Tornier N.V.'s (TRNX) CEO David Mowry on Q1 2014 Results - Earnings Call Transcript

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 |  About: Tornier BV (TRNX)
by: SA Transcripts

Tornier N.V. (NASDAQ:TRNX)

Q1 2014 Earnings Call

May 06, 2014 4:30 pm ET

Executives

Carol A. Ruth - IR, The Ruth Group

David H. Mowry - President and CEO

Shawn T. McCormick - CFO and Principal Accounting Officer

Jim Erickson - VP, Finance

Analysts

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Matthew O'Brien - William Blair & Company L.L.C., Research Division

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Craig W. Bijou - Wells Fargo Securities, LLC, Research Division

Daniel Sollof - Barclays Capital, Research Division

Glenn J. Novarro - RBC Capital Markets, LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Tornier First Quarter 2014 Earnings Call. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the conference over to Carol Ruth. Ma'am, you may begin.

Carol A. Ruth

Good afternoon, and thank you for joining us today for Tornier's First Quarter 2014 Investor Conference Call. Joining us from Tornier on the call today will be David Mowry, President and CEO; Shawn McCormick, Chief Financial Officer; and Jim Erickson, Vice President of Finance.

Before we begin our detailed discussion of the first quarter of 2014, I'd like to remind you that, during the course of this call, we will make forward-looking statements regarding our future financial and operating results and our 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 desires 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. 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 duties to update or revise our forward-looking statements.

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

With that, I'll turn the call over to Dave Mowry. Dave?

David H. Mowry

Thank you, and welcome, everyone. On today's call, I will provide an overview of our financial and operational performance in the first quarter, summarize the accomplishments we made in executing Phase 2 of our U.S. sales force transition and give an update on the key products and technologies that are driving our business and our pipeline. I will then turn the call over to Shawn who will provide a first quarter financial review, an update on our key sales force performance metrics and context for our second quarter and full year 2014 guidance contained in our release. Following Shawn's update, we will then open the call to your questions.

Since our last earnings call, we continued to make progress on our strategic and financial objectives. During a productive first quarter, revenue at constant currency grew 6.8% over the same quarter last year. We executed against Phase 2 of our U.S. sales force transition plan, placing us in a strong position to achieve our goal of 85% of our U.S. sales reps dedicated to either upper or lower extremities by year end. We delivered focused product launch and surgeon training activities, resulting in continued adoption of Tornier products. And we made advancements with our product development and technology pipeline that we believe will drive future growth. These accomplishments represent solid progress towards positioning Tornier to achieve our long-term growth objectives as we move through the remainder of 2014 and into 2015.

During the first quarter of 2014, we saw less-than-expected impact of revenue from the 2 territories where we had distributor separations late in the fourth quarter of 2013. We believe this is related to the fact that distributors in these territories remained under separation agreements into the first quarter, providing sustained access to Tornier products and uninterrupted case coverage support to our shared customers. While the case coverage agreements were in place, we installed sales leadership early in the quarter and made solid progress throughout the quarter with the planned hiring and rep training for these 2 territories. Based upon our experiences to date, new sales reps placed into recently transitioned territories have taken between 12 to 18 months to fully ramp up their sales rate to predisruption levels. Following the expiration of the contractual agreements and case coverage support, we remain cautious of the potential revenue impact in these 2 territories in the second quarter.

Phase 2 of the U.S. sales transition is focused on increasing sales rep alignment and territory optimization with our primary emphasis on the expanded direct sales team. Management is working closely with sales leadership to optimize the size and rep coverage planned for each territory, separating direct sales representation into dedicated sales channel for upper extremities or lower extremities. As we move through this process across the remaining territories, sales reps assigned to a dedicated channel will be taken through a series of comprehensive training and development activities to align them to their respective product lines, as well as Tornier's selling strategies.

The first quarter marks significant progress on these initiatives, further elevating the capabilities and potential of our U.S. sales force. We remain confident that the transition process will result in competitively superior, dedicated upper extremities and lower extremities sales teams that are highly effective and capable of delivering above-market revenue growth in both segments. While we are pleased with our performance thus far, it is still very early in Phase 2 of the transition. We expect that some revenue risk remains over the balance of 2014 as we make the required moves to ensure that our direct reps are performing to standards and our distributor reps are providing adequate focus on our products and remain free of competitive lines.

Changes made to build a focused, long-term sales channel can be disruptive in the short term as seen in the first quarter specific to our lower extremities business. As we move through Phase 2 over the course of 2014 and our expectations for sales rep productivity ramps upward, we anticipate the potential for some sales rep turnover as performance management activities are implemented. With these expectations in mind, although pleased with our first quarter results, we remain cautious about prematurely identifying trends from our first quarter results at this stage. Shawn will provide a comprehensive update on our key sales force performance metrics during his prepared remarks.

Now let me turn to an update on the innovative products, technologies and pipeline products that are contributing to our long-term growth objectives. Our portfolio strategy remains focused on providing best-in-class products through the introduction of designs and technologies that improve clinical outcomes, increased surgeon ease-of-use, and extremities market expansion by providing surgeons with early intervention and late-stage revision solutions.

In upper extremities, our Aequalis Ascend Flex convertible shoulder system performed exceptionally well. During the first quarter, we saw continued success in gaining access to competitive accounts with this innovative shoulder platform. The customer feedback continues to be very positive, and we are pleased with the customer retention and reorder rates as seen with competitive surgeons previously trained and now using the Flex system. The conversion data reinforce our belief that the Flex ease of implementation, true humeral stem convertibility and reversed tray design features make it a best-in-class product.

The addition of the new threaded post base plate, which was available in limited user release during the first quarter, has already begun to contribute to heightened physician interest. The threaded post base plate designed to be used in conjunction with the Ascend Flex system offers surgeons added confidence in placement and fixation of the prosthesis. We intend to gradually expand the rollout of this enhanced system component over the course of 2014 to provide a broader array of reversed base plate options to the shoulder surgeon.

The PerFORM glenoid system continues to serve to anchor the Aequalis Ascend Flex line in what we believe to be an industry-leading glenoid solution used in conjunction with the Flex system. PerFORM offers multiple backside curvatures, allowing the shoulder surgeon to better match variable patient anatomy and preserve subchondral bone, a critical factor in preventing glenoid migration and loosening. Physicians presented with this product immediately recognize the potential for improved outcomes through a product specifically designed to address one of the most common complications with total shoulder replacement.

While we were pleased with our shoulder platform systems, the surgeon interest we have seen throughout the world and the number of competitive accounts trialing the Ascend Flex system, we also recognize that the conversion of physicians to full time users takes some time. As we drive deeper into competitive conversions, we fully expect that the lead time to total conversion will expand and have planned accordingly.

Regardless, we believe that the combination of Ascend Flex, threaded post base plate and PerFORM glenoid represents significant opportunities for further competitive conversions and market share growth as we continue to roll out additional Ascend Flex sets in the U.S. and around the world.

Beyond Ascend Flex, we continue to be excited about several other innovative products in our upper extremities pipeline line, including the pyrolytic carbon humeral head and the Simpliciti Stemless Shoulder. We believe these products, designed to further simplify total shoulder procedures and preserve bone, will improve clinical outcomes and expand the market to younger patients.

Simpliciti, currently available in our international markets, remains on track to file for U.S. approval. We currently expect to complete 2-year follow-up on patients enrolled in the Simpliciti IDE study and provide the FDA with our submission for 510(k) approval early in 2015. The timing of our submission suggests a mid-2015 approval for the product, providing Tornier with approximately 18 months of lead time as the first to market with a stemless shoulder in the U.S.

Meanwhile, our proprietary pyrolytic carbon humeral head, designed to work with the Aequalis Ascend Flex stem is well along in its limited user release in Europe. With well over 70 hemiarthroplastic cases having been completed by our designing surgeons, the early results give us confidence that we are on a pathway that could provide significant market expansion opportunities. We have also received positive physician feedback that this proprietary technology could be an important portfolio product in helping recruit more generalist orthopedic surgeons as it potentially eliminates the need to perform complicated glenoid exposure in placement procedures.

With respect to U.S. FDA approval of the pyrolytic carbon head, we have been in contact with the FDA and have scheduled a review later this summer to better define the U.S. approval pathway for this novel, potential market-expanding technology.

As we have previously highlighted, the orthopedic extremities market in Japan remains a strategic, important initiative for Tornier as it represents a strong medical device market with solid reimbursement and significant headroom for long-term extremities utilization expansion. Tornier has been long committed to working through the challenging regulatory and market support activities needed to bring reversed shoulder technology to the Japanese shoulder surgeon. In early April, the first ever commercial total shoulder reverse arthroplasty procedure in Japan was performed using the Aequalis Reversed Shoulder system. Aequalis Reversed was the first product indicated for reverse shoulder arthroplasty to receive shonin approval in Japan. In our efforts to ensure excellent long-term outcome, we have partnered with the Japanese Shoulder Society to develop and implement a reversed shoulder training and certification program in support of the introduction of this product. In alignment with our standard approach to product introduction, we are taking a long-term view of the Japanese market and expect our commercialization program to move at a very measured pace.

Now switching to lower extremities. During the first quarter of 2014, we saw strong surgeon engagement and product pull-through of our primary Salto Talaris as a result of the ongoing limited user release of the Salto Talaris XT Total Ankle revision system. We believe that the pull-through of the Salto Talaris demonstrates that the availability of a system, designed specifically for ankle revision, serves to increase surgeon willingness to perform primary ankle replacement over fusion. Throughout the first quarter, we also witnessed the positive effects of our sales rep training efforts on the Salto Talaris system initiated during the back half of 2013.

The combination of these factors, training and access to revision system, has provided us with expanded access to competitive total ankle arthroplasty accounts, as well as access to new surgeons looking at total ankle arthroplasties.

In addition to Salto Talaris success, we produced another strong quarter with the CannuLink and angled CannuLink plus hammer toe correction products. We continue to be focused on and excited about our offering in this $200 million market.

On the international front of lower extremities, we have started to see the impact of our introduction of the OrthoHelix products and have done some early cases in Europe with our pyrolytic carbon metatarsal arthroplasty device.

Lastly, I will turn to a brief discussion on our large joint portfolio and the impact from recent product introductions on our business performance in the quarter. We saw higher-than-anticipated volumes, especially in hips during the first quarter of 2014, driven by physician interest in our newly introduced MIS techniques and the deployment of the associated field instruments. Additionally, we saw a mild increase in total knee revenue driven by case volumes associated with our cementless Kneetec product. We intend to continue to roll out this product in our existing knee markets and suspect that there will be some cannibalization of our business along with some minor volume uplift.

While we are pleased with our first quarter large joint revenue growth, we recognize that the impact from the previously discussed French reimbursement reductions, as well as the normal ebb and flow of new product coming from competitors being launched into the market will affect our large joint revenues. As such, we do not expect this level of market overperformance to continue as we move through the remainder of the year.

In summary, we are pleased with the start to the year from a financial, operational and product development perspective. Our innovative products have continued to perform well, and we are excited about the potential of our products' pipeline to expand both the extremities market, as well as our base of surgeon customers.

Additionally, first quarter progress on Phase 2 of our U.S. sales transition plan has moved Tornier closer to our objective of fielding a competitively superior sales force positioned to deliver sustained above-market growth. Management's confidence continues to grow in our U.S. sales capabilities as we realize improved results delivered from this team. Still early in our efforts, we remain committed to and focused on developing our sales reps' capabilities.

As I mentioned earlier, we are cautious about using first quarter results to identify full year trends. Nevertheless, the management team remains encouraged by our progress and intensely focused on near-term execution as we strive for our ultimate long-term goal of establishing Tornier as the #1 extremities company in the world.

I would now like to turn the call over to Shawn for his comments.

Shawn T. McCormick

Thank you, Dave. I will discuss some of the drivers of our financial performance, including the strategic decisions, allocation of resources and sales force focus that led to the numbers we are reporting today. I will also provide the key performance metrics we are using to track our execution on Phase 2 of the U.S. distribution transition and progress toward our long-term growth objectives.

Our total first quarter revenue of $89 million was up 7.7% as reported and 6.8% in constant currency, driven by strength in our upper extremities business and growth in our large joints business, offset by flat lower extremities growth. First quarter total extremities revenues totaled $72 million, an increase of 7% as reported and 6.7% on a constant currency basis over the same quarter last year. We continue to see only modest pricing pressure of approximately 1% during the first quarter.

Upper extremity joints and trauma category revenues increased 9.9% in constant currency, led by the Aequalis Ascend family of products, which continue to gain worldwide acceptance. We saw particularly strong performance from the Ascend Flex, including positive conversions from surgeons we had previously trained on the product, along with increased trialing from competitive accounts. Ascend Flex results also benefited from the rollout of additional instrument sets in the first quarter, ahead of our previous plan, to make these sets available beginning in the second quarter. As Dave mentioned, however, we are cautious about forecasting a trend to this momentum as conversions from trials into full-time consistent users will take time.

Lower extremity joints and trauma category revenues were flat over the same quarter last year. During the quarter, we saw a good pull-through of primary Salto Talaris procedures due to the availability of the Salto Talaris XT revision system. This growth in arthroplasty was offset by a decrease in sales of foot and ankle fixation products. This decrease was partially related to our proactive strategic decision to move away from a few U.S. distributor relationships that were not highly focused on our lower extremities product suite. This is in line with the strategy Dave outlined to continuously improve the quality and productivity of our sales force in order to ensure we meet our long-term growth objectives.

Sports medicine and biologics revenues were down 6.2% in constant currency, reflecting the company's increased focus and expectations of the sales organization on upper extremities arthroplasty and lower extremities arthroplasty and fixation.

Large joints and other revenues increased 6.9% on a constant currency basis, reflecting strong growth in hip products in Europe. The introduction of new minimally invasive instrument sets late in 2013 was a key driver in the quarter, enabling some recovery from the negative growth experienced in 2013. While we are pleased with this performance in the first quarter, we believe the volume benefit was primarily a regain of market share in France, representing a short-term revenue bounce. Therefore, we do not expect this above-market growth to continue throughout the remainder of the year.

Our international business continued to perform well overall, growing 10.4% over the same quarter last year in constant currency and led by continued success of our upper extremities offering, including the Aequalis Reversed and Ascend family of products. We also saw solid double-digit growth in lower extremities in our international markets as we continued to expand the launch of OrthoHelix products. Several of our geographies made solid contributions in the first quarter, most notably, France, Germany, the United Kingdom and Australia.

First quarter gross margin expanded by 340 basis points over the first quarter of 2013. Excluding inventory step-up charges relating to acquisitions of approximately $300,000 in the first quarter of 2014 and $1.8 million in the first quarter of last year, our non-GAAP adjusted gross margin expanded to 75.1%, an increase of 150 basis points over non-GAAP gross margin in the first quarter of 2013. This improvement in non-GAAP adjusted gross margin was driven by continued improvements in production costs and manufacturing efficiencies. Looking forward, we continue to see headroom for gross margin expansion, but we expect this to come in smaller incremental steps over time.

Non-GAAP operating expenses, which excludes special charges and intangible amortization, increased 10.7% to $64.6 million or 72.5% of reported revenue. As discussed during previous calls, this increase in operating expenses as a percent of revenue was driven by strategic investments in our U.S. sales organization, including sales leadership and training personnel; going direct in certain U.S. territories; product training and education programs; expansion in Japan and Australia; and investments in new IT ERP systems. These investments in SG&A were partially offset by a decline in R&D as a percent of revenue. The decline in R&D is temporary based on the timing of projects, and we continue to expect R&D spending to remain in the range of 7% of revenue over time.

First quarter 2014 operating expenses as reported on a GAAP basis were impacted by $2.7 million of special charges, primarily related to acquisition, integration and U.S. distribution channel transition costs.

Adjusted EBITDA for the first quarter was $9.5 million, up modestly over the same quarter last year with adjusted EBITDA margin down 30 basis points to 10.7% of revenue. The decrease in our adjusted EBITDA margin reflects the investments we are making in our U.S. sales organization and IT infrastructure. As mentioned on our previous earnings calls, we expect SG&A as a percent of revenue to increase in 2014 over 2013, primarily as a result of our expanded direct U.S. sales representation and Phase 2 training and education associated with our U.S. sales force transition. Adjusted EBITDA was positively impacted in the quarter from the timing of R&D expenses shifting out of Q1.

Cash and available credit at the end of the first quarter of $79.4 million consisted of $49.4 million of cash and cash equivalents, and $30 million available under our revolving line of credit.

Our outstanding long-term debt totaled $67.6 million at the end of the quarter.

Non-GAAP adjusted free cash flow was negative $5.2 million, driven by $6.8 million of investments in implant instruments and $1.8 million of additional property, plant and equipment. These investments relate primarily to the continued expansion of Ascend Flex and OrthoHelix products in international markets, and manufacturing capacity.

I will now turn to an overview of the metrics we are using to track our progress as we execute through Phase 2 of U.S. sales transition process. We currently have approximately 380 U.S. sales reps carrying Tornier products, 160 of which are direct. This reflects a decrease in total reps of approximately 20, while, at the same time, an increase in direct reps of 15. As already mentioned, during the first quarter, we made additional territory changes that eliminated reps that do not have an adequate focus on Tornier products. At the same time, we converted some reps from distributors to direct and hired 10 new direct reps. As we continue through 2014 with optimizing our territories, we expect to continue to see fluctuations in the total number of reps as well as the number of direct reps.

At the end the first quarter, we increased the percentage of reps identified and transitioned or in the process of transitioning to dedicated upper or lower extremities to over 70% of our direct reps, up from 60% at the end of 2013, and distributors increased slightly to over 80%. As Dave mentioned, our goal is 85% of our U.S. sales reps dedicated to either upper or lower extremities by year end and we remain on track to meet this goal.

In terms of rep training, we have completed training for over 65 reps in the first quarter of 2014 and remain on track to achieve our goal to train a total of 200 reps by the end of 2014. These metrics are closely aligned with our goals to optimize sales territories and sales rep focus and proficiency in all of our territories. We believe that as we continue to move through Phase 2, our reps will be in a stronger position to represent Tornier and increase their productivity. This, combined with our medical education, is expected to move us toward our goal of delivering above-market revenue growth.

Now let me move to our financial outlook for the second quarter and full year 2014. In addition to our operating plans and expectations, our guidance also accounts for the anticipated U.S. and international market dynamics, seasonality, the timing of holidays and recent currency exchange rates.

As mentioned in our press release, we are increasing our revenue guidance for the full year and establishing guidance for the second quarter. While today's earnings release includes the specifics of our financial expectations for the second quarter and full year, let me provide the following additional context.

We expect continued growth in upper extremities to be driven by our shoulder lines, primarily Ascend Flex. However, our expectations are tempered, given that anticipated competitive product conversions in the remainder of the year are with lower volume implanters, leading to an extended time frame from trialing to conversion to full time users. We also expect continued growth of ankle arthroplasty and slightly improving performance in foot and ankle fixation as our distribution changes and training programs begin to take effect.

We are very pleased with our progress on Phase 2 of the U.S. sales transition, but are still early in the process. As we mentioned, some risk remains as we proactively focus on rep training and monitoring their performance. Consistent with our actions in the first quarter, we expect to continue to make performance management decisions during the remainder of the year, which we expect may result in some rep turnover that could adversely impact sales.

Lastly, we do not expect performance of our large joints business to continue at the first quarter's pace stemming from the MIS instrument-related revenue growth. Additionally, we see the potential for the November 2013 enacted hip and knee reimbursement cuts in France to have an adverse impact on our pricing as those cuts flow through additional hospitals. We are also aware of additional pricing cuts in France beginning in June of this year.

In addition to the guidance provided in today's earnings release, amortization expenses are estimated to be approximately $17 million to $17.6 million in 2014 compared to $15.9 million in 2013. We anticipate interest expense for fiscal 2014 to be in the range of $5 million to $5.7 million, including anticipated interest accretion charges of $400,000 to $900,000 relating to contingent consideration payments for the OrthoHelix and certain distributor acquisitions. In 2014, we expect to continue to record special charges related to sales transition activities and distributor acquisitions, as well as OrthoHelix restructuring activities. Special charges are expected to total $5.6 million to $6.8 million, of which $1.8 million to $2.3 million are anticipated in the second quarter. We also expect to record approximately $500,000 to $700,000 of inventory step-up charges in cost of goods sold during 2014, of which approximately $100,000 to $200,000 is expected to occur in the second quarter.

With that, I will now turn the call back to Dave for closing remarks before we open the call for questions.

David H. Mowry

Thanks, Shawn. As outlined during our prepared remarks, Ascend Flex had a strong quarter booked in the U.S. and internationally and our platform is in exceptionally strong position. Ankle arthroplasty lines did well and we are making headway with our international foot and ankle revenues. Nevertheless, we recognize the departure of key agents and sales reps from the U.S. foot and ankle sales force had a negative impact. But we believe we are doing the right things to build our foot and ankle sales for the long term. We have made significant progress on our Phase 2 U.S. sales transition objectives and are confidence continues to grow that these efforts will yield a competitively superior sales force.

We also recognize it is very early in Phase 2 and there remains the potential for some revenue disruption with the expiration of the contractual agreements with the 2 transition territories and continued performance management execution of our U.S. sales force.

Finally, we saw some short-term outperformance in our large joint business in France following the introduction of the new MIS techniques that we do not anticipate to carry over through the remainder of 2014. Accordingly, we remain cautious about using first quarter results to identify full year trend.

The entire management team is pleased with our first quarter results in what we have accomplished to date. We remain committed to consistent execution of our critical initiatives through the remainder of the year. I would now like to open the call to your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Mike Weinstein of JPMorgan.

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Obviously, there's a lot that you said to try and just caution us from extrapolating from this big outperformance in the quarter, so I just wanted to spend a few minutes on that. Can you just talk about some of the different items that you described during the quarter and what impact you thought they had? And really what I wanted to focus on was the distributor activities. I know, number one, there were the 2 distributors that you lost in the last year that you were able to extend their agreements through the first quarter. So relative to your original expectations, they were an upside performance. So can you talk about have those agreements with those 2 distributors ended, and if so, when and kind of what's the impact in the first and second quarter? And then second, can you just give a little more on -- I think you said that you converted additional distributors, I think you were plural on that, from indirect to direct. And then third, you said you had some intentional turnover in the direct sales force. Can you -- so on those second and third items, can you talk about what impact those had on the quarter and what impact they have going forward? So if you need me to go back through that, just let me know.

David H. Mowry

I think we've got it, Mike. By the way, thanks for your comments. First, let me kind of take those in order. The first question regarding the 2 distributors, I think, given the learnings that we had from third quarter and having a very abrupt end to a relationship, we certainly recognize the value in working, I'll say, collaboratively with our agents to come to a better end point. And in doing so, we were able to establish case coverage for our existing customers, and those are shared customers, as well as kind of giving us a little bit longer runway, if you will, to build our

capabilities. So I think those yielded some much more favorable results in the quarter than we had anticipated, just from the nature of having uninterrupted support to our shared customers. The challenge with that is, as we look forward, those same sales reps are now carrying competitive lines and are getting trained on those competitive lines and will ultimately come back and leverage their relationships with those physicians. So that's the tempering that I think we wanted to provide just so everyone recognizes that, although we didn't have the downside, we still face the competitive threat. So -- and the timing of those, as we indicated, is we had between 30 and 45 days of extended coverage depending upon each territory and what reps were going to training and when they were going to training, et cetera. So it's kind of a weighted average between those 2 periods. And just for kind of food for thought on those 2, one was a lower -- a very, very significant lower extremity, specifically on the fixation side. And the other distributor was a lower and upper legacy carrier for Tornier. The second question you posed was taking some of the distributors to direct, and I think some of that's really much more about the timing of those things that rolled over from decisions in the fourth quarter that actually get executed early in the first quarter. And those weren't disruptive per se. Those were all contemplated, challenged, collected and then worked through collectively with the agents. So those weren't a negative impact, but rather we just took that agent sales team and drove them under a kind of -- or pulled them under a direct management team that we had in place. So that was a very collaborative relationship, and as a result, there was no disruption from it. But there wasn't any significant pickup as a result of that either. And I think your third question was regarding the rep turnover. Yes, there was some rep turnover and I think that's inevitable. As you think about what we've gone through over the last 12 to 18 months, really, of disruption and taking some of these distributors into direct sales organizations, in many cases, we have retained the distributor as a sales manager. In other cases, we've only retained their sales reps. But as you go through that process and you are keeping everybody onboard, not everyone is performing to the same standards. Some people have other lines that they're interested in carrying, some people have other relationships, et cetera, especially when you bring them over from distributors. So it's inevitable that some of the lower performers that weren't carrying or being focused on the line were inevitably going to either self-select or we were going to turn over. And that's part of a normal process that we expect to continue through the course of 2014, maybe at a little higher rate than it would normally run as we install performance management with those direct sales reps.

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Okay, and then just one follow-up. Obviously, the commentary on Ascend Flex was very positive, but you were cautious there as well. So maybe just give us a little bit more in terms of -- what sounds like, the last 2 quarters you've had a lot of momentum in getting surgeons to at least trial the product. But you're caution is because there's other products out there competitively that are also are going to get some trialing and you've got to convert trialing to full conversions. Am I capturing that correctly?

David H. Mowry

I'd like maybe you to answer the rest of the questions for me as well, Mike. I think that's exactly the case. I mean, we've seen some other competitive products introduced in the marketplace. I don't think we are overly concerned by the technology of those products nor what they represent. However, they are still competitive distractions. They are going to take time to vet out with competitive surgeons. And people, if they're going to make a change, they're going to look at every option that they have available to them and evaluate that in a very thoughtful way. I think the second point we tried to make, and maybe I can be a little more direct on it, is as you get deeper into conversions and you start to work your list, we'll say, the top 10 guys and now you're in the top 20 and now, all of a sudden, you're into the 50 on your conversion list, these guys are doing either smaller amounts of volume, and as a result, if people take -- they want to do 10 and then wait 2 or 3 months to see how they do, it takes them longer to do those 10 and they wait a little longer to see how they're doing. So the conversion starts to drag out a little bit longer as you go deeper into that conversion. It's just the natural, if you will, evolution of a trialing process with people that are doing fewer shoulders per year. And I think we are very bullish that we'll get through this and have high levels of conversion. It's just the matter of moving through that process and taking the time it takes to ensure we have successful outcomes.

Operator

Our next question is from Bob Hopkins of Bank of America.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

I want to follow up with Mike's question there on shoulders just real quickly and I understand exactly what you're saying, I think. But I just wanted to be clear, are you actually seeing the momentum you saw in the first quarter fade a little bit here? Is there actual trialing going on? Or is this just something that you're going to be cautious on because you're seeing some of these other launches? I just want to be clear on that point.

David H. Mowry

We have a finite ability, Bob, to support trialing, right? We only have X number of sets. We can't do trialing with 100 guys with the same sets, right? So you have a finite capability of moving through the trialing. And what I was trying to express is that, as you do trialing with people that have lower volumes and you support them, it takes longer to -- for them to move through the process. I think, in addition to that, their trialing may take longer because they may be trialing a couple of products at the same time and going back and forth between a couple of products that are out in the market. And as I said to Mike and I'll repeat again, I think we have great confidence that we will win out on the technologies and the product. I think it's a great product, I think it is a market-leading, a best-in-class. But nevertheless, if people are trialing a couple of products, it takes twice as long for them to move through that process.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Okay. Another question on shoulder since you guys have, obviously -- from a distribution perspective, have been on the defensive for a while. And interesting announcement, obviously, out of Zimmer and Biomet. Those are 2 of the largest shoulders player in the world. And I'm just curious as to your views as to whether or not that might open up some opportunities for you guys to go on the offensive as we look forward over the course of the next 12 and 24 months?

David H. Mowry

Well, first of all, Bob, I think what's really interesting from my perspective is when we launched the Ascend Flex -- and if you did channel checks and never talked to one of our sales guys, I think they'd actually quote me. I told people that I thought Ascend Flex allowed us to be back on the offense regardless of competitors. We were defending people with the existing product line before having Flex and trying to keep everyone at bay. And now with Flex, think I we've been able to go out and actually show the ability to convert competitively against each and every one of the competitors that are in the field. So I think that's kind of the undertone here. I think more specifically to your question, I think when these 2 companies move through their process, they've announced the first quarter 2015 close and it's business as usual from now until then. And frankly, I like our chances competing against either or both. And I think that's the way we're going to run our business. We're going to continue to focus on our strategies and leverage our product against those targeted competitive conversions that we've have outlined for ourselves. Inevitably, disruption creates opportunity, but right now, we're focused on executing our strategy.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

And then just lastly on the same topic. Could you just give us a sense...

David H. Mowry

Bob, I'm sorry I missed the question. You cut out.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Sorry, I just wondered if you could give us a sense as to the overall health of the shoulder market as you see right now from both a pricing and unit perspective?

David H. Mowry

Shawn?

Shawn T. McCormick

Yes, I think, Bob, we continue to see the market strong. Really haven't seen any indications of a change there. So we believe the total market is growing in the upper single digits, maybe even pushing 10%. We have not seen any significant changes in pricing pressure in the U.S. or internationally in shoulders. So we continue to see the same strength in the market that we've seen and really have no indications that it's beginning to change.

David H. Mowry

Yes, I think the caveat to that, Bob, is that we do expect a couple of points, 3% in France on shoulders from kind of mid-year on. And that's been preannounced and preapproved. So we just know that the reimbursement will take a hit in France. But other than that, we're not seeing a challenge.

Operator

Our next question is from Matthew O'Brien of William Blair.

Matthew O'Brien - William Blair & Company L.L.C., Research Division

Just to dig a little bit deeper on your commentary about those 2 distributors. Is it fair to characterize what they were selling at, being close to kind of 100% of what they had been selling at before the decision to move on? Had they come down at the last year? I mean, did they sell in Q1 at about 100% or were they at 80%, 90%? Or can you just give us a level of magnitude of the reduction we should expect here in Q2 and then moving forward?

David H. Mowry

Yes, it's hard to give you that level of magnitude with a couple of these guys because it's not ever as clean and crisp as giving you a number. The way I would word it or have you think about it is, for the most part, customers continued in a status quo with their existing rep and existing product during that case coverage time frame and very few departed as a result of that. So that's a period -- significant period within the quarter that you saw almost 0 disruption, if you will. Post that period, there was a continued run of the Tornier product with those customers as the competitive -- or as the distributors started to move and get trained on the competitive products that move their business. Meanwhile, we were able to put our sales management and sales reps in place. So I'm not sure it's an easy number to throw at you. It's kind of a change, if you will, that happens over the course of the quarter. I think we were pleased, in general, with our ability to retain business during that period. But we also recognize that these reps have great relationships and are coming back with competitive product. I think the foot and ankle performance is clearly reflective of what happens when a significant distributor kind of goes away and continues to carry the line or a competitive line and ultimately gets turned through a transaction with one of our competitors. And I think, as a result of that, we saw a significant hit to our foot and ankle fixation business and we recognize that, that's only going to take us time to build those relationships and build up the product line and the relationships with those reps in place to build the kind of -- that business back. And that's generally a 12- to 18-month time frame. So nothing is easy, but we still recognize that we made some decisions in the foot and ankle side that we think will drive long-term success. But the short period is going to take some time.

Matthew O'Brien - William Blair & Company L.L.C., Research Division

Okay. And then, historically, you've given us some numbers as far as new doctor training on the Flex and so on and some numbers on reorder rates. I know you probably don't want to provide that right now, but can you just give us a general sense as far as how that reorder rate is trending with Flex? I mean, is that still pretty strong? And then is the real gaining factor system or growth of the Flex products on the instrument side of things?

David H. Mowry

Yes, let me give you that in kind of 3 bites. I think the first is in retention. What we've seen is that once physicians get through the trialing and reorder, they stay, okay. So I think that's the important point and something we were trying to kind of, I guess, point towards with our concern over the timing being expanded over the course of the rest of the year. We know that once they reorder and start the process of being converted, they're converted and we've kept those. The second point I would say is the training, the level of training and the amount of training. What we have continued to do is train physicians. In many cases, we've done regional trainings. In other cases, we've done trainings at the headquarters here on cadavers. And what we found is a very high conversion of those people we bring in to training. But I'll just point out that, that's the result of an effective targeting and qualification process. So we're not taking all comers to that training. They have to kind of already go through a process to be vetted and that's why we have a high conversion rate. It's not taking all comers to see what comes out the other end because these are expensive procedures, expensive processes to take people through. And I guess, the third point I would make is that this is as much about training the surgeons as it is about training the reps, so that the reps can continue to service these accounts. What we have found is that as we go deeper into the conversions, these physicians are lower volume than the Tier 1 guys that we've talked about historically. So having a high-quality rep that can support them in cases when they do 25 or 50 shoulders a year and not 100 or 150 shoulders a year is critical to their success. So our efforts have been mutually focused on both sales training, as well as physician training and that's really a key point for us.

Operator

Our next question is from Matt Miksic of Piper Jaffray.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

So very strong obviously in upper extremities in the quarter. And if I'm -- don't want to put words in your mouth, but it sounds like you would say still a lot of work to do here and potential sort of variability going forward. Is that a fair way to look at it?

David H. Mowry

Yes, I think that's very fair, Matt.

Shawn T. McCormick

Yes, what were going through, Matt, is it really has to be looked at as a process and the process just doesn't happen all at once in 1 quarter. So we'll continue to move through that process of optimizing territories and the right coverage and getting the reps through the training programs.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

And if you could, you've given us some -- the second quarter guidance is helpful. But maybe as we think about what's going on with upper and lower extremities, you talked a little bit about this dynamic of trialing in shoulders, but maybe could you speak to, in addition to replacing reps or rebuilding territories, maybe how total ankle and the ramp in training and specialists in those areas play into the dynamics in lower extremities in the next couple of quarters? And then I have one follow-up.

David H. Mowry

Yes, so we haven't released specific product family growth rates. I will confirm to you that we think that the market in total ankle is growing very close to the foot and ankle market in total as we see it. We think the drivers of that is, as we have indicated historically, we think more data, more clinical data out there is a good thing for us. We think having access to a revision system is critical to long-term success in the total ankle market. And we actually think kind of a rising tide lifts all boats with other companies releasing better ankle products into the space has raised the level of awareness and willingness of physicians to move from fusion to arthroplasty. We've always indicated that fusion is the largest competitor we have to ankle arthroplasty and we still believe that. And so it's very easy for us to recruit patients -- or recruit physicians over from fusion if we have the right products in place, the right training in place and the right data to help them make that decision. And we're seeing that.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Just to push a little bit on that, I know you don't want to sort of sketch out exactly and it's difficult to sketch out exactly, which way these lines could go, but understanding some of the variability and challenges that you have worked through and have a sort of gotten on top of here, is it fair to say that really any one of these lines could sort of -- you've guided to sort of down a little bit here in the second quarter on the extremities line. I mean, is it fair to say we could see, I don't know, lower extremities -- a little more variability in lower extremities between second and third quarter we could see, as opposed to just getting better quarter-after-quarter? I just want to make sure we're looking at this the right way.

Shawn T. McCormick

Yes, I think, Matt, you're right. On the lower extremity piece, I think you're thinking about it right, that there's potentially a little bit more of variability. I think Ascend Flex, we've talked about the timing of conversion from trialing to full time users. I think on the lower extremity, it's probably a little bit more weighted towards the right reps getting the training in place, getting them to building the relationships and reinvigorating the growth rate. And that potentially is going to create a little bit more lumpiness on the lower side.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Great. And then just lastly, on the comment you made about the shoulder and some of the -- it sounds like a feature or technology that you're talking about on the glenoid side, which is, of course, the more challenging side of that implant. Do you think that, that's something that separates you from the pack in terms of some of the other custom-cutting jig systems that are being rolled out by your competitors? And maybe how differentiating is that, if you could flesh that out?

David H. Mowry

Well, first of all, what I mentioned was the PerFORM glenoid. And that PerFORM glenoid, what separates that from the other products on the market right now is it has used about 152 patients, I think, where we actually did 3-dimensional imaging to scan those -- the subchondral bone. And what we looked at is how to best match the backside of our glenoid to that meeting surface of the bone so that you don't have to do a significant amount of reaming. So preserving that bone, we think, is critical. However, we know a little bit of reaming gets a good meet to the back of the glenoid, but we don't want to take all that bone away through excessive amounts of reaming. We think that, that alone separates our product from -- no matter if people are using image-guided or not, we think that, that alone separates the product. And I think that's recognized very quickly by the physicians. In terms of some of the other products or technologies that are coming out, I'm not so sure they're ready for prime time yet, although I think that a lot of good thought is going into better glenoid placement and better awareness of how to place the glenoid. It still does not yet address the challenges of the generalist, which is all about glenoid exposure and glenoid placement in a surgical field and not just preoperative planning. So I think some of the things that are coming out are good. But I don't think they truly advance the techniques significantly, whereas I think our product is a better product, and I think some of the things we're looking at will advance the technique. And we'll have more to say on that later in the year.

Operator

Our next question is from Larry Biegelsen of Wells Fargo.

Craig W. Bijou - Wells Fargo Securities, LLC, Research Division

It's Craig on for Larry. Just first question on the full year guidance. If I look at what you had previously guided, constant currency and what you raised your guidance to, it also looked like you narrowed it. But it looks the raise is bigger than the beat you had in Q1. So I just wanted to see if you guys are more confident on the business overall? Do you expect to get back to normal faster? Is there anything that you've seen that gives you a little more confidence?

Shawn T. McCormick

Yes, I would tell you, Craig, not anything really specific. If you look at the Q1 beat and then look at our Q2 guidance, that's kind of how you'll get to our annual guidance. And I think what we saw that was different is really a lower level of disruption, as Dave had talked about, from the 2 separated distributors in Q1. But we're also reflecting that as those transition agreements or case coverage agreements wrapped up, that can flow into Q2. But we are pretty pleased with the sales leadership that we were able to get in place and their management of those territories. And then I think as we've talked about here, as we look forward, we're really just -- we're factoring in the hiring we still need to do, the territory optimization. Getting through the training programs is important and will be a process that will take time. I know you guys focus a little bit more on our reported guidance. We look at constant currency. FX is giving us a bit of a lift as well on the reported piece. In the first quarter, the dollar versus the euro is giving us a little bit more of a bump than our previous guidance reflected as well.

Craig W. Bijou - Wells Fargo Securities, LLC, Research Division

Okay. And then just a follow-up. On Simpliciti, I wonder if you guys could just talk about the market opportunity for the stemless shoulder and what kind of penetration rate you guys would expect once you guys are on the market?

David H. Mowry

Well, I'm not so sure we're ready to get too deep into that discussion, Craig. But I think the way to think about it is the global shoulder market is about $1.1 billion, of which, on a stemless shoulder like Simpliciti, it would represent potential cannibalization of some portion of the primary shoulder, which is about $400 million to $500 million -- $450 million to $500 million, actually. So the thing you have to think about is what is it cannibalizing and how does it present itself in the U.S. market, in particular, which is about -- interestingly enough, about 80% of that total shoulder market is the U.S. number. So if you think about it, it's really about providing ease-of-use. It's providing a more minimally invasive surgery, a bone conserving solution. And as a result, we think that there's opportunities to cannibalize a significant portion of share over a long period of time that will come with training, education, experience, et cetera. I think the other thing to consider is, we believe that the Simpliciti and the stemless shoulder, in particular, provides an expansion to the segment as well, recruiting younger patients who may not have enough -- they would have too much life cycle left to go with a total stem or full stem. So having something where it's stemless gives them a couple bites of the apple before having to be revised to a reversed. So I'm not ready to put a number around it now, but I'll tell you it's a portion of that U.S. market segment and we think it's a higher percentage in the U.S. than it would be in the European markets.

Operator

Our next question is from Daniel Sollof of Barclays.

Daniel Sollof - Barclays Capital, Research Division

So to start with, I had a quick clarification. So on the trialing of the Ascend Flex in the back half of the year, if I'm understanding correctly, it's both the result of, I guess, Tornier first training the higher-volume docs first and then it's also a function of these physicians trialing other competitive products out there. So if that's right, I mean, is it fair to say that among, I guess, the higher-volume reps that you've -- first of all, the higher-volume reps, is it correct to say you've largely went through and trained those and now it's just a function of attracting the reorder rates? Or is that just extrapolating too much?

David H. Mowry

Yes, I think you may be getting a little bit too simplistic here, Dan, if I could. I think the way to think about it is, we went through and we created a -- kind of our internal algorithm for creating a target list. And some of those things are things you might not think of. It might be the speed at which we think we can get pricing approved at the hospital, things like the availability of other physicians in the area so that we can get better turn rates on the existing sets. But those are the type of things, in addition to just looking at higher-volume docs, that were factored into some of our prioritization. We also had to prequalify them, that they were open and kind of willing to consider other products. So as we've gone through that list, highest to lowest, not only is it -- it's not strictly sorted on volume. It's sorted on what we believe is kind of the speed to revenue, which is the speed of conversion times their volume or kind of a function of volume. So as we get deeper in that list, we think that, number one, volume does drop off. The second thing that drops off is the speed of which they can get approval, either through their IRB or value committees or get pricing approved at their hospital. These are other factors that extend the length of time. So all we've tried to lay out to you is as we go deep in the list and continue to penetrate deeper in our conversion off that target list, the timeline it takes from start to finish just continues to extend. That's all we tried to say. It's not anything more complicated than that, but there's other factors.

Daniel Sollof - Barclays Capital, Research Division

No, appreciate that. And just a quick follow-up on pricing. I appreciate your comments on the stemless shoulder and how that could impact the market going forward. On the pricing, you've talked about that over the last several quarters about being flat to maybe kind of down 1%. Could innovation in the shoulder market bring back some pricing power or at least back to flat? Or would you be cautious to say that? I'm just curious.

David H. Mowry

Yes, I'm very cautious to say that. I mean, there's so much energy around the Affordable Care Act and the focus on value committees at hospitals. I'm very concerned that, long term, you can really raise prices significantly even with technology. I think technology is going to be used to preserve pricing. And older technology may continue to decline. So our job is to continue to innovate and kind of obsolete ourselves with newer, better technology to preserve pricing and provide better value.

Operator

Our next question is from Glenn Novarro of RBC Capital Markets.

Glenn J. Novarro - RBC Capital Markets, LLC, Research Division

Can you quantify what the benefit was from these 2 distributors in the first quarter and what you anticipate the territories to produce in the second quarter? I'm just trying to get a better sense of the step down from the $89 million that you just reported in 1Q and the $76 million to $80 million in the second quarter.

Shawn T. McCormick

Yes, Glenn. So we haven't broken out and aren't giving specifics. I think, Dave, earlier had talked a little bit about those 2 distributors and it's really hard for us to pinpoint the impact. I think when you look at Q1 to Q2, we are modeling the potential revenue impact from continuing performance management. Those 2 territories play into that. Other territories play into it as well. But probably, the bigger impactor, if you're looking at Q1 to Q2, is really the seasonality of the quarters. We typically have a pretty sizable seasonal impact from Q1 to Q2. And then if you follow through our full fiscal year, Q3 ends up being our lowest revenue quarter because of seasonality.

Glenn J. Novarro - RBC Capital Markets, LLC, Research Division

Just as a follow-up, I'm just trying to get the bridge again from 1Q to 2Q, so you mentioned seasonality. There's going to be less sales coming from these 2 territories. Can you quantify what France and what the large joint business may be contributing to that step-down?

Shawn T. McCormick

Well, what I would say with regards to the large joints, we had our large joints was near 7% in the quarter, whereas the market is low single digits. I think low single digits is much more appropriate for large joints. The pricing impact that's coming into France in June that has already been enacted is a 3% across-the-board price cut. So that factors in to a portion of Q2 as well.

Glenn J. Novarro - RBC Capital Markets, LLC, Research Division

Okay. And 2 quick follow-ups. One, was there any extra selling days in the quarter? And some companies have reported weather having a slight negative impact on the quarter. So any extra selling days, any weather impact?

David H. Mowry

I'm going to ask Shawn if I can talk about weather after he's done. So...

Shawn T. McCormick

I'm going to -- I'll let Jim talk about selling days and then I'll talk about the Ukraine.

Jim Erickson

Yes, no. In Q1, we had no real difference in selling days, Q1-to-Q1. In our guidance for Q2, to kind of tack onto Shawn's comments on our step-down to Q2, our Q2 will probably have roughly 1 fewer selling day in Q2 outside the U.S. U.S., it's comparable, same selling days year-over-year, down 1 day in Q2. But there was no impact in the current quarter from selling days.

David H. Mowry

So Glenn, I think, we had this conversation at AOS, and for those on the call, I think we've had this pretty open dialogue when anybody that's asked us a question about weather. Predominantly, our business is not as impacted by weather as maybe somebody that has more trauma in their product lines. So the 2 things I've heard about weather is, number one, the winter was terrible, but it also was not a time where a lot of people went skiing or did a lot of outdoor activities. So trauma was down as a result of the weather because of people not being active. The second thing I've heard is that weather was so bad that people couldn't get to cases or cases had to be rescheduled. I think when you look at our product portfolio, generally speaking, if you're in pain and you have a surgery that's scheduled, if you can't get to the hospital, you reschedule that surgery as quickly as you can and you get right back in the queue. And I think physicians, in particular, are very aware of that and will change their personal schedules to make time to get people in and have surgeries. So I think being an arthroplasty upper extremities business mostly, and on the lower side, being an arthroplasty and fixation business, we're not as impacted by the weather as maybe other people were. Although I did notice that during the course of the weather, my CFO became a little grumpy. So other than that, we were not impacted by weather.

Operator

I'm showing no further questions at this time. I would like to turn the conference back over to Dave Mowry for closing remarks.

David H. Mowry

Thanks, operator. At this point, we've given a summary. At this point, I would only like to thank everyone for their interest in listening to the call, and look forward to giving you an update on our second quarter earnings sometime later this summer. Thanks for listening, and we'll talk to you soon.

Operator

Ladies and gentlemen, this concludes today's conference. Thanks for your participation, and have a wonderful day.

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