Thank you for standing by, and welcome to the STAAR Surgical 1Q 2020 Financial Results Conference Call and Webcast. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your speaker today, Brian Moore, Vice President, Investor, Media Relations and Corporate Development. Thank you.
Please go ahead.
Thank you, Jesse, and good afternoon, everyone. Thank you for joining us on the SCAR Surgical conference call this afternoon to discuss the company's financial results for the Q1 ended April 3, 2020. On the call today are Karen Mason, President and Chief Executive Officer and Deborah Andrews, Chief Financial Officer. The press release of our Q1 results was issued just after 4 pm Eastern Time and is now available on STAAR's website at www dotstaar.com. Before we begin, let me quickly remind you that during the course of this conference call, the company will make forward looking statements.
We caution you that any statement that is not a statement of historical fact is a forward looking statement. This includes remarks about the company's projections, expectations, plans, beliefs and prospects. These statements are based on judgment and analysis as of the date of this conference call and are subject to numerous important risks and uncertainties that could cause actual results to differ materially from those described in the forward looking statements. The risks and uncertainties associated with the forward looking statements made in this conference call and webcast are described in the Safe Harbor statement in today's press release as well as STAAR's public periodic filings with the SEC. Except as required by law, STAAR seems no obligation to update these forward looking statements to reflect future events or actual outcomes and does not intend to do so.
In addition, to supplement the GAAP numbers, we have provided non GAAP adjusted net income and adjusted earnings per share and sales in constant currency. We believe that these non GAAP numbers provide meaningful supplemental information and are helpful in assessing our historical and future performance. A table reconciling the GAAP information to the non GAAP information is included in today's press release. Following our prepared remarks, we will open the line to questions from publishing analysts. We ask analysts limit themselves to 2 initial questions, then re queue with any follow ups.
We thank everyone in advance for their cooperation with this process. And with that, I'd now like to turn the call over to Karen Mason, President and CEO of STAAR.
Thank you, Brian. Good afternoon, everyone, and thank you for joining us on today's call. Let me start by saying that the health and safety of everyone around the globe remains paramount, and we continue practicing by countries served the directives from national and local governments and public health officials. We have been fortunate at STAAR that our global employee team has fared well through this most difficult of times. We continue to wish the best for all of our surgeon partners, their staffs and patients, frontline health care workers, shareholders and analysts and their teams.
The Q1 results we reported today illustrate the advantages of STAAR's positioning as a global company with business in over 75 countries. STAAR achieved admirable growth despite COVID-nineteen headwinds causing a pause in elective procedures across different markets and at various durations. Global ICL unit growth in the Q1 of 2020 was up 9% as compared to the prior year quarter. With European distributor business usually more heavily weighted to the 3rd month of the quarter, China not performing ICL implants for 7 weeks of the quarter and the rest of our markets mostly shut down for the last 2 or 3 weeks of the quarter, the terrific start in January and the momentum in Asia late in the quarter really proved to be significant. Consistent with the business update we provided on April 13, ICL units grew strongly in key Asian geographies.
1st quarter year over year ICL unit growth was as follows: Japan units up 79%, Korea units up 14%, China units up 7% and the rest of Asia Pacific, excluding Japan, Korea and China, up 37%. STAR also achieved solid unit growth in markets outside of Asia. In Canada, ICL unit growth was up 10% in the first quarter, And in Germany, ICL unit growth was up 5% even with the discontinuation of procedures commencing in the 2nd week of March. I am pleased to report that we resumed production last Monday, April 27, at our Monrovia and Aliso Viejo California manufacturing facilities. We have implemented wide ranging COVID-nineteen safety enhancements and protocols at both facilities.
With respect to our U. S. EVO clinical trial, our contract research organization is providing clinical study support to the EVO principal investigators, including the restart of patient enrollment following a pause associated with recommendations from states and medical societies with respect to elect procedures and clinical trials. Several At this time, all of our principal investigator sites plan to reopen by May 15. Our EVO EDOF lens for presbyopia remains under review by DECRA, our notified body.
The pandemic may cause a delay in DECRA's response to our submission. Still, we remain optimistic our EDOF lens will be approved and introduced in a staged rollout to CE Mark countries either in the second or third quarter of this year. Designed for early presbyopes ages 45 to 55, our EVO EDOF lens targets millions of eyes of opportunity for STAR for those who want to dispense with their reading glasses. I am pleased to announce that ANVISA, Brazil's health regulatory agency, renewed the approval of STARZIVO lenses for promotion recently after
a protracted review cycle. Brazil is
a country with an affinity for aesthetic procedures and the largest refractive surgery market in Latin America. We are excited to resume sales in this market during the Q2 of 2020, subject to the potential impact of COVID-nineteen on surgeons or patients. Governments and public health officials globally are beginning to lift stay at home, work and other restrictions in many hotspot geographies. For example, ophthalmic surgeons in China, the largest refractive procedure market in the world, are once again performing EVO ICL procedures across the country. Preparation for the upcoming peak implant season is well underway with planned advertising and patient marketing events.
As our key customers begin to resume work around the world, there is significant interest in growing their ICL and EVO lens business as we have been reporting since November of last year. The move to lens based surgery continues. During numerous and well attended virtual webinars and education events sponsored by STAAR and select societies around the globe, the question and answer sessions would routinely go an hour or longer than scheduled regarding ICL patient profiling, surgical technique and practice development recommendations. The reasons most often cited by our customers as we surveyed them for their interest include an emerging EVO patient profile that is younger and perhaps less concerned about COVID-nineteen than an older demographic as well as a higher profit per eye with an EVO procedure than many other refractive procedures. The COVID-nineteen pandemic is highlighting the utility of our EVO family of lenses, not only for surgeons but for their patients as well.
Patients' stories of lost disposable contact lenses, fears of running out of contact lenses, glasses that fog up while wearing a mask and concerns about not touching one's face or eyes have been more prevalent on social media in recent months. Front line healthcare workers are perhaps experiencing these challenges most acutely. Recently, a U. S. Surgeon posted the following note online regarding a frontline worker requesting ICLs.
After 5 weeks out of the OR, it feels so great to be back, taking care of 1 of our own today, a nurse who treats patients in the hospital and feels unsafe touching her eyes to manipulate her contact lenses right now. In closing, I'd like to comment on how we see the months ahead. As previously noted in discussions with our surgeon partners, it is clear that there is a strong desire to resume refractive surgery quickly once elective procedures are allowed by local government and public health authorities. However, we expect that Q2 will be negatively impacted by the markets that are just returning to reopen their clinics and practices in late May into June. We started 2020 off with the highest ICL sales and YID growth experienced in the last 5 years in a January timeframe.
In every open market, that trend continued into the middle of March. The large Asian markets are growing well now. Unless there is another forced closure or challenging COVID-nineteen scenario for surgeons and patients beyond Q2, we fully expect to resume the double digit growth outlook originally targeted for Q3 and Q4. Those are my prepared remarks. I'll now turn the call over to Deborah to further review our Q1 financial results.
Deborah?
Thank you, Karen, and good afternoon, everyone. I'll start with the financial review with a summary of top line results and then provide more detail down the income statement. STAAR reported net sales of $35,200,000 for the Q1 of 2020, an 8% increase over the 30 $2,600,000 reported in the year ago period. Top line growth was driven by $1,600,000 or 6 percent sales increase in ICLs and a $1,000,000 increase in other product sales, primarily injectors and injector parts. ICL sales represented 83% of total company sales for the Q1 of 2020.
Moving down the income statement. Our gross profit margin for the first quarter was 70.4% as compared to 74.2% in the prior year quarter. Gross margin in the first quarter decreased The remaining 220 basis point change was primarily due to period costs associated with the expansion of manufacturing capacity. In the Q2, the company expects to record $1,400,000 of manufacturing charges associated with the 6 week pause in production at our California facilities that would normally be capitalized inventory. Total operating expenses for the Q1 were $25,900,000 an increase of 15% compared to the prior year quarter of 22.6 $1,000,000 The company did begin moderating non essential variable spending in February.
Taking a closer look at the components of operating expenses, G and A expense in the Q1 was $8,000,000 compared to the prior year quarter of $6,800,000 The increase in general and administrative expenses was due to increased headcount and salary related expenses, increased tax consulting costs and increased facilities costs. Marketing and selling expenses were $11,000,000 compared to the prior year quarter of $10,100,000 The increase in marketing and selling expenses was due to increased advertising and promotional activities and increased headcount and salary related expenses, partially offset by decreased travel expense. Research and development expenses were $6,900,000 compared to the prior year quarter of $5,600,000 The increase in research and development expenses was due to increased clinical expenses associated with our EVO clinical trial in the U. S, increased quality validation expenses and an increase in headcount and salary related expenses. Because we and our customers remain optimistic for the future of refractive surgery, we have not reduced our workforce and continue to invest in the future while prudently managing variable spending where we can.
During the quarter, we released another 1 point $4,000,000 of the valuation allowance against our deferred tax assets due to a shift in forecasted foreign income, which caused more of the NOL to be used to offset domestic income in profitable years, thereby increasing the benefit of the NOLs and the VA release. The operating loss in the Q1 of 2020 was approximately $1,100,000 as compared to an operating profit of $1,600,000 in the year ago quarter. The net loss for the Q1 was $100,000 or approximately breakeven on a diluted per share basis as compared to net income of $1,400,000 or $0.03 per diluted share in the year ago quarter. On a non GAAP basis, adjusted net income for the quarter for the Q1 was $1,900,000 or $0.40 per diluted share as compared to adjusted net income for the year ago quarter of $4,300,000 or $0.09 per diluted share. A table reconciling GAAP information to the non GAAP information is included in today's financial release.
Turning now to our balance sheet. Our cash and cash equivalents at April 3, 2020, totaled 110,900,000 The company used $8,200,000 in cash for operations due primarily to an increase in accounts receivable and due to the payment of bonuses, both of which are typical in the Q1. In Q1 2020, we also experienced an additional increase in AR due to COVID-nineteen related delayed payments. Based on discussions with our largest customers, we expect to end Q2 with more cash than Q1. Fortunately, our past due receivables were at an all time low at the beginning of the quarter and the company expects collections to resume as elective surgeries are permitted and customers return to their practices.
The company also invested $2,200,000 in property and equipment during the quarter. These uses of cash were partially offset by $1,300,000 in cash from financing activities, primarily stock option exercises. As a reminder, the company typically generates most of its cash in the second half of the year and the company does anticipate a year over year increase in cash. We believe our cash balances and operating cash flows, including anticipated cost containment measures, will provide sufficient liquidity for the next 12 months and beyond. This concludes our prepared remarks.
Operator, we're now ready to take questions.
Thank you. Your first question comes from Cecilia Furlong with Canaccord Genuity. Your line is open.
Hi, Karen and Deborah. Thank you for taking the questions. I wanted to ask just about what you're seeing to date in China as they're coming back. Just in terms of relative center capacity, given enhanced sanitation practices, how you've seen that trend as they've slowly started to ramp volume and where that goes going forward relative to pre COVID level?
Thank you, Cecilia. Appreciate your calling today. Regarding China, when China first started to reopen, there were what I would call extraordinary safety measures that would limit substantially the normal pace of patient procedures. In that there was an hour or 2 hours between patients for very strong application of sterile procedures to be sure that there would be no possible transmission of virus. As time went on through April, there was more confidence in being able to increase and being able to increase capacity and still maintain exceptional safety and security for patients.
So what we're seeing is a ramping up in China at an aggressive level in terms of the number of patients who are in waiting rooms, which we happily receive videos of from our China team. In terms of the amount of special promotions that the largest clinics, hospitals and practices are putting into effect. In fact, during the recent timeframe of May 1 through May 5, there is an Asia Golden Week and there are special holidays. And a number of retailers we're providing promotions and young people in our major markets like China and Korea and Japan, we're very much excited about in scheduling their ICL surgeries. So I believe that in our large Asian markets, China of course set the lead.
We're seeing some really exciting fundamentals back in place. We're seeing productivity and we're seeing the right concern obviously about patient safety.
Great. Thank you for all the color. And then I guess just turning to the U. S. Trial, I recognize some centers are starting to enroll again.
Can you talk about just how centers were able to engage with patients in the interim, maybe build patient funnels in those centers that haven't yet opened and what their positioning will be when they do open to really start and ramp procedures back up?
Sure. So our contract research organization, as I mentioned in my April 13, state of the business report, have maintained constant contact with each of our clinical trial sites. And each of those sites were in a different phase with regard to screening patients, evaluating the results of the screenings, scheduling patients, actual implantations and implantation follow-up, all according to the protocol of our FDA study. So during the time frame when these clinics were not open, everything related to clinical trial and making sure that we were absolutely not deviating in any way from protocol requirements continued. And so what we're seeing now is as a result we're just picking up where we left off.
And so depending upon where you were in the queue in terms of waiting for an implant or waiting to be determined whether you qualify as a patient, all of that work really continued unencumbered and appropriately. And so now we're really excited that by the middle of the month we expect every site to be up and running and open.
Great. That's great to hear. Thank you, Karen.
You're welcome.
Your next question comes from Chris Cooley with Stephens. Your line is open.
Good afternoon. And 1st and foremost, hope you're doing well. Hi, Craig. Hey, and also congrats on the results in a very challenging period. I guess just first for me, if I could maybe follow on to that last question on the EVO trial here in the States.
I think many of us have been assuming there's obviously been a push out of sorts there in terms of timing. But could you, I guess, press a little bit more here, maybe give us some more color as to how far along you are in terms of total enrollment? Do you think this essentially puts you back by a quarter? Do you think it's a couple of quarters? I'm just trying to get a better read on time to completion versus maybe your original expectations for EVO trial?
Then I have a follow-up. Thank you.
Well, we have not changed the dates on our clinical trial protocol, which we just updated on clinicaltrial.gov. So we are continuing to run to our original completion time frames. Where we end up, if we need to adjust based on how things go over the next 2 to 3 months, we'll do so. But at this point in time, we've made no adjustment on our clinical trial protocol commitments.
Understood. Appreciate that. And then I guess just lastly for me, I'll get back in queue. Could you contrast for us maybe just when you think about the various countries that comprise the Asia Pac region in particular and then to a lesser extent, the European theater. Just some of the regional differences you saw throughout the course of the quarter
and kind of
where you exited through the quarter from a run rate basis. That way we can kind of maybe get a little bit better baseline expectation about the decline that we should see here in the calendar 2Q before you resume the double digit growth that you had referenced in the press release and on your prepared comments? Thank you.
Sure. Thank you, Chris. So we made sure that we got information on every one of the markets we serve both direct, hybrid and also of course full distributor coverage from our country managers and our team and our executive team several times a week. And most of the time, we would have a different point of view than what you might have been reading in local media or national or global media. When we look at Europe, definitely Spain, Italy were impacted greatly, and those markets shut down permanently.
However, even in the worst of times, some of the best training, education and virtual connection was happening with our Spanish and Italian surgeons, as well as in other parts of France, for example, the Netherlands, etcetera, Belgium. When we look at Germany, Germany had some clinics that remained open most of the time that others were shut down in other parts of Europe. Germany still, of course, practiced the appropriate guidelines and work at home. But we found that in Germany, which probably contributed obviously to their growth, surgeons were continuing to provide patients who wanted them ICLs. We've had some interesting stories I'm going to share very quickly 2 of them.
One is that one of our European patients has actually had her ICL experience tattooed on her arm from top to bottom and was unable to have them completed because the tattoo parlor was shut down, but she was so taken with the life change that during the COVID shutdown, she was on social media showing her tattoo in progress and how everybody should get ICLs because her life had so dramatically changed. We also had a German bachelorette from the Bachelor Show who also was covered during the shutdown for her ICL enthusiasm in multiple magazines and trade publications. So in Europe, we really had the gamut between what we would call closed, emerging and open. And those are the 3 categories that we would check multiple times a week to determine what we needed to do and when. We also kept a running tab of all of our webinars, etcetera.
And then we also created a library of educational excellence that we shared around the globe. When you look at Asia, Korea really never slowed down. Korea continued to do the right thing, but the surgeons managed to be open through their challenge. Same with Japan, even in the heist recently of shutdown, Japan continues to aggressively help patients who really want to be visual free with visual safety. And then also, obviously, China, we were shut down from the end of January through the end of March, a little bit into March, and then we really saw the pickup in the last few weeks in April.
Your next question comes from Ryan Zimmerman with BTIG. Your line is open.
Great. Thank you. Karen, your commentary about double the double digit outlook remaining intact in Q3 and Q4. I wonder if you could put a finer point on that. Is that irrespective is that indicative of your original guidance of 16% to 20% heading into the year?
Or is that just double digit broadly? I'm just wondering if you could frame that a little more. And then my second question and I'll ask you right now is particularly around pricing in the quarter. Last quarter, we saw noticeably higher pricing driven by toric uptake in the U. S.
And so the implied pricing here is a little bit lower this quarter. I'm just wondering if you can kind of comment on your expectations for pricing through the balance of the year. Thank you for taking the question.
Sure, Ryan. With regard to double digit growth getting we hope to be able to achieve in Q3 and Q4, certainly based on where we are in each of the markets that we serve regarding COVID-nineteen and any public health directives. But if in fact we have a more normal operating environment, our practices and elective surgeries are allowed. Our expectation is that we should be able, especially in our highest growth markets, we should be able to achieve in units growth on a relative basis above 20%. That's and we think we can do better if at all possible.
But at this point, it's hard for us and there's no real outlook that I'm providing for the right reasons. But what I am seeing is that in those markets where they're open for business and where they reclassify them in O, we are seeing double digit growth now.
Appreciate that.
With regard to pricing, yes. So it really depends on mix when you're looking at our ASPs, how many torics are out there, as well as what we're doing in the Spheric world. At this point, we do not believe there's going to be pressure on our ASPs. I think we're going to end up having that becoming quite positive for us. We will be advancing some support in surge for surgeons around the world in special promotions that we think are going to really advantage in 2 ways.
One is we want to give surgeons tools to bring back their patients as soon as possible. And second of all, we want to help where we can help to encourage for periods of time during opening, maybe a month or 2 that we provide lenses here and there, to help. So I think overall, it's got to be a great combination of supporting the surgeons, pricing to the market and also managing to get higher demand faster.
Your next question comes from Jim Sidoti with Sidoti and Co. Your line is open.
Hi, good afternoon. It's good to hear your voice. I hope everybody is well.
Yes, same here Jim. I hope the same to you.
Deborah, can you just repeat the comments you made about the charge you're going to take in the Q2? I missed that.
Yes. Well, because the facility, the plant was shut down for a month, basically or 6 weeks, because we didn't manufacture any product and of course we didn't lay off any employees. The operating expense, the manufacturing expense for that 6 week period will have to be recorded as a charge on the P and L and that equates to about 1,400,000
dollars Okay. And will that go into gross margin?
Yes.
Okay. All right. And obviously, your accounts receivable up in the quarter. Do you think this brought you some goodwill with those accounts and something you can leverage later on in the year?
Well, definitely our customers have been very appreciative of our understanding of the circumstances during this really tough time. But we stayed in very close contact. The good news is that we've been in very, very close contact with all of them. They've been very responsive. It's not like they're not picking up the phone or answering our calls or whatever.
And we've had a lot of interaction, as Karen mentioned, with sales training meetings and things like that to stay in touch. So right now, in fact, I got a great e mail today summarizing our situation internationally. And it looks like we'll start to get back on track here in the second quarter and then hopefully return to normal in the 3rd quarter.
Okay. And the increase in PP and E in the quarter, which plant was that?
A little bit of everything. We made a number of manufacturing improvements in Monrovia, Lake Forest and in our Swiss facility in Neto.
So if you do have a big pickup in Q3 and Q4, you think you have capacity for that?
Absolutely. Absolutely. What we did is we made the decision to discontinue production out of an abundance of caution for our employees when the fear was at its highest and concern was at its greatest. And over time, on a weekly basis, we communicated with all of those employees, told them all the policies that we were looking at, all the protocol changes, all the safety enhancements that we would have. So when our employees came back, I can tell you it wasn't a long path to productivity.
It was immediate productivity. And we know we will have the inventory
And there are no further questions. I turn the call back to Karen Mason for any closing remarks.
Thanks everyone for your participation on our call today. We look forward to speaking with many of you in the days and weeks ahead. We will be participating in virtual investor conferences and excited to speak more with you then. We always appreciate your interest and investment in STAAR. Please take good care.
All the best to all of you.