-in-class products and a portfolio and the support necessary for them to win the business. And I think at the end of the day ultimately they are going to go with a group that’s going to allow and during the most money and have long term success.

Matt Miksic - Piper Jaffray

Great. And then if I could just one on sports medicine and teams like we’re talking a fair amount here about their shoulders and OrthoHelix low extremities. Can you talk a little bit maybe about what’s happening there if anything in terms of distribution and you mentioned some products in the pipeline maybe what some of the key catalysts are for that segment?

Dave Mowry

Okay. So yeah I think that’s another [encyclical] question. When we look at the dedication of the sales organization, we know that, if we have groups that will be serving upper extremities specialists and lower extremities specialists, we believe that a large part of our sports medicine and biologic line fit into both back. But we also believe that some of the specific sports medicine product has to be customized for lower extremities with lower profile and smaller sizes and a lot of that work is now entering into our development pipeline.

I think the most significant space though within sports medicine and biologics has been some of the biologics development in particular the BioFiber high strength suture I mentioned that we’ll launch into the second half of 2013 as well as having a bioresorbable Insite anchor similar to the – that we have a metal or [sheet] anchor but we have a resorbable anchor.

Those two things serving both the upper and lower further extend our line and give us some significant play and with the BioFiber high strength suture that’s a resorbable suture that is the differentiator for us as well. So, I think that, there is a lot of development efforts that are going on that. These are all aligned to that same strategy of specialists servicing specialists and teeing this up for individual kind of application both upper and lower.


Thank you. And our next question comes from the line of Larry Biegelsen from Wells Fargo.

Larry Biegelsen - Wells Fargo

Thanks for taking the question. Congratulations, Dave. A couple of questions, first for Shawn actually medtech tax, where is that being booked Shawn?

Shawn McCormick

We’ll book that into our operating expenses SG&A.

Larry Biegelsen - Wells Fargo

I got it. And when we look at, if I’m doing the math right back to Mike’s question earlier about Q1 it looks like on a pro forma basis constant currency Q1 the guidance is negative 4% -- about negative 4% to flat. How should we, I understand, there is one less selling day but versus the 7% or so in Q4 what – how do you have – how are you guys looking at that Q1 kind of on an apple-to-apples basis or how much do you think that the fewer selling days negatively impact Q1?

Shawn McCormick

Yeah, well, if we look at the negative or the fewer selling days that’s actually going to be a point or two and maybe even more than that. We’ve seen over the course of 2012 some decelerating growth rates. We’re not happy with that overall. The U.S. sales channel efforts that we’ve going on are obviously, we don’t necessarily have specific numbers of how that’s impacting the revenue. We’re really focused on getting that corrected and moving in the right direction in the back half of 2013. So as we look at the first quarter between selling days you’re not having the Ascend Flex which David talked a lot about in full commercial launch. Here those are the things that are still impacting our growth rate. We get our distribution channel aligned into upper and lower get these new products out there. We’re very confident of all ability to reaccelerate that growth rate.

Larry Biegelsen - Wells Fargo

I got it. And then when I look at the adjusted EBITDA guidance for this year 10.6% we’re still at 11.7%, it’s below where you came in 2012, the 11.9, is, does it exclude or include the $10 million to $12 million in special charges that you mentioned earlier and if exclusive beside the netted tax. Why is the gallon year-over-year I thought there were some manufacturing benefits that going to help your margin in 2013?

Shawn McCormick

Yeah, so the adjusted EBITDA does exclude the $10 million to $12 million of special charges that I talked about. What’s driving the number down versus where we finished 2012 is our investments in the U.S sales management including investments in our sales and training efforts both for our sales reps and for physicians impacts that going direct in certain territories in the U.S and going direct in Canada impact that the investments we’re making there those are not special charges, investments we’re making in Japan that to make sure we’re prepared for the production expansions there will impact that rate.

And then, the other thing that kind of kicks in I guess two other things it’s a beginning of the year you kick back into bonuses, FICA taxes all your benefits that give you an expense uplift and then finally as we looked forward to the integration of OrthoHelix and making sure that we’ve got the business platform to ensure we’re prepared to sustain long-term growth. We’re making some investments in our IT infrastructure as well.

Larry Biegelsen - Wells Fargo

That’s helpful. Lastly, from me earlier this week Medtronic I know it’s good people at a little bit and their comments on Europe. Now what are you guys assuming for 2013 for Europe if, there is any color you cam give them here that started off and related to that on large joint if I’m doing the math right it’s the guidance was negative five to negative one, is that kind of, is that the right math and is that a factor because of the Europe, the weakness in Europe? Thanks

Shawn McCormick

Yeah, I would say generally for a year of what we are assuming is a level of stability in 2013 we are not in anyway expecting a rebound or a invigoration of the market into the macroenvironment. So that places into it, we do think even with that as we’ve launched some new products in the back half. We’re going to be in a good position to accelerate the growth rate and actually do betters in the market overall and in large joints.

The other thing that is impacting you know right now is we are seeing some downward pressure in the European market overall for 2013 and in the first quarter we are kind of assuming about you know somewhere in the range of a 1% maybe a little more than a 1% price decline. I might say you know 1% to 2%.


Thank you. And that concludes our question and answer session today. I would like to turn the conference back to David Mowry for concluding remarks.

Dave Mowry

Thank you, operator. I want to thank each of you for listening to the call today. As you have heard during our prepared remarks as well as from some of the question and answers on this call this afternoon we are highly committed to executing on our Vital Few initiatives which we believe return Tornier to double-digit constant currency revenue growth on a pro forma basis during the second half of 2013.

While we recognize the challenges associated with meeting these commitment we are encouraged by the early results we are delivering from each of these critical initiatives of sales channel transition OrthoHelix integration and Ascend Flex product launch.

While 2012 was a difficult year for Tornier in terms of financial measures. My confidence entering 2013 is bolstered by the knowledge of the organization having executed on multiple programs last year. We completed the design development and initial release of the Ascend Flex product. We close the OrthoHelix acquisition and initiated integration activities focused on the preservation of revenue and acceleration of growth.

We completed the reorganization of our U.S sales management team and built the playbook of activities to address issues within the U.S sales channel. While these programs did not provide positive contributions to 2012 they did set the stage for the recovery of our growth rate through a disciplined execution of these initiatives for 2013.

I am state facts and my belief that through the combination of these initiatives we will see the acceleration of revenue growth during the back half of this year. Additionally Shawn and I have spent the time to fully understand the challenges and have the entire organization aligned and focused on the execution of these vital initiatives. I along with the entire team very much appreciate your interest in Tornier and we look forward to updating you on our progress at the next earnings call in May. Thank you operator.


Thank you. Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may now disconnect. Everyone have a good day.

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