Tornier N.V.'s (TRNX) CEO David Mowry on Q2 2014 Results - Earnings Call Transcript

Aug. 7.14 | About: Tornier BV (TRNX)

Tornier N.V. (NASDAQ:TRNX)

Q2 2014 Earnings Call

August 07, 2014 4:30 pm ET

Executives

David H. Mowry - Chief Executive Officer, President and Executive Director

Shawn T. McCormick - Chief Financial Officer and Principal Accounting Officer

Analysts

Robert A. Hopkins - BofA Merrill Lynch, Research Division

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

Joanne K. Wuensch - BMO Capital Markets Canada

Matthew S. Miksic - Piper Jaffray Companies, Research Division

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

Daniel Sollof - Barclays Capital, Research Division

Lawrence Biegelsen - Wells Fargo Securities, LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Tornier Second Quarter 2014 Earnings Call. [Operator Instructions] As a reminder, this call is being recorded.

I would now like to turn the call over to Mr. Nick Ladico [ph]. You may begin, sir.

Unknown Executive

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

Before we begin our detailed discussion of results for the second 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 operational -- 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 and quarterly report on Form 10-Q. We suggest that you read these risk factors in our SEC periodic reports and other future filings that we may make with the SEC. You should also note 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 measure to the 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 will turn the call over to Dave Mowry.

David H. Mowry

Thank you, and welcome. On today's call, I will provide an overview of our financial and operational performance in the second quarter, a summary of the accomplishments we made in executing Phase II of our U.S. sales force transition and an update on key developments in our upper and lower extremities that are driving our overall business. I will then turn the call over to Shawn who will provide a second quarter financial review, an update on our key salesforce performance metrics and context for our third quarter and full year 2014 guidance contained in our release. Following Shawn's update, we will open the call to your questions.

With respect to the second quarter of 2014, I am pleased with our strong results, which reflect another quarter of execution, demonstrating progress toward our strategic objectives and delivering results ahead of guidance. Total revenue in the quarter grew 9.5% in constant currency, driven by strong performance in upper extremities, a sequential improvement in our lower extremities results and continued strength in our large joint business.

During the second quarter, we also made progress against our key strategic initiatives, including the expansion of our customer base through surgeon adoption of our new product and the continued execution of our Phase II U.S. sales force transition.

Regarding our U.S. sales force transition, we are pleased with our progress to date, as well as the specific results being posted in transition territories. During the quarter, we experienced less-than-anticipated impact in our upper extremities business in the territory where we had a distributor separation late in the fourth quarter of 2013. The recently installed sales management team has effectively transitioned the case coverage to our newly established sales rep team, retaining the business of our Tornier customers.

In the lower extremities territory, where we had a similar late 2013 distributor separation and transition agreement, we believe that we are well positioned to begin building positive momentum with both sales management and sales reps in place. But we will need time to rebuild our customer base in this territory. Our team is focused on reengaging customers, rebuilding relationships and gaining access into previous, as well as new lower extremities accounts. While pleased that this progress is underway, our experience has shown that a full recovery in this territory will likely take between 12 and 18 months.

The progress in these 2 territories is representative of our broader expectations for the U.S. sales force transition. We have seen a faster recovery to growth in our upper extremities channel, while our lower extremities transition and recovery has extended a bit longer due to our initial focus being placed on upper, and that there were greater number of territories requiring transition in our lower extremities channel.

Based on our results thus far, we are confident that the defined transition process will continue to generate positive and significant impact on our business.

As we continue to execute on this process, our sales managers are taking an aggressive approach to performance management, including identifying reps that can benefit from additional training, closely monitoring rep productivity metrics and actively coaching their rep team for long-term success.

Overall, we remain pleased with our sales team's development and the momentum we expect to carry forward into the back half of 2014 and beyond.

I will now turn to an update on the key drivers on our upper extremities, beginning with the Aequalis Ascend Flex convertible shoulder system. The Aequalis Ascend Flex platform continues to generate very positive feedback from both new, as well as previously converted surgeon customers. Our targeted marketing strategy and defined cadence of sales activities designed to attract and convert competitive customers has proven, thus far, to be a successful market building strategy and contributed to our strong shoulder sales growth in the quarter. As we move forward with the Ascend Flex launch and conversion process, we plan to deploy additional instrument set into the U.S. and international markets over the second half of the year in support of the expanded opportunity for conversions.

Ascend Flex conversions to date have covered a broad range of surgeon customers that include users from all of the major competitors. The Ascend Flex conversions also include higher volume, shoulder arthroplasty specialists, as well as orthopedic surgeons who primarily perform hip and knee procedures. Our conversion success provides strong evidence that the Ascend Flex platform has the capability to expand our customer base as an attractive shoulder platform that meets the needs of a variety of surgeons.

Complementing Ascend Flex, the new Tornier Reversed Threaded Base Plate should prove to be one of the most important and successful product launches of 2014, as it supports the continued expansion of our Ascend Flex platform. It's threaded center post is designed to provide increased acute fixation, giving surgeons greater confidence in placement. The launch of this product has exceeded our initial expectations, suggesting that it may become the base plate of choice and create an increased draw to the already compelling Ascend Flex shoulder platform. We are now shifting our focus to leverage the new Reversed Shoulder Base Plate as a catalyst for surgeon conversions, given that it further strengthens the positioning of our Ascend Flex platform.

The combination of the Ascend Flex convertible stem, along with the performed glenoid and the reversed threaded base plate provide best-in-class solutions for total shoulder arthroplasty and reversed shoulder arthroplasty procedures.

While we believe there is significant headroom for additional share gain with the Ascend Flex platform, we are equally excited about other innovative new products in our upper extremities portfolio, including our pyrolytic carbon humeral head; Blueprint [ph], a novel preoperative planning and patient-specific glenoid-placement system, powered by the MS Cap [ph] technology; and the minimally-invasive designed Simpliciti shoulder platform. These products have been specifically designed and developed to simplify shoulder procedures, conserve patients' native bone stock and soft tissue, as well as preserve options for future surgical intervention, all of which we believe will improve clinical outcomes and help further expand the shoulder arthroplasty market.

With regard to Simpliciti, we remain on track to file for the U.S. approval in early 2015, with an anticipated approval by mid-2015. We continue to expect that this timing will provide Tornier with significant lead time as the first to market with a specifically designed, minimally-invasive shoulder platform in the U.S.

Another novel development in upper extremities that we have not discussed in great detail is Blueprint [ph], the recently introduced, computer-aided, surgical planning and glenoid-placement tool built on the MS Cap [ph] technology platform. This software solution is an enabling technology, specifically designed to enhance the surgeon's ability to select the optimal implant, precisely prepare the implant site and accurately place the glenoid component in a total shoulder procedure. We plan to make this innovative software application, currently being used in a select few international centers, more broadly available to our customers in the coming quarters so that surgeons using a Tornier glenoid may more easily and accurately place their cases -- plan their cases in advance of the actual surgical procedure.

As for our pyrolytic carbon humeral head, we have continued to gain experience in the international markets and are very pleased with our results, as well as the increasing interest being expressed by international customers who have become aware of this product from colleagues. We intend to continue our gradual expansion of this product's international availability, concurrent with our ongoing dialogue with the FDA to define a U.S. approval pathway.

Staying with our upper extremity key driver updates, I will now turn to Japan. During the second quarter, we continued to execute on our surgeon training and field support plans for the Aequalis Reversed Shoulder. Leveraging this plan, we exceeded our own expectations for the total number of cases completed in the first quarter of product availability, and we are confident in the infrastructure we are building to support long-term success of this technology in Japan. While it is still early in our market building efforts, we are off to a strong start, working in partnership with the Japanese Shoulder Society to deliver a comprehensive training and certification program, as well as building out our product offering to meet the local market needs. These efforts include the recent addition of a 25-millimeter reversed base plate that is more aligned to the anatomic needs of the Asian patient population. We believe that the foundation being established through our efforts on the reversed shoulder position Tornier to build an extremities leadership position in Japan over the next several years.

Now moving to the key drivers in our lower extremities business. I will begin with an update on total ankle arthroplasty. Our sales of total ankle arthroplasty grew at a strong double-digit rate during the second quarter, driven by sales force productivity initiatives, as well as the availability of the Salto Talaris XT revision ankle system. We are pleased to see the results from investments in physician education, Salto Talaris product training and our lower extremities sales rep development bringing across new ankle arthroplasty customers who have more typically performed ankle fusion. Additionally, we have seen that the availability of our new Salto Talaris XT revision system has provided increased access to competitive accounts, unlocking new total ankle arthroplasty customers. We plan to continue to drive growth within the total ankle arthroplasty market by initiating a limited user release of an improved total ankle instrumentation in support of a simplified surgical procedure later this year. We believe that the full launch of this new instrumentation and the associated simplified surgical procedure will recruit additional competitive users, as well as accelerate the conversion from fusion to arthroplasty in the treatment of ankle arthritis.

During the second quarter, we also had strong performance from our CannuLink and angled CannuLink plus hammertoe correction products, which address a $200 million market opportunity. We are pleased with the success we are seeing in this market, and we intend to further expand our hammertoe offering introducing a radio-lucent PEEK CannuLink implant into limited user release during the second half of 2014, with the full launch of this product scheduled for 2015.

Despite the successes we are seeing in total ankle arthroplasty and our hammertoe correction products, we are not yet satisfied with our overall lower extremities results. We will continue to move aggressively along our plans for improved results by adding additional depth through our product portfolio, concurrent with the ongoing execution of Phase II of our U.S. sales force transition activities.

Additional new product introductions for lower extremities in the second half of 2014 include: Nitinol staples, the MedialMax lapidus dorsal plate, new minimally-invasive EdgeLock plates and instruments, as well as the addition of line extensions specifically designed to address international market requirements.

In addition to extremities, our large joint business grew 13% in constant currency year-over-year in the second quarter, led by growth in hips, resulting from the uptake associated with the use of our minimally-invasive instrument sets launched in the back half of 2013.

We also benefited from a cementless knee, which contributed above-market growth. Most of the large joint growth in the quarter was associated with regaining customers that we had previously lost due to the lack of minimally-invasive options for cementless versions of our knee.

While we are pleased with the success in hips and knees during the quarter, we do not anticipate that an above-market growth rate can be sustained.

In summary, we are pleased with our second quarter results and specifically with the progress of Phase II of our U.S. sales force transition. Our innovative products continue to perform well, and we remain excited about the potential of our pipeline as we move these products closer to market introduction, with a focus on expanding both the extremities market, as well as our base of surgeon customers.

Our second quarter results serve to strengthen our commitment to our strategy, as well as increase our confidence in returning to above-market growth. Based upon the strong second quarter performance delivered in combination with our revised revenue projections for the second half of 2014, we are pleased to increase our full year revenue guidance accordingly.

I would now like to turn the call over to Shawn to provide additional detail in our guidance, along with an overview of the company's financial performance and our U.S. sales force metrics. Shawn?

Shawn T. McCormick

Thank you, David. 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 II of the U.S. distribution transition and progress toward our long-term growth objectives.

Our total second quarter revenue of $86.9 million was up 11.2% as reported and 9.5% in constant currency, driven by strength in our upper extremities business, improved results in lower extremities and strong growth in our large joints business. Second quarter total extremities revenues totaled $71.9 million, an increase of 9.7% as reported and 8.8% on a constant currency basis over the same quarter last year. During the second quarter, we continued to see only modest pricing pressure of approximately 1%.

Upper extremity, joints and trauma category revenues showed solid growth in both the U.S. and international markets, increasing 11.4% in constant currency, led by the Aequalis Ascend family of products. We saw particularly strong performance from the Ascend Flex shoulder platform, including positive conversions from surgeons we had previously trained on the product, along with increased trialing from competitive accounts.

As we noted on our last call, we deployed additional Ascend Flex instrument sets in the first quarter and plan to continue to add additional sets as this best-in-class platform system continues to gain worldwide acceptance.

Lower extremity joints and trauma category revenues were up 3.7% in constant currency compared to the same quarter last year. During the quarter, we saw a strong growth of Salto Talaris sales for primary total ankle procedures as a result of our investments in sales force training and the availability of the Salto Talaris XT revision system.

We also had double-digit growth in lower extremities in our international markets, led by total ankle arthroplasty.

Strong double-digit growth in worldwide arthroplasty revenue was offset by a decrease in U.S. sales of foot and ankle fixation products, which continued to reflect the impact of our U.S. sales force transition efforts.

Sports medicine and biologics revenues were down 5.9% in constant currency, reflecting the company's increased focus on -- and expectations of the sales organization on extremities.

Our international business delivered another quarter of double-digit growth, up 12.8% over the same quarter last year in constant currency. This performance was driven by our shoulder platform and upper extremities and by the increased focus in geographic expansion in lower extremities, combined with another quarter of above-market growth in large joints.

We are pleased that our international growth was balanced across multiple geographies and across upper and lower extremities and large joint product categories.

Non-GAAP adjusted gross margin, excluding inventory step-up charges related to acquisitions, was 75.7% in the second quarter of 2014, an increase of 180 basis points over non-GAAP adjusted gross margin in the second quarter of 2013. Our non-GAAP adjusted gross margin has continued to reflect improvements in manufacturing costs and production efficiencies. We are pleased with the improvements we have made thus far and continue to see further opportunity to continue to improve gross margins going forward.

Non-GAAP operating expenses, which exclude special charges and intangible amortization, increased 20.3% to $68.6 million or 79% of reported revenue. This increase in operating expenses reflects strategic investments in our U.S. sales organization going direct in certain U.S. territories, product training and education programs, expansion in Japan and Australia and investments in a new IT ERP system.

Research and development expenses totaled 7% of revenue in the second quarter of 2014, and we remain committed to continuing our investments in R&D at this rate going forward.

Second quarter 2014 operating expenses as reported on a GAAP basis were impacted by $4.3 million of intangible amortization and approximately $700,000 of special charges, primarily related to acquisition, integration, restructuring and U.S. distribution channel transition costs.

Adjusted EBITDA for the second quarter was $6.1 million, a decrease of $1.2 million compared to the same quarter last year, with adjusted EBITDA margin of 7% of revenue compared to 9.4% last year. The decrease in our adjusted EBITDA margin reflects the previously mentioned investments we are making in our U.S. sales organization, direct territories, geographic expansion and IT infrastructure, which we anticipate will continue to impact SG&A as a percent of revenue throughout the remainder of 2014.

Cash and available credit at the end of the second quarter totaled $61.8 million and reflects non-GAAP adjusted free cash flow of negative $14.1 million, driven by $7.7 million of investments in implant instruments and $3.1 million of additional property plant and equipment in the second quarter of 2014. These investments relate primarily to the continued expansion of Ascend Flex, lower extremities 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 II of the U.S. sales transition process. We currently have approximately 360 U.S. sales reps carrying Tornier products. The decrease in total reps from 380 at the end of Q1 relates primarily to further reductions in agent reps who were not primarily focused on Tornier products. At the end of the second quarter, we had 150 direct reps, consistent with the end of the first quarter. During the second quarter, we did see the expected level of rep hiring that offset performance management and other reductions. As we continue through 2014 with optimizing our territories and increasing our focus on productivity, we expect to continue to see fluctuations in the total number of reps, as well as direct reps.

At the end of the second quarter, we increased the percentage of sales reps identified and transitioned or in the process of transitioning to dedicated upper or lower extremities to 75% of our direct reps, up from 60% at the end of 2013 and 70% at the end of the first quarter of 2014. With approximately 80% of all of our U.S. sales reps now dedicated to either upper or lower extremities, we remain on track to meet our goal of 85% by year end.

In terms of rep training. We completed training for nearly 70 reps in the second quarter of 2014. In the first half of 2014, we have completed training for over 135 sales reps, ahead of our plan to train a total of 200 reps by the end of 2014.

Because of the success we are seeing with this training, we have expanded it to include our international sales reps, with our first international participants just recently attending one of our courses. We also recently completed the first certification level training of sales leadership and expect to continue to roll out this higher level of training as we complete the Level 1 training.

These metrics are closely aligned with our goal 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 II, 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 provide our financial outlook for the third quarter and full year 2014. In addition to our operating plans and expectations, our guidance also accounts for 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 to $328 million to $336 million in constant currency, and we are establishing guidance of $69 million to $73 million in constant currency for the third quarter. While today's earnings release includes the specifics of our financial expectations for the third quarter and the full year, let me provide the following additional context.

We expect continued growth in upper extremities to be driven by our shoulder line, primarily the Aequalis Ascend Flex platform. We also expect continued growth of ankle arthroplasty and slightly improving performance in foot and ankle fixation as our distribution changes and training programs take effect.

While we are very pleased with our progress on Phase II of the U.S. sales transition, we still have work to do to complete the process. Some risk remains as we continue to focus on rep training and proactively monitoring performance. Consistent with our actions in the first and second quarter, we expect to continue to make performance management decisions in the remainder of the year, which we expect will result in rep turnover that could adversely impact sales.

Lastly, we do not expect performance of our large joints business to continue at the pace seen in the first and second quarters. Additionally, we see the potential for the November 2013 hip and knee reimbursement cuts in France and additional cuts that began in June to have an adverse impact on our pricing as those price cuts flow through additional hospitals.

In addition to the guidance provided in the earnings release, amortization expenses are estimated to be approximately $17.1 million to $17.5 million in 2014 compared to $15.9 million in 2013. We anticipate interest expense for fiscal 2014 to be in the range of $5.1 million to $5.6 million.

In 2014, we expect to continue to record special charges relating to sales transition activities and distributor acquisitions, as well as OrthoHelix restructuring activities. Special charges are expected to total $5.3 million to $6.2 million for the year 2014, of which $1.4 million to $1.9 million are anticipated in the third 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 third quarter.

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

David H. Mowry

Thanks, Shawn. As outlined during our prepared remarks, we have delivered another quarter of progress with Phase II of our U.S. sales force transition, and remain on track to achieve our goal of 85% dedicated by year end. Our confidence continues to grow that these efforts will yield a competitively superior sales force.

Aequalis Ascend Flex had a strong quarter both in the U.S. and internationally, and combined with the reverse threaded base plate and performed glenoid, our platform is in an exceptionally strong position.

Within lower extremities, our ankle arthroplasty lines had strong double-digit growth, and we are making the progress needed to rebuild those specific lower extremities territories moving through our U.S. sales force transition process. We believe our second quarter results are reflective, not only of our progress to date in key initiatives, but also of our team's focus and commitment to execution of our key initiative of our U.S. sales force territory optimization, sales rep training and expansion of our customer base.

Finally, I would like to thank the global Tornier team and our distribution partners for their continued support, personal engagement and team spirit as we transform our business and move toward our shared vision of becoming the #1 extremities company in the world.

I would now like to open the call to your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Bob Hopkins of Bank of America.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

So 2 questions. First, on the shoulder side. Coming into this quarter, you guys gave some fairly conservative guidance because you were concerned -- not concerned, but talking to us about the potential for trialing of competitive technologies. So I'm curious, did that trialing not really happen this quarter? Did maybe Zimmer/Biomet disruption help a little bit? Or is the strength we're seeing in upper extremities is simply the strength of the platform and the rollout of the new technologies?

David H. Mowry

Yes, Bob. That's a good question. Let me just kind of pull back a little bit. We had identified 4 key risk factors last earnings call. We talked about the distributor transitions and the effect of those reps coming back with competitive product. We talked about the general uptake from our Phase II programs. We also talked about the large joint business and sustainability, as well as the question you put to us on Flex conversions. And I think, frankly, in a very transparent way, we tried to outline to you what we saw as risks in all 4 of those categories. On the Flex conversions, in particular, there was a lot of activity from a lot of competitors who were bringing new products to the market. I think our focus in our process and in our targeting efforts allowed us to continue to move at the pace we had originally anticipated to. So I don't want to say that there isn't going to be an impact from trialing from some of the competitive products, but I think our focus and our execution really kind of led the day, if you would, and allowed us to continue along our path and our project plan.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Okay. Great. That's helpful. And nothing on Zimmer/ Biomet?

David H. Mowry

Look, they're 2 different companies that have 2 different lines that compete with shoulders, and I think we're working against both of them on a very active basis every day.

Robert A. Hopkins - BofA Merrill Lynch, Research Division

So -- and the second question I wanted to ask is a little bit of a bigger question. And obviously, there's a lot of commentary around M&A over the last couple of months. And David, I was wondering if you could just comment on your outlook for M&A, and just how you view the potential benefits of having more critical mass, especially in lower extremity.

David H. Mowry

Well, frankly, I'd say as part of our strategic planning process, we're only now starting to look at where M&A may fit into our long-term growth. We've all along said to the industry or the analysts and the Street that we have what we need, and we have a pipeline that I think is extremely strong, and we've continued to talk about our pipeline. So I think we've got what they need from a technology perspective. I think we've got what we need in terms of the distribution channel and the control over that channel now with our efforts. So I think, at this point, we're only now starting to look at what's next and what's on the horizon. But frankly, we've got quite a bit on our plate now that I think we need to continue to execute against.

Operator

Our next question comes from Mike Weinstein of JPMorgan.

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

If I look at the quarter, there's outperformance everywhere. Certainly, the upper extremities is the driver of the business. But any reason why you think every business or every large segment came in better than expected, including large joints?

David H. Mowry

Well, Mike -- by the way, thanks so much. I appreciate it. I will start by telling you, I think there's been a lot of hard work, a good amount of planning and a great deal of alignment that's happened within the company. And we talk about alignment, but it really is fundamentally who we are. So when we started 1.5 years ago talking about this is an execution story, we have what we need, we just need to make it happen, Shawn and I had the, kind of, the inside story of knowing what we had and what we could have with the resources that were available to us. And I think what you're seeing is that execution come to fruition. And unfortunately, it's been a long time coming for a lot of the investors going back to '11. But fundamentally, it's right on plan for what we hoped to accomplish with Phase II or Phase I and Phase II of our distribution changes, bringing our portfolio to plan and starting to work in our international market to effectively leverage our lower extremities growth. So I think that a lot of things are going on here but it really is, fundamentally, about getting the alignment and the resources focused on those vital few initiatives that drive our uptake.

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

Okay. And Dave, the guidance for the second half of the year, I don't know if I was doing the math right, but it seemed to imply a more conservative back half. I think it was like 3% to 8.5% or roughly they're about reported on the top line, which will be a lower cost than currency. Other than the kind of the onetime elements that have seemed to creep up in the large joint business this quarter, any reason to think that the momentum you've got in upper extremities and kind of the momentum you're starting to feel on the lower side won't continue into second half?

David H. Mowry

I think the story, Mike, is the 4 factors that we talked about at the end of first quarter affecting second quarter are still in play as we think about the latter half of this year. So although, the distributor transition for upper extremity has kind of played itself out, and we feel very good about that one territory, the lower extremity territory is kind of now part of our Phase II efforts. And the general take up with our Phase II, although we're ahead of plan or on plan to achieve our goal of dedication and optimization, there's still a lot of sales rep training that has to happen in order for us to execute and hit our numbers. So I think we're having a generally frank discussion and moving through that process in a very thoughtful way. I think in Flex conversions, I think we continue to move lower on the target list, which means we go to smaller and smaller volume surgeons, as you would imagine. And the risk of not making a conversion, although probably has less impact overall, it's very resource -- I guess, expensive. It takes a lot of resources to go to so many different places. We're trying to factor in those conversions and get the right timing. But I don't think, fundamentally, they're going to slow because of competitors. I think they're slowed because smaller volumes surgeons. And then, large joint, as I said, we are coming up on the anniversary of launches, and there's only a finite number of customers you can recruit back to the fold, if you will. So I think that's really the culmination of how we set our guidance is those 4 factors and putting the risks and opportunities together just to set the guidance.

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

I understand. One last question. When we see the 2-year data on Simpliciti presented, either will be late, late this year or early next year?

David H. Mowry

Yes, we will be in a position to create a publication strategy for the Simpliciti data next year. Our intent is to keep that study locked until we file with the FDA at the beginning part of 2015, at which point, thereafter, we'll have several surgeons produce probably with their first experiences, as well as a review of the cohort of that data.

Operator

Our next question comes from Joanne Wuensch of BMO Capital Markets.

Joanne K. Wuensch - BMO Capital Markets Canada

Couple of questions. The sports medicine commentary, so it sounds as if you're not investing or spending time there. Is that the right way to read that?

David H. Mowry

Well, I think, fundamentally, Joanne, what we have seen with sports medicine is we want to support the procedures that we're in. And rather than trying to diffuse our resources, both in R&D or in the sales organization into chasing procedures or physicians around the hospital, what we're trying to do is leverage the portfolio into current procedures. So on the foot and ankle procedures, in particular, anchors and sutures are used even in many open procedures by both podiatrists as well as orthopedic surgeons. So we've tried to retool, if you will, that portfolio and our future investments better support the procedures we're already in.

Joanne K. Wuensch - BMO Capital Markets Canada

Okay. And I apologize if you had -- if you gave us this piece of information, there's a lot going on tonight. The number of salespeople, where are you on that? And where is that tracking towards your goal towards the end of the year?

Shawn T. McCormick

Yes. So Joanne, we have a total of 360 reps in the U.S. right now, and that's down from 380 at the end of Q1. Our direct reps stayed flat at about 150. Our direct reps are 75% dedicated and, in total, our distributor reps are a little bit more than 80%. We're at 80% dedicated in total, and our year-end goal is 85%. So we're well on track to hit our year end goals.

Operator

Our next question comes from Matt Miksic of Piper Jaffray.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

I have one question on upper extremities. You use the word conversions normally and regularly when you talk about Ascend Flex. And that's, oftentimes, we hear the word trialing when other folks are rolling out new systems. And I'd just love to understand how confident you are, are you far enough along in the rollout here that you're seeing kind of these accounts, these surgeons are, in fact, converted? Or just maybe provide some color as to how that transition happens in shoulders, for example, and how sustainable that growth is.

David H. Mowry

Well, yes. A couple of things, I guess, Matt. First of all, and I think first and foremost, we look at the Flex platform and, as we say, conversions as a process. Trialing is one step in that process. And to get to trialing, you actually have to do several things first. We want to have our sales reps work with our marketing teams to prequalify those targets. We don't want to be chasing people that we have no hope of converting. So -- and then, we prioritize those based upon, not only the likelihood of conversion, but the likelihood of getting pricing approval at their hospital, the likelihood that folks are open to be converted, et cetera, and then, even the size of the account that's representative. So there's an algorithm that we've developed, if you will, to help prioritize those that are in the target list. I think, secondly, the process includes several touch points. Trialing is that touch point where they have made a commitment to at least evaluate the product in their OR, but that's not the end of the story. Frankly, there's quite a bit more that has to file -- follow-up on that. We leverage our field sales experts to ensure that they have the support needed when they're doing those trials. Number one, we have some really great salespeople, but we also have some field sales experts, if you will, our regional folks, that can come in and support those cases, in particular, or help support that sales rep as they move through the trialing. So really, to us, it's a process. And you start by entering people into the start of the funnel and you move them through the process to that conversion, whereas trialing is just one step. So that being said, we have pretty good data, and we track people through the multiple steps of that conversion process to the point where we have a very good understanding of what goes in and what comes out. And although there are a lot of variables along the way, we feel very comfortable that when we talk about the conversions that we're making and the growth that we're seeing that there's a great deal of stickiness to that amount of the business.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

That's very helpful color. One follow-up on the ramping up of the new distributor territories or the areas where you've gone direct or changed partners. You talked a number of times about this being kind of a 12- to 18-month process. Given -- with the strength in the second quarter, you had started making some of these changes in the first half of last year. Can you give us a sense of those early changes because they were sort of -- are they running back at your sort of previous run rates? Or are they still ramping here as we head into the back end of the year, in line with your 18 months' comments?

David H. Mowry

Yes. I think what we see in our Phase I, Phase II kind of progression here is that the upper extremities is kind of leading, if you will. Because as I said during my prepared comments, we started with upper and, frankly, there were fewer disruptions, if you will, in that cadre of people versus the lower where we had a significantly higher number of territories that have gone through that transition process. So I think what you're seeing is the result of a very thoughtful and mindful process of identifying, optimizing territories, training reps, filling those positions and bringing them up to speed. And what gives us confidence is not only the upper that is a little further ahead, but even in the lower territories that were started sooner seeing some of that success from those direct territories, in particular, in lower. So I think we have confidence. I think the comments I made in the prepared remarks were that we expect this will continue to grow and provide significant and positive impact on a go-forward basis the back half of '14 and into '15.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

And just finally, just one, if I could, on the training process that you're going through for total ankle arthroplasty. You had mentioned that, that was going to be something that -- it will take some time to sort of get some of these reps comfortable with guiding surgeons through a total ankle and maybe a little bit more complex than some of the other foot and ankle products that they're accustomed to selling. Can you give us a sense of where you are there? Are they now contributing on that line, newly trained reps? Or is that something else that we should expect to develop over the next couple of quarters?

David H. Mowry

I think that the first commentary I'd like to make is we had the, I guess, the luxury, if you will, or impatience of listening to a lot of other people's scripts and what they're saying about the space. And I can tell you that I believe that our total ankle arthroplasty growth is among the leaders in growth that we've heard from other folks. So we're extremely pleased with how total ankle arthroplasty played out for us. And that is squarely on the back of the product training we've done, the education we've done and training with the surgeons and the development we've made in the lower extremities sales reps, keeping in mind that, that was our primary focus last year with the training for the reps. Now as we move forward into 2014 and later, the back half of '14, we're working closely with our sales training organization to certify reps and even further improve the quality of their capability in taking surgeons through. So we believe that there's quite a bit of headroom in terms of total ankle arthroplasty growth. We've heard other people talk about it. We believe it as well. I think maybe we're a little bit more bearish than they are in the total amount of growth that's in that market. But in general, we believe it's fueling a lot of the lower extremities growth on a go-forward basis, and we fundamentally believe it's about having a revision system, it's about having a trained, qualified rep in the room and it's about having a simple, easy-to-use system available to the physician. And fundamentally, all our efforts are aligned to provide that kind of perfect storm of events.

Operator

Our next question comes from Matthew O'Brien with William Blair.

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

Dave and Sean, I was hoping to push a little bit more on the upper extremity commentary. By my math, and that's certainly questionable, but by my math, I think the market grew about 8% in the quarter. And you guys did something around 12%, and this is just in the shoulder market. And I'm curious as to what some easier comparisons in the back half, the reason that you're thinking that the growth rate in upper extremities may slow down. Is that a function of you're now a lot deeper in previous Ascend Flex accounts? Because I would think that you're fairly early, in more of a trialing phase with a lot of those new customers. Or is it that the sales force churn that you're expecting in the back half of the year?

Shawn T. McCormick

Yes, Matt. I'd say it's a little bit of both of those things and we are quite honestly, making sure we don't get out ahead of ourselves in the process of going through and completing all transitions and completing all of the training. So we're obviously very pleased with the growth we saw in the second quarter, but as we look to the back half, we are cautious about continuing the rep training. We are cautious about the level of trialing and the timeframe, as Dave said just at the end of the first quarter. We are watching the competitive products that are out there, the impact that may have on trialing and on the timeframe of conversions. So we've had great experience to date, but we're still cautious that we're not completely through the process. You'll also -- we don't provide upper and lower guidance, but if you look at the high end of our extremities guidance, we are pushing towards that 9% range, which would be more consistent with what we saw in the second quarter.

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

Okay. Fair enough. Just within there, a little bit more, Shawn. In the past, and I know, I'm sure you don't want to get exact number, but you had provided some conversion rates in the past, the people that had trialed Flex to the point where they went ahead and convert it over and started using it full time. Are you still seeing similar type of levels as to what you were seeing kind of early days?

Shawn T. McCormick

Yes. So Dave talked about a pretty involved process of getting a physician to trial a product, and then we watched the metrics of once somebody's actually using the product, what kind of repeat use do we see the next quarter and the quarter after. So we're continually monitoring what we call a conversion. And I would tell you the rates we're seeing with quarter-after-quarter retention of those who had trialed product, we're very pleased with them. We haven't given out specific rates on that, but I would say we are seeing a consistent trend in sequential use after somebody's done their initial trialing with us.

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

Okay. Two more follow-ups for me. And I'm going off of memory here, but the Japanese commentary. I think about a year ago, you had sized that market at about $25 million for Tornier in 5 years. Should we anticipate that timeframe to $25 million maybe moved up a little bit, given the training that we've seen so far?

David H. Mowry

No, I wouldn't accelerate that expectation. I think what we've been very thoughtful about doing is creating the right partnership. And frankly, Japan is going to move at the speed Japan moves at. It's a very kind of hierarchical market. It's based upon getting the leaders in line and providing the right training and education and allowing it to flow kind of top-down through their own system. I think what we're trying to do, though, Matt, that may be helpful is build something that not only hits that $25 million but is not only sustainable, but allows us to start to leverage our complete extremities line in Japan at some point. So really, we're building the right infrastructure from a distribution perspective with our sales channel, our direct sales channel, and the relationships we're establishing so that it become sustainable and something that's transportable even into lower extremities at some point.

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

Got you. And one more real quick one, if I may. On the profitability side. And I know you don't want to get into '15 too much right now, but is it reasonable think that as we get into the first half of 2015, we can get to an EBIT positive level for Tornier? Because I looked at the cash balance, it's dwindling a little bit here, and just trying to reconcile those 2.

Shawn T. McCormick

Yes. So Matt, what I'd say there is, one, I don't -- we talked about adjusted EBITDA, and I've -- we have said that 2014, we will see deleveraging on the adjusted EBITDA versus 2013. As we get to 2015 and we sustain and -- and move towards and sustain above-market growth rates, that we will be able to garner some leverage over the course of the year. So I'm going to stop short of then moving to an EBIT metric at this point in time or getting into 2015 guidance beyond that.

Operator

Our next question comes from Daniel Sollof of Barclays.

Daniel Sollof - Barclays Capital, Research Division

I wanted to start with Simpliciti, obviously, a focused pipeline product, especially given the lead time you have. So I wanted to ask, when you think about opportunity there, is it principally share gains or is really also expansion of the market?

David H. Mowry

I think it's a little bit of both, Dan. And thanks, by the way, for your comments. The -- when we think about Simpliciti, we've always, all along, said that the U.S. model -- market is very different than the European market when it comes to Simpliciti. We think that having the first minimally-invasive design shoulder platform for the U.S. gives us a significant advantage. So it's not just about expanding to younger patients, it's also about some cannibalization of the total shoulder market currently in play. So we think both are options for us. I think primarily, as we gain experience, we're probably going to see a greater amount of cannibalization of existing market, then we will expansion of the market initially as education and experience builds confidence in expanding the market.

Daniel Sollof - Barclays Capital, Research Division

That's helpful, guys. Just a follow-up on the lower extremity portfolio. You've started to see some momentum. You talked about taking another few quarters to really get more momentum, you've explained why. But my question is, you look at the portfolio that you see strong ankle growth and we think about how that pulls through the fixation part of the portfolio, do you think on that fixation, do you have everything you need in that bag as that business ramps? Or do you think -- or would you really characterize that bag is full as you see today?

David H. Mowry

Well, I think, Dan, there's 2 different ways to look at the portfolio, if you will. And I prefer to look at it not so much as what we need from a pathology perspective. But I think we need to think about what do we need for different options for surgeons. Because we cover the pathologies. We may not have the most innovative and best product for each pathology but we don't, in many cases, have options for different approaches within that pathology. And I think, first and foremost, we need to build the depth of our portfolio on the lower extremities side. Now you may recall me saying earlier, not in this call but in previous calls, that our OrthoHelix team now principally runs our lower extremities portfolio. And they're very qualified and talented people, however, we've had to have them focused on doing some design development, design control, et cetera as they've integrated the company. That's in our rearview mirror now. So I'm expecting that the cadence of products that they will continue to produce will more likely replicate the cadence of products they produced previous to the acquisition. And so I'm hopeful and very excited about that, I listed a few during the prepared comments. I think, in addition to that, we need to think about having what I would consider to be an ankle -- I'm sorry, an ankle arthritis portfolio. And frankly, our fusion solutions to the ankle arthritis right now aren't as deep or as broad as they need to be. So when you show up, we can offer a great ankle. In fact, an ankle would probably be the best data on the market in terms of survivorship data. However, we can't offer the fusion solution. So we need to be better in that total ankle arthroplasty market by having a fusion solution that's at industry standards. So we're working on that now and we'll bring that to market shortly, and that's kind of the way we're thinking about the ankle, if you will. Got to have a full bag, got to be faster, easier to use and it's got to have options with revisions. And I think having a fusion option, as well as a revision option and a best-in-class total ankle will give us a winning portfolio there.

Operator

Our next question comes from Larry Biegelsen of Wells Fargo.

Lawrence Biegelsen - Wells Fargo Securities, LLC, Research Division

First, one housekeeping question. Did you have one less selling day this quarter, are there any selling day differences in the third and fourth quarter?

Shawn T. McCormick

Yes, Larry, we have some gives and takes in the international markets. There was no differences in the U.S., whatsoever. There were some gives and takes in various international markets that effectively net to -- I just said that they net to an insignificant impact on the quarter. As we look at the back half of the quarter, it's kind of the same scenario. We don't have any quarters that have any difference in days that we would call out as expected to have a material impact.

Lawrence Biegelsen - Wells Fargo Securities, LLC, Research Division

And then, I know you talked about the pricing being stable pricing pressure. Can you talk about the overall health of the extremities market and the outlook for the second half? Where do you think the market's growing at right now? And I have one follow-up question.

David H. Mowry

Yes. So with upper extremities, we still believe that, that market, globally, is growing somewhere between 9% and 10%. We believe that it's growing a little faster maybe in the U.S., driven specifically by mixed shift from reverse -- from anatomic to reverse on shoulders. I think on the elbow side of upper, it's probably growing on the little lower side, the 6% to 7%, but that's a much of smaller component that market for us. So that's kind of our color on the upper. On the lower, we think that, that market's probably growing 8% to 10%. I think ankles maybe on the higher end of that right now because of the flurry of activities and focus that's going on there. Whereas, maybe some of the fusion and hammertoe may be mid to lower side of that market growth.

Lawrence Biegelsen - Wells Fargo Securities, LLC, Research Division

That's helpful. I just wanted -- my follow-up question, I wanted to ask about your expectations for 2015 because, Shawn, you did talk about growing above market I believe next year. So if the market, is that -- did I hear you correctly? And I know you're not giving guidance now, but just setting expectations. You gave the growth rates for what the market's growing at, let's call it high-single digit. Is it your expectation at this point that you should be able to grow at or above the market next year in extremities?

Shawn T. McCormick

Yes, Larry, what I'd say is -- as we have said all along, we're moving through, especially our U.S. sales force transition, with a focus on having a proficient sales force, clinically proficient sales force, and arming with them with the tools to be a value-added organization with the ultimate goal of sustainable, above-market growth. The goals we've set forth for 2014 really get us by -- at the end of the year to what we think is that sales organization that can continue to build the momentum towards sustainable growth. And without setting guidance for next year, that's the objective we have, is to be executing this year on that ramp to growing above the market.

David H. Mowry

The only color I'd add to that, Larry, is it's about having the right sales organization for us right now, but it's also about continuing to execute on bringing the right products to the portfolio now. I think you should understand that lower will lag upper, but we're focused on both. And so it's not just sales force development but bringing the products to bear, and also getting the lower to be through its transition, if you will, which would lag by a couple of quarters based on the timing and the amount of work that we have done there.

Operator

We have no further questions in queue. Please continue with any closing remarks.

David H. Mowry

Thank you, operator. I'd like to thank each of you for listening today's call, as well as your continued interest in Tornier. We look forward to updating you on our third quarter results in November. Thank you again, and we'll see you soon.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.

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