Wright Medical Group N. V. (WMGI) Q3 2018 Earnings Conference Call Transcript

Wright Medical Group N.V. (WMGI)
Q3 2018 Earnings Conference Call
November 7, 2018, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen and welcome to the Q3 2018 Wright Medical Group N.V. earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. If anyone should require operator assistance, please press * then 0 on your touchstone telephone. As a reminder, this call is being recorded.

I would now like to turn the call over to Julie Dewey. Please go ahead.

Julie Dewey -- Senior Vice President and Chief Communications Officer

Thank you and good afternoon, everyone. Welcome to Wright Medical's third quarter 2018 conference call. We appreciate you joining us. I'm Julie Dewey, Wright's Chief Communications Officer. With me on the call today are Bob Palmisano, Wright's President and Chief Executive Officer, and Lance Berry, Wright's Chief Financial Officer.

We issued a press release this afternoon regarding our third quarter results and a copy of that press release is available on our website at wright.com. The agenda for this call will include a business update from Bob, a review of our financial results from Lance, a question and answer session, and the conclude with closing comments from Bob. Additionally, the company has posted a slide presentation highlighting Cartiva historical revenue and preliminary combined non-GAAP pro forma revenue, including third quarter of 2018 on our investor relations website at ir.wright.com.

Before we begin, I would like to remind you that this call includes forward looking statements, including statements about our outlook for 2018. Each forward-looking statement contained in this call is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements. Additional information regarding these factors appears in the section entitled "Cautionary Note Regarding Forward Looking Statements" in the press release we issued today.

More information about risk can be found under the heading risk factors in Wright's most recently filed annual report on Form 10-K and subsequent quarterly reports on form 10-Q as supplemented by our other SEC filings. Our SEC filings are available at www.sec.gov and on our website at wright.com.

The forward-looking statements in this call speak only as of today and we undertake no obligation to update or revise any of these statements. Our earnings release in today's discussion include certain non-GAAP financial measures. Please refer to the reconciliation, which appear in the tables of today's press release and are otherwise available on our website.

Note further that our form 8-K filed today provides a detailed narrative that describes our use of such measures. Unless otherwise noted, today's discussions refer to results from continuing operations. Also note that unless otherwise noted, all growth rates discussed today are on a non-GAAP constant currency basis compared to the prior year quarter.

With that introduction, it is now my pleasure to turn the call over to Bob Palmisano. Bob?

Robert Palmisano -- President and Chief Executive Officer

Thanks, Julie and welcome to our third quarter earnings call. Our team produced outstanding results across the board in the third quarter, including over 14% constant currency net sales growth fueled by our new product launches, increased contributions from our sales organization and continuing strength in our underlying businesses. We also had a strong quarter of adjusted EBITDA, with 330 points of EBITDA margin expansion.

These results include continued strong performance in our US upper extremities business, which grew 19% in the third quarter, driven by a 21% growth in our US shoulder business. We had excellent growth from our SIMPLICITI shoulder and our PERFORM Reversed glenoid this quarter, which both grew faster than our overall shoulder growth.

We also set new records in Q3 for the number of surgeons planning and saving cases in BLUEPRINT and registration of new BLUEPRINT users who are strong and continued to grow. As of Q3, approximately 30% of our shoulder customers and shoulder cases are using BLUEPRINT, which is a significant acceleration from approximately 20% last quarter. BLUEPRINT has proven to be integral to our ability to convert competitive surgeons and we believe that impact will increase as we execute our plans to make the system easier to use and release additional enhancements.

We anticipate that continued penetration of our SIMPLICITI shoulder system, our ongoing PERFORM Reverse launch, and accelerating adoption of our BLUEPRINT enabling technology will continue to drive market-leading shoulder sales growth. Our US lower extremities growth accelerated to 12% in the third quarter, driven by accelerating growth of 22% in our total ankle and a return to market growth in our core lower extremities business.

Additionally, the launch of AUGMENT Injectable is off to a strong start and provided an excellent boost to our US biologics business, which grew approximately 11% this quarter, up from 5% in the second quarter of 2018. We continue to see new products and improving Salesforce execution drive improved results in our core foot and ankle business, resulting in core growing at market rates of growth for the full third quarter.

We expect the Cartiva acquisition as well as the ongoing launch of our PROstep minimally invasive surgery system and other recent new product launches to support our growth prospects in our core lower extremity businesses for the remainder of the year and throughout 2019.

With the Cartiva acquisition now closed, we significantly strengthened our market-leading lower extremities portfolio by adding Cartiva's highly differentiated CSI synthetic cartilage implant, the first and only PMA product for the treatment of great toe osteoarthritis, supported by compelling clinical performance and the only product of its kind backed by level one clinical evidence.

Cartiva has experienced rapid commercial adoption and is well-positioned for future growth as it addresses large markets with significant unmet needs and strong patient demand. We expect this acquisition to support our growth prospects in our core lower extremities business throughout 2019 and beyond.

As we begin the integration process, our guiding principle is first do no harm. Our top priority is to protect and grow revenue and our integration is off to a great start. There will be some disruption to Cartiva sales in Q4, which was anticipated as we finalized the go forward sales organization. We will be in a great position to hit the ground running on January 1st.

We are confident in our ability to deliver $47 million in 2019 sales for Cartiva, which we forecasted at the time we announced the acquisition. Over the next several months, we intend to evaluate additional opportunities for the development of the Cartiva platform and determine investments needed for long-term growth.

In summary, everything went right in Q3. Third quarter net sales growth improved significantly, with upper extremities continuing to grow more than double the market rate of growth and lower extremities and biologics and international all significantly accelerating at constant currency growth rates.

Additionally, we had a very strong adjusted EBITDA margin expansion. As a result, we are increasing our full-year guidance to reflect both the overperformance of our existing business as well as the addition of Cartiva. This couldn't be a more exciting time to be at Wright. I believe we are set up well for the next several years. Our upper and lower extremities, biologics, and end markets remain healthy and fast-growing. Our gross margins are expanding and our specialized salesforces are executing well.

Additionally, with BLUEPRINT, our total ankle portfolio, including PROPHECY, AUGMENT Injectable, and now Cartiva, we have unique, differentiated, and protected technologies in all parts of our business.

With that, I'll now ask Lance to provide further details on our third quarter results. Lance?

Lance Berry -- Senior Vice President and Chief Financial Officer

Thanks, Bob. As we get started, please note that unless otherwise stated, all of today's discussions regarding our sales growth rates refer to our constant currency growth rates compared to the prior year quarter and our results of operations refer to our as-adjusted results, which are non-GAAP financial measures as described by Julie during the introduction of our call. Unless otherwise noted, today's discussions refer to results from continuing operations. Please refer to the non-GAAP reconciliations in our press release.

Globally, our net sales grew 14%. We saw strong sales performance in all segments of the business with continued exceptional growth in US upper extremities and above market growth in our US lower extremities business. We also saw an acceleration in US biologics business, driven by the first quarter of AUGMENT Injectable sales. International also had a strong quarter growing 13%. Overall, Q3 net sales came in better than we anticipated.

Moving on to some detail below the sales line, beginning with our Q3 adjusted gross margin, we achieved gross margins of 77.9% for the quarter. As we have discussed previously, our gross margins fluctuate from quarter to quarter and Q3 is often the lowest gross margin quarter of the year. We remain on track for the full-year guidance for gross margins in line with prior year and are approaching 79%.

As for the line items making up our Q3 operating expenses, selling general and administrative expenses as adjusted totaled 71.4% of net sales for the second quarter compared to 76% in the prior year period, a 460-basis point improvement. R&D expense has adjusted to $13.8 million in Q3 of 2018 and $11.9 million in Q3 of 2017.

And finally, amortization expense was approximately $5.9 million in Q3 of 2018 compared to $7.2 million in the prior period. Below the operating income line, net interest and other expense was $7.6 million through Q3 of 2018 compared to $8.5 million in the prior year period.

For share count, our Q3 per share results as adjusted are based on average diluted shares of $113 million for Q3. Altogether, this resulted in adjusted EBITDA of $20.6 million and 10.6% of sales for the quarter, a 330-basis point improvement over the prior year period.

Overall, year to date for the first nine months of 2018, we have seen EBITDA margin expansion of approximately 260 basis points, slightly ahead of our expectations driven by sales over performance. From a cash standpoint, our total cash balance at the end of Q3 was approximately $695 million. The increase in this balance from Q2 was driven by our equity offering to fund the Cartiva acquisition. The $435 million purchase price was dispersed in October upon close of the acquisition.

I will now discuss our 2018 full year guidance. Consistent with Wright's past practice, please note that our guidance ranges and assumptions for 2018 exclude any consideration for the effect of potential future acquisitions or any other possible material business developments. Additionally, it is important to note that we will be using a number of non-GAAP financial measures to describe our outlook for the business.

In particular, unless stated otherwise, all of today's discussions regarding our financial guidance refer to our as-adjusted results of continuing operations. Our press release issued today notes those items that are excluded from as adjusted results.

We are raising our full year 2018 net sales guidance, excluding the impact of the Cartiva acquisition to approximately $825 million to $828 million from our previous guidance of approximately $812 million to $822 million. This is a fairly narrow range, but with a little more than a month left in the year, this is realistically where we expect the year to land. This guidance range assumes foreign currency exchange rates for the rest of the year that are generally in line with current rates.

In addition, this range implies full-year 2018 constant currency net sales growth of 11% to 12% and fourth quarter 2018 constant currency net sales growth of 10% to 12%, excluding the estimated $9 million impact of the four fewer selling days in the fourth quarter of 2018. This guidance implies a slight growth rate deceleration in the fourth quarter due to tough comps on shoulders and an expected lower growth rate for international in the fourth quarter than we saw in Q3.

International had an excellent third quarter at 13% constant currency growth and well above our full-year expectation for that business of high single digits. Also, I want to remind everyone that we did not provide line item estimates for the impact of the four extra selling days in Q4 of last year. So, it will be challenging to try to compare individual product line performance to previous quarters. One thing we know for sure is the extra days had a greater impact on the US business than international.

Additionally, the company is providing guidance on the impact of the Cartiva acquisition. From the date of closing, which was October 10, 2018, Cartiva is anticipated to provide approximately $7 million of net sales in 2018, resulting in an as reported net sales guidance of $832 million to $835 million.

This guidance implies a year over year decline for the stand-alone Cartiva business in the fourth quarter. This was anticipated as we knew that from announcement to the end of the year, we would be working with the existing distributor group and until they had certainty about the future, sales would be negatively impacted. The vast majority of Cartiva's revenue is with a little over 20 distributors. We have informed those distributors there is a role for them going forward with the SCI product. We are currently in the process of negotiating their ongoing contracts.

The goal for these territories is to keep the momentum they have with the product and supplement that in 2019 with our salesforce where it can be beneficial. The remaining slightly less than 20 distributors have been notified that we will not be renewing their contracts. Our direct salesforce will be taking over those territories on January 1st and we will be training our salesforce this quarter.

As Bob said, we expect to be in a great position on January 1st with our salesforce trained and ready to go and clarity for the distributors that will be retaining. As previously announced, we expect Cartiva to contribute approximately $47 million of sales in 2019. We are also raising our full-year 2018 non-GAAP adjusted EBITDA from continuing operations guidance to a range of $110 million to $116 million from our previous guidance range of $106 million to $113 million.

Cartiva is estimated to be roughly neutral to 2018 non-GAAP adjusted EBTIDA on an as-reported basis. As you may recall, we have a headwind on EBITDA margin expansion this year from the lower levels and incentive compensation in prior year all in the second half of the year.

We estimated this was a headwind of a little over a percentage point impact for the full year of 2018 or approximately 260-basis point impact in the back-half of 2018. At the midpoint, our guidance implies EBITDA margin expansion in the second half of the year of approximately 140 basis points or approximately 400 basis points excluding the incentive comp headwind.

The company estimates approximately 112.6 million diluted shares outstanding for fiscal year 2018 and 127.2 million non-GAAP adjusted diluted shares outstanding for the fourth quarter of 2018.

The last item I would like to cover is some directional comments on 2019. As is our normal mode of operation, we will provide formal 2019 on our Q4 call in February. However, I wanted to provide you with some thoughts to keep in mind as you begin to develop your 2019 models. We expect the extremities and biologics market to continue to be high-growth in the range of 7% to 10%.

From a modeling standpoint, all quarters in 2019 have the same number of days versus the prior year quarter. We are confident in our ability to grow revenue on a constant currency basis in the double-digits in our base business plus the $47 million for Cartiva that we previously announced.

At current rates, foreign currency is a headwind in the range of 1% as we head into 2019. We typically include some currency cushion in our as-reported guidance. From a profitability standpoint, we have been consistently expanding EBITDA margins in a range of 200 to 300 basis points each year and expect the addition of Cartiva to increase this to 300 to 400 basis points of expansion in 2019 over the midpoint of our current 2018 guidance excluding Cartiva.

As we have stated previously, we expect to have 20% EBITDA margins toward the end of 2019 and that is still the case. Specifically, we now expect to achieve our goal of 20% adjusted EBITDA margins for the full fourth quarter of 2019.

In closing, we delivered a strong quarter in Q3 that was driven by our enabling technologies, new product launches, and strong salesforce execution across the business. Our increased guidance reflects the strong underlying business performance and the recent close of the Cartiva acquisition. We are confident in our ability to deliver a strong close to 2018 and are set up well for next year.

With that, we would now like to open the call to take your questions.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, if you have a question at this time, please press * then 1 on your touchstone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the # key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Again, that is * then 1 if you would like to ask a question.

Our first question comes from the line of Matt Blackman with Stifel. Your line is now open.

Matthew Blackman -- Stifel Nicolaus -- Analyst

Good afternoon, everyone and thanks for taking my questions. First, for Bob and/or Lance, you just posted your fourth consecutive quarter of sequential stronger sales growth and you've touched on this a bit in your prepared remarks. I was hoping to get your take on the health of your end markets. Are the upper and lower extremity markets getting a little stronger here in 2018 or do you think the acceleration we're seeing is largely specific to Wright? Then I've got one follow-up.

Robert Palmisano -- President and Chief Executive Officer

I think the end markets are continuing in the growth rates that we have seen them previously in that 7% to 8% area. So, the overage is more related to what we're doing in terms of our new products that we talked about -- salesforce execution, enabling technologies, those kinds of things. I think that both things are good. The markets are strong and healthy and growing nicely and our position in them is very strong. Our upper business is better than two times, almost three times market and our lower business is 150% of market. So, I think that's all good and puts us in great shape now and for the foreseeable future.

Matthew Blackman -- Stifel Nicolaus -- Analyst

Thanks for that. I appreciate the color. My follow-up shifts to AUGMENT Injectable -- obviously, it's still early, but we can already see some modest monthly acceleration since the launch. Do you think your reps have hit their stride yet or do you think growth should continue to accelerate from here? Can you give any flavor as to the early uptake? Is it largely increasing penetration in existing AUGMENT Classic users or are you also seeing new account openings as well? Our survey work suggests meaningful opportunities for both those avenues of incremental growth.

Robert Palmisano -- President and Chief Executive Officer

Yeah. I think that AUGMENT Injectable is off to a good start. We got approval, I believe, in June, but really didn't have full supply and everything going until sometime in July. I think we're very happy where we are. We've always commented that where we launched AUGMENT Injectable international markets, we saw about a 30% increase. I think we're on a trajectory to get there. We're not there yet, but I think that is very doable for us.

I think the AUGMENT Injectable has opened some new doors for us. But the vast majority of it is cannibalizing what we call the AUGMENT Classic. I think we still have some of that out in the field that is still being used up. It won't be long before the 90%+ of AUGMENT sales will be AUGMENT Injectable. It's only about 60% right now, I believe.

We're off to a great start. The product performs well. It doesn't seem that we're going to have to go back to any vet committees again. That was something that we thought might be possible, but we haven't been notified of that. So, it's just all positive from the AUGMENT Injectable, from getting the approval to now.

Matthew Blackman -- Stifel Nicolaus -- Analyst

Thanks for all that, Bob.

Operator

Thank you. Our next question comes from the line of Larry Biegelsen with Wells Fargo. Your line is now open.

Larry Biegelsen -- Wells Fargo -- Analyst

Good afternoon. Thanks for taking the question. Bob, I just wanted to ask you about international and Cartiva. You talked about you've seen a nice improvement there. Can you talk about why you think you've seen that improvement and the sustainability of that? I have one follow-up.

Robert Palmisano -- President and Chief Executive Officer

Regarding international, we've always said international is a little bit choppy. One quarter is really strong, then the next quarter isn't so strong. International third quarter just had a very good year. Everything kind of went right there also. The above performance results, in my opinion, came mostly from distributor markets that are strong biologic markets also, which is a good thing. Whereas I think that our direct markets grew in the high single digits, which is where we thought they should be growing at and had forecasted that, but the real uptick came from our distributor markets.

Larry Biegelsen -- Wells Fargo -- Analyst

That's helpful. Then on Cartiva, thanks very much for publishing the stand-alone sales. When people look at them, they might be surprised to see sequential declines in 2018, I know I was given all the positive feedback we've heard from physicians and the numbers you've provided. Can you talk about why there have been sequential declines in 2018 for Cartiva and why you're so confident in $47 million in 2019? Thanks for taking the questions.

Lance Berry -- Senior Vice President and Chief Financial Officer

Yeah, Larry. This is Lance. I'll take a shop at that and Bob can jump in. As we were looking at the deal, we saw that as well. A lot of that had to do with you had a management team that spent most of this year working on a sales process for the company and not really driving sales. You really could see the slowdown coincide to when they really started their process. We looked at that very closely in our diligence.

We're very confident that then when we were able to get highly focused on this and really roughly doubled the number of active reps selling this product, we would be able to get that going strongly in a positive direction. We were obviously well aware of the results up until we announced and then we were not surprised at all that following announcement, sales has slowed down as all the distributors really wait to see what the future holds from them, which we're working through with them now.

Larry Biegelsen -- Wells Fargo -- Analyst

Thank you, Lance.

Operator

Thank you. Our next question comes from the line of Jeff Johnson with Robert W. Baird. Your line is now open.

Jeff Johnson -- Robert W. Baird -- Managing Director

Bob, I'm just wondering any update on your presence in the ASC channel? I know it's only been a month with Cartiva. PROstep has been out there, I think, since July. Those are two markets, I think, that are going to help lead you into that market in a more robust way going forward. But what are you seeing so far on the ASC side?

Robert Palmisano -- President and Chief Executive Officer

This has been a growing part of the business for several years. We trailed a little bit and had some catch up to do. I think we started in earnest a year or so ago when we formed a team to go attack this. We've learned a lot and we've gotten significantly better results, which I think will just keep on getting better.

Specifically, a couple of things that we learned are that this is more -- our group before had traditionally sold to physicians and their hold mentality was selling to physicians. This is more selling to an institution or an ASC site. The sales process is different. The billing is different. They like to be billed for a procedure, not each piece of the procedure. The inventory on hand is different. The actual product mix is different.

I think all that was leading that we learned -- that's one of the reasons we're seeing some improvement in our core lower extremity business is we're getting much better at it and we will continue to get better at it. Cartiva is a product that I think is made for ASCs, along with the other stuff. The learnings that we have I think will make us increasingly important to ASCs. I'd also put our minimally invasive PROstep into that category also that has helped our presence in the ASC.

So, whereas we were not in a great position a year ago at this time, I would say, in ASCs, I think right now our business is strong and is accelerating. When we get Cartiva really going, I think it will actually be one of the stronger parts of our distribution system.

Jeff Johnson -- Robert W. Baird -- Managing Director

Thank you. That's helpful. Lance, I don't know if you could provide more color there on what percentage of your business you think goes to ASC, where you think that might go over time, just any help there. Then the same kind of clarifying question on AUGMENT Injectable. If that goes to 60% to 90% over time, just remind me, is there a pricing differential on Inject versus the Classic version?

Lance Berry -- Senior Vice President and Chief Financial Officer

So, I'll take the AUGMENT first. We're generally pricing that the same. That was intentional, partly to avoid having to go back to the back committee. If we were to put through a real lenient price increase of consequence, that would have meant a lot of accounts have to go through the back committee and delayed that entry. So, our choice was we held good pricing on AUGMENT, the original, so let's just maintain that and get Injectable into these accounts.

We don't break out what percentage of our business is ASCs. I would say at a high-level, the way you can think about it is things like total ankle and complex hindfoot surgeries, those are generally being done in a hospital inpatient setting. Then your forefoot and midfoot procedures, for the most part, unless they're being done in conjunction with one of the more complicated procedures, are being done in an outpatient setting, which is a mix of hospital outpatient and ASC, but trending over time more toward the ASC.

So, that's really how the business kind of shakes out. We haven't broke out what percentage is which, but both parts of that are very important to us and our ability to grow our lower extremities business.

Jeff Johnson -- Robert W. Baird -- Managing Director

Great. Thank you.

Operator

Thank you. Our next question comes from the line of Travis Steed with Bank of America. Your line is now open.

Travis Steed -- Bank of America Merrill Lynch -- Analyst

Congrats on the great quarter. I appreciate the comments on 2019, but from where I've sit, you've got several tailwinds -- new products in lower, good growth in shoulder, AUGMENT Injectable, you just closed in mid-teens growth. So, could you just remind us of some of the headwinds we should consider in 2019 that could keep you from achieving mid-teens growth next year in your underlying business?

Robert Palmisano -- President and Chief Executive Officer

Well, I think mid-teens growth is something we would strive to hit, but I think it's a little bit unrealistic for every quarter, particularly when you look at this quarter, Q3 that we're reporting on, everything went right. You've always heard the story about the perfect storm. The perfect storm is usually a negative storm -- bad weather, regulatory problems, supply chain problems, etc.

This was something that we believe everything went right on. I just don't think you can count on that all the time. I think we will continue to put up very strong numbers. We consider ourselves to be -- what we said, I think, about a year ago at this time is you can look at us to be a double-digit growth company. Hopefully, we can do better than that, but I think that's something we're willing to sign up for.

We do have some very difficult comps when you look at this compounding year over year, particularly in our upper extremity business, where our PERFORM Reverse product line has been over 20% for the last year of growth. At some time, that would slow down some. Our SIMPLICITI business is extremely strong and growing even more than our PERFROM Reverse business. So, it's just hard to say that you can continue that on infinitum.

On our lower extremity business, I think that this is two aspects to it that I do think will provide some good headwinds to us. We've launched a lot of good solid new products. We talked a lot about minimally invasive in the past and that is now launched.

As we expected there's a pretty steep learning curve on that and that's going to get better and better and really accelerate our business, our lower extremity business as well as our ASC business. AUGMENT Injectable, again, is something that I think is really going to help grow that business. We're looking at about a 30% increase from where we were with just the classic formula there.

I think all the kinds of issues we had with salesforce last year as we went away from the Tornier lower extremity salesforce into the new salesforce that created problems -- those are behind us. I think that business is getting stronger and stronger. So, I think that the way I see it, our upper extremity business will deaccelerate some in that it's too hard to maintain that kind of 20% growth, but our lower extremity business, I think, has the potential to increase some. Our biologics business, I think, should be able to increase some.

So, I think that we'll give you a much better insight in 2019 in February, but directionally, we think that we're very comfortable with people thinking about the out years as double-digit at this time.

Travis Steed -- Bank of America Merrill Lynch -- Analyst

That's very helpful. Last quarter, I think you said SIMPLICITI grew 31%. I'm curious if you're willing to give that growth rate again this quarter.

Robert Palmisano -- President and Chief Executive Officer

I think it's roughly the same.

Travis Steed -- Bank of America Merrill Lynch -- Analyst

Okay. Then the shoulder revision product launching in Q4, is that a material impact to revenue? How should we think about the ramp there?

Robert Palmisano -- President and Chief Executive Officer

What we learned -- we knew this when we launched our revision product in ankle -- is that there's not a big amount of new business that comes, but what it does, though, is it gives surgeons the -- I don't know how to say this -- the courage, I guess, to do these procedures knowing they have a bailout. Our INVISION product in ankle is growing triple digits, quite frankly, but it's on the low base.

I think that eventually, the revision product in upper will have some type of a meaningful effect, but the more important thing is that physicians will be doing these procedures more than they would have done them without having a revision option if something happens downstream. That's really what that product is for.

Travis Steed -- Bank of America Merrill Lynch -- Analyst

Great. Thanks and congrats on a great quarter.

Operator

Thank you. Our next question comes from the line of Matthew O'Brien with Piper Jaffray. Your line is now open.

Will -- Piper Jaffray -- Analyst

Hi, guys. Thanks for taking the questions. This is Will on for Matt. I guess starting off with US upper extremities, the shoulder business was still very strong, 21%. You anniversaried the PERFORM Reverse glenoid launch. So, I'm trying to deconstruct the growth there. What's driving that? Is it SIMPLICITI, PERFORM? Then the 30% customer base using BLUEPRINT, was that a factor?

Robert Palmisano -- President and Chief Executive Officer

I think you hit on all of them. The PERFORM Reverse continues to be strong. As I said, we had over 20% growth in that. It was higher than that. SIMPLICITI is around 30%. I think a really driving force is the acquisition of new surgeon customers. That has a lot to do with the adoption of BLUEPRINT. We have now about 30% of our cases that are done are using BLUEPRINT. I think that would continue to accelerate it.

Once you actually demo this to a surgeon no matter how skilled they are -- some of the most highly skilled surgeons use it all the time, are just wowed and bowled over by what this can help them do. We're just at the beginning of this. We have a lot more modules, if you will, that we're working on, everything from augmented reality, artificial intelligence, interoperative guidance that are being worked on.

Now, we made a big investment and I think it's paying off. We have 25 or so software engineers working on these things full-time. It's not insignificant. This is what's driving our growth more than anything. I'll put it this way -- it's driving our acquisition of new surgeons away from competitors.

I think that as the additional modules get ready and are rolled out, this will even have a more profound effect. The hardware itself, the PERFORM Reverse and SIMPLCITI are doing their jobs extremely well, 20% to 30%. Then BLUEPRINT is just really pushing everything forward really well.

Will -- Piper Jaffray -- Analyst

Great. That makes sense. Shifting to the US lower extremities with core still at market growth, when do you think that you can be back in a share-taking position given some softness with your competitors?

Robert Palmisano -- President and Chief Executive Officer

Well, we're driving to do that. I think that our organization is a thousand times better than we were a year ago when we went through the transition. I can't give you a time period. I do think that is in the cards. I think there's no reason with our organization and the strength of our organization and the competency that they exhibit that we should not be taking share.

But don't forget in total, when you look at the market, that includes what we call technically advanced products, Charcot Systems as well as AUGMENT, is that just the hardware piece of it, we're going well above market now.

Will -- Piper Jaffray -- Analyst

Thank you very much.

Operator

Thank you. Our next question comes from the line of Mike Matson with Needham & Company. Your line is now open.

Mike Matson -- Needham & Company -- Managing Director

Hi, thanks for taking my questions. I just wanted to follow-up on that last question about lower extremities growth. Stryker called out some supply issues in their extremities business and Tegra seems to have self-inflicted issues going on in their extremities business. Do you think you've benefited from these competitors' issues in the quarter at all?

Robert Palmisano -- President and Chief Executive Officer

I don't know. We certainly didn't see a slowdown in the market, if that's what you're asking. The people that were gaining some share last year and the year before were not the big players, I would say. They were a bunch of smaller companies and distributorships that were spawned out of the Wright-Tornier merger when 50 or so distributor sales reps were displaced and got their own business. Those are the people who gained share.

I don't know specifically what's going on with those competitors, but it seems like the growth in these smaller players has waned some, for sure. The reason it has, I think, is our salesforce has got much more traction behind it and customers, surgeons realize they need more than just a cheap product. They need medical education. They need support and everything that we strive to give them.

Mike Matson -- Needham & Company -- Managing Director

Okay. Thanks. And then you went through this big salesforce expansion in the lower extremities business last year and we've seen some tremendous growth in the upper extremities business. I'm just wondering where things stand there with the size of the salesforce. Do you need to expand that as well or have you been doing that on an ongoing basis?

Lance Berry -- Senior Vice President and Chief Financial Officer

Yeah, Mike. This is Lance. One, we have been adding in territories as needed through the normal course on the upper extremity business. I will also say the sales per rep in the supper extremity business, if you go back a year and a half ago was pretty low compared to the lower extremity business.

We moved that business into our hub network, which created a fair amount of capacity for the reps as well. I think just natural, adding where we needed to but also giving them some extra capacity has allowed us to handle that very significant increase in volume over the past two years.

Robert Palmisano -- President and Chief Executive Officer

I would add to that, Mike, that we don't see a big bullous of additions like we did in lower. We think that, as Lance said, we're adding people pretty much all the time, but it's Mondays, Tuesdays in different areas so we don't get the big disruption that we get in our lower extremity organization a year ago.

Mike Matson -- Needham & Company -- Managing Director

Great. That's kind of what I was getting at. I just wanted to make sure we weren't going to see a risk of something like that. Thank you.

Operator

Thank you. Our next question comes from the line of Craig Bijou with Cantor Fitzgerald. Your line is now open.

Craig Bijou -- Cantor Fitzgerald -- Analyst

Thanks for taking the questions guys. I want to start with the total ankle business. Obviously, you guys had a strong quarter this quarter on a relatively tough comp. I know, Bob, you've talked about it before. Is there anything you saw within the total ankle market, maybe in terms of penetration, anything that could be signaling an inflection point where total ankle starts becoming a larger portion of the market?

Robert Palmisano -- President and Chief Executive Officer

I think it's pretty much just steady growth. For me, it's hard to believe that everybody that has an ankle fusion doesn't have a total ankle replacement, but that's still the case. We're making progress on it.

The big driver here that differentiates us than any of the other players is PROPHECY. Just like BLUEPRINT affects in a pretty dramatic way our upper growth, PROPHECY is what affects our lower growth. What it does is it makes it easier for physicians to do total ankles than just freehand surgery like they have to do with most of the competitive products.

I think the enabling technology philosophy is key. I just think that it will continue to grow and hopefully, it will continue to grow 20% and 20% and 20%, and at some point in time, ankle fusions will go the way of knee fusions that used to be in effect a while ago. But we're making great progress. The team is very motivated. We do a lot of med ed. and we continue to develop our portfolio to have even better hardware, but PROPHECY, I think, is really the differentiator.

Craig Bijou -- Cantor Fitzgerald -- Analyst

Great. Thanks for that. A couple of follow-ups on AUGMENT -- Lance or Bob, I think you guys said you expected $3 million in additional revenue in the second half from Injectable. So, I'm just curious as to if that's still a good number. Then a little maybe longer-term or bigger picture, I know there were some other indications you guys were looking for with AUGMENT when you originally did the deal. So, just maybe your thoughts on what the next indication could be for AUGMENT.

Lance Berry -- Senior Vice President and Chief Financial Officer

Yeah, Craig. So, we raised guidance when we got approval. So, we were trying to give people a little color as to how much that was attributable to injectable. So, no real intent to update that and how we're performing against that. We had two pretty meaningful upticks in our guidance since then. So, overall, obviously, the business is doing well. If you just look at the US bio business, we have a pretty significant improvement in growth rate from Q2 to Q3. So, I think all good signs that injectable is doing well, but we're not going to give any hard specifics on that.

Then as far as other indications, we're still evaluating are there any nearer term opportunities, which is a little more challenging and then still working through the process to decide do we want to do a full-blown PMA, which could potentially be very meaningful if approved, but obviously a very long timeframe to get that done.

Robert Palmisano -- President and Chief Executive Officer

As I said, I think that we're looking at both things. The regulatory path that we would have to go through is dictating how we're going to proceed. Short-term, if we could get an indication for maybe our midfoot or forefoot, that would be something we may be able to have a much sooner regulatory path. If we're going to go to some other part of the anatomy, that's a real big investment, but it may be worthwhile.

Craig Bijou -- Cantor Fitzgerald -- Analyst

Thanks for taking the questions, guys.

Operator

Thank you. Our next question comes from the line of Robbie Marcus with J.P. Morgan. Your line is now open.

Robert Marcus -- J.P. Morgan -- Analyst

Thanks for taking the question. Lance, I was hoping -- excuse me if someone asked this, I was between calls tonight -- I was hoping you could talk about the good EBITDA performance in the quarter. Cartiva is going to start hitting next quarter. You reiterated guidance for greater than 20%, probably exiting next year.

Seeing the good performance you've had to date, does this increase your confidence you could get there? Help us think about over the next few years over the next few years as this business continues to grow where you think this could trend beyond the 20%, which doesn't seem that far from being achievable at this point.

Lance Berry -- Senior Vice President and Chief Financial Officer

Sure. So, first of all, I'd say we've always had a pretty high-level confidence in getting to that 20% number by the end of '19. We've posted pretty steady 200-300 basis points of EBITDA margin expansion every year since the merger. That's pretty much the same formula we've been talking about, which is the actual salesforce. And our R&D, we're not going to look to get any leverage out of that. We want to reinvest in that at the rate of sales because that's really differentiated technology and specialized salesforces is how we think we can win.

Then the other parts -- sales management, medical education, marketing, those things are things that we can continue to invest in, but not fully at the rate of sales and then we can get some leverage. Then we can start looking at more our distribution network and our G&A, which honestly are pretty high for what you would expect for a company our size due to our unique history. We have everything we need there.

There's a great opportunity to hold that as flat as possible and if we can grow double digits, drive quite a bit of leverage. That's really been the formula for the past couple of years. We see that ongoing and we certainly have a 20% objective that we laid out at the merger. We're getting pretty close to that if you look toward the end of next year.

We're not ready to give formal guidance beyond that, but we are confident in our ability to continue to drive leverage beyond the 20%. We're certainly not going to stop once we hit that number.

Robert Marcus -- J.P. Morgan -- Analyst

Got it. Thanks. At AOFAS over the summer, PROstep was a product you talked a lot about. Can you help us understand maybe the good numbers you put up and lowered tonight, how much was driven by PROstep and other products and how much was just improved productivity from the base business?

Robert Palmisano -- President and Chief Executive Officer

Well, I think all our new products performed at expectations or greater. PROstep is a very important product for us for two reasons. First of all, it's a market share gainer for us. It's a better procedure for bunions, which are the largest surgical procedure that we have. The operating times are much less, the recovery times are much less, and there's less of a scar. So, it's a better procedure, which helps drive that.

Secondly, it's a product that is really made in a way for the ASCs. We talked a little bit earlier about how important that is and how much of a trend or an uptick on that. What I will say is the learning curve is pretty steep and that it's one of these things is if the doctor seems to do one or two of them, they get discouraged.

We have a whole process that we have and we're working to refine that encourages doctors to do a lot of procedures under supervision, if you will, a lot of help there so that they get comfortable doing this procedure more quickly than they would have if they just do a couple and then stop.

So, it's kind of a breakthrough product, we believe for a very large surgical procedure. So, that's a lot of it. Our other new products are CROSSCHECK and revision systems that we talked about are all performing at or above expectations. The reason hat we had such good growth is a lot to do with the new products and will continue to be that as we exit '18 into '19 when we have a lot of other stuff that will be hitting the market.

Robert Marcus -- J.P. Morgan -- Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Richard Newitter with Leerink Partners. Your line is now open.

Richard Newitter -- Leerink Partners -- Managing Director

Thanks for taking the questions and congrats on the quarter. I have two and I apologize if one of them was asked. Bob, you've talked in the past and you mentioned again on this call the procedural sell versus individual product sell. I hesitate to use the word bundle, but it sounds like that's what that is. When you talk in the ASC, what is the impact to gross margin in AST from that new selling process?

Robert Palmisano -- President and Chief Executive Officer

Richard, I'm going to turn it over to Lance, actually, because he led the team on our ASC expansion. So, I'm going to let him talk about that.

Lance Berry -- Senior Vice President and Chief Financial Officer

Rich, as we really tried to dig into this, we found it's not just a price thing with ASC. They're much more profitability-focused, but that profitability really entails a lot of things. Cost of the product is part of it, but it's also how do they keep their ORs full? That's their biggest cost.

How do they attract the type of procedures and patients they want to fill up the OR? What can you do to help them with their efficiency? Then they want options and they're willing to pay fine gross margins for the different options, but they may want a lower cost option and a higher cost option that they will make some decisions around.

So, it's not as simple as price. It's a lot more nuanced than that. That's something that we've learned as we've gotten into it. So, this can be a really good healthy part of our business, but we have to be more attuned to the customer and know the customer is not just a surgeon. It's the surgeon and the account. That's what we've really been working on over the past year. We've made a lot of progress, but I still think there's a lot of progress we can make a lot and do a lot better on this as we roll into 2019.

Richard Newitter -- Leerink Partners -- Managing Director

Okay. That's helpful color. Thanks. Maybe just a follow-up on Cartiva. Bob, just in the past, you've done a number of deals in the past few years. Occasionally, the unanticipated happens and some things take you by surprise, whether it's distributor workouts or sales productivity ramps and whatnot. Can you maybe just describe what you've learned from those in the past and how you've approached getting to the numbers you've provided for '19 and what you could say to give us confidence that you've got this one entirely right?

Robert Palmisano -- President and Chief Executive Officer

Well, I wish I could guarantee that, what I would say is that I think most of the acquisitions that we've made turned out just great. There is a learning around when you really disrupt the sales organization and the relationship of that rep with that customer, which is usually a physician, you're in some jeopardy.

So, what we've done here is let me just say Cartiva has had about 40 distributors. It's really the 80-20 rule. About 80% of the revenue comes from the top 20 distributors. We are not messing with that. We have offered all the distributors new contracts. We're in the process of finalizing those and negotiating the terms and the accounts, etc.

The other 20 distributors we have notified that we are not going to be using them in the future and we will be supplementing our salesforce with them. We think that's a low-risk deal. So, what we've tried to do is protect revenue and in doing that, protect the relationship between who is selling it to them in that account.

I think I can't be sure that everything will work 100% as planned, but I think this is a good plan and the distributors that we are keeping, that we've offered new contracts to are thrilled. There was a little bit of anxiety between the announcement of the deal and the close and even after the close until we were able to get to them and talk to them, each one specifically, but I think that right now, I think that we're seeing their business picking up.

I think that as we go into next year and all these things are behind us, 80% of the revenue is going to be with the same sales rep, the same distributor. The other 20% that didn't do much, we think we could do better with with our direct organization.

Richard Newitter -- Leerink Partners -- Managing Director

Thank you very much.

Operator

Thank you. Our next question comes from the line of Chris Pasquale with Guggenheim. Your line is now open.

Chris Pasquale -- Guggenheim Securities -- Managing Director

Thanks. Congrats on the quarter. Bob, I wanted to start following up on Rich's question about Cartiva. The $47 million guidance for next year implies over 30% growth. That's obviously pretty healthy. Is that actually net of some assumed friction as you make that transition? Or are you guys really assuming that the handoff is going to be pretty smooth and we should think about that as being a clean number for the product?

Robert Palmisano -- President and Chief Executive Officer

Yeah. We think that as we get into next year, that hand off will be pretty smooth. The addition of the right sales rep selling this product in addition to the current distributors will drive a lot of upside. We will have probably a third more reps selling than --

Lance Berry -- Senior Vice President and Chief Financial Officer

Maybe close to double.

Robert Palmisano -- President and Chief Executive Officer

Double the reps selling Cartiva next year as are selling it this year.

Lance Berry -- Senior Vice President and Chief Financial Officer

Chris, one thing on that -- for the distributors we notify that we won't be renewing their contract, they still have the territory through the end of the year, so our salesforce can't really get in there until January 1. So, I think there will be some ramp-up period over the first quarter as we get the much bigger salesforce in there.

As we've discussed, we expect the fourth quarter to be much less than it would have been if there hadn't been a transaction and for the reasons Bob had discussed with uncertainties the distributor network had until we could get to them and explain the ones that had a role going forward.

Chris Pasquale -- Guggenheim Securities -- Managing Director

Thanks. Then on BLUEPRINT, I thought the jump in utilization there was an interesting data point. You've had that software for a while. I know you've been adding functionality over time. Was there anything in particular that you think drove the step-up in adoption this quarter and where do you think that penetration could go over the course of let's say the next year?

Robert Palmisano -- President and Chief Executive Officer

We've made it a lot easier recently. The software now is a cloud-based software, whereas before, we had to physically take the CT scan discs to the surgeon. Now, it's all in the cloud. We've made it a lot easier. So, I just think that in addition to that, doctors are getting much more comfortable with it.

One of the things that is unique and is kind of surprising in a way is that it's really the leading physicians that are using it all the time. They use it all the time. I think other doctors who are kind of dabbling in it are talking to these other physicians and are now converting to using it all the time. So, I think that the combination of making it easier, plus the momentum of the leading KOLs is driving that.

So, I think it's going to continue to grow. I'm not sure it's going to be next quarter up to 40% or 50%, but I think it's going to accelerate and I think the vast majority of cases in the next couple of years will be done using the BLUEPRINT technology. It's so much better than doing it the other way and there's so much more help for a physician to plan and execute a case. They love it and the leading KOLs are using them more than anybody.

Chris Pasquale -- Guggenheim Securities -- Managing Director

Thanks.

Operator

Thank you. Our next question comes from the line of Joanne Wuensch with BMO Capital Markets. Your line is now open.

Matthew Henriksson -- BMO Capital Markets -- Analyst

Hi, this is Matt Henriksson in for Joanne. I'd like to follow-up on Robbie's question on PROstep. You talked about the steep learning curve. You talked about how doctors need more than one or two cases to kind of get up to speed. What is the average number of cases that doctors need to do before they say, "Okay, I feel comfortable with this?"

Robert Palmisano -- President and Chief Executive Officer

I don't have a specific number, but it's certainly double-digits. So, what we try to do is ask a doctor to line up a bunch of cases and make sure that all the help we can throw at the doctor is there when they're doing a bunch of cases. This is contrary to a lot of other products that are procedures where doctors like to do one or two and then wait a couple of months and see how the patients do and then start up again. This is a high-volume procedure. Physicians, DPMs do a lot of these. Using PROstep is a pretty big change in their technique, but once they get it, they get it and they never go back.

Matthew Henriksson -- BMO Capital Markets -- Analyst

That's helpful. Just my follow-up -- now that the holders of the 2021 notes can convert those notes in the upcoming quarter, what's your strategy to address investors who decide to convert those notes?

Lance Berry -- Senior Vice President and Chief Financial Officer

Well, we've had this situation on and off in the past. It would be to their economic detriment for them to redeem the notes. They honestly could get, just because of the mechanics of how converts trade, they could get more money just selling the convert in the open market than what their redemption price would be from us. So, we've had that in the past. No one has ever redeemed because it's detrimental to them to do that. So, we would not expect that to occur.

Matthew Henriksson -- BMO Capital Markets -- Analyst

That's helpful. Thank you very much.

Operator

Thank you. Our next question comes from the line of Steven Lichtman with Oppenheimer & Company. Your line is now open.

Steven Lichtman -- Oppenheimer & Co. -- Managing Director

Thank you. Hi, guys. You talked about the strong performance outside of the US. Bob, you gave a little color on where the strength came from. I'm wondering geographically, has that growth been broad-based? Are you expanding your reach outside the US or has this been accelerated growth within the current countries?

Robert Palmisano -- President and Chief Executive Officer

Sometimes we have a not so good quarter internationally and we say, "Well, it's choppy internationally." That's what it is. In one quarter, you could have a good growth -- these are stocking distributors. So, I would just give these in the emerging markets, specifically China and South America. It seems like one quarter is really strong.

The next quarter is not so strong and it just goes on like that. I say it that a lot of the growth is in our bio portfolio, particularly in China, which is a good thing because we like the margins and we like the lack of capital intensity that goes with bio. So, it would be great if we could have that growth every quarter. I would look at a normalized international growth rate in the high single-digits as we go forward. We'd like to do better than that, but that's realistic.

Steven Lichtman -- Oppenheimer & Co. -- Managing Director

That's perfect. You actually answered my second question on the underlying sales growth ahead. So, thanks a lot, Bob.

Robert Palmisano -- President and Chief Executive Officer

Thank you.

Operator

Thank you. This concludes our question and answer session today. I would now like to turn the call back to Bob Palmisano for closing remarks.

Robert Palmisano -- President and Chief Executive Officer

Thanks, Operator and thanks all of you for joining us today. I want to express my appreciation to our team for their efforts in Q3 and I am also delighted to welcome Cartiva employees to the Wright Medical family. I look forward to speaking with you again in our next quarter earnings call. We appreciate your interest and your continued support. This concludes our call.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.

Duration: 67 minutes

Call participants:

Julie Dewey -- Senior Vice President and Chief Communications Officer

Robert Palmisano -- President and Chief Executive Officer

Lance Berry -- Senior Vice President and Chief Financial Officer

Matthew Blackman -- Stifel Nicolaus -- Analyst

Larry Biegelsen -- Wells Fargo -- Analyst

Jeff Johnson -- Robert W. Baird -- Managing Director

Travis Steed -- Bank of America Merrill Lynch -- Analyst

Will -- Piper Jaffray -- Analyst

Mike Matson -- Needham & Company -- Managing Director

Craig Bijou -- Cantor Fitzgerald -- Analyst

Robert Marcus -- J.P. Morgan -- Analyst

Richard Newitter -- Leerink Partners -- Managing Director

Chris Pasquale -- Guggenheim Securities -- Managing Director

Matthew Henriksson -- BMO Capital Markets -- Analyst

Steven Lichtman -- Oppenheimer & Co. -- Managing Director

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