K2M Group Holdings' (KTWO) CEO Eric Major on Q1 2018 Results - Earnings Call Transcript
K2M Group Holdings, Inc. (NASDAQ:KTWO) Q1 2018 Results Earnings Conference Call May 1, 2018 5:30 PM ET
Eric Major - Chairman, President and CEO
Greg Cole - CFO
Lane Major - COO
Larry Biegelsen - Wells Fargo
Matthew O’Brien - Piper Jaffray
Steven Lichtman - Oppenheimer & Co.
Kaila Krum - William Blair
Josh Jennings - Cowen
Glenn Navarro - RBC Capital Markets
David Saxon - Needham
Good evening, ladies and gentlemen, and welcome to the K2M Group Holdings, Inc., First Quarter and Fiscal Year 2018 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. At the end of the Company’s prepared remarks, we will conduct a question-and-answer session. Please note that this conference is being recorded and that the recording will be available on the Company’s website for replay shortly.
Before we begin, I would like to remind everyone that our remarks and our responses to your questions today may contain forward-looking statements that are based on the current expectations of management and involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated, including those identified in the Risk Factors and Management Discussion and Analysis of Financial Condition and Results of Operations sections from our Form 10-K for fiscal year ended December 31, 2017, filed on March 1, 2018, as updated by our most recent Quarterly Report on the Form 10-Q and other subsequent periodic filings with the SEC, which are accessible on the SEC website at www.sec.gov.
Except as required by law, we assume no obligation to update our forward-looking statements. In today’s remarks we will refer to certain non-GAAP financial measures, reconciliations of these non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in our earnings press release and supplemental disclosure on the Investor Relations portion of our website.
I will now turn the call over to Eric Major, the Company’s Chairman, President and CEO.
Hello and welcome to K2M’s first quarter 2018 earnings conference call. Let me begin with a brief agenda for today’s call I will start off with a summary of our revenue performance of the first quarter 2018, then I will discuss the progress we made during the first quarter in a number of key areas, including enhancements to our distribution network, our ongoing collaboration with Brainlab, our continued focus on product innovation, expansion of our BACS platform and leveraging our 3D printing capabilities. I’ll then turn the call over to Greg Cole, our Chief Financial Officer, who will discuss our financial results in greater detail and review our 2018 guidance, which we updated in this afternoon’s press release. We’ll then open the call to questions.
We reported total revenue growth of 10% in the first quarter, consisting of 8% growth in the U.S. and 15% growth outside the United States. Excluding the impact of exchange rate fluctuations, total sales increased 8% and sales outside the U.S. increased 9% in the first quarter. Overall, we are pleased with the start to fiscal year 2018. Our first quarter revenue performance in the U.S. was at the high end of our expectations, driven by strong sales trends in both our Complex Spine and Degenerative Spine businesses during the quarter. Our Complex Spine sales increased 8% year-over-year, led by a very strong response from the introduction of our YUKON OCT Spinal System. YUKON can be used as a standalone system or in combination with our PALO ALTO Cervical Static Corpectomy Cage System the first and only static corpectomy cage in the world to receive a cervical 510(k) clearance.
First quarter Complex Spine sales also benefited from a strong sales growth in three of our key proprietary technologies, Everest, CASCADIA and CAPRI. Our degenerative business posted strong growth as well during the quarter with our MIS procedure category increasing 6% year-over-year and our open degenerative procedure category increasing 9% year-over-year. Growth in our degenerative business continues to be driven by our EVEREST MI XT spinal system and our family of CASCADIA 3D interbody products. In addition, our first quarter degenerative growth benefited from newer product introductions as well.
Specifically, the early response from our recent entry into the expandable interbody market has been very positive. Surgeon feedback during the Alpha launch of our first of its kind MOJAVE PL 3D expandable interbody system featuring Lamellar 3D Titanium Technology has been very strong. Additionally surgeon feedback on our SAHARA AL Expandable Stabilization System has also been positive.
Overall, we are pleased with the early market response to our first two expandable interbody product offerings. The recent commercial launch of our YUKON OCT Spinal System and PALO ALTO Cervical Static Corpectomy System also contributed to first quarter degenerative revenue performance. Clearly, K2M’s focus on introducing new and innovative spinal implant technologies continues to be a primary driver of growth for the Company.
Turning to our revenue performance outside the United States. In Q1, we reported constant currency growth of 8% year-over-year, driven by strong performance in our largest direct and distributor markets outside the U.S. as well as stronger-than-expected demand for our products from our distributors in Latin America.
Turning to an update on our operating progress and highlights thus far in 2018. We continue to identify opportunities to enhance our distribution network around the world. In the U.S., we have the flexibility with our hybrid structure to align our distribution needs with the appropriate mix of sales agents and direct reps, and we are continuously evaluating both against the revenue performance objectives of the Company.
As discussed in the past, we have employed the P&L friendly strategy of opportunistically shifting the form of our representation in an effort to continue to expand our distribution channel and to do so in the most capital-efficient manner. We continue to see enormous opportunity to attract high-quality sales partners to represent K2M in markets where we currently have little to no sales presence. The pipeline of potential partners continues to be fueled by the tremendous product innovations that K2M is bringing to the marketplace.
Outside the U.S., we identified an opportunity to improve our product distribution in Spain and Portugal with our partner Medcomtech, which we believe will improve our long-term growth and gross margin profile in these important international deformity markets.
On April 27, 2018, we executed an exclusive agency and transition services agreement to replace the existing exclusive distribution agreement with Medcomtech, extending our partnership with Medcomtech through 2024. Under our revised relationship, K2M will begin recognizing revenue at the hospital level instead of a wholesale level. In 2019, we expect up to 200 basis points of contribution to gross margin and up to $7 million of incremental revenue.
Medcomtech will transition from a stocking-based distributor to a commission-based independent sales agency and continue to focus on sales, marketing and market development activities for our products. Beginning in May, revenue generated by K2M in Spain and Portugal will reflect its supplier relationships at the hospital level as opposed to its prior wholesale relationship with Medcomtech. We believe this revised relationship with Medcomtech may represent an opportunity to improve the growth and gross margin profile for the Company in the Spanish and Portuguese markets.
As part of these agreements, K2M acquired Medcomtech’s customer contracts and business relationships, specific to spine as well as K2M product inventory and instrumentation previously purchased by Medcomtech in exchange for certain outstanding receivables that have been due to K2M for Medcomtech. This strategic agreement is another example of K2M enhancing our existing global distribution capabilities in attempt to create P&L leverage.
With respect to our new partner in Japan, Japan Medicalnext, a subsidiary of Mitsubishi, we are pleased with how the relationship is progressing since we signed our agreement last summer. Recall that we worked quickly to begin securing the requisite product approvals in Japan under the K2M name and hosted our first training of key opinion leaders from Japan at our corporate headquarters last fall. Nearly all the surgeons that attended the first training are up and running, and are already expanding their user base in the country. We are very pleased with the positive feedback we are receiving from the users, and plan to host additional training sessions throughout 2018. We are excited to be partnering with Japan Medicalnext, given their significant experience in medical device distribution, including the spine surgery market. We look forward to this partnership helping K2M increase its share of the estimated $350 million spine market in Japan.
An update in our recent progress with new strategic partners would not be complete without discussing our global compatibility and co-marketing agreement with Brainlab. We began this partnership last fall with hopes of combining K2M’s leading spinal systems with Brainlab’s leading image guided navigation platform for spinal surgery. This agreement represents an incredible opportunity for K2M and that we have partnered with a leader in the surgical navigation field who provides us with access to a global installed base of over 5,300 navigation or O.R. integration systems.
We continue to target a commercial launch in the second half of 2018. The engineering teams are working closely on the compatibility of K2M spinal systems and instrumentation with Brainlab’s intraoperative image guided navigation and imaging platforms. And the commercial teams are collaborating on identifying and prioritizing the key accounts to target once the requisite regulatory clearances are secured. Additionally, in Q1, many of our field managers and clinical experts have been trained at the Chicago Brainlab facility.
We believe this partnership will further enhance our three-dimensional Balance ACS platform by providing surgeons and hospitals with state-of-the-art technology to support the full continuum of care of patients. We are also excited about the opportunity to engage our new projects in the future, including the commercial release of future navigated K2M spinal systems, which would be compatible with the Brainlab.
Product innovation continues to be the core of our strategy to drive growth and capture market share and we could not be happier with the momentum we are seeing in 2018. As I shared on our last earnings call, we believe the last year may have been the most important year of product innovation in the history of the Company. We anticipate that our impressive new product activity in 2017 will position us to drive above market growth again in 2018. Specifically, our product clearances, and Alpha launch activities in the Complex Spine market over the last 6 to 9 month has provided us well, heading into the deformity season.
Building our flagship Complex Spine product platforms MESA and EVEREST, we enhanced our product offering with the introductions of our NILE Proximal Fixation Spinal System and our YUKON OCT Spinal System for facilitating fusion with posterior fixation in the occipito-cervico-thoracic region of the spine.
We recently announced the full U.S. launch of YUKON following one of if not the most successful Alpha product launches among the 99 product we have commercialized throughout the Company’s history. The full launch of YUKON is also going very well and the surgeon feedback has been extremely positive. We are also pleased to see early evidence that our PALO ALTO Cervical Static Corpectomy Cage System is proving to be a nice addition to our complex cervical offering. Recall, PALO ALTO is a cervical vertebral body replacement device that can be used with our YUKON OCT system and is the first and only static corpectomy cage in the world to receive a cervical 510(k) clearance from the FDA.
In addition to these important innovations to our Complex Spine offering, our recent addition to our Balance ACS digital platform, the new BACS app 2.0, gives us additional confidence that we are well-positioned to take market share during this year’s deformity season. The BACS app 2.0 features an improved user-friendly interface and access to all BACS tools. We’ve been very pleased with the increasing awareness and acceptance of our BACS platform from various constituents throughout the spine surgery market. Surgeons continue to find value in the BACS preauthorization and BACS Data Management offerings because they help streamline the surgical preauthorization process with the goal of validating the balance concept through data collection.
We’re the only spine company to offer this preauthorization application and we continue to see strong surgeon interest in our BACS offering today. We’re also very excited to announce in February that we have licensed our BACS Data Management tool to the International Spine Study Group Foundation, or ISSGF, for collecting spine patient data including Patient Reported Outcome Measures PROMs as part of the ISSGF’s global recognized research study.
Our new product innovation progress was not limited to enhancing our position as the leader in Complex Spine. We are also enhancing our market leadership position in the newest areas of spinal innovation and disrupting areas of the spine market where we have historically not competed.
3D printing is one of the hottest areas of spine implant innovation and K2M was the first leading spine company to market a 3D printed spinal implant. K2M now offers the most comprehensive portfolio of 3D printed spinal devices. We provide 3D solutions for Complex Spine, MIS and Degenerative Spine procedures. We have experienced an overwhelming response from surgeons on our CASCADIA family of 3D printed products over the last two years. And building on the success, we have enhanced our leading market position with the introduction of our second and third product families of 3D printed products that feature K2M’s Lamellar 3D Titanium Technology. With the MOJAVE PL 3D Expandable Interbody System and the CAPRI Small 3D Corpectomy Cages. We are aware of the increasing number of 3D printed products from competitors. But given our market-leading position five plus years of R&D know how and early commercial entry into the space, we believe we have the engineering and clinical expertise to continue to lead in the new frontier of 3D printed spinal technologies. K2M continues to drive innovation in 3D printed spinal technologies, and we will continue to introduce new 3D printed products during 2018.
With respect to our new product activity in areas of the market where we previously did not compete, we believe our new products for the expandable interbody market will be truly disruptive. The surgeon response during the Alpha and full launch of our SAHARA AL Expandable Stabilization System has been extremely positive, and we have enjoyed the resulting contributions to our US growth in recent quarters.
K2M’s first and only expandable 3D product MOJAVE 3D Expandable is a great example of how we view new product innovation. We’re not interested in building me too products, rather we engage our surgeon customers to understand what capabilities and qualities the competitive products lack and leverage our expertise in 3D printed manufacturing to develop a truly innovative expandable product.
MOJAVE PL 3D was our first to market 3D printed FDA cleared expandable posterior lumbar interbody system, which offers a new capability not available with any other product in the market today. The surgeon feedback during the Alpha launch for our MOJAVE PL 3D expandable has been strong and we are very excited to introduce this product across the U.S. when we begin the full launch in the second quarter.
One additional strategic announcement from Q1. On March 29th, we appointed Lane Major the Chief Operating Officer. Lane has been a valued member of our team since K2M’s inception in 2004, and essential contributor to the development and commercialization of our product portfolio. We look forward to continuing to leverage his strategic insight, passion for innovation and business acumen in this newly created position.
To summarize, we reported solid revenue growth in the first quarter of 2018, well above market trends and made progress in enhancing our distribution footprint around the world. Our new product activity in 2017 and early 2018 has us well-positioned heading into the summer deformity season. Innovation continues to be a key differentiator for K2M. And this growth engine allows us to offer products and services that we believe improve spine surgery outcomes and attract high-quality distribution partners. Our strategic partnership with Brainlab and our international distributors in Australia and Japan as well as our strategic partnership in Spain and Portugal represent key opportunities to improve the Company’s growth and gross margin profile going forward. Also, we believe we have the right strategies in place to continue to post above market growth in the global spine surgery market.
With that I will turn it over to Greg for more in-depth summary of our financial performance during the quarter as well as a review of our guidance for fiscal year 2018, which we updated in this afternoon’s release. Greg?
Thank you, Eric. Our total revenue for the first quarter of 2018 increased $6 million or 9.7% to $67.9 million. Total revenue increased 8.3% year-over-year, on a constant currency basis. The increase in revenue was primarily driven by higher sales volume from new domestic surgeon users and newer product offerings as well as increased set investments by our distribution partners in Latin America. Revenue in the United States increased $3.7 million or 8% year-over-year to $49.9 million, and represented 73.5% of total revenue in the period. First quarter U.S. revenue growth was driven primarily by the addition of new surgeon users and sales from new product offerings.
By procedure category, Complex Spine sales increased 8% year-over-year to $18.5 million; MIS sales increased 6.4% year-over-year to $8.4 million; and Degenerative sales increased 8.5% year-over-year to $23 million. As a reminder, our Degenerative business is reported in two procedure categories, MIS and open degen. Together, our combined Degenerative businesses increased 8% year-over-year in the first quarter. U.S. revenue in the Company’s Complex Spine, MIS and Degenerative categories represented 37%, 17% and 46% of U.S. revenue respectively in the first quarter.
Our Q1 same store, same product pricing headwind was in the low to mid single digit range, similar to the trends we’ve experienced since 2014.
Revenue outside the United States increased $2.3 million or 14.7% year-over-year to $18 million, representing 26.5% of total Company sales in the period.
International sales increased 9.3% year-over-year on a constant currency basis. International revenue growth was driven primarily by low double digit growth in both our international direct and international distributor markets. Growth in sales from our OUS distributors in Q1 was driven primarily by increased set investments by our distribution partners in Latin America.
Turning to our financial performance throughout the rest of the P&L in the first quarter. GAAP gross margin was 64% compared to GAAP gross margin of 65.3% last year. GAAP gross profit includes amortization expense on investments in surgical instruments of approximately $3.9 million or 5.7% of sales in the first quarter of 2018, compared to $3.5 million or 5.6% of sales in the same period last year.
Excluding the impact of amortization expense, our non-GAAP adjusted gross margin was approximately 69.8% in the first quarter of 2018, compared to 70.9% in the same period last year. The year-over-year change in gross margin was driven primarily by the higher mix of lower margin international distributor revenue in the first quarter of 2018 than in the prior year quarter, which was our more typical mix. We expect this to improve sequentially in Q2 as the mix will return to more normal patterns.
GAAP operating expenses increased $4 million or 8.1% year-over-year to $53.5 million. The increase in operating expenses was driven primarily by a $2.3 million increase or 7.4% year-over-year in sales and marketing expenses compared to last year, primarily reflecting increased investments and selling representatives and higher commission costs on our increased revenue.
GAAP G&A expenses increased $1.4 million or 9.9% year-over-year to $15.1 million in Q1 2018. This line item includes intangible amortization of approximately $0.2 million in the first quarter 2018, compared to $2.4 million last year. In addition, operating results included approximately $2 million of legal and administrative spending that we expect will dramatically reduce going forward in 2018.
GAAP net loss was $11.4 million or a loss of $0.26 per share compared to a loss of $10.9 million or $0.26 per share last year. Our GAAP net loss includes the impact of non-cash foreign currency transaction gains and losses which was a gain of $478,000 this year compared to a loss of $27,000 in the first quarter of 2017. The difference was driven by the impact of fluctuations in foreign currencies against the U.S. dollar on our intercompany subsidiary payable balances.
Our first quarter adjusted EBITDA loss was $3 million compared to an adjusted EBITDA loss of $336,000 last year. As of March 31, 2018, cash and cash equivalents were $17.2 million and outstanding long-term indebtedness included a carrying value of the convertible senior notes of $39.8 million and the capital lease obligation net of current maturities of $33.5 million. In addition, the Company also had $7 million of outstanding borrowings and $34.6 million of unused capacity under its revolving credit facility.
We had working capital of $98 million as of March 31, 2018 as compared to $99.6 million as of December 31, 2017. As a reminder, we had cash spending of approximately $20 million in total in 2017. The majority of that spending occurring in the first half of the year as we purchased inventory in advance of deformity season. We’re anticipating cash needs of approximately $25 million in 2018 and again, the majority of which should occur in the first half of 2018, similar to our experience last year.
Turning to our full-year 2018 full-year guidance expectations. As detailed in our press release this afternoon, the Company now expects total revenue on an as reported basis in the range of $283 million to $287 million. It represents growth of 10% to 11% year-over-year compared to total revenue of $258 million in fiscal year 2017. Our prior revenue guidance expectations for total revenue on an as reported basis were in the range of $280 million to $284 million, representing growth of 9% to 10% year-over-year.
The Company continues to expect total net loss of $34 million to $30 million in fiscal year 2018, compared to a net loss of $37.1 million in fiscal year 2017. The Company continues to expect an adjusted EBITDA benefit in the range of $4 million to v8 million in fiscal year 2018, compared to adjusted EBITDA loss of $740,000 in fiscal year 2017. We have provided a reconciliation of expected 2018 GAAP net loss to adjusted EBITDA in our earnings press release to assist in understanding the impact of certain non-cash items on our outlook for adjusted EBITDA.
Finally, for modeling purposes, the Company continues to expect growth in its U.S. business of approximately 10% to 11% year-over-year in 2018. The Company now expects growth in its international business of approximately 11% to 12% year-over-year in 2018 compared to the prior guidance expectations for growth of approximately 5% to 7% year-over-year. The Company continues to expect currency to have a positive impact on total revenue in 2018 of $2 million. For the full year 2018. we expect the weighted-average share count for earnings per share purposes to be approximately 43.5 million shares.
With that, I’ll turn the call back to Eric for a few closing comments. Eric?
In closing, we remain committed to being a global leader in complex spine and to our continued focus on providing minimally invasive solutions that help surgeons to achieve three-dimensional total body balance. Our growth continues to be driven primarily by two factors, growing our innovative portfolio of technologies and techniques, and increasing our sales force productivity as we leverage the investments we have made in our global distribution network.
Our execution in the areas of new product innovation, strategic partnership and investments in enhancing our U.S. and international sales distribution, gives us confidence that we remain well positioned to post above market growth rates in 2018, as we continue to differentiate K2M as a market share gainer in the spine space. We also continue to evaluate inorganic growth opportunities that represent the appropriate mix of incremental growth and potential return on invested capital.
We expect to show improving profitability through a combination of revenue growth and efficiencies in sales and operations and to reduce our net loss for 2018. We believe our success in each of these areas should drive long-term performance.
Operator, we will now open the call for questions.
[Operator Instructions] Your first question comes from the line of Larry Biegelsen. Your line is open.
Good afternoon, guys. Congrats on the nice start to the year. Just a few for me, just one housekeeping. How much of the revenue guidance raise was due to Spain, was it all Spain? And then just a couple for me. One on the cadence of growth through 2018. Do you expect it to be fairly consistent through the year, anything you would point out? And then on EBITDA, the EBITDA guidance, what kind of ramp do you expect through the year? Thanks for taking the questions, guys.
Sure. I’ll start and hand it over to Greg. When you think about the year, I think you should think we have seasonality. I think, you look at K2M for 2018, you should see similar seasonality to previous year’s Q2 and Q3 as the kids start to go on to deformity season in late May, June, July and August, we tend to see that uptick for us specific to the adolescent idiopathic scoliosis segment of the market. We are seeing continued growth in Q4 because of our entree into minimally invasive products, degenerative product with our 3D technology portfolio. And we see that in Q4. So, I think the model should be similar to our 2017 from that perspective. Greg, do you want to…
Yes. So, Larry, in Spain, the increase to our guidance really is attributable to Spain and the benefit that we see there. What’s really nice about that is that these are not incremental procedures. This is really the -- procedures that we’re doing today, we’re just now recognizing the revenue at the hospital level as opposed to the wholesale level. So, it’s a nice way for us to better control our business and reflect to the investors what we’re really doing in these important countries.
To Eric’s point on the revenue and earnings, we don’t actually put super detailed guidance down on a quarterly basis. But following his comments on seasonality, earnings and revenue will follow very similarly to the strength in that deformity season. We do expect the second half of the year to be vastly more profitable than the first half of the year. And that’s pretty typical from a pattern perspective. We did have a few additional items in G&A this first quarter than what we typically see, but we don’t expect this to recur for the remainder of the year. But you should see some dramatic movement in the EBITDA in the back half of this year in particular.
And just one -- I just want to sneak in one follow-up question, Eric, on the robotic arm Brainlab’s system, I think you’ve talked about clearance of that in fairly near term. And any update on that? And I assume that would be part of this [Technical Difficulty] Thanks for taking the questions, guys.
So, as we’ve said in the past, our relation -- we’re very excited about our relationship with Brainlab. Right now, we are working on integrating our instrumentation with their navigation and imaging technologies. We think their installed base of 5,300 units is pretty exciting. At our global sales meeting, at the training that our team has gone to in Chicago, and frankly some of the visits that our surgeons have made to Chicago, they have seen what Brainlab is doing in the area of robotics. There is excitement there. We will see as that starts to enter the marketplace. Right now, we are focused on -- our engineering team’s been over to Munich. I’ll be back over -- I’ll be in Germany this quarter as we work towards that integration of our instrumentation, and then look at updating the street as we move into the back end of the year once that instrument -- once our software is fully integrated to our instrumentation. And we seem to be on our internal time line there to have that moving forward here at the midpoint of the year.
Your next question comes from the line of Matthew O’Brien from Piper Jaffray. Your line is open.
Just follow-up on L:arry’s question, Greg specifically. The EBITDA loss in the quarter was a little bit higher than I was modeling. I know, there’s a lot of new reps in house and that’s probably a reason for it. But to get up to that 4 million to 8 million, even at the low end of the range is a pretty big step. So, just to tee this out a little bit more, can you talk about where specifically the improvements come from, from a gross margin perspective or SG&A perspective, be able to get you all the way up to that, even the low end of the range?
Absolutely. The big steps are going to be in the G&A area. Sequentially, we’re not going to see the same level of G&A drain that we have in the first quarter. So, you’re going to get a lot of benefit there going forward, just we’re not going to be spending as much. These are very specific items and matters that are not recurring in nature.
The other piece that’s very helpful, there is about -- there’s a decent 100 basis-point impact to gross margins from the mix of sales that we had in the first quarter to our international partners in Latin America. They are just lower margin partners. We just don’t make as much money there. On a full-year basis, you probably wouldn’t noticed those, but the fact that we had a couple of them in the same first quarter, it’s a more noticeable impact. So, you’re not going to see that recurring for the remainder of the year as well. Those are very meaningful orders. And then, secondarily, the last thing is really, we had a little bit of mix going on in the sales channel on a year-over-year basis when you’re looking at the comparisons. And that reflects really the movement of our commission plans between sales agents and direct reps and a little bit of the products that they are selling that reflect those commissions there. So, there is a little bit of mix in the commission structures. And that’s going to bounce around little bit, but that’s all within the expectations of what we put together when we do our planning each year.
That’s super helpful. So, follow-up question then is on the new products or I guess to ask it different way, what are you seeing competitively as these new 3D entrants are coming into the space? Are they disrupting you at all? And then on the expandable side, specifically, I know, it’s still more of the early launch stage there. But, what are you seeing as far as physician feedback from existing customers to new customers, and how impactful can that be here in ‘18?
As we’ve been talking about for quite a while, we are -- we continue to be extremely excited about our 3D portfolio. And as you start to see entrants from other competitors, it just -- I think, it’ll start jumping off the page more and more to the analysts on where that differentiation is. For a long time, I know during the one and ones and during presentations, Greg, Lane and myself have been talking about how Lamellar 3D Titanium Technology is more than just using a 3D printer and that we have unique geometry designs that we’ve been able to apply our five years of experience in our large portfolio.
So, today, what I’d have you think about and when you dig in and look at the other companies, remember that what we have been talking about, and go back to all the previous earnings calls, we’ve been talking about bony ongrowth, bony ingrowth, radiographic imaging and stiffness and all these things kind of fall into a unique design on what we’re doing across that entire portfolio of CASCADIA. So, we think that we are very well-positioned in the 3D space to continue to be the leader. And it really is growing the business. You can see our numbers.
On the expandable interbody side of MOJAVE, the feedback has been very strong. We’ve got into an Alpha, we have the feedback has been very positive on the Alpha. And now we are in Q2 launch. And I’m very pleased with not only that but that we’re one time. We’re doing what we said we were going to do with regard to introductions of the global sales meeting, introduction of YUKON in Q1 and now MOJAVE in Q2. It’s exciting for the team to be on time and the feedback thus far has been very strong on the expandable piece. And I guess the last thing I’ll say in expandables is while we see other companies start to think about entering the 3D space, we’ve gone from a portfolio of 10 products, 10 static products to more coming but now gone to a next phase of expandables. And MOJAVE is just the first of what you should expect to see in future expendables. As we go out after this launch and we start talking about launches in 2019, we’re building a very strong portfolio. And as we described in the prepared remarks, these expandables do things that other expandables don’t do and they provide the physicians with more control and capability to ensure end play to play connection between the implant and the vertebral bodies. So, overall, we’re very excited about our portfolio in the 3D space.
Okay. And Eric just to follow up a little bit on that. I know you love all your children the same, all your products the same, but can you just give us any kind of maybe qualitative sense for the feedback on MOJAVE versus other launches you’ve had in the past? Thank you.
Sure. Lane, do you want…
Hey, Matt. Thanks for the question. This is Lane, maybe to follow-up on Eric’s comment and then directly address that. I’ll just remind ourselves, we’re the first leading spine company to market 3D printed implants. And we remain the market leader with the most comprehensive portfolio of 3D printed products. It’s CASCADIA, has really been our portfolio of static interbody. We actually have two other families of product that includes CAPRI and MOJAVE. And specific to MOJAVE, MOJAVE PL 3D, the feedback has been incredibly positive. As Eric noted, we are wrapping up the Alpha phase evaluation. We’ve been very pleased with the performance of the product. And as we march into Q2 with our commercial launch, we’re very excited about having not just -- not just the first to market 3D printed cleared expandable but an expandable that can expand in ways no other expandable can in the marketplace. So, I think the product really gives us enthusiasm or confidence about what the future has in store for 3D printing. And as we continue to head in that direction, we’ll be sure to let you know how that progress is going.
I mean, Matt, the rollout went -- the alpha went great and now, the sets are just going out here in Q2 to the field. And once we go, we’ll start getting feedback and continued growth. So, we are right in the middle of that rollout, that broader rollout of the launch. The Alpha was very strongly received.
Your next question comes from the line of Steven Lichtman from Oppenheimer & Co. Your line is open.
Thank you. Hi, guys. Just building on MOJAVE, just wondering how we should think about the ramp here, given some of the unique benefits you mentioned on height adjustment. Will you have training sessions or is that not necessary? Any color on how you see this ramping in the coming quarters would be great.
So, we used that global sales meeting as our training opportunity with many of our sales professionals. That was in -- that was the end of January. We had hands-on training for them at that time. The beauty of MOJAVE is that it functions -- it provides the surgeon the ability to do things they haven’t been able to do before, but and a pause there, is that the instrumentation is so beautiful and easy to use that the surgeon can load it and with that instrumentation do all the adjustments they need to do without going in and out or going through a long complex learning process. So, there is not additional training required. We train our sales reps on how to use the instrumentation, but unlike a procedure where we would have to bring the surgeons in let’s say go through a cadaver lab before surgeon can use the technology. This doesn’t fall into that category.
And with regard to utilization, it’s really exciting because MOJAVE plays in the broader interbody space. The interbody space is a very large market, a multibillion-dollar market. The expandable space has had a few players that have done very well. And there hasn’t been a lot of competition. So, now we bring along expandable competition, but not it’s just an expandable, as we said earlier but can expand in ways others can’t and it’s 3D printed which we believe will lead to demonstrated over time very good bony ingrowth and bony ongrowth. So, that’s kind of the excitement, big buzz around the office here and in the field around MOJAVE.
And then, switching to the Spain distribution change. Thanks for the thoughts on the impact, in 2019. You mentioned sales and gross margin, I was wondering how you see it impacting on the EBITDA level. Will it be accretive there too? Any thoughts would be helpful./
Yes. Certainly accretive as well. That’s one of the main reasons we’re looking at it. We expect it to be accretive. We have changed the structure quite a bit. So, it will be fun for us to have some more control over that process and we continue to really be in-charge of driving that growth with our partner and be part of that process. So, it’s pretty exciting. It’s very exciting.
And then lastly on distribution, you talked before about this solid pipeline of new rep opportunities. Latest thoughts on growing the distribution force in the U.S. in 2018, any color you can provide there?
Absolutely. So that hasn’t changed. We reported the growth last quarter on what we were seeing with the overall growth. We continue to get the same interest we’ve always talked about. We get tremendous amount of interest from many of the other spine companies, those people wanting to come to K2. If you talk to those sales professionals, they are going to tell you, I’m just not getting the product technologies we need. We’re just not getting new technologies for our customers. Our customers are demanding innovation. You’re bringing in enormous 3D portfolio, what you’re doing in the area minimally invasive and differentiating and complex spine. I mean at the end of the day, it’s a combination of a corporate team focused exclusively on spine. That’s what we bring to the table. Innovation that is catching the surgeons’ attention; that’s going to bring them real value. And then those salespeople that want to be part of that growing team and that growing effort of new products and new technologies, like last year what I would say to you is you should expect from us again this year, roughly a 10% increase in feet on the street. And use that number because we’re trying to balance all that interest I talk about with also managing the bottom line. And so, it’s -- that 10% would be a number that we would be looking at going into next year and we have -- we do not have any type of shortfall in interest of people wanting to come to K2.
Your next question comes from Kaila Krum from William Blair. Your line is open.
So, in Spain, you’re suggesting perhaps an improved gross margin profile for that business and that it will be accretive and but you did not state EBITDA guidance. So, I guess, can you just walk through the puts and takes there? Is it simply too small the matter in 2018, and I guess when do you think that might?
Yes. That’s exactly right. 2018, it’s not a material impact and we’ll have some transition costs just getting it up and running in the new format. So, there wasn’t enough there to get excited about changing guidance for EBITDA this year. Again, it’s a $3 million number as opposed to something loftier in 2019. It will be much more accretive in the transition costs and will be behind us in 2019. So, we feel obviously much, much better about that. It would be much more accretive and we’d be able to give you much better guidance on that as we talk about our ramp plan for the products that we’re going to sell in that market. So, we’ve a little bit of time here in 2018 to work on that for you guys.
Your next question comes from Josh Jennings from Cowen. Your line is now open.
I was hoping to just ask first, understand that you -- K2 is not as the holding to market trends as one of your larger competitors but as we go into the second quarter here, the U.S market faces an easier comp. I’m just wondering, if your sales force is seeing anything or hearing anything,. if there is any buzz about improving trends as we march through April here, understanding it’s early in 2Q?
We’re not seeing demonstrably different trends from what we saw. Remember that we said that we thought Q3 was an anomaly last year. September was a tough month for everybody. And I think everyone kind of reported that for the most part. It’s a broad-based statement. Q4 was stable and growing. And as we went into Q1, we haven’t seen a change, they were growing. So, we saw that come as we went into October through the year and now as we go into this year. So, we don’t see any additional or different headwinds will not allow us to achieve our guidance this year, which we increased to $283 million to $287 million.
Great. And just as you think about the opportunity to replicate the Medcomtech agreement and restructuring in other territories, moving distributors to independent sales agents, are there other opportunities in other international regions? I just had one last question after that.
Absolutely. We’ve been talking about this for a while. And I know everyone is looking for margin guidance from us and we’ve been really hedging on providing margin outlook guidance, because we know the bigger pieces and chunks of margin to call back into K2M and to really structure big improvements on a year-to-year basis will come as we start pulling in some of these distribution channels under the tent, to really optimize the cost of that channel. We probably have a higher proportion of international distributor business than some but that’s what you do when you’re smaller and getting started. So, we’re starting to pull those pieces in, we’ve already identified a number of other areas that we’d like to evaluate. I don’t have any forecast or anything yet to talk about in terms of those markets. But, this has been on our radar screen for some time and we felt this is a tremendous opportunity to begin that process.
Your next question comes Kaila Krum from William Blair. Your line is open.
Hey, guys. Just a follow-up question. So, looking at your domestic growth at 8% in the first quarter. Is there any way you can parse out and quantify any product contribution within there?
We specifically don’t break that out. I mean, what we are seeing is underlying trends -- some of our product sometimes have predecessor products that would cover similar cases. So, it’s always difficult when you’re trying to get into specifically what a new procedure versus an existing procedure. But we’re seeing very specifically is that YUKON is covering a need that we did not have a product in the bag to fill in the past. So, this is a much greater, longer term opportunity for us. And that’s why we’re so excited about the launch of it. Lane, do you have anything you want to add on that.
Yes. Kaila, I would just add, I mean, we were talking about -- we’ve mentioned in the past this was arguably one of the best Alpha phase evaluation we had ever had. And as we gone into the launch of this product, it’s very much in line with what we experienced during the phase. I think it also validates our strategic decision to move forward with the PALO ALTO Cervical Static Corpectomy Cage being the only product with cervical indications in the U.S. because those products really do go hand-in-hand and it really just speaks to our leadership in complex spine which YUKON fills quite nicely.
Your next question comes from the line of Glenn Navarro from RBC Capital Markets. Your line is open.
Hi. Good afternoon, guys. Just a quick -- few quick housekeeping questions. First, can you quantify the contribution from Spain and Portugal to the top line in 2018? It sounds like it’s minimal, but just want to get a number. Number two, I noticed in your prepared remarks, you didn’t discuss your Australian distributor. So, any update on how that relationship is going? And then, lastly, I’m trying to get some color around sales force productivity, particularly the reps and the distributors that you brought on in 2016 and 2017. Are they fully ramped up? Where are we in their productivity cycle? Thank you.
All right. So, you’ve got three questions there. Let me start with Australia. No, actually, Australia is going extremely well. We believe that our Australian partners actually have moved to number one position in the Australian market from a market share perspective. Their growth has been very strong. The collaboration continues to go very well. And we’ve been very pleased with the ongoing engagement between our team and their team to understand the market, provide the products that they need and work with them on training and those types of things. So, we’ve been very pleased with our continued relationship with LifeHealthcare.
With regard to sales rep productivity. We’re in line with what we have said in the past. And that is that it is roughly, we’ve talked in the past, when you bring on a new sales professional, that sales professional sits out for a period of time that they have a non-compete often, or non-compete from the area that is their key customers. We obviously always respect that and wait through that period. And then after that they come back off that non-compete. And there’s a period by which they work to get back into the hospital to make sure -- or help to get our K2M products cleared into that hospital and then move back into their account. So much of that is starting to happen, especially from a 2016 hires but we’re still in their early innings. We’re in the early innings of those people that are getting up and running, which will help drive our growth as we go into ‘18 and ‘19, which is why we feel strong that K2M will be a best in class grower in ‘18 and continue to be a growth oriented business in the out years. And do you want to give more details on Spain?
Sure. Glenn, in terms of trying to help you think about Spain and why 3 million for 2018, they have been a sub 10% of the international revenue kind of player for us so it’s not a big market. They’re number one in deformity in Spain. But remember, we recognized revenue in 2017 at the wholesale level, not the retail level. So that’s -- they’re a sub 10% participant of our 2017 revenue internationally at a wholesale level. So, when we move to a retail level for the remaining eight months of this year, the increment should be about 3 million bucks of revenue on the growth of that business. So, we’re pretty excited about that. So, it’s a direct contribution into the P&L of $3 million.
I know, it’s a small number, but should we just put $1 million in our model for 2Q, $1 million in 3Q and $1 million 4Q, is that how we should spread out the $3 million?
Yes. That’s very reasonable. It’s over eight months; it’s from May 1st forward, not over evenly for the quarter. So, from May 1st forward, feel free to spread it evenly.
Your next question comes from the line of Michael Matson from Needham. Your line is open.
Hi. Good afternoon. This is David Saxon on for Mike. Thanks for taking our questions. First, can you talk a little bit more about the BACS 2.0 and if there’s any way to quantify the impact of that?
BACS 2.0 is our commitment to the space of healthcare digital platform, but its features improves user-friendly interface and ongoing improvements to our access of the BACS tools, again the modules are tools that exist today are BACS preauthorization, BACS Surgical Planner, BACS Anatomical Models, and our BACS Data Management, our BACS preauthorization as we noted is differentiated from anything we’ve seen in space. February and March are one year anniversary. So, we’re still very early on in this space, bringing our core competency of software development. But what I can tell you is that we continue to see what we had hoped we’d see, which is, it really helped us continue to get closer to our current customer base or new customers because they’re seeing offerings unlike anything they’ve seen from spine manufacturers before. So, that initiative has gone very well. I think our partnership with the ISSGF has been ongoing validation of this direction or initiative with, if you will. And as we continue to build out this platform and our commitment to this space, we’ll continue to bring that to your attention.
And then, at the Meeting of the Minds meeting, can you talk about what products the surgeons were most excited about and any feedback you guys got?
Sure. Thanks for asking the question about Meeting of Minds, because for us, it’s really our pinnacle meeting of the year. We always are just so impressed with the attendees and the conversations. People who come will often give us feedback that they feel like they’re at a mini SRS meeting, very, very positive conversations. And the products there, clearly going into deformity season, the meeting is always -- is strategically placed in April. So, there’s a lot of focus in our AIS areas of MESA 2, the NILE Proximal, but also we had Brainlab there. And there was a lot of excitement. Brainlab was at the meeting as well. They brought their technologies, lots of questions about Brainlab, how can Brainlab engage with these deformity surgeons to understand total body balance and really utilize the fact that the Brainlab unit provides a very large view of the spine with one turn, which is very helpful interoperatably for these surgeons to be able to look at the total spine, to get total bodily balance approach.
And MESA 2, NILE and then obviously we’re still getting questions even at that meeting, around our EVEREST platform, our 3D-printed, in every meeting we go to, we’re getting a lot of questions around 3D printing. The big take away from Meeting of Minds is just the fact that we have -- and we have said this before, but over a 100, very high profile and leading deformity surgeons from around the world that come together and engage around these topics that are right at the core of what K2M stands for and what we focus on.
Your next question comes from the line of Josh Jennings from Cowen. Your line is open.
Thanks guys. I just had one follow-up on new product introductions. Is it still the case that your current guidance does not include any new products that will be introduced this year? And can you just talk about, let’s think of the cadence of the new product introduction. I think in one of your early answers or prepared remarks, Eric, you talked about more broadening the family of potentially CASCADIA or 3D printed products. But how should be thinking about these new products as we go through the next eight months? Thanks again.
Let me take the guidance piece of that. So, you’re absolutely right, Josh. In terms of our 2018 guidance, we were focused on the products that we had either in Alpha or already launched, when we put together our guidance for the full year. So, any incremental products that we put into Alpha or launch in 2018 would be incremental to our original plans. So, there are certainly some of those opportunities. The way we -- I can let Lane talk about the development effort. As we committed to -- and to all of our investors each year, we plan to launch five to eight new products each year. So, the entrepreneurial engine for product launches is not going to stop that is going to be a core tenant of what we do. But, it gives us time to appropriately launch them, put them in Alpha and develop revenue expectations for you guys. And that is a helpful process for us.
Yes. I think, Greg addressed those details very well. We’re proud of introducing five to eight new products or line extensions, and we’ll continue to update all of you as we make that progress. But, when we look back already so far this year, we’ve been very proud with what we’ve got in the market. When we said we were going to get to it market. So, we anticipate we will continue to do just that.
That does conclude our conference for today. Thank you for your participation.
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