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Wright Medical Group Inc  (NASDAQ:WMGI)
Q4 2018 Earnings Conference Call
Feb. 26, 2019, 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 Q4 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. (Operator Instruction) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mrs. Julie Dewey. You may begin.

Julie Dewey -- Senior Vice President and Chief Communications Officer

Thank you, and good afternoon, everyone. Welcome to Wright Medical's fourth 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 Executive Vice President, Chief Financial and Operations Officer.

We issued a press release this afternoon regarding our fourth 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 then conclude with closing comments from Bob.

Before we begin, I would like to remind you that this call includes forward-looking statements, including statements about our outlook for 2019. 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 risks can be found under the heading Risk Factors in Wright's most recently filed annual report on Form 10-K, Wright's to be filed annual report on Form 10-K for the period ending December 30, 2018 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. These 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 and today's discussion include certain non-GAAP financial measures. Please refer to the reconciliations 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 and that full year and Q4 2018 global constant currency growth rate approximate organic growth, as the approximately $9 million negative impact of the four fewer selling days in Q4 2018 was offset by the $9.5 million contribution of Cartiva revenue.

Before I turn the call over to Bob, I did want to mention that Wright will be holding an Investor and Analyst Breakfast during the American Academy of Orthopaedic Surgery AAOS Annual Meeting in Las Vegas. This event will take place on Wednesday, March 13th from 7:00 a.m. to 8.45 a.m. local time at the Venetian Hotel and will feature an informal Q&A with Bob, Lance and members of our management team.

We are also honored that upper extremities specialist, Dr. George Athwal and lower extremities specialist, Dr. James Sephora (ph), will be sharing their clinical perspective. If you're interested in attending the breakfast or visiting us for an exhibit booth tour, please email me at julie.dewey@wright.com to register. If you'd like more information about this AAOS Annual Meeting or Agenda, please visit aaos.org. We look forward to seeing you there.

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

Robert J. Palmisano -- President and Chief Executive Officer

Thanks, Julie, and welcome to our fourth quarter earnings call. On today's call, we will be covering our results for the fourth quarter and providing our 2019 guidance.

As we previously announced our Q4 net results -- net sales result, I'll be focusing the majority of my comments on our outlook for 2019. As previously reported, our fourth quarter results represent an outstanding performance across all our businesses. This performance was driven by continued strong shoulder growth in the quarter, which included the ongoing launch of our PERFORM Reversed glenoid and continued contributions from our SIMPLICITI shoulder system.

We anticipated that these products, as well as accelerating adoption of our BLUEPRINT enabling technology and the upcoming launch of our REVIVE revision shoulder system, will continue to drive strong shoulder sales growth in 2019 and beyond. We also had a strong adjusted EBITDA with 210 basis points of EBITDA margin expansion for the full year.

In our lower extremities business, we got off to a very strong start with Cartiva revenue of $9.5 million, which exceeded our expectations in the fourth quarter. On January 1st, Cartiva was fully launched with our US lower extremities sales force, including the integration of the former Cartiva distributors that we have chosen to retain. We also saw continued strong growth in our core products as well as in total ankle.

Our US biologics business continued to be driven by the ongoing roll-out of AUGMENT Injectable. We intend to continue to focus on strong execution and new product launches throughout 2019. For the full year of 2018, we delivered strong performance in multiple areas. Our total company revenue reached $836 million, and we accelerated our top line organic revenue growth from 8% in 2017 to 12% in 2018. This growth was propelled by major new product launches, including our PERFORM Reversed glenoid, BLUEPRINT adoption, AUGMENT Injectable and our PROstep MIS System, as well as improved execution in our US lower extremity sales force.

We increased non-GAAP adjusted EBITDA margin from 12% to 14%, and our fourth quarter adjusted gross margins of nearly 80% are some of the best in high-growth medtech. Our US upper extremities business grew more than twice the market rate, a truly exceptional rate that puts us -- puts the number one position in shoulder well within our reach.

Just a few years ago, there was approximately a 15% percentage point gap between the shoulder market leader and Wright. Today, we believe that gap is only 4 percentage points and shrinking. We have strong momentum, and we have no doubt that with our project -- with our product portfolio and BLUEPRINT enabling technology, we have worked the pieces in place to become the number one company in shoulder soon.

Our US lower extremity business is already number one, and back to performing in line with our expectations of double-digit sales growth on a same-sales day basis in the second half of 2018. We exited 2018 on a great trajectory. This is a great result, and is a testament to the improvement in our lower extremity sales force, the success of our new products like PROstep and good products, and further building our ASC business.

We also added the Cartiva Synthetic Cartilage Implant to our lower product -- to our lower product offering. This product is a true game changer. It is the first and only PMA product for the treatment of great toe osteoarthritis, and the only product of its kind backed by Level 1 clinical evidence. Cartiva is a perfect fit, and I couldn't be more bullish on what this team can do with it in 2019.

In addition, Cartiva Synthetic Cartilage is a platform technologies with many avenues for growth. The US biologics business had significant growth rate acceleration in the second half of the year, driven by the approval of AUGMENT Injectable. The feedback from the market is just what we expected. And the combination of Injectable superior handling characteristics with a proven efficacy of AUGMENT is driving significant growth.

I will now turn my focus to our guidance and outlook for 2019. I continue to be optimistic as we look forward, and I believe that we are set up well for double-digit net sales growth and significant EBITDA margin expansion in 2019 and beyond. We have leadership positions in the three of the fastest-growing markets in orthopedics.

Additionally, we have truly differentiated products in all our market segments, differentiated enabling technologies for shoulder and total ankle, very high gross margins and specialized sales forces that are performing at a high level. Our 2019 net sales guidance implies full-year 2019 constant currency net sales growth of 15% to 17%, pro forma constant currency net sales growth of 11% to 13% and organic constant currency net sales growth of 10% to 12%, resulting from continuing -- resulting from continuing above market growth in all three of our businesses; upper extremities, lower extremities and biologics.

We anticipate that growth in upper extremities will continue to be double the market rate of growth and be driven by new products, specifically the PERFORM Reversed Shoulder, SIMPLICITI shoulder and the adoption of BLUEPRINT and the upcoming launch of REVIVE revision shoulder.

On the lower extremity side of the business, we believe continued strong growth in our total ankle and SALVATION Limb Salvage products, combined with the ongoing launch of the PROstep MIS System, will drive improving growth rates throughout the year. We expect biologic will benefit from the continuing strong growth of AUGMENT Injectable.

From an EBITDA perspective, our guidance assumes continuing significant EBITDA margin expansion that puts us on track to exceed our goal of 20% adjusted EBITDA margin for the fourth quarter of 2019. I am confident that our 2019 ranges are achievable, and have been set up appropriately based on the current trajectory of our business.

I'm also optimistic about our prospects to continue improving beyond 2019. We announced new three-year financial targets from 2019 through 2021, which are to deliver double-digit constant currency net sales growth each year, maintain adjusted gross margins in the high 70% range each year and expand adjusted EBITDA margin to the mid-20% range, exiting 2021.

Delivering on our long-term financial targets is expected to result in Wright becoming a billion dollar revenue company with double-digit top line growth and adjusted EBITDA margins in excess of $0.20 during the course of 2020. This would represent a company with a best-in-class combination of size, growth and adjusted EBITDA and gross margins. I believe our leadership in high-growth markets, combined with our specialized sales force and differentiated technologies, positions us well to achieve these targets and deliver enhanced shareholder value.

With that, I'll now ask Lance to provide further details on our fourth quarter results and 2019 guidance. Lance?

Lance Berry -- Executive Vice President, Chief Financial and Operations 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.

Also, our final revenue results are the same as the results that we previously announced. Therefore, my comments will be focused primarily on our Q4 adjusted EBITDA results and our outlook for 2019. Globally, our net sales grew 10% in constant currency, as the approximately $9 million negative impact of the four fewer selling days was offset by the $9.5 million contribution of Cartiva revenue.

We saw a strong sales performance in all segments of the business, with continued exceptional growth in US upper extremities and a strong start from Cartiva, and an acceleration in the US biologics business, driven by AUGMENT Injectable sales.

Now, moving on to some detail below the sales line. Beginning with our Q4 adjusted gross margin, we achieved gross margins of 79.8% for the quarter. As for the line items making up our Q4 operating expenses, selling, general and administrative expenses as adjusted totaled 64.5% of net sales for the fourth quarter, flat to Q4 2017, due to incremental incentive compensation.

R&D expense as adjusted was $16.7 million in Q4 2018 and $13.1 million in Q4 2017. And finally, amortization expense was approximately $7.7 million in Q4 of 2018, compared to $6.8 million in the prior year period. Below the operating income line, net interest and other expense was $7.7 million for Q4 of 2018, compared to $9.2 million in the prior year period.

For share count, our Q4 per share results as adjusted are based on adjusted average diluted shares of 127.2 million for Q4. All together, this resulted in adjusted EBITDA of $44.1 million and 18.5% of net sales for the quarter. Overall, for the full year of 2018, we saw EBITDA margin expansion of approximately 210 basis points, despite a 110 basis point headwind from incentive compensation year-over-year.

When normalizing for the incentive comp headwind, this represents the third year in a row of adjusted EBITDA margin expansion of at least 300 basis points. From a cash standpoint, our total cash balance at the end of Q4 was approximately $191.4 million. The decrease in this balance from Q3 was primarily driven by the disbursement of the purchase price of the Cartiva acquisition, the funding of the BioMimetic revenue milestone in the fourth quarter and payments on the previous metal-on-metal master settlement agreements. Other than these items, our cash flows were meaningfully positive in Q4.

Overall, our Q4 was a strong finish to a year of very solid execution, evidenced by full-year sales and adjusted EBITDA results that exceeded the high end of our original guidance ranges. We completed a major turnaround in the performance of our lower extremity business from roughly flat in 2017 to double-digit growth on a same-sales day basis in the second half of 2018.

Our shoulder business continued to grow at more than double the market rate of growth as BLUEPRINT adoption, PERFORM Reversed and SIMPLICITI continue to drive significant market share gains. We added two breakthrough PMA products to the portfolio, with the approval of AUGMENT Injectable and the acquisition of Cartiva.

We also made great progress on our profitability in our balance sheet. We expanded EBITDA margin by 210 basis points despite the approximately 110 basis point negative impact from our incentive compensation headwind. We refinanced the majority of our convertible notes at a lower interest rate and higher conversion price, and we turned the company to cash flow positive. We made significant progress across the business in 2018 from both a competitive and financial standpoint and are positioned well heading into 2019.

I will now discuss our 2019 full-year guidance. Consistent with past practice, please note that our guidance ranges and assumptions for 2019 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'll 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 our as-adjusted results.

Starting now with sales. As stated in today's press release, we anticipate net sales for full-year 2019 of approximately $954 million to $966 million. This guidance range assumes foreign currency exchange rates in line with current rates, which resulted in a negative impact of approximately 1 percentage point as compared to 2018 and $47 million of Cartiva sales in 2019. This range implies full-year 2019 constant currency net sales growth of 15% to 17%, pro forma constant currency net sales growth of 11% to 13%, and organic constant currency net sales growth of 10% to 12%.

I also wanted to provide some directional comments on some of the components of net sales. Unless otherwise noted, these growth rates are constant currency. In the US, we expect upper extremities to be the fastest-growing part of the business with growth rates in the mid teens.

The growth in upper extremities will continue to be driven by new products, specifically the PERFORM Reversed shoulder, SIMPLICITI shoulder, the adoption of BLUEPRINT and the upcoming launch of the REVIVE shoulder. We expect a fairly constant rate of growth throughout the year, as the expected accelerating adoption of BLUEPRINT and the launch of REVIVE offset tougher comparable throughout the year.

In the US, the lower extremity business is expected to grow in the low double digits on an organic basis for the full year, driven by continued strong total ankle growth in the mid-teens, and core foot and ankle growth in the high single-digit range.

On a pro forma basis, including Cartiva, the lower extremities growth rate is expected to be in the low to mid teens. The pro forma growth rate should improve throughout the year, as the Cartiva business gains traction in our direct sales force and we have easier comps for Cartiva in the second half of the year.

To be a little more specific on this point, pro forma growth is expected to be less than organic growth in Q1, as Q1 is the toughest comp of the year for Cartiva. US biologics is expected to grow in the low double digits, driven by the ongoing launch of AUGMENT Injectable. We anticipate growth rates will be higher in the first half of the year and lower in the second half, as we annualize the Injectable launch mid-year.

International net sales are expected to grow in the high single digits on a constant currency basis, driven by continued strong performance in biologics and upper extremities. In addition, we also expect Cartiva to have an impact for the back half of the year as we launch the product in select markets. As is typically the case, you should expect to see some variability across quarters in the international growth rate.

Turning now to the P&L. Our outlook for full-year 2019 non-GAAP adjusted EBITDA is in the range of $160 million to $170 million, as we expect revenue growth to drive continued leverage in SG&A. This guidance assumes 280 basis points to 360 basis points of EBITDA margin expansion in 2019, and puts us on track to exceed our goal of EBITDA margin of approximately 20% for the full fourth quarter of 2019.

From a line item perspective, we continue to expect gross margins to be generally consistent with what we saw in 2018 at approximately 79%. We expect R&D to be in the range of 7% to 8% of sales. In general, we anticipate EBITDA margin expansion will be driven by SG&A leverage.

To assist you with modeling EBITDA, I want to provide you with our outlook for depreciation expense, which for the full-year 2019, we expect to be in the range of approximately $63 million to $64 million as compared to $59.5 million in 2018. Stock-based compensation expense is anticipated to be in the range of $32 million to $33 million. Amortization is expected to be in the range of approximately $7.5 million per quarter.

Now, let's touch briefly on the line items below the operating income line. Our expectation for interest and other is approximately $8.5 million per quarter. We will be in a positive income position in 2019, but due to the valuation allowance on our NOLs, we will not have a typical effective tax rate. Similar to our expectation in the past several years, we expect to have approximately $6 million in tax expense related to profits in taxable jurisdiction.

On a separate note, as it relates to cash taxes, we currently have over 1 billion of US NOLs. We don't have any NOLs of consequence that expire until 2024, and then no more than 4% of the NOLs expired in any one given year until 2032. The net result is that we don't expect to pay any cash taxes of consequence for an extended period of time.

On an as-adjusted basis, we expect to be in the income position for 2019, which will result in a slight increase in our diluted shares. We estimate approximately 131 million non-GAAP adjusted diluted weighted average ordinary shares outstanding for fiscal year 2019. As a reminder, our convertible debt is all cash converts with call spreads. This means that the principal balance does not convert into shares and the only dilution that occurs is when the stock price exceeds the upper strike price of the call spread. And then it is only the incremental value over the upper strike that results in incremental shares.

For context, if our stock was at $40 per share, it results in approximately 3 million additional shares over this guidance. Briefly, as it relates to cash, excluding the hip product liabilities, net of any insurance recoveries and any IMASCAP related milestones, we expect to be cash flow positive in 2019. With our cash on hand, availability on our line of credit and the underlying business cash flow positive, we are in a great position to fully fund the organic growth of the business.

As it relates to quarterly guidance, as was the case in 2018, for 2019, we will update our annual guidance each quarter but will not be giving guidance expectations for the current quarter. We do want to provide you with information on the expected cadence of our business to assist you in modeling our quarterly performance.

Overall, we expect organic constant currency sales growth rates to be generally in line with the full-year guidance, with the caveat that normal quarterly fluctuations in the international business could impact that sum each quarter. On a pro forma basis, we expect growth more in line with the lower end of our guidance range in the first half of the year and then accelerate to the higher end of our guidance range in the back half of the year, as we expect to see an accelerated benefit from Cartiva.

All quarters in 2019 have the same number of days versus the prior year quarter. From a profitability standpoint, our adjusted EBITDA margin is expected to improve by 280 basis points to 360 basis points in 2019. We expect this improvement to be less in the first half of the year and then accelerate in the second half of the year, driven partly by greater contribution from Cartiva. At this point, we now expect to exceed 20% EBITDA margin for the full fourth quarter of 2019.

Also briefly on foreign currency. To simplify our guidance this year, our as-reported revenue range assumes foreign currency rates in line with current rates. Therefore, fluctuations in rates could impact where our as-reported results fall within the range, but will have no impact on our constant currency or pro forma growth rates and how those compared to our guidance. Also, we're fairly naturally hedged on foreign currency rates from an EBITDA standpoint and would not expect currency fluctuations to have much impact on EBITDA.

In closing, we entered 2019 in a great position strategically with leadership positions in high-growth markets, the most focused specialized sales forces, the best products with differentiated enabling technologies. Our 2019 guidance reflects the strong underlying business performance and the recent close of the Cartiva acquisition.

We've made tremendous progress on our EBITDA margin expansion efforts over the past three years and we have ongoing opportunities to continue to improve in this area, with the addition of Cartiva driving continued leverage in the business. Overall, we believe Wright is built to win, with significant opportunities to achieve our long-term targets.

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

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from Matt Miksic with Credit Suisse. Your line is now open.

And pardon me, Matt, if your line is muted, please unmute.

Julie Dewey -- Senior Vice President and Chief Communications Officer

Let's just go to the next caller in the queue.

Operator

And our next question will be from Joanne Wuensch with BMO Capital. Your line is now open.

Steven Plachtyna -- BMO Capital Markets -- Analyst

Hi. This is Steve on for Joanne. As we think about the adjusted EBITDA guidance for 2019 in excess of 20%, what are the biggest risks to achieving this? And how should we think about the gating in the out years for your long-term plan?

Robert J. Palmisano -- President and Chief Executive Officer

Yeah, the biggest risk is always that you achieve the revenue number. So, I think that's -- we feel really good about that. That's why we have previously said that we would exit the year at 20% EBITDA. Now, we've said a little bit different, saying that we expect to exceed 20% in the fourth quarter based upon our revenue trajectory and the leverage that we have been able to see in our business in '18 and are planning for 2019. So, we feel pretty confident about that. And I said -- as long as we get to the revenue number, I think the EBITDA number should be pretty -- should be very attainable.

Lance Berry -- Executive Vice President, Chief Financial and Operations Officer

And just to be clear, that comment on exceeding 20% is for the fourth quarter of 2019. And then we haven't given any cadence on the out years. But if you think about getting to mid-20s, exiting 2021, if we can just continue to kind of get EBITDA margin expansion past 2019 in that 250 basis point to 300 basis point range, we should be able to easily achieve that objective.

Steven Plachtyna -- BMO Capital Markets -- Analyst

Okay. Thanks. And then just as a quick follow-up. Can you talk about just really the health and stability of the lower extremity sales force today? How was training the new -- the reps on the newer products being going, PROstep, Cartiva?

Robert J. Palmisano -- President and Chief Executive Officer

Yeah. I mean, I think -- first of all, the stability is very, very good. 2018, the reason that we were able to grow that business double digits in the last half of the year was that, that team really came together and we expect -- and we left 2018 really on a great trajectory. So, we see that sales force is really humming right now and doing extremely well.

I mean, all the sales reps have been trained on the new products. We just, last week had our US national sales meeting and two weeks before that we had international sales meeting. There was extensive training of that, which is probably follow-up training because they have already been exposed to it, to most of the new products and including Cartiva, AUGMENT Injectable, et cetera. So, I think that we are in really in execution mode now and feel pretty good about our ability based upon our past experience to be able to execute and grow these markets to the way that we're anticipating.

Steven Plachtyna -- BMO Capital Markets -- Analyst

Okay. Thanks for taking the questions.

Operator

Thank you. And our next question comes from Christian Moore with J.P. Morgan. Your line is now open.

Christian Moore -- J.P. Morgan -- Analyst

Hi. Thanks for taking my questions. Maybe just to touch on some of the areas that were upside in 2019. It looks like Cartiva came in stronger than expected for the fourth quarter versus the $7 million we've been originally guided to. So, how do you think about $47 million for 2019? Is there upside there? And then how much would Cartiva sales performance translate to the increased EBITDA margin expansion, given the margin profile of that business? Thanks.

Lance Berry -- Executive Vice President, Chief Financial and Operations Officer

Yeah. I think the $47 million is a real good number. Based upon what we know, that's a combination of US and international where we have some small markets internationally. But I think we have some opportunities there. That's pretty well built in. If by chance that we did over exceed on Cartiva, given that it's such a high-margin product, is that we will have the opportunity to expand our outlook and earnings and cash and EBITDA and all that. So -- but right now, I think $47 million, we give a lot of thought to that. It's probably a real solid number.

Christian Moore -- J.P. Morgan -- Analyst

Okay. Then just one question to follow up on the upper extremities business. In the past, you've given an update each quarter on how many procedures are being done with BLUEPRINT on a quarterly basis. Do you have that update and then where do see that accelerating (ph)?

Robert J. Palmisano -- President and Chief Executive Officer

Yeah. I think it's a -- I don't think we have it. This is an approximation, is that it's around 40% right now. I think it's higher with the new doctors that we've converted more recently and that's kind of the future. So, I think that it's going to continue to accelerate but right now, we're somewhere around 40%.

Christian Moore -- J.P. Morgan -- Analyst

Great. Thank you.

Operator

Thank you. And our next question comes from Matt Miksic with Credit Suisse. Your line is now open.

Matt Miksic -- Credit Suisse -- Analyst

Hi. Thanks for taking the questions and we dropped off earlier for some reason. So, I apologize for that. So, I had a couple of follow-ups on these very same two topics actually. And if it wasn't asked when I was off the call here. You mentioned a couple times Cartiva will be tougher in the beginning of the year and improves throughout the year. And I just wanted to understand sort of the mechanics of moving that over to your -- to direct folks and keeping some of the reps you described, and why you think that is? What are the mechanics of that improving?

Robert J. Palmisano -- President and Chief Executive Officer

So, I think it has to do a lot with the comparisons. Last year, Q1 was the strongest quarter for Cartiva. And then as the sale process of Cartiva started to take place in Q2 throughout the rest of the year is that sales decreased some. So the comparisons year-to-year are more difficult in Q1 and get easier as you go through the year.

Matt Miksic -- Credit Suisse -- Analyst

Okay. So, just that business, even before you took it over has totally, inherently a tougher comp. It sounds like if I'm hearing you correctly, it has nothing to do with sort of like the handoff, or the training, or the ramping up, or the moving to new docs or anything like that, that you would think?

Robert J. Palmisano -- President and Chief Executive Officer

No. What we did is we kept -- I think that Cartiva had about 42 distributors. We kept 40 -- 20 or 21 of them. I forget the exact number, which were the high volume ones. So, we didn't have that potential drop off that you may see with an integration. And then, we are adding it into our direct sales force.

So, I think that -- we didn't -- I don't think that -- I don't think that the transition from into our direct sales force is at all a factor. I think it's upside because the majority of the sales came from these 20, 21 distributors that are still distributing.

Matt Miksic -- Credit Suisse -- Analyst

Got you. Okay. And then on the upper extremities side, the share gains that you've delivered, I mean, they are impressive and BLUEPRINT obviously having an impact now, and I would expect maybe that 40% goes to some number higher.

Just looking at the success you had in shoulder against the -- who was the market leader several years ago, just you are normalizing that growth rate or thinking about kind of coming, the gains getting tougher, what kinds of -- you have the revision system, you have SIMPLICITI, you have BLUEPRINT. I guess, how would you describe you being able to sustain and extend that run, which has been a pretty good run on the upper extremity side?

Robert J. Palmisano -- President and Chief Executive Officer

Well, I still think there is a lot of potential upside in the -- with BLUEPRINT, where we're -- we got -- we have our group of people working on additional BLUEPRINT modules, as well as ease of use for customers on BLUEPRINT. So, I think that in our lower extremity business, our PROPHECY system is used in 70% of the surgeries of total ankle. I would expect that the BLUEPRINT system should be used in 70% or greater of the shoulder surgeries as we go forward. It's not all at once, but I think it's -- it happens, it's been having fairly rapidly and we see that continuing.

Secondly, I do believe that the revision system is going to be a big deal, just as the revision system in ankle has been a very strong deal for us. So, those things plus the PERFORM Reversed glenoid is gaining and gaining and so is SIMPLICITI.

SIMPLICITI has competition, but we're still seeing high double-digit high-teens growth in that maybe more. So, I think that I feel very confident for the next couple of years that we're on a trajectory. We have the products, we have the enabling technology that we should be able to continue on this, certainly mid-teens growth rate that we're looking at for 2019.

Matt Miksic -- Credit Suisse -- Analyst

That's great. Thank you, Bob.

Operator

Thank you. And our next question comes from Matt Taylor with UBS. Your line is now open.

Young Li -- UBS -- Analyst

Hey, guys. This is actually Young Li in for Matt. Maybe another question on Cartiva. So, you made a comment that Cartiva is a platform technology. Can you maybe expand on that a little bit? What other locations are you referring to? (Multiple Speakers)

Robert J. Palmisano -- President and Chief Executive Officer

The product is actually synthetic cartilage, and there is currently an IDE for a thumb use that hopefully will be approved. I'm not saying when because I don't ever want to get in that conversation, but that's getting closer. Secondly, is that in Europe, we have a CE mark that has broad approval. So, as a matter of fact that we have some markets where it's being used in these -- in other areas. So, we have to kind of harness all that, put it together into a strategy. But Cartiva, we have to think about Cartiva as a synthetic cartilage platform, not just a big toe product. Although, we love where we are with it, but it has a lot of areas to grow in.

Young Li -- UBS -- Analyst

Okay. Thanks. Maybe just switching gears just a little bit. At a high level, and I think you have one of the best enabling tech portfolios in extremities. Is there a need for robotic in extremities surgery? And what's the level of interest from surgeons and/or patients ?

Robert J. Palmisano -- President and Chief Executive Officer

Well, we've made our bet on software as enabling technology because it's more flexible and it's certainly less expensive. It's very different, I believe. The joints are very different where robotics are being currently used. Specifically, if you look at, a knee has two, if we stretch it maybe three joints and ankle foot has 23, I believe. So, it's a very much difficult thing. So, you need a very flexible system, as with the shoulder it has multiple joints.

So, we think that having a very flexible technology that can be used very easily for planning purposes intraoperatively. Using augmented reality and artificial intelligence gives the physician the best of both worlds. And the physicians that we're dealing with that are using BLUEPRINT technology, have no desire for robotic. They have never expressed that. And when we ask them about it, they just like us to keep on developing and improving our BLUEPRINT technology. So, that's the path we're on, and I believe that's the right strategy. So -

Young Li -- UBS -- Analyst

Okay. Thank you very much.

Operator

Thank you. And our next question will be from Raj Denhoy with Jefferies. Your line is now open.

Anthony Petrone -- Jefferies -- Analyst

Hi, Greg (ph). This is Anthony for Raj. Maybe a couple of lower extremity questions and one upper. On lower, maybe just to revisit Cartiva, Bob. In terms of the TAM, I think, when the acquisition was done, it was quoted as $400 million. So, I'm just wondering is that the, just the current indication? In the lower extremity, does that include some of these other indications, whether it be thumb or knee eventually?

And then the second question in lower extremities would be just the health of the commodity business, the sort of screws and pentacles. Is any, what we're seeing share recapture from slippage that we saw sort of mid-2018? And then I have a follow-up on the upper extremities space.

Robert J. Palmisano -- President and Chief Executive Officer

Yeah. On the -- on Cartiva, certainly, we were fully aware of the approval, plus the ongoing clinical study that is going on in thumb, as well as the CE mark. Now, we're looking at ways to monetize that. So, I think that the -- the thumb should be the next thing to happen. And again, I'm not going to give a time period on that, but that's a significant market.

Also, we have a sales force that calls there. But there's still a lot of room, there's a lot of room on the -- in the foot and with the big toe. So, yeah, it was an expensive deal and we said that at the time, but very happy with it. I think it offers us a platform technology that has many avenues to grow and is very capital-friendly to us to operate. So, we're very -- we couldn't be happier with the acquisition.

Regarding the -- what was the other question?

Anthony Petrone -- Jefferies -- Analyst

The health of the corporate pentacles (ph).

Robert J. Palmisano -- President and Chief Executive Officer

I think that's gotten a lot better. 2017, as we -- we had a tough year there. And I think we are -- we've gotten the back up to market rates of growth in that business. Our ASC business has really turned around. We were actually losing share in '17, and we got back to gain in 2018. But that's a tough business. It was always going to be a tough business. It's -- we can add some differentiation to the products.

But generally speaking, it's more or less that you -- you have to be there when the surgery is done and you have to have exactly what is needed. So, we've made big improvements in '18, I think we are on a trajectory to continue that in '19. But there is always going to be a rock fight for us.

Anthony Petrone -- Jefferies -- Analyst

And I think you guys -- go ahead, Lance.

Lance Berry -- Executive Vice President, Chief Financial and Operations Officer

The size of the market for the Cartiva indication and that is $400 million. If we get any additional indications that would be additional potential market.

Anthony Petrone -- Jefferies -- Analyst

And then just quickly on upper, just pricing in shoulder specifically within stemless and any update there as pricing (Multiple Speakers)

Robert J. Palmisano -- President and Chief Executive Officer

Yeah. Pricing is stable. I think that we have such an advantage in stemless shoulders, given that we have PROPHECY -- excuse me, we have BLUEPRINT because the tolerances are greater with the short stem devices and the enabling technology plays a greater part. So, we have a real advantage there. So, pricing is stable and it's at a premium to either anatomically reverse and it's continuing to grow very strong.

Operator

Thank you. And our next question comes from Larry Biegelsen with Wells Fargo. Your line is now open.

Shagun Singh -- Wells Fargo Securities -- Analyst

This is Shagun in for Larry. Thank you so much for taking the question. I guess, the first one is on Cartiva. It has a TAM of $420 million, and our checks indicate that penetration could hit about 20% to 30% in the US in just two to three years. Bob, is that reasonable in your view and what kind of ramp are you expecting for this product?

Robert J. Palmisano -- President and Chief Executive Officer

I don't know where you got that from. It doesn't sound unreasonable, but I think it's a -- if you look at the ASPs in the market opportunity, it certainly is greater than that. Just things have -- how fast that we can -- we can capture that.

Reimbursement plays a part, and I think that we have a real good reimbursement strategy. And as that gets better, I think that the business will accelerate even faster. But I don't -- do you have anything to add to that, Lance?

Lance Berry -- Executive Vice President, Chief Financial and Operations Officer

I'd say, let's just start with -- let's knock down the $47 million and then we can talk about where we are sitting at the moment.

Shagun Singh -- Wells Fargo Securities -- Analyst

Okay. Fair enough. And just as a follow-up. I just wanted to touch on US upper extremities. Thank you for the color there. And you've indicated that you can grow two times market growth, which is 7% to 9%, so two times that.

I was just wondering, when do you expect to see competition in that segment? Have you gone head-to-head in any accounts with Zimmer Sidus or Exactech's Equinoxe? And if you can just outline the key differences between the products, that would be helpful. Thank you.

Robert J. Palmisano -- President and Chief Executive Officer

Yeah. I don't want to say -- I don't want to sound that arrogant, but we don't see them very much, quite frankly in that. Again, because we have BLUEPRINT is that whenever there -- we usually win all those -- all those jump-offs because we have not only the implant, but we have the enabling technology. So, like I said, I don't want to sound arrogant and I'm sure that those are good products and certainly those are good companies. But we are able to win most of those.

We've been -- on the Biomet -- Zimmer Biomet product, I think we've seen that in Europe for years now and have competed very successfully against that. And rumor is they're making some improvements and they're going to come out with another one, but I haven't seen that or know anything about it yet. But our product, our implant is state-of-the-art and the enabling technologies a real differentiator -- is really a differentiator.

Shagun Singh -- Wells Fargo Securities -- Analyst

Thank you.

Operator

Thank you. And our next question comes from Richard Newitter with SVB Leerink. Your line is now open.

Richard Newitter -- SVB Leerink -- Analyst

Hi. Thanks for taking the questions. I had two. The first is on the ASC penetration strategy, which you clearly indicated is turned around and having success. I guess, you're kind of selling more to the procedure and less focused on, I guess, line item pricing.

Is that something that is unique to you, that your competitors might not be able to replicate? I guess, what I'm trying to get at is, to the extent to which others might be able to kind of compete more effectively with that as well and the degree to which we're starting to see incremental pricing pressure in the foot and ankle space, come into play within the ASC setting?

Lance Berry -- Executive Vice President, Chief Financial and Operations Officer

Rich, I'll take a shot at that. So first of all, the procedure pricing, there is nothing proprietary about it or anything like that. We just tried to give -- that is a good example of, we had some things internally. The way that we did them, that we're really not friendly for the way that ASCs wanted to do business and there were barriers for our reps to do well in those accounts.

And over the course of '18, there were a number of those things that we tried to remove just to make it easier for a rep to effectively sell to an ASC, procedure pricing is an example. And honestly, those things were not -- it was nothing really exciting about those things, but you have to listen to your customer and be able to address their needs.

So, some of it was just getting our reps back in a situation, where they can't effectively serve their customer and so they could compete well. And that -- just those little things allowed us to turn that business around pretty quickly from something that was in decline for several years to getting that back to positive growth.

So the main thing there is, we got to do a better job of listening to the customer of the ASC. And I think we'll do a better job on that going forward, and put our reps in a position to succeed as opposed to really put them in a tough spot to begin with.

And then on the pricing, ASCs -- business has been moving to ASCs for an extended period of time and ASCs are more of an economic buyer frequently than a hospital. But they're also looking for what can you do to help them and add value. They're not necessarily just looking for a price cut. They are looking for flexibility. They're looking for how you can meet their needs and help them drive their business. So, they are meeting their revenue goals as well. And I think we have some real opportunities with things like Cartiva and PROstep. They can really be beneficial to the ASC market and our customers in that market. And that's what we're going to be focused on driving.

Richard Newitter -- SVB Leerink -- Analyst

Thanks for that. And then, Bob, maybe on the margin for you. Thanks for the long-term outlook that you provided and the mid-20% EBITDA margin, certainly from where you're coming from is incredibly at the seat (ph). I guess, my question though is why couldn't that be higher and maybe a better way to frame that, what would it take for that to be higher? And is there a certain top line growth rate like a mid-teens or better top line that would necessarily mean that that's probably 25 plus?

Robert J. Palmisano -- President and Chief Executive Officer

Well, I don't think we're going to stop at mid-teens. So, as we go out, I think that there is the opportunity that, I think, the higher volume, the better it is. The way we're looking at expenses, quite frankly, is we're looking our R&D and sales probably growing at the rate of market growth, and we're looking at G&A and distribution to be relatively flat. And that's how you get -- that's how the -- that's why the leverage is so good.

We knew this three years ago when we set out our last long-term forecast projection guidance, when we said that we thought we could get to 20% EBITDA at the end of 2019, given -- so we had in our mind what the revenue growth was going to be and then how we were going to handle expenses along that line, is that to grow R&D and sales at market rates of growth and really -- and be able to leverage without cutting, but leverage the G&A and distribution expenses. So, I think we're right on set, the more volume, the better you can build leverage.

Richard Newitter -- SVB Leerink -- Analyst

So, there's nothing structurally to -- I mean, stop you from getting to, say, 30% with the business in hand and I mean, we are very clear on margin.

Robert J. Palmisano -- President and Chief Executive Officer

No, there is nothing structurally. It's a matter of continuing to accelerate our growth.

Richard Newitter -- SVB Leerink -- Analyst

Okay. Great. Thanks.

Operator

Thank you. And our final question comes from Craig Bijou with Cantor Fitzgerald. Your line is now open.

Craig Bijou -- Cantor Fitzgerald -- Analyst

Great. Thanks. Thanks for squeezing me in here. I appreciate the top line long-term guidance, the double-digit each year in top line growth. And I know you guys, I'm sure you still have that aspirational goal of mid-teens. I just wanted to see if, what do you think would have to outperform or go well to get to that mid-teens growth? And is that an attainable level? How you think about the business today?

Robert J. Palmisano -- President and Chief Executive Officer

Well, I still consider that aspirational. I think that, given, I feel much better thinking, double-digit growth puts you in a very good spot. It means that you're growing your market shares and gaining market share in your businesses. So, I think that's good.

But the -- I think we're a unique company and that we have double-digit growth, high 70% margin, almost 80% margin last quarter, and I think that's really outstanding, given -- I don't think anybody else in the publicly traded orthopedic space has margins like that and it's very -- so, I think we're trying to balance all that and then certainly our EBITDA in the mid-20s. I think that really makes us a topper-class kind of company. Would we like to do better or would we like to have mid-teen? Sure. But I'm not willing to put myself out on a limb and say that's what we're going to attain in three years.

It's possible. But we have great products. We have new products. We have what we call, platform technologies. Our AUGMENT Injectable is growing phenomenally fast. And I think when we talked about that, I always said that when we launched AUGMENT Injectable in international markets like Australia, we saw about a 30% uptick, but we've seen that here. And I think that it's even going to get better. And I think Cartiva, again, as a matter of, we have to prioritize what else we're going to go after because there is a lot of opportunities. So, both AUGMENT and Cartiva of our platform technologies and is just we have to prioritize how much we are going to go after those things.

The big differentiator, I think in the short term continues to be BLUEPRINT and being able to expand that and make that easier. I think that puts us in a spot that makes it tougher on competition, which is my job. And I think that we're going to continue to work on that. We're expanding that quite significantly in terms of the manpower that we have and the emphasis on that. So, there are things in place that could get us higher, but let's just stick with the double-digits for now and maybe next year we'll talk again.

Craig Bijou -- Cantor Fitzgerald -- Analyst

Okay. A quick follow-up on the revision shoulder product. I think in the past, you guys have said that maybe it wasn't a significant market but it kind of -- it builds out the entire portfolio. So, I just wanted to see if those comments are still valid and the contribution you expect from this year. And then maybe just any other new product within the shoulder portfolio that we may see over the next couple of years?

Robert J. Palmisano -- President and Chief Executive Officer

The revision product is the main new product, and we think it's going to drive a lot of business for us. And I don't -- the revision shoulder like the revision ankle in itself is in a big business, a huge business. What it does though is it drives physicians to do more like total ankles or more shoulder replacement because they have a bailout if something goes wrong.

Secondly, in the shoulders, a lot of shoulders, they started being implanted maybe 10 years ago. And that's a good life of a product, and they're coming out and have a bona fide revision product, again is -- we're the only people that have that. And we'll have that shortly. It gives us an advantage on something else to make sure that doctors think of Wright Medical as their -- as a company of choice to deal with because we have everything that they need.

Craig Bijou -- Cantor Fitzgerald -- Analyst

Great. Thanks for taking the questions.

Operator

Thank you. And our next question comes from Matthew O'Brien with Piper Jaffray. Your line is now open.

William Quirk -- Piper Jaffray -- Analyst

Hi, guys. This is Will on for Matt. Thanks for squeezing me in. The sales and operating margin guidance for '19, looking out was great to see. But how do you expect to balance the implied SG&A leverage without sacrificing the top line? Thanks.

Robert J. Palmisano -- President and Chief Executive Officer

Well, I think that we have had more SG&A expense as a percentage of sales for the last couple of years than was desirable. But that was because of the merger and everything there was that we couldn't do anything about it. Now, we're getting to be the right size. And so we think that -- I don't think that the SG&A being where it is, which is pretty flat or minimal growth anyway, in anyway is going to affect our ability to drive the top line. What affects the -- what will affect the drop line is, if we make smart investments in R&D and if we make smart investments in our sales organization. Those are the two things that are going to impact the top line much more than G&A.

William Quirk -- Piper Jaffray -- Analyst

Great to hear. And then drilling into the components of the lower extremity guidance, does that bake in a certain level of cross-selling opportunities from Cartiva? Or would that be an opportunity for delivering upside? And then, any sense of any cross-selling benefits today from Cartiva for the US lower extremities franchise?

Robert J. Palmisano -- President and Chief Executive Officer

Yeah. We don't have anything baked in. But I was just at our US sales meeting this last weekend and people are talking a lot about the ability of Cartiva to be a door opener, plus to be able to go into competitive accounts that want to have Cartiva, who signed them for Cartiva and that we're getting other parts of the business as well. So, I think that's going to work, but none that's baked in.

William Quirk -- Piper Jaffray -- Analyst

Great. Thank you.

Operator

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Bob Palmisano for any closing remarks.

Robert J. Palmisano -- President and Chief Executive Officer

Thanks, operator, and thank all of you for joining us today. I want to express my appreciation to our team for their efforts in 2018, which enabled us to deliver on our commitment to our shareholders. I look forward to speaking to you again next quarter -- 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 and you may all disconnect. Everyone have a great day.

Duration: 60 minutes

Call participants:

Julie Dewey -- Senior Vice President and Chief Communications Officer

Robert J. Palmisano -- President and Chief Executive Officer

Lance Berry -- Executive Vice President, Chief Financial and Operations Officer

Steven Plachtyna -- BMO Capital Markets -- Analyst

Christian Moore -- J.P. Morgan -- Analyst

Matt Miksic -- Credit Suisse -- Analyst

Young Li -- UBS -- Analyst

Anthony Petrone -- Jefferies -- Analyst

Shagun Singh -- Wells Fargo Securities -- Analyst

Richard Newitter -- SVB Leerink -- Analyst

Craig Bijou -- Cantor Fitzgerald -- Analyst

William Quirk -- Piper Jaffray -- Analyst

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