Ladies and gentlemen, good afternoon. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to Nevro's Second Quarter 2023 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

[Operator Instructions] And I would now like to turn the call over to Greg Chodaczek for introductory remarks. Please go ahead..

Thanks, Abby. Good afternoon. And welcome to Nevro's second quarter 2023 earnings conference call. With me today are Kevin Thornal, CEO and President; and Rod MacLeod, Chief Financial Officer. On today's Kevin will discuss second quarter business results.

And Rod will conclude with detailed financials and guidance before we open it up -- open up the call for questions. Please note, there are also slides available related to our Nevro's second quarter performance on the Investor Relations website in the Events & Presentations section.

Earlier today Nevro released its financial results for the second quarter ended June 30, 2023. A copy of our earnings release is available on our Investor Relations section of Nevro's website at nevro.com.

This call is being broadcast live over the Internet to all interested parties on August 1, 2023 and an archived copy of this webcast will be available on Nevro's Investor Relations website.

Before we begin, I'd like to remind everyone that comments made on today's call may include forward-looking statements within the meaning of the federal securities laws. Results could differ materially from those expressed or implied as a result of certain risks and uncertainties.

Please refer to Nevro's SEC filings including the annual report on Form 10-K filed on February 21, 2023 for a detailed presentation of risks. The forward-looking statements in this call speak only as of today, and the company undertakes no obligation to update or revise any of these statements.

In addition, management will refer to adjusted EBITDA, a non-GAAP measure used to help investors understand Nevro’s ongoing business performance.

Non-GAAP adjusted EBITDA excludes interest, taxes and non-cash items such as stock-based compensation, and depreciation and amortization, as well as litigation-related expenses, certain litigation charges and credits and other adjustments, such as restructuring charges.

Please refer to the GAAP to non-GAAP reconciliation tables within the earnings release. And now, it’s my pleasure to turn the call over to Kevin..

First commercial execution. We have not performed commercially to the levels that we consider world-class in a market that demands excellence in salesforce execution.

Starting with the hiring of Greg Siller to the CCO role, we are moving quickly to ensure we have A+ talent at every position to increase sales productivity, improve physician engagement, and maximize the growth opportunity in this business.

We're also focused on improving our sales rep performance to quota, rightsizing some of our sales territories and filling open territories faster. These changes, coupled with aligning the goals of our internal and external teams, will improve our sales productivity and enhance our customer experience. Second, market penetration.

We will continue to expand indications with strong clinical evidence as our ongoing -- such as our ongoing Sensory Study for PDN, pursue HFX line extensions and support our robust R&D pipeline development. We will also consider augmenting our product portfolio through strategic opportunities. Lastly, profit progress.

We will continue to scale our Costa Rica manufacturing facility, improve our operational efficiency and streamline internal processes. On the commercial front, Greg Siller recently joined as our new Chief Commercial Officer.

Greg's proven track record of success and his passion for building high performing commercial organizations will be instrumental as we continue to focus on accelerating revenue growth, developing underpenetrated markets such as painful diabetic neuropathy and non-surgical back pain, and launching new products, including our new HFX iQ system.

Greg is off to a fast start and is already having a positive impact on our commercial organization. He has realigned our sales reporting structure. So the teams are working closer together with one common goal, providing the best service and clinically proven stimulating therapy to our clinicians and their patients.

This change sets us up for success in future quarters. I'm confident that Greg's appointment will further bolster our ability to capitalize on the growth opportunities in front of us and accelerate our market performance. Okay. Let's now turn to our second quarter results and business updates.

Although, we lowered our second quarter guidance, we continue to move the business forward and lay a stronger foundation for improved commercial execution in future quarters. Nevro's revenue of $108.8 million increased 4% on both a reported and constant currency basis compared to prior year results. Our U.S.

perm procedure growth was 8% year-over-year, and PDN continues to be a significant growth driver with a strong second quarter increase in revenue of 73% compared to last year. As of today, three of the four main market participants have disclosed their Q2 SCS results. Nevro and one of our competitors reported clear SCS growth.

It's evident that the challenges to our market are improving. And although recovery isn't expected to be linear, we expect it to continue to improve in the quarters ahead.

Remember, SCS is considered a late or last line therapy used to relieve patients of their chronic pain when surgeries and more conservative treatment options either don't provide optimal relief or just simply don't work and are not an option.

We have seen positive indicators of growth and recovery, including patients entering the pain treatment funnel. As patients make appointments for their pain specialists and continue to move through their treatment pathway, we are confident we'll see more patients who are ready for SCS and the market return to historical growth rates.

The non-linear recovery, along with our recent salesforce execution changes, which will take time to fully implement, however have led us to re-gauge our guidance for the year. I will come back to this at the end of my prepared remarks.

In Q2, HFX iQ accounted for approximately 30% of our permanent implant procedures, up from 11% in Q1, and we expect a meaningful shift to our HFX iQ throughout the rest of the year. We continue to receive positive feedback from physicians and patients regarding the ability to deliver personalized pain relief using our HFX algorithm.

I'm convinced this technology has the opportunity to differentiate our competitive position further. All of this progress builds on our superior high-frequency paresthesia-free SCS technology. Turning now to our PDN business, PDN trials represented approximately 23% of our total U.S. trial volume. That's up from 14% of our total U.S.

trial volume in Q2 of last year. Among our permanent implant procedures, PDN represented 18% of total worldwide procedures resulting in approximately 19 million in PDN indication sales, an increase of 73% compared to 11 million in the second quarter of last year.

We attribute this in large measure to the continued PDN referral sales organization expansion, our direct outreach initiatives to physicians and patients, and the general enthusiasm regarding the compelling data and real world outcomes in these otherwise difficult to treat patients.

We continue to see success with our direct-to-patient marketing for PDN as well. In Q2, approximately 23% of our U.S. PDN trial procedures came from leads generated by our DTC programs. We continue to believe both patient and physician marketing efforts are imperative to drive awareness of the PDN indication.

On the new indication coverage front, our PDN coverage continues to grow. Florida Blue, the largest commercial payer in Florida, represented 4.6 million covered lives updated their medical policy to include coverage for PDN, which became effective on June 15th.

And we are very pleased to see that Medicare administrative contractors, Novitas and First Coast Service Options decided to retire their SCS Local Coverage Determination or LCD and cover both PDN and non-surgical back pain using Medicare National Coverage Determination or NCD that is already in place.

This positive coverage policy development became effective on July 13th and provides immediate access to SCS therapy for PDN and NSBP patients who meet the NCD coverage criteria and have Medicare or Medicare Advantage health plans.

This is a huge win for Medicare patients suffering from PDN, who have had limited to no access to HFX therapy since FDA approval in July of 2021. The combined increase of coverage represents nearly 24 million covered lives, bringing health plan coverage of PDN to over 205 million covered lives total.

I want to congratulate our entire government affairs and market access team on this accomplishment and thank them for their significant effort and unrelenting focus on expanding coverage to patients, who suffer from these debilitating conditions.

In addition to the existing payer coverage policies in place for PDN, we continue to see a high level of case-by-case approvals through the prior authorization process and the appeal of payer prior auth denials, including with payers who don't have a positive PDN coverage policy in place.

For those PDN cases that have come through our own Access Group, our rolling 12 months approval rate at the end of Q2 continued to trend around 72%, up from approximately 62% at the end of 2021.

By leveraging our strong published clinical data, FDA approved PDN indication and inclusion in various society guidelines, we have been able to successfully overturn over 50% of these prior auth denials.

Equally impressive is that, through Q2, across all indications, our HFX Access team has an over 80% approval rate at the initial prior authorization for patients who meet medical necessity for SCS. In June, we attended the American Diabetes Association 83rd scientific sessions, where Dr. David Klonoff and Dr.

Erika Petersen presented important secondary findings from the landmark SENZA-PDN RCT, comparing Nevro's proprietary high frequency SCS plus conventional medical management for the treatment of PDN to conventional medical management alone.

This presentation was the first look at the correlation between the use of a 10 kHz SCS implant and reductions in A1C and body weight. For your reference, we've included this ADA abstract data in our 2Q investor slide presentation. Dr.

Erika Petersen also participated in an ADA symposium on the treatment of painful diabetic neuropathy, where she reviewed the long term 24 months durability of pain relief as well as clinically meaningful improvement in neurological function and quality of life achieved with 10 kHz Therapy.

Impressively at two years high frequency spinal cord stimulation from Nevro, HFX was associated with significant pain relief with 90% of participants reporting greater than 50% pain reduction.

We recently received confirmation that this 24 month PDN RCT data has been accepted for publication and we expect to see this data published in the second half of this year.

In addition to these promising results, we've enrolled almost 20 patients in our new PDN Sensory Study, which is the first prospective RCT specifically powered to assess restoration of neurological function as a primary endpoint in patients with intractable PDN.

You'll recall that the neurological improvements we observed in the original SENZA-PDN study are unique to 10 kHz SCS therapy and have not been reported for any other competitive low frequency SCS therapy.

By restoring sensation in the feet, 10 kHz SCS may alleviate this tremendous disease burden, reduce amputations and enable patients to be more active, all of which would improve overall health and quality of life, and of course reduce healthcare costs. Now, before I leave PDN, I wanted to cover one more topic.

On our last earning call, you'll recall that we mentioned that we were evaluating whether we should continue to break out PDN indication sales since there are now two other PDN on-label competitors who do not segment their SCS business at all. Since that call, we received a lot of feedback from analysts and investors on this topic.

All of these in SCS indications whether for PDN, non-surgical back pain or failed back and leg used the same SCS technology utilizing products sold and serviced by the same organization, are reimbursed using the same codes used with patients that may have multiple pain areas and ideologies and are developed by the same in planning -- and are deployed by the same in planning physicians to treat chronic pain.

Given this, we've decided to continue providing this PDN indication breakout for 2023 reporting purposes. However, beginning with our first quarter of 2024 results, we will not specifically break out PDN, but we will continue to provide qualitative commentary on this important growth indication.

As stated last quarter, we are interested in driving overall market share gains in company growth period, and we're doing just that. Finally, I wanted to say a few words about our updated guidance.

First, do not interpret our guidance as a lack of confidence in the long-term outlook of the SCS market, our growth drivers are where the company is headed.

We believe the market is on a path to recovery and will eventually return to sustained historic growth rates, along with the organizational changes we discussed, the scaling of our Costa Rica manufacturing facility and our future product line.

We believe we can generate significant future returns, including improved revenue growth, enhanced margins, and increase operating leverage, setting us up for success in 2024 and beyond.

We're also not providing formal PDN indication guidance for the year, but expect PDN indication sales to be in line with how we have previously discussed the 2023 PDN opportunity.

We are enthusiastic about our plan and look forward to executing our current strategies, driving growth and taking advantage of the meaningful leverage opportunities we have to drive towards profitability and deliver shareholder value. And with that, I'll pass the call over to Rod to provide further details on our second quarter results and guidance.

.

Thanks, Kevin, and good afternoon. I'll begin with our worldwide revenue for the second quarter of 2023, which increased 4% reported and on a constant currency basis compared to the second quarter of 2022.

PDN represented 18% of worldwide permanent implant procedures, which resulted in approximately $19 million in PDN indication sales in the second quarter of 2023. This quarter included the same number of selling days as Q2 2022. U.S. revenue in the second quarter of 2023 increased 4% compared to the second quarter of 2022.

International revenue in the second quarter of 2023 increased 5% as reported and 4% on a constant currency basis. Now moving on to some detail below the top line. Gross margin was 68.4% in the second quarter of 2023 compared to 69.8% in the second quarter of 2022.

The full market release of the HFX iQ system continues to progress well, and we expect a meaningful shift in the mix to the HFX iQ product throughout 2023, which combined with the ramp up of our Costa Rica facility, is expected to benefit gross margins beginning in the fourth quarter of 2023.

Looking at operating expenses year-over-year, the increase in operating expenses was primarily due to $3.6 million in personnel-related costs largely specific to management changes made in the second quarter.

Non-GAAP adjusted EBITDA for the second quarter of 2023 was a loss of $3.1 million compared to a loss of $4.5 million in the second quarter of 2022. Cash, cash equivalents and short term investments totaled $329.9 million as of June 30, 2023. This represents a decrease during the second quarter of 2023 of $11.8 million.

Uses of cash were in line with normal business operations as well as our projections, and we continue to manage our working capital and are very comfortable with our balance sheet to fund operations. Turning now to guidance. It's important to note that we'll be using non-GAAP financial measures to describe our outlook for the business.

Please see the financial tables in our press release issued today for GAAP to non-GAAP reconciliations. We expect third quarter worldwide revenue of approximately $95 million to $97 million, which represents a decrease of 4% to 6% on a constant currency basis.

We expect third quarter of 2023 non-GAAP adjusted EBITDA to be a loss of approximately $8 million to $10 million. We expect worldwide revenue for full year 2023 of approximately $410 million to $415 million, an increase of 1% to 2% over prior year on both an as-reported reported and constant currency basis.

We expect full year 2023 non-GAAP adjusted EBITDA to be in the range of negative $25 million to negative $28 million, which compares to a non-GAAP adjusted EBITDA loss of $23.8 million in 2022. In closing, we made good progress in the second quarter and remain on track to drive growth and scale profitably in our core business in the years ahead.

We are in a great position strategically with best in class SCS technologies, remaining share gain opportunity, future growth opportunities in PDN, NSBP and our new HFX iQ platform, superior clinical data and the opportunity to improve our commercial execution.

We look forward to aggressively attacking the significant opportunities to drive the performance of the business the rest of the year. That concludes our prepared remarks. I'll turn the call back over to Greg to moderate the Q&A session..

Thanks, Rod. In order to get through the question queue efficiently and take as many questions as we can, we ask you to please limit yourself to one question and a brief related follow-up question. You can rejoin the queue and if time allows, we will take additional questions. Abby, we are ready for Q&A..

[Operator Instructions] We will take our first question from Shagun Singh with RBC. Your line is open..

Good afternoon. This is Avi on for Shagun. Just overall, talking about 2023 guidance, how did you arrive at the new guidance range? And overall, what's your guidance philosophy? Is this a guide that you think is conservative, or it allows you to be at a place where you can be in rates as you progress throughout the year? Thank you..

Yes. Thanks for the question. If you look at the previous two quarters, all four of us -- the biggest part of the SCS market reported positive growth. This is the first quarter since those last two quarters where one of us reported flat.

Now we were up 4%, and one of the other competitors was up significantly, but one of the others was flat to negative in the U.S. per their reports. And so that gives us a little bit of caution just to think about the market. And we said it's going to be a non-linear recovery.

And so each quarter-by-quarter may be a little different on that recovery journey.

The second part is if you look at the changes that we did during the second quarter with bringing in Greg Siller as the new Chief Commercial Officer, who got off to a fast start and has made the appropriate changes that we have done in the past at other organizations that we know will be successful.

It does take some time for those changes to sort of take hold and get the sort of the teams in the field working as one unified unit, as well as filling some of those open territories with speed and making sure people are getting trained and effective out in the field.

Those are really the two reasons which made us change our guidance for the remainder of 2023..

We will take our next question from Anthony Petrone with Mizuho Group. Your line is open..

Hi. Thanks. And maybe just to dig in a little bit too, maybe the second half implied guide and fully understand that PDN beginning in 2024 is going to go away here.

But if we just assume PDN is basically flat in 3Q and 4Q, and that would be conservative considering that it's still growing, the implied math sort of shakes out to a core outlook that's sort of down in the low double-digits for a blended timeframe of 3Q and 4Q.

So maybe between just underlying market and competition, if we barbell those two themes, what's really sort of impacting the second half more so? And then the quick follow-up would be just on salesforce restructuring and replenishment. In the core SCS division, is that also at play when we look at the back half guidance? Thanks..

Yes. I will answer the second part and then turn it to Rod for the numbers on the first part on the implied math that you said. With the salesforce execution, what we are really doing is, we are aligning the people that are in the field underneath the closest manager that's in each of those regions or territories.

Previous to that, we had different reporting structures reporting to different leaders within the organization. So now compiling together, so that they're operating and making decisions for each territory, that's the big change. And it will take some time for that to sort of take effect.

But the positive outlook on that -- I'm a big believer that putting power to those closest to customers, what drives meaningful results because every city is not the same. Every territory is not the same.

The decisions that need to be made to drive growth in each of those territories is different versus a peanut butter spread across the whole nation or the whole world for that matter. And so that's going to take some time though. People have new managers, they have new teammates, new bosses.

We know that this is the right thing to do, specifically as we look about -- look at strategic opportunities maybe in the future. We've got to organize ourselves ready to be able to scale not only in the SCS market, but anything else for the future as well. So I will turn it to Rod to do the implied math, and the other question that you asked. .

Yes. Hey, Anthony, this is Rod. The first is, your math is directionally right, using those assumptions. We do think PDN continues to be a growth driver for us. We've seen good sequential growth quarter-over-quarter with that business.

We also continue to see NSBP as a growth driver and we're all seeing ourselves as well as our competitors out there, continuing to push NSBP. But fundamentally, your math is right. We're -- as Kevin mentioned, we're sitting here after two pretty strong quarters in Q4 and Q1 of growth in the industry.

And as he mentioned, we have two of the three posted growth in the second quarter, with one being flat to maybe down a little bit in the U.S. And with that and our salesforce execution that we have in place, that's how the guidance is kind of playing out for the second half of the year. .

And your next question comes from the line of Adam Maeder with Piper Sandler. .

Hi, this is Simran on for Adam. Thank you for taking the questions. I want to dig into Q3 a little bit. So it looks like the Q3 guide implies revenues down about 12% sequentially.

And I understand there is a seasonality component with the business, but this is maybe a bit steeper of a quarter-over-quarter sequential step down than we've seen historically.

So can you walk us through the puts and takes for Q3, and how do you weigh other dynamics like competition, HFX iQ launch, and just underlying market recovery in this quarter?.

Yes, sure. Simran, on this -- so yes, seasonality, definitely Q3 has historically been one of the lowest quarter throughout the year before the Q4 end of the year where people's insurance plans, right, when their deductibles were reset into the new year.

But still going back to the couple of reasons we talked about in the script and also answered on the first couple of questions.

If you go back and look at what happened and transpired with Q2, I started on the two days before the last earnings call, and about four weeks in, five weeks in, I made the change at the Chief Commercial Officer role, and we took down guidance for the second quarter. Obviously, that was one month and 1.5 months into the quarter.

And I knew that we had some things that we needed to change in the organization. So it's either, put off some of those changes that we need to make or do it immediately so we can set us up for the future.

So bringing Greg in, in the middle of the quarter obviously gave him time to spend time with the team and really assess what offense we need to play here? So he quickly made those changes with the reorganization of the sales teams, and made some changes in the marketing side as well to be able to align our internal and external organizations to be working together as one team versus two separate units.

So, that all happened towards the back half of second quarter. So if you look at those changes and possible little bit of disruptions that could occur because of those changes, that's why the Q3 is down sequentially more than it would've been in previous years.

Rod, you want to add to that?.

No, I think, you covered it. The only thing that I might add is that HFX iQ, which we should receive a bump from both in pricing, it's going to take a little while for that mix to ramp up and we saw it increase or improve in Q2, and we'll see that continue to improve as we go into the third and the fourth quarters. .

And your next question comes from the line of Larry Biegelsen with Wells Fargo. .

This is Nathan Treybeck on for Larry. Thanks for taking the questions. You had indicated several times that you plan to diversify Nevro in interventional pain. You talked about new technologies and new indications on your existing technology and all within three years.

Can you let us know what that will entail? And would you raise equity for M&A?.

Yes. So as far as -- I'll answer the new indication question. As you know, we have 20 patients enrolled, as I said on the script, out of the 200 we need for our PDN Sensory Study. Our plan is to withdraw and extract some really good data that will allow us to build on the claims we already have on that indication. So that one is already in play.

We've not talked about other indications that we're working on in the background, but we're in the pilot phase of some really interesting other areas of pain. That's not been publicly disclosed yet. And we will do that whenever we get closer to something that's more tangible there. But that's the plan with our superior clinical team that we have.

I mean, look at the clinical results that we've been able to produce over the history of this company. That's a core part of who we are, and we're never going to get away from that. And so, think about the things that we're able to find because we're doing that clinical study.

The Sensory Study is an offshoot because we saw these early indications in our first PDN study that allowed us to say, “Hey, you know what, we should explore this further because this is showing really good things for additional claims.” Now, as far as new technologies in diversifying, yes, I talked about it in the main pillar that we have to really diversify our revenue.

And I'll just say that we're always constantly looking and taking meetings and looking at what should be part of our -- leveraging our biggest asset we have in this organization, which is our salesforce. I mean we've got great relationships.

We have we said publicly 500 people out in the field that should be leveraged to be able to service our same call point that we service today with adding stuff in the bag that they're already doing from a procedure standpoint or other areas that there are other procedures that could be launched, that could help those patients that suffer from chronic pain.

So we're not going to steer way far from the ship, we won't do anything stupid. But we're constantly looking for those opportunities. And as far as raising capital, I'll let Rod talk about some of the options that we might have. .

Yes. Hey, Nathan. And really financing, it depends. It depends on if we enter into a deal, what the size and the magnitude and the timing of it is. We are in very good shape from a balance sheet perspective. We have about $330 million on the books and cash, cash equivalents and short-term investments as of the end of the second quarter.

And with a little bit of growth, we find ourselves getting closer to that adjusted EBITDA, positive growth territory. And then cash flow should be not too far behind that. So we like where we are from an operating perspective.

But it really depends on what size of a deal and when it comes along from a financial perspective, what we'd entertain at that point..

Okay. Thanks. If I could follow-up with one more, in terms of just the competitive landscape. One of your larger public competitors reported strong quarter.

But in terms of the smaller private competitors like Saluda and BIOTRONIK, would you say you gained or lost share in Q2? What do you think Nevro stacked up?.

Our calculations show that we held steady with the physicians that we already had that implant exclusively Nevro or those accounts that we call splitters that use some of us and some of somebody else. Obviously, they are going to try new technology that's out there.

But we don't think by our calculations and data that we can get, that there were significant impacts on any of us from those two new entrants at this time. Now to say that, I'm a ex-athlete, both NFL and college, and I do not take any competitor lightly.

So we will continue to be vigilant in some of the changes that we made in our organization and the commercial organization, will set us up to be more competitive to not only just tread water and just keep the share we have, but our plan is to go out and take share. We are highly competitive team here.

And that's why we are changing our organization and ensuring we have A+ talent at every position so we can go out there and continue to win in this market..

And your next question comes from the line of Robbie Marcus with JP Morgan. Your line is open..

Hi, team. This is Allen on for Robbie. Just for the first question, clearly, the rest of 2023 is going to be pretty impacted by the commercial changes as you kind of refocus the organization.

What level of confidence do you have that the majority of work is going to be behind you by 2024 and then you are going to do a kind of return to a normalized growth rate then?.

I mean, that was the plan of making the change early here with Greg. And Greg had 17 years at Stryker.

Rod and I both came from Stryker as well where we know how to build world-class sales organizations and bring in our people that we know from other organizations that operate with the same level and intensity, competitiveness and passion that we all do, and all the other leaders that we have on my direct reporting team.

We are a highly competitive group in everything that we do. And so, we believe that, that six month mark is traditionally what it takes new people to sort of get ramped up, specifically if they're top performers, but maybe they are coming from a different side of medtech.

And we believe that most of that groundwork is going to be taken care of in 2023. And as I mentioned at the other question, doing it early was the right thing to do for our shareholders, our investors and for all of us as employees so that we can get off to a really good start as we come out of this year..

Got it. And then, as a quick follow-up, you referenced confidence in the market kind of returning back to historical growth rates.

And I think, I hope I'm not alone in saying that this idea of historical growth rates is one that's kind of been up in the air because the market has been pretty bumpy, both before never first enter the market, after you enter the market, and then the slowdown we saw in the years after leading to COVID.

So when you talk about a normalized market growth rate, what are you thinking of?.

Yes, typically the historical rate would be anywhere from like 6% to 9%. And if you look at this quarter and the last two quarters where we all had growth in the previous two quarters, this quarter was -- as you mentioned, one or the previous question mentioned, there was one large competitor that had really good double-digit growth.

We had 4% growth, and then we had one of our competitors that were flat, and then down 4% we calculate in the U.S. So, it is starting to diverge a little bit. But overall, the market is going to show -- likely show growth in this quarter.

So -- and just to go back to those remarks, the non-linear nature, it's not going to be a straight bottom left to top right graph that we see in some other elective procedures return. It's a little choppy as it's going up into the right.

So it's not just a linear line, but the trajectory is going in the right direction if you look back from the last two to three quarters now. .

[Operator Instructions] And we will take our next question from Brandon Vazquez with William Blair..

Kevin, you had made a brief comment earlier about potentially replacing or filling some open territories as you guys make some commercial changes.

Just wanted to one, clarify, do you have open territories? Is that a result of any higher than usual turnover, given there's been some volatility in the core market recently, or perhaps there's just commercial changes? So curious if you can just give an update on how the salesforce has been in their turnover.

Are you guys having to fill in some open territories and does that kind of elongate what a recovery could look like since they have to ramp? Thanks. .

Yes. No, we're still within those norms of med device turnover that this traditional the 10% to 20% type range. We only have a handful of territories open.

A lot of that's behind us with what we've been doing behind the scenes since our -- our last public announcement was Greg's hiring, and quickly bringing in some people that we both have known from even before Stryker, and me even before that as well. These are people that we've known that are great results-driven sales professionals.

So we have a handful of sales openings right now. But yes, anytime you make a change with a underperforming rep, even when you put in a A+ star rep there, it does take them time to get those relationships built and to start taking share from our competitors.

So that's again what's going to take six months for us to start seeing some of those territories that we have proactively changed over.

Because we've had some non-performing territories, and we have some territories that by the way, are absolutely crushing it in some areas that have higher than our national market share, sometimes double of what our national market share is. So we know we can do it, when we have the right people in the right territories. .

And your next question comes from the line of Richard Newitter with Truist Securities. .

Hi, this is Sam on for Rich. Thanks for taking our questions. Just one quick one on the market growth rate, 6% to 9%.

Just to clarify, is that inclusive of PDN when you say that amount?.

Yes. .

Okay, thanks.

And then just as we think about salesforce productivity going forward with a lot of the changes getting made upfront, how should we think about productivity ramp through 2024, and then how does that relate to what operating leverage the business can see as growth returns to more normalized rates in '24?.

As far as some of the reorganization that we had out in the salesforce, and really it's the realignment to who their managers are and a little bit of increasing and enhancing their comp plan where they're working together as a team to hit their number, the quota that we hand out to them.

We had people that were sort of chasing different numbers out there, and now they're aligned to work together closer to the customer, closer to the patient to make those right decisions that are for right for their territory. And that's really the big change that we have.

So as far as productivity, having a team that's working together and aligned together, that's always championship winning teams that are out there. It's not those teams that are full of all stars that don't work together. We've seen it in sports, for those of us who watch sports.

You can see those organizations that have A+ people on their team, but they don't work together as a team. And this is a team sport, right? Each of our sales reps can't do it on their own. They have therapy consultants, they have assistant sales reps, they have coaches that talk to the patients post-implant.

They have to be working together as one oiled machine. And that'll bring efficiency as well as the team's culture and engagement should increase as well. And so those are more the things that we expect to get out of them.

And then longer term, as I said publicly, being able to add in something more to their sales bag, eventually will also bring really strong operating leverage because that will allow us to increase the revenue with the same footprint that we have out there today.

But obviously, we can never comment on when and how and what we would do on an M&A standpoint. But that's something in why we're constantly taking all these calls and looking to see what would be a right fit for us over the longer term. .

And your next question comes from the line of William Plovanic with Canaccord. .

It's Sean on for Bill tonight. Thanks for taking our questions. Just a quick one on iQ. I know you mentioned briefly.

But are you seeing any ASP benefits? And do these benefits more than offset the ASP degradation you see on older generation products in the U.S.?.

Yes.

You were asking about ASP there?.

Hey, Rod, yes. .

Sorry, I didn't hear that real clearly. So yes, so far we are seeing the sort of pricing that we anticipated for the year and we're receiving a premium on the iQ product. We are seeing some pricing erosion, as we've talked about in prior quarters, and that we've seen over the last couple of years with some of our legacy products.

And those continue to make up a disproportionate amount of the mix. And so they have a tendency to offset one another.

But as iQ continues to become a greater part of our mix as we go throughout the year into Q3 and Q4, we anticipate that the pricing will hold and we'll start to see that show up in margins, particularly in Q4 when we also start to see some of the benefit of some of the lower costs from Costa Rica starting to flow through gross margins. .

And Kevin for you, just when you think about the HFX coaches and how this allows sales reps to be more productive in terms of selling versus managing patients, are we still at the beginning ages and beginning innings of the -- in terms of sales productivity for utilizing those coaches and freeing a breadth?.

I'd call it, early innings, maybe 4th inning, if you will. That's there. Some would call that mid-inning, maybe depending on when you bring in your reliever. So I think that, I would call it early to mid-innings on that and we are seeing a lot of success.

Now part of the changes that we have made on the realignment is those coaches are now going to be aligned closer with each of those individual territories, so that those coaches work alongside the sales reps as one team and get to know the physicians and what they like and what the patient's pool is.

But, yes, that allows our sales reps to concentrate on going out and winning new business and taking more cases away from our competitors while the coach is talking to the patients and really taking care of them. And just want to make sure we are not just talking about money and growth and everything here.

The good news is about the coaches is, it's better for the patients as well. If our rep is in the OR covering a case, they are not answering the cell phone when a patient calls them. Our coaches are stationary and they are not traveling around. And so our coaches have the ability to be able to spend more caring time with those patients.

And some of these patients are trying to find optimal pain and really trying to dial in what the right frequencies are for them or the right amplitude or what have you and really talk them through their pain management journey.

And they have really appreciated the fact that they can get somebody on the phone more quickly and often than they could if the sales rep wasn't available. So it's better for patients and our customers as well..

[Operator Instructions] And your next question comes from the line of Brad Bowers with Mizuho Securities. Your line is open..

Hi. Thanks for taking one of our questions. Again, just wanted to follow-up from Mizuho here. We have been talking a lot about a lot of the growth outlook. We just wanted to hear more about kind of the reimbursement wins that you had.

I mean, obviously, they are incremental to all of the coverage that you have gotten on both PDN, non-surgical back and on the core business over the years. So want to kind of hear how they are impacting conversations with doctors and are you kind of -- do you plan on meeting with those new wins and to help to drive the U.S.

trials higher as well? Thanks for the color..

We believe, which we will never know for sure what turn the tide for someone like First Coast and Novitas. They wouldn't have made that change in decision unless there was clinical data that led them to make that decision.

And we believe that we have made the biggest impact regardless of what other press releases or whoever else took the credit for that, because it was the RCT data that was out there that allowed them to make that decision based upon the clinical data. So we have a team. Our government affairs and medical affairs team is one of the best in the business.

I put them up against anybody and any of the companies I've ever worked for or any of our competitors. They are an unbelievable team that work, underneath Greg Siller in the commercial organization, and are completely aligned with working with our customers to ensure that their patients have access. So, yes, that's a big tailwind for us.

However, they have been shut down for quite some time. And so, believe it or not, not all the physicians just read the newspapers and find out about this good news. So it's our team's ability to go out there and educate and educate the referral pathways in for PDN that need to be sort of primed.

And so it's not like immediately that happens in Q3 and Q4, but we are going out there and selling the good news and telling the good to both the referring physicians as well as the implanting physicians that this is now an available treatment for those patients that were -- previously didn't have the access, but it doesn't happen overnight.

So that's going to take a little bit longer into Q3 and Q4 before we see a ramp up from those changes. But think about the areas in which they cover. These are high Medicare populations and really cover a lot of those 205 million people that we now say are covered for PDN. So yes, thanks for recognizing that. That's a big win for patients. .

And your next question comes from the line of Dave Turkaly with JMP Securities. .

I just wanted to clarify one thing. You mentioned sort of market growth fluidity, but you also said obviously there's been some turnover.

So I'm just trying to make sure that the updated 3Q and implied 4Q include that turnover, that you're not anticipating more, that you've made those changes and replaced the folks and that is implicit in what you're talking about for 3Q and 4Q right now?.

Yes, we took that all in consideration as we set the guidance. There may be some macro-economic things that we can never predict that could be outside of our control. However, we took into the -- just like we said in our prepare remarks that the sort of two quarters of all of us growing.

This quarter being the first one where we saw one of our competitors flat to negative in the U.S. gives us a little pause. And then obviously the changes that we've made, we've got a handful of territories that we're interviewing for and close to some candidates. So, we took that into consideration as we set the guidance for the back half of the year. .

And for some of the folks that are no longer with you, I imagine you've taken out whatever their contribution was or adjusted those numbers to account to the fact that you might have to start rebuilding a territory maybe from scratch or from a lower base. .

Yes, I see where you're going there. Just to make sure you understand. So most -- we don't have any territory that had one person only in them, right? So when we lose a rep, or more than likely we made the decision that the rep wasn't going to be an A+ player and we wanted to make a change.

There are therapy consultants and assistant sales reps that are often there, to be able to keep the business sustained for at least period of time. But those are areas in which you don't expect a 5% to 7% growth out of, because those that are left are just managing the current business that’s there.

So yes, we took that in consideration as well as we set the Q3 and Q4 guidance. .

And there are no further questions at this time. So I would now like to turn the conference back to Mr. Thornal for closing remarks. .

Thanks for joining the call, everybody. And I look forward to reporting on our progress on the next call. See you then. Thanks. .

Ladies, then gentlemen, this concludes today's conference, and we thank you for your participation. You may now disconnect..