Thank you standing by, and welcome to the STAAR Surgical 1Q 2020 Financial Results Conference Call and Webcast. [Operator Instructions]. I'd now like to hand the conference over to your speaker today, Brian Moore, Vice President, Investor and Media Relations and Corporate Development. Thank you. Please go ahead..

Thank you, Jesse, and good afternoon, everyone. Thank you for joining us on the STAAR Surgical conference call this afternoon to discuss the company's financial results for the first quarter ended April 3, 2020. On the call today are Caren Mason, President and Chief Executive Officer; and Deborah Andrews, Chief Financial Officer.

The press release of our first 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, belief, 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 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 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 would now like to turn the call over to Caren Mason, President and CEO of STAAR..

"After 5 weeks out of the OR, it feels so great to be back. Taking care of one of our own today, a nurse who treats patients at 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 unit 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 a challenging COVID-19 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 first quarter financial results.

Deborah?.

Thank you, Caren, and good afternoon, everyone. I'll start with the financial review with the summary of top line results and then provide more detail down the income statement. STAAR reported net sales of $35.2 million for the first quarter of 2020, an 8% increase over the $32.6 million reported in the year ago period.

Top line growth was driven by $1.6 million or 6% sales increase in ICLs and a $1 million increase in other products sales, primarily injectors and injector parts. ICL sales represented 83% of total company sales for the first quarter 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 approximately 160 basis points due to the higher mix of other product sales which have a lower gross margin than our ICLs.

The remaining 220 basis point change was primarily due to period costs associated with the expansion of manufacturing capacity. In the second quarter, the company expects to record $1.4 million 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 first quarter were $25.9 million, an increase of 15% compared to the prior year quarter of $22.6 million. The company did begin moderating nonessential variable spending in February.

Taking a closer look at the components of operating expenses, G&A expense in the first quarter was $8 million compared to the prior year quarter of $6.8 million. The increase in general and administrative expenses was due to increased head count and salary related expenses, increased tax consulting costs and increased facilities cost.

Marketing and selling expenses were $11 million compared to the prior year quarter of $10.1 million. The increase in marketing and selling expenses was due to increased advertising and promotional activities and increased head count and salary related expenses, partially offset by decreased travel expense.

Research and development expenses were $6.9 million compared to the prior year quarter of $5.6 million. 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 head count 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 $1.4 million 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 first quarter of 2020 was approximately $1.1 million as compared to an operating profit of $1.6 million in the year ago quarter.

The net loss for the first quarter was $0.1 million or approximately breakeven on a diluted per share basis as compared to net income of $1.4 million or $0.03 per diluted share in the year ago quarter.

On a non-GAAP basis, adjusted net income for the quarter -- for the first quarter was $1.9 million or $0.04 per diluted share as compared to adjusted net income for the year ago quarter of $4.3 million 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 $110.9 million. The company used $8.2 million 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 first quarter.

In Q1 2020, we also experienced an additional increase in AR due to COVID-19 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 committed and customers return to their practices. The company also invested $2.2 million in property and equipment during the quarter.

These uses of cash were partially offset by $1.3 million 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..

[Operator Instructions]. Your first question comes from Cecilia Furlong with Canaccord Genuity..

I wanted to ask just about what you're seeing today in China after coming back just in terms of relative standard capacity given enhanced sanitation practices, kind of how you've seen that trend as it slowly started to ramp volume and where that goes going forward relative to pre-COVID level?.

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 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 were providing promotions and young people in our major markets like China and Korea and Japan were very much excited about and scheduling their ICL surgeries.

So I believe that in our large Asian markets, China, of course, at 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 just starting to enroll again.

Can you talk about just how centers were able to engage with patients in the interim, maybe build patient funnels, and those centers that haven't yet opened, 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, has 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 timeframe 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..

Your next question comes from Chris Cooley with Stephens..

Congrats on the results in a very challenging period. I guess just first from 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 quarters? I'm just trying to get a better read on time to completion versus maybe your original expectations for the EVO trial? Then I have a follow up..

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 timeframes. 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. I appreciate that. And then I guess just lastly from me and then 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 the quarter from a run rate basis? In 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..

Sure. 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 little 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 shutdown 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, et cetera, Belgium.

When we look at Germany, Germany had some clinics that remained open most of the time that others were shutdown 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, but one of 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 shutdown.

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 a 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, et cetera.

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 height 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 shutdown 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 Zimmer with BTIG..

Caren, 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 respective -- 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. 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..

Sure, Ryan. With regard to double digit growth, 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-19 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 we classify them an O, we are seeing double digit growth now..

With regards 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. And 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 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 & Co..

Deborah, can you just repeat the comments you made about the charge you're going to take in the second quarter? I missed that..

Yes. Well, because the facility, the plant was shut down for a month, basically your 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&L and that equates to about $1.4 million..

Okay.

And will that go into gross margin?.

Yes..

Okay. All right. And obviously your accounts receivable is up in the quarter.

Do you think this brought you some goodwill with those accounts and it's 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 -- 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 Caren 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 third quarter..

Okay.

And the increase in PP&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 Nidau..

So if you do have a big pickup in Q3 and 4, 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 necessary for demand as we see it going forward beyond double digits. So we're in good shape..

Seeing there are no further questions, I turn the call back to Caren 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. I'm 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..

This concludes today's conference call. You may now disconnect..