Good day, ladies and gentlemen. Thank you for standing by. Welcome to the STAAR Surgical Fourth Quarter and Full Year 2018 Financial Results Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the call will be open for questions. [Operator Instructions].

This call is being recorded today, Thursday, February 21st, 2019. At this time, I would like to turn the conference over to Mr. Brian Moore with EVC Group. Please go ahead..

Thank you, Cantus, and good afternoon, everyone. Thank you for joining us on the STAAR Surgical conference call this afternoon to review the Company's financial results for the fourth quarter and fiscal year ended December 28, 2018. On the call today are Caren Mason, President and CEO of STAAR Surgical; and Deborah Andrews, Chief Financial Officer.

The release of the fourth quarter results was issued just after 4:00 p.m. Eastern Time and is now available on STAAR's website at www.staar.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 risk 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 assumes 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.

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 today, we will open the line to questions from publishing analysts. We ask analysts to limit themselves to two initial questions then re-queue with any follow-ups. We thank everyone in advance for their cooperation with this process. At this time I'd like to turn the call over to Caren Mason, President and CEO of STAAR..

Thank you, Brian, and good afternoon everyone. 2018 was an exceptional year for STAAR. We achieved record net sales, record ICL sales, significant gross margin improvement and positive net income for the 12 months that ended December 28, 2018. And we are positioned to set new records for these four financial metrics during 2019.

In this breakout year for our business, we believe we have made noteworthy progress towards paradigm change in refractive vision correction delivering visual freedom. Implanting an EVO ICL lens to correct Myopia is becoming a preferred surgical solution as evidence by global ICL net sales surpassing the $100 million revenue mark for the first time.

This milestone was achieved through exceptional 54% ICL unit growth for the year. A rate that demonstrates the global momentum in our business. For 2018 total ICL net sales grew 48% over prior year. On a regional basis we achieved solid double digit ICL sales growth in most of our markets.

China grew 91%, Japan 90%, Korea 37%, Germany 31%, the rest of our Asia Pacific distributed market 22%, Canada 21%, Europe 21%, and the Middle East 21%.

In terms of momentum going into 2019, we ended 2018 with strong ICL sales and units growth despite moving into a seasonally weaker fourth quarter for refractive procedures in our highest volume market which is China. ICL unit volume growth in China over the fourth quarter of last year was 99%.

China is the largest refractive market in the world representing approximately one quarter of refractive procedures globally.

We believe the high level of Myopia in the China population, the increasing demand for the ICL down the vision correction of our diopter curve and our uniquely successful business model for our strategic partners is also contributing to our high level growth in China.

Ultimately, our strategy of building the refractive market for visual freedom through surgeon training and certification, practice development, consumer outreach, patient education, digital marketing and strategic agreements with our customers has position the ICL in more and more clinics and doctors’ offices as a premium and primary solutions for vision correction around the globe.

EVO ICL only clinics are opening, and many others are already offering primarily ICL lens implants in both Asia and Europe. And ever more data supporting the safety and effectiveness of the ICL is being published. In December of 2018 Dr.

Mark Packer published literature review of 67 papers from 10 countries on the EVO lens in the Journal Clinical Ophthalmology. The analysis covered 600 eyes with up to five years of follow-up, concluding that improve safety and effectiveness across the broad range of refractive errors make EVO an attractive option for surgeons and their patients.

Our clinical study, clinical validation and the publishing of numerous preview [ph] papers supports continued adoption of our ICL refractive products. We have submitted our EVO PMA supplement to the FDA for review. We will not be entertaining questions on our progress regarding this process.

We are very appreciative of the dedicated team at CDRH for working with us even through a number of government shutdown dates. With regard to our pivotal trial for the EVO with EDOF lens for presbyopia, the patient enrollment for our European trial is complete and we are conducting the required six-month patient follow-up for this study.

Once we complete this follow-up, our plan is to submit our CE Mark application to our regulated body by mid year 2019. We look forward to sharing data from this study more broadly in the future when permitted and appropriate.

Throughout 2018 we executed our plan to make targeted investments design to foster continued growth including the launch of the Toric ICL in the United States and future ICL product launches. Even with these investments we own $0.02 per share in the fourth quarter and a $0.11 per share for the year.

We also generated $12.8 million in cash from operations during the year and had $104 million in cash and equivalents on the balance sheet at year end.

To continue STAAR’s strong growth in 2019 and to ensure STAAR’s readiness for continued strong growth well into the future we have established the number imperatives for 2019 which require prudent investment in capital and operating expense. For expansion of the ICL in the U.S. we are in the process of establishing a U.S.

surgeons console with a strong cadre of ICL expertise and key opinion leaders and we will partner with for the rebuilding of our U.S. business and the pending addition of our EVO ICL products. Several of these prominent surgeons were first implanters of our recently launch Toric ICLs in their respective markets in the U.S.

We are planning for making additional investments in 2019 and manufacturing and facilities expansion that includes the doubling of manufacturing capacity at our Monrovia California facility for our Myopia ICLs.

The reopening and expansion of our manufacturing and distribution facilities in Nidau [ph] Switzerland, to manufacture EVO ICL primarily for sale in Asia and in coming years Europe as well. We are also moving outside the U.S. administrative and sales to marketing offices to larger quarters in Nidau.

We've begun moving into newly renovated Lake Forest facility which now includes our executive and corporate offices. We are preparing for the validation of our Lake Forest facility for the manufacturing of our ICL with EDOF for presbyopia lenses expected to be for sale initially in CE Mark countries.

Other inheritance include continued market penetration in China where we have create chair fivefold in less than three years. Continued market share gains in all global markets with increasing adoption of low and mid diopter ICL. Increasing investment in direct-to-consumer marketing and patient education in targeted markets.

Strengthened existing and new strategic agreement and alliances with global partners at contracted unit volumes and prices co-marketing initiatives, practice development programs, surgeon training, patient education and clinical research projects.

And so on conclusion, our outlook for 2019 is as follows; ICL unit growth percentage target increase of 30% plus over 2018. Overall revenue growth percentage target increase of 20% over 2018.

Our overall revenue target is expected to be impacted by our other product segment sales decline of approximately $3.6 million including a $2.6 million reduction in sales of low-margin injector parts. GAAP net income is anticipated to increase over 2018 and we anticipate achieving positive full year cash flow and cash balance increases.

Those are my prepared remarks. I’ll now turn the call over to Deborah to further review fourth quarter and full year financial highlights.

Deborah?.

Thank you, Caren and good afternoon everyone. I’ll start the financial overview with the summary of topline results and then provide more detail down the income statement. STAAR reported net sales of $31.2 million in the fourth quarter of 2018, an increase of 26% over the $24.9 million reported in the year ago.

As Caren mentioned the strong topline increase was driven by ICL revenue growth of 41%, which represented 84% of total company net sales in the quarter.

Moving down the income statement, our gross profit margin for the fourth quarter was 73.7%, up 380 basis points compared to the prior year quarter gross profit margin of 69.9% and while total company net sales increased 26% gross margin dollars increase 32.3%.

The improvement in gross margin was due to favorable product mix resulting from increased sales of ICL and lower freight inventory provisions partially offset by the effect of lower ASPs for lower diopter ICL and large volume commitments strategic partners.

Total operating expenses for the fourth quarter were $21.8 million, an increase of 17% compared to the prior year quarter of $18.6 million. Taking closer look at the components of operating expenses, G&A expense in the fourth quarter was $6.2 million as compared to $5.1 million a year ago.

The increase in G&A spending is due to increased headcount and salary related expenses including stock-based compensation and increase facility costs. Marketing and selling expenses were $9.9 million as compared to $7.9 million and included increased headcount and investments in digital, strategic and consumer marketing.

Our R&D expenses were $5.7 million compared to $5.6 million in the year ago quarter. R&D expenses include headcount, compensation and clinical expenses related to our next generation ICL with EDOF optic for presbiops. We generated net operating income of $1.2 million during the fourth quarter.

Net income during the fourth quarter was $1.1 million or approximately $0.02 per diluted share compared to a year ago net loss of $0.1 million or approximately breakeven per share.

On an non-GAAP basis we reported adjusted net income for the fourth quarter of $3.2 million or $0.07 a share as compared with adjusted net income for the same period of 2017 of $0.8 million or $2 a share. A table reconciling the GAAP Information to the non-GAAP Information is included in today's financial release.

At point its probably worth reminding our analysts and investors, we do have regular visibility into the ICL inventory at our larger distributors.

For example, we can communicate that as of February 15, 2019 our distributor for China our largest distributor by far held an approximate 30 to 35 day inventory of our lens is consistent with historical levels.

Turning to our full year financial performance for the full year 2018 and to December 28, 2018, total company net sales grew 37% to $124 million. And our gross margin expanded approximately 290 basis points year-over-year to 73.8%. ICL sales for the full fiscal year 101.1 million, up 48% from the prior year.

Turning now to our balance sheet, our cash, cash equivalence and restricted cash at December 2018 totaled by $104 million compared with a 102.3 billion as of September and 18.6 million at the end of prior fiscal year.

The company generate approximately $2.3 million in cash from operating activity, So in the fourth quarter of 2018, for the full fiscal year 2018, the company generate $12.8 million in cash flow from operations, as compared to $2.9 million in the prior fiscal year.

The increase in cash on the balance sheet for fiscal year 2018 is due to cash generated from operations and proceed from approximately $2 million cash of common stock issued during the third quarter. This includes our prepared remark. Operator, we are now ready to take your questions. .

Thank you. [Operator Instructions]. And our first question comes from Jason Mills of Canaccord Genuity. Your line is now open..

Hi, Caren. Thank for taking the question. We had a two part first question and then I’ll hop back after you answer that I’ll ask the second one. Deborah, sort of in to the first part of my first question, which was respect to the inventory levels. There’s obviously been some negative accusations with respect to that Chinese distributor.

Maybe elaborate a little bit on what, Deborah, went into -- specific to the patient demand, the employee demand, the demand you had for ICL, over the world relative to growth rates you put up over these last six, eight quarters, which is really the period of time that the business has changed remarkably from a growth perspective? And then second part of that question is specific to China.

What is China represent in terms of 2019 growth relative to what you gave for the full – for the global growth of 30% plus?.

Okay. Jason, in terms of inventory levels in China as Deborah said, we’re running at 30 to 35 days. And through the first six weeks of 2019 patient demand is up substantially, so that the amount of inventory that’s slowing out of the warehouse is going expediently faster than the amount that we’re currently selling.

So we expect certain large orders that committed volume from our importer by the end of the first quarter to be on target to our 30% plus growth expectation.

In terms of China representing 2019 growth at what percentage? We’re not going to disclose that, but we can tell you is that their continuing to be a high-level performer in growth as we begin 2019, and we expect that to continue throughout the year.

Remember that, our largest customers in China are working with us very closely as partners under our strategy cooperation agreements, we have full visibility to inventory at the importer. We are aware of what’s being ship to sub-importers and we are very aware of what it do us in terms of contractual obligation throughout the year..

Thank you for that, Caren. That’s very helpful. And then the second part of the question has to do with the U.S.

So you ran through growth rates for 2018 and obviously cheaper among them was not the United States growth, and we know why? It’s not been a fast-growing market for you here to pour, but just those that comment you talk about the supplemental filing of the EVO family of lenses.

And why you said, you’re not going to talk too much about it, I'm guessing from a guidance standpoint,. maybe we can talk a little bit about facts associated with that filing.

What sort of guidance you been given in terms of the length of that review whether or not your ICL guidance from year has any in it for EVO sales in the United States? And whether or not it implies just as a matter of fact that the FDA is going to look at what you’ve given them so far at this point in time has not suggested they need any more information specifically prospective data, anyway we’re just working facts for a bit.

Appreciate your thoughts? Thank, Caren..

So in terms of U.S. numbers, as we said, we did grow 16% in the fourth quarter, and as we are beginning the year we are ahead of our projections in terms of what we expected from Toric ICL placements in the U.S. through six weeks.

So we like what we see in terms of trends in the U.S., but no, none of the EVO family of lenses is in our projections as we look at it 20% total sales growth for the year for the company. So there is potential upside assuming that there were some possibility that we would be able to bring EVO in this year.

My reasons for not wanting to talk about FDA process and progress is because as much as I appreciate the – what I consider is exceptionally strong performance of our regulatory and clinical teams and the work that they are doing and the excellent relationship we’re building the CRH, its just not appropriate for us to comment on timing et cetera.

What I can confirm is that they are reviewing our supplemental submission which does include retrospective data as part of the analysis..

Got it. Thanks guys. I’ll get back in queue..

You you're welcome, Jason..

Thank you. And our next question comes from Brian Weinstein of William Blair. Your line is now open..

Hi, Caren, hi, Deborah, this is actually Andrew Brackmann on for Brian. Maybe we could just go back to the 30% ICL growth for 2019.

Could you maybe talk a little bit about the process that you guys have in order to get to that number? What are the sort of indicators that you’re looking out in 10 months out that you think that you’ll end the year, is that over 30% growth rate? Thanks..

Thanks very much, Andrew. So, we have the typical review process where we look at each of the markets. We’re aware of what the economics and demographics and what the buying cycle is there in terms of patient out of pocket especially at high income levels.

We look at the number of surgeons we’re training and adding, we’re looking at the number of strategic collaboration agreement. Of course is a high-level view of what growth will be. And what we normally find is that our strategic cooperation partners are signing up for more and more higher percentages than the 30%.

So that gives us some confidence in terms of strength in committed partners. And then we also add in all of the new business that we are working on and the timing for that business throughout the year. So for example, in the U.S.

we already are aware of course, in each of the major markets which surgeons are most excited about making ICL and in the future EVO, a bigger and bigger part of their business model and clinical offerings. And so we look at them in terms of their willingness to begin now.

Their willingness to sign-up as strategic partners for a future with EVO et cetera. and then we balance that.

And we also look at downside for example ,in Canada, unfortunately one of our largest implanters has fallen ill, and so we are working on helping him with other surgeons who are working with his practice, as well as signing up additional business.

So I mean obviously we look at the gamut of what we can do, what we're sure will do and what the pressure is an opportunity is for upside..

Much appreciated. Thank you. And then maybe the second question, China, this sort of a mix report on health of the consumer in that area. For your demographic could you talk about what the health of your Chinese consumers is right now? Thank you..

Well, we are very bullish on our customers, our patient in the Chinese consumer. Our strategic partners continue to tell us that they are very confident in what they have committed to. And again, you got to always look based on what is being said versus what we’re seeing.

So we know that they’re talking about 8.6% GDP of the consumer in China versus 8.8% or what it used to be. With regard to us after six to seven weeks the number of implants, is that been the same neighborhood as our growth. So, we are not seeing a decline..

Thanks, Caren..

You’re welcome, Andrew..

Thank you. And our next question comes from Chris Cooley of Stephens. Your line is now open..

Good afternoon, Caren and Deborah and congratulations on exiting $100 million, it’s a nice yields, so it’s a great milestone..

Thank you..

Just a couple of quickies from me. I just want to make sure I fully understand the guide, so I’m not concerned about the other surgical decline with the injectors there. But your guidance is calling for 30% unit growth in ICLs and 20% corporate growth.

So, just want to make sure I’m thinking about the decline or the stability in the traditional IOL franchise and kind of thinking about price versus volume on the ICL. If you could maybe just help us frame that a bit? And then have one quick follow-up..

Sure. So, we are projecting about a $1 million decline in IOL business, but then, through the beginning of the year it’s a little stronger than we expected. But right now when you take a look at growth of over $124 million you first need to deduct that $3.6 million and you really looking at $120 million.

So, when you add that 30% units on ICL you could see that we would be in the 28% plus growth. Had there not been that reduction.

With regard to ASPs, when you take a look at the growth level where we are right now and I look for the full year of 2018 we’re talking about a 4% ASP decline on what was a 54% unit growth, so I’ll take those numbers any day..

Right, right. I agree. I just want to clarify. Thanks so much on that.

And then from an operating expense standpoint and then you appreciate again, generating cash for the full year, but help us just think about, you have some pretty aggressive scale out taking place now, while that’s appreciate its going to be so much easier to come to see you guys and like for us to suppose to Monrovia [ph], but when we think about all that’s going on there, help me think a little bit about gating again on the related operating expense.

And how should we think about unabsorbed overhead from a capacity standpoint here in 2019 where we’re thinking about our gross margin assumptions? Thanks so much..

Deborah, do you want to talk a little bit of gross margin expectations for 2019..

Yes. We do expect our gross margins to increase and there are pretty in line frankly with the analyst estimate for the year. So I think we’re in good shape on gross margins. We expect that we will be able any under absorbed overhead that we do have, we expect to reduce other expenses.

This going to be minimal let's say and we expect to be able to offset that within manufacturing with manufacturing efficiency that we gain throughout the year through our other operating improvements that we have planned..

Okay. Super. Let me just squeeze one other quick in.

On the extended that to focus of the emerging presbyopia, could you remind us just what you think you have to demonstrate competitively for that lens to be a commercial success, just maybe contrasting what you hope to achieve with that offering versus maybe some of the off lenses that are more of a cataract focus right now or the multifocals during the marketplace? Thanks so much..

Sure. So, our goal is that for the early presbiop let’s say 40 to 55 year old who really hates reading glasses and the multiple pairs that they take with them everywhere and lose conveniently all the time.

That we will provide them for the first time a bilateral implanted lens that will be able to restore for them excellent reading ability, excellent intermediate vision and very good distance vision. That would be the focus. They have obviously keep their natural lens which they have to give up in RLE or anything obviously cataract procedure.

But our goal is to delight 45 to 55 year old especially that’s a suite spot, it’s so frustrated with that they cannot longer read without some type of visual assistance. So, we are really looking forward to being able to introduce this product first of course in the 31 CE Mark countries and then after that globally.

We are already working with other major markets around the world, those regulatory bodies to determine what the appropriate requirements will be in terms of study..

Understood. Thank you so much and congratulations..

Thank you..

Thank you. [Operator Instructions] And Our next question comes from Jim Sidoti of Sidoti & Company. Your line is now open..

Good afternoon.

Can you hear me?.

Yes, Jim. Good afternoon..

Great. Two quick questions.

I know you don’t want to talk too much FDA submission, but can just tell me was that submitted in the fourth quarter or was that submitted at the beginning of 2019?.

Fourth quarter..

And then, do you have any plan to kind of hold back on the launch of Toric in the U.S.

while you wait for this approval or you’re going full speed ahead with Toric and then you’ll just go full speed ahead with this [Indiscernible]?.

Well, we’re really combining the effort and what that means is that as I talked about the U.S. surgeons console, our goal is to have our prominent and premier positions in each major market who want to get Toric into long waiting patient to have the ability to do so which we are providing.

So our rollout is on schedule, but many of those same surgeons as well as additional surgeons are very excited about EVO. So what we have started to do is create the upgrade of the way we market in the U.S. already. But we are not ahead of demand.

We are basically moderating the demand appropriately with a very strong what we call tiger team of top people who have joined us recently as well as some of our own individuals who been with us for a while to make sure that the ICL is experiencing a long-awaited and well-deserved rejuvenation in the U.S. market..

Okay.

So, kind of a similar question, but do you think the marketing efforts are more accelerate once EVO is approved or are you going full speed ahead right away?.

No, no. What we’re doing is we are effectively rolling out the Toric product in the markets and working with the surgeons to get coverage from local radio, television, newspaper, media, YouTube, social media and you can see a lot of that all over the web right now where they're really happy Toric patient.

But when we will let EVO it’s going to be a lot of fun. We’re definitely going to push very very hard, so that people are aware in every market where surgeons are ready, that they can finally have extraordinary visual freedom and be as happy as those 99.4% of patients who are willing to have this procedure again..

Okay. Thank you..

You’re welcome Jim. Thank you..

Thank you. And that’s concludes our question-and-answer session for today. I’d like to turn the conference back over to Caren Mason for closing remarks..

Thank you very much. Thank you for your participation on our call today. We will be on the road again meeting with financial community in the coming weeks including presenting at the Leerink Global Healthcare Conference next week on February 28 in New York City. Participating in non-deal roadshows in Southern California in March.

Conducting Investor and Analyst Meeting at STAAR's booth during ASCRS in San Diego in the early part of the May. And also we are announcing that later this year on November 8th, we’re looking forward to hosting our next Investor and Analyst Day at Lotte New York Palace in New York City.

And with that, I appreciate so much your interest and your investment in our company. All the best to all of you..

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..