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RTI Surgical Inc (SRGA)
Q4Â 2019 Earnings Call
Jan 14, 2020, 8:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, ladies and gentlemen, and welcome to the RTI Surgical Holdings Conference Call. [Operator Instructions] I would now like to turn the call over to our host Mr. Jon Singer. Please go ahead.
Jonathon M. Singer -- Chief Financial and Administrative Officer
Good morning, and thank you for joining the call to discuss the sale of RTI's OEM business and the Company's preliminary fourth quarter and full-year 2019 revenues. I am Jon Singer, RTI's Chief Financial and Administrative Officer, and I'm joined by Camille Farhat, our President and Chief Executive Officer.
After our prepared comments, Camille and I will be available to take questions. Before we start, let me make the following disclosure and it's long. The matters we will be discussing on this conference call will involve statements that are forward looking. These statements are based on our management's current expectations, but they are subject to various risks and uncertainties associated with our lines of business and with the economic environment in general. Except for historical information, any statements made on this call about anticipated financial results, the implementation of RTI's strategic initiatives, the potential financial impact of the transaction, shareholder and regulatory approvals, satisfaction of the closing conditions, and the completion of the transaction also are forward-looking statements.
These statements are not guarantees of future performance and are subject to risks and uncertainties. Our actual results may vary from our statements concerning our expectations about future events that are made during this call. We make no guarantees as to the accuracy of these statements. Accordingly, we urge you to consider all information about the Company and not to place undue reliance on these forward-looking statements.
In addition, during the call, we may also present certain financial information on a non-GAAP basis. Management believes that non-GAAP financial measures taken in conjunction with U.S. GAAP financial measures provide useful information for both management and investors by excluding certain non-cash and other expenses that are not indicative of our core operating results. Management uses non-GAAP measures to compare our performance relative to forecast and strategic plans to benchmark our performance externally against competitors and for certain compensation decisions.
Reconciliations between U.S. GAAP and non-GAAP results are presented in tables in our financial statements filed with the SEC, which can be found in the Investor Relations sections of our website. Now, I will turn the call over to Camille. Please continue.
Camille I. Farhat -- President and Chief Executive Officer
Thank you, Jon, and good morning, everyone. We are nearly three years into a strategic transformation for RTI and in that time, we have reduced the complexity of the Company to focus on OEM and Spine. We have driven operational excellence across our manufacturing sites and successfully monetized $25 million in costs from our operations. We have also rebuilt top leadership roles in both the customer-centric and growth-oriented culture. And when you look at the OEM business, the team has returned this business to growth, invested heavily in customer intimacy securing long-term contract for 70% of its revenues, and has established a pipeline of both new customers and focused products.
On the Spine side, we have secured four high-growth, high-margin product platforms with coflex, SImmetry, Fortilink and ViBone. We are building a Novel Therapies channel, which is now showing quarter-over-quarter growth and our worldwide product plan in spine is expected to begin materializing this year as expected. With this substantial progress, we now have sufficient scale in both OEM and Spine to operate as independent businesses.
In considering the third pillar of our strategy, we considered how best to accelerate the growth of both OEM and Spine, both of which have clear strategic roadmaps and significant opportunities for growth. To enable them both to reach their full potential, we have entered into a definitive agreement to sell the OEM business for a total consideration of $490 million to Montagu, a global private equity firm. We are excited about this transaction, not only because of the value that is immediately created but also because the OEM business is going to an owner who continues to appreciate the business and the expertise of the people and is enthusiastic about investing in accelerating its growth and development.
The RTI Board of Directors has unanimously approved this transaction. The sale is subject to approval from RTI's shareholders and the satisfaction of customary regulatory approvals and closing conditions. Preparation of the proxy statement should be completed in the next several weeks. And we are targeting the closing of the transaction in the first half of 2020. After the close of the transaction, RTI will be a global pure play spine company with what we believe are strong fundamentals, a redefined balance sheet and leverage profile, and exciting long-term growth prospects.
We believe Spine finished 2019 with solid financial results. The full-year for 2019 revenue is expected to be between $118 million and $119 million, demonstrating growth of 11% to 12% over 2018. In addition to be in the top 10 spine business based on our revenue, our gross margins are industry-leading at approximately 75%.
After the transaction, the Spine business will have a completely overall balance sheet and leverage profile. We plan to pay off our outstanding long-term debt, and the remaining cash of approximately $175 million to $200 million will go on Spine's balance sheet. As we progress toward closing, we are evaluating the balance between the appropriate capital structure for Spine and supporting the business' growth needs of investing in differentiation and scale, and we anticipate having that assessment done by the time we close.
Our goal for the Spine business is to drive double-digit top line revenue growth over the long term. We believe we are poised to execute and deliver on that goal through continued execution in our Novel Therapies business and new product development, which we expect to result in a minimum of 10 new product introductions during each of the next two years. I would like to note that while these businesses are being structurally separated, they will have an ongoing business relationship. We expect the Spine business will become a leading customer for OEM, sourcing a portion of product development and manufacturing directly from the OEM business in support of the Established Therapies portfolio.
This allows the Spine business to focus on future innovation and commercial execution, including the marketing, sales and distribution of the product portfolio. We are very excited about this transaction and extremely enthusiastic about the future of both organizations. I would like to thank the RTI Surgical employees for their significant contribution in positioning both OEM and Spine for accelerated growth.
And with that, I would like to hand the call over to Jon to briefly review our preliminary fourth quarter and full-year financial results that we also announced today or yesterday.
Jonathon M. Singer -- Chief Financial and Administrative Officer
Thank you, Camille. For the fourth quarter of 2019, the Company expects to report worldwide revenues of $79 million to $80 million, an increase between 11% and 12% compared to the prior year quarter. In the quarter, the OEM segment revenues are approximately $47 million and global Spine segment revenues are expected in the range of $32 million to $33 million driven by solid progression of Novel Therapies portfolio, delivering over 20% sequential growth compared to the third quarter of 2019.
For the full-year 2019, the Company expects to report revenues of $307 million to $308 million, an increase of between 9% and 10% compared to the prior year. In the full-year 2019, OEM segment revenues are expected to be approximately $189 million and global Spine segment revenues are expected to be in the range of $118 million to $119 million. The Company will provide formal 2020 guidance for the global Spine business at the time of the transaction closing.
Operator, I'd like to open the line for questions.
Questions and Answers:
Operator
Thank you. [Operator Instructions] And our first question comes from Craig Bijou with Cantor Fitzgerald. Your line is open.
Craig Bijou -- Cantor Fitzgerald -- Analyst
Good morning, guys. Thanks for taking the questions. And obviously, congrats on the transaction.
Camille I. Farhat -- President and Chief Executive Officer
Thanks, Craig.
Craig Bijou -- Cantor Fitzgerald -- Analyst
So Camille, you mentioned the double-digit growth profile of the business. So, just a couple of questions there. One, is there anymore color or granularity that you can give on the double-digit growth? Is that kind of a low-teens? Can you get to 20%? And then what are the steps that you need to take from -- basically from where you are today to get to that level? And is that growth something we can see in 2021?
Camille I. Farhat -- President and Chief Executive Officer
So why don't we answer that for the two parts of the channels that we have. When we look at the Established Therapies, we know, as we have continuously said back to 2017, we have to rebuild the pipeline and the products are going to be coming in 2020. So I think as we exit 2020, the Established Therapies will continue to -- believe to continue to grow at double the market as we expect in that segment. And it will need to be aided by the products that we have in developments that would be introduced.
On the Novel Therapies channel, as we have mentioned, I think on our Q2 call, we needed about six months in rebuilding that channel and we have talked about stabilizing this toward the end of the year, and that's what you're seeing in the sequential growth. We have talked on the last call about needing to hire, to train the people where they are and continuing to drive our commercial operating system. We're not fully done with that, but we've stabilized that we believe as we entered the year, and that's going to continue to grow. And I expect that to be in the healthy teens and potentially as it accelerates to probably go higher than that.
So that's kind of my view. And as I say, you go into exit 2020 and you go into 2021, we will have almost a complete portfolio of the Established Therapies. The Novel Therapies channel would have been fully established by then, and that's where you're going to get the blend as we talk about in our confidence in the double digits. I don't know, Jon, if you want to add anything else.
Jonathon M. Singer -- Chief Financial and Administrative Officer
No, I think that sound accurate.
Craig Bijou -- Cantor Fitzgerald -- Analyst
Great. That's helpful. And following the close of the deal, you guys are going to have close to $200 million in cash. So just wanted to ask, how you guys are planning to deploy that capital and with that going to -- the cash needs of the Spine business now that the OEM -- the profitable OEM business won't be supporting it as much? And then just any thoughts on potential M&A and areas where you may be looking there? Thanks.
Jonathon M. Singer -- Chief Financial and Administrative Officer
Yeah. So as you indicated, we'll have somewhere between $175 million and $200 million in cash on the balance sheet upon the close of the transaction. Our primary focus is to evaluate the investment necessary to support the growth, both through the internal and external development. We continue to be focused on differentiation and scale as critical to the long-term success of the Spine business. And as we did with the Zyga and coflex acquisition, to the extent that there are products out there that are developed on market that we think complement the strategy, we'll continue to evaluate them as we go forward. So I think the priority is positioning the business, both in the short term and long term to achieve the double-digit growth that we outlined. And that's really going to be the priority as we evaluate cash needs of the business going forward.
Craig Bijou -- Cantor Fitzgerald -- Analyst
Great. Thanks for taking the questions guys, and congrats again.
Camille I. Farhat -- President and Chief Executive Officer
Thank you very much, Craig.
Operator
Thank you. And our next question comes from Lee Cooperman with Omega Family Office. Your line is open.
Lee Cooperman -- Omega Family Office -- Analyst
Thank you. I have three questions, if I could just put them out here and you can handle them in anywhere you like. Roughly what is the cash flow characteristics of RemainCo? Is that a business that's going to generate cash or use cash, number one? Number two, really to get more granularity on the other questioner's question, any company can use their cash flow to either acquire, pay dividends, spend on capex or stock repurchase, how would you prioritize these different uses of cash in terms of going forward, dividends, acquisitions, capex, stock repurchase? And finally, I'm just out of [Phonetic] curiosity, will this transaction result in a gain or loss upon at closing? Thank you very much and congratulations.
Jonathon M. Singer -- Chief Financial and Administrative Officer
Thank you. So in the short term, the business will be a cash user in 2020. Particularly as we separate and make the investments necessary for it to be a stand-alone business, we'll provide detailed guidance around the profile as we complete the planning on the separation and get closer to the close.
You outlined -- as we indicated, we're evaluating the capital structure of the business and we'll go through that evaluation in conjunction with the finalization of the cash needs as a result of the separation. And I think we'll have a better answer for you on that question in conjunction with close. And then what was the third question?
Camille I. Farhat -- President and Chief Executive Officer
Whether we're going to have a gain.
Jonathon M. Singer -- Chief Financial and Administrative Officer
Yeah. We'll -- we will have a fairly significant gain as a result of the transaction. And part of the difference between the proceeds and the pay-off of debt and what's going to remain on the balance sheet is the taxes that we anticipate playing on the transaction. So, hopefully that answers your question.
Lee Cooperman -- Omega Family Office -- Analyst
Yeah. And one other one. I assume you would respond like most companies do. But with the simplification of the Company, we might be a more desirable acquisition candidate for somebody who wanted a pure play. Do we have a strong desire to be independent? Or we'll do whatever is right for the shareholders?
Jonathon M. Singer -- Chief Financial and Administrative Officer
Well, I think as we've demonstrated with this transaction that we just completed, our focus is on the creation of shareholder value. And I think we've been saying for well over a year that the [Indecipherable] the value of the two pieces within the business and that we add an OEM business that was worth more than our enterprise value in a spine business, it was kind of right around with free. And so I think as we did that internal valuation, we felt the best path forward for shareholder value was this transaction that we have in front of us.
And so I think as a leadership team and a board, we've demonstrated that we prioritized the creation of shareholder value and we take that responsibility seriously. And so I think we have a good track record that you should look to as you asked that question.
Lee Cooperman -- Omega Family Office -- Analyst
Thank you very much, and good luck.
Jonathon M. Singer -- Chief Financial and Administrative Officer
Thank you.
Camille I. Farhat -- President and Chief Executive Officer
Thank you.
Operator
Thank you. And our next question comes from Jim Sidoti with Sidoti & Company. Your line is open.
Jim Sidoti -- Sidoti & Company -- Analyst
Hi, good morning. Can you hear me?
Camille I. Farhat -- President and Chief Executive Officer
Yes, we can. Good morning to you.
Jim Sidoti -- Sidoti & Company -- Analyst
Great. So I just want to be clear. In the past when you broke out revenue you broke out a sports medicine international OEM in spine. So going forward, this sports medicine and the OEM are both going to be sold? And I would assume a large portion may be in the international revenue was OEM. Is that correct?
Jonathon M. Singer -- Chief Financial and Administrative Officer
No. I would say, in general, about two-thirds of the international revenue is Spine and about a third will be going with the OEM business.
Jim Sidoti -- Sidoti & Company -- Analyst
Okay.
Camille I. Farhat -- President and Chief Executive Officer
But the first classification is accurate. The sports -- as we had announced merging the sports and the OEM business together into one group that was on our last call.
Jim Sidoti -- Sidoti & Company -- Analyst
Okay. All right. And then in terms of expenses, right now you're going to maintain about 40% of the revenue with the new company. Can you give us some idea in terms of R&D and SG&A? Is that proportional or will you be retaining a larger portion of the expenses for R&D and SG&A?
Jonathon M. Singer -- Chief Financial and Administrative Officer
Yeah. We'll -- as we've indicated, we'll give guidance in conjunction with -- we'll give more detail on the financial profile when we announce the year-end numbers. It is not -- it's not proportional, but we don't have specifics that we're going to provide at this time.
Jim Sidoti -- Sidoti & Company -- Analyst
Okay. And can you just repeat what you said before about the cash flow? Do you expect to be cash flow neutral by 2021?
Jonathon M. Singer -- Chief Financial and Administrative Officer
That's what we are working toward. Correct.
Jim Sidoti -- Sidoti & Company -- Analyst
Okay. All right, thank you.
Operator
Thank you. And our next question comes from Matt Hewitt with Craig-Hallum Company -- Capital. Your line is open.
Lucas Grant Baranowski -- Craig-Hallum Capital -- Analyst
Hi, guys. This is Lucas on for Matt Hewitt here at Craig-Hallum. Just a couple of questions here today. I guess given the inflow of cash that you're getting, is there any kind of an update you could provide on the sales force, how many reps you have and if you may be going to be looking to add some more now that you have the capital to do so?
Jonathon M. Singer -- Chief Financial and Administrative Officer
We really haven't provided specifics on the numbers and structure of the sales organization. And given the increase in cash, we don't intend to start now. We'll give guidance for the business as we've said in conjunction with the closing of the transaction. And with that you should get a sense of the structure of the P&L. I would say that, in general, the investments we've been making in Novel Therapy and the stabilization of the sales force that we saw in the fourth quarter is directionally sufficient to drive the growth of the business. And as we start getting traction, we'll continue to evaluate whether there are places in which we need to make incremental investment in order to keep the momentum going, particularly with the progress we're seeing on the SImmetry side. But we don't anticipate that to be, what I would call, wholesale material increases, it's really just filling out.
And the Established Therapies sales organization is a pretty mature and effective sales organization. And similarly, we think it's appropriately structured to support the long-term objectives that we've outlined for the business.
Lucas Grant Baranowski -- Craig-Hallum Capital -- Analyst
Okay. Thank you. That's very helpful. And then a question on the transaction. I believe it said you're going to be debt free following the transaction. So does that mean the preferred stock is going away?
Jonathon M. Singer -- Chief Financial and Administrative Officer
We are evaluating that right now and we will have further disclosure regarding that in conjunction with the proxy.
Lucas Grant Baranowski -- Craig-Hallum Capital -- Analyst
Okay. So the cash -- kind of expected cash balance you gave, the $175 million to $200 million, it sounds like that didn't assume the preferreds going away. Is that correct?
Jonathon M. Singer -- Chief Financial and Administrative Officer
Correct. Yeah.
Lucas Grant Baranowski -- Craig-Hallum Capital -- Analyst
Okay.
Jonathon M. Singer -- Chief Financial and Administrative Officer
It's just the Ares term debt and the ABL with JPMorgan Chase in...
Lucas Grant Baranowski -- Craig-Hallum Capital -- Analyst
Okay.
Jonathon M. Singer -- Chief Financial and Administrative Officer
$175 million to $200 million. Correct.
Lucas Grant Baranowski -- Craig-Hallum Capital -- Analyst
Okay. Excellent. And then I guess one final one here. You talked about product launches, 10 new introductions during each of the next two years. Anything you can tell us about kind of the cadence of those?
Camille I. Farhat -- President and Chief Executive Officer
Well, they're spread out throughout the year and they're basically across the portfolio in Novel Therapies, in existing Established Therapies as well as also on the biologics side. So we haven't been sitting idle. We had talked about it. As we came into 2017, our pipeline was relatively dry. We would -- did focus our energy around Fortilink and TETRAfuse that have done remarkably well for us. And then we augmented with three inorganic opportunities. In the meantime, as we started that developments, you're starting to see the products come out.
So there are more improvements on the therapies for the Novel Therapies side as well as more biologics coming out next year and then completing and filling gaps in our portfolio on the remaining Established Therapies. They're scattered basically throughout the year. And hopefully, as I said, we would be exiting 2020 very well poised in terms of product portfolio to support the objectives of growth that Jon articulated.
Lucas Grant Baranowski -- Craig-Hallum Capital -- Analyst
Excellent. Well, congrats on the transaction and I'll get back in the queue.
Camille I. Farhat -- President and Chief Executive Officer
Thank you.
Operator
Thank you. That concludes our question-and-answer for today. I will now turn the call back to Camille Farhat for closing remarks.
Camille I. Farhat -- President and Chief Executive Officer
Thanks, Effrin[Phonetic]. And thank you for your ongoing interest in RTI Surgical Holdings. Look, we view the sale of the OEM business as a fantastic milestone in our journey to accelerate the growth of RTI, and both the Spine and OEM business is moving forward. We have found the right partner in Montagu who values unique design, development, and manufacturing capabilities we've developed, the deep expertise of the people across tissue, biologics and hardware and the significant opportunity for growth.
On the Spine side, we are starting the year with a growing Novel Therapies channel, double-digit product introductions are expected and upon close of the transaction, we will have a strengthened balance sheet to support our growth strategy of investing in differentiation and scale. And we look forward to updating you on our ongoing progress.
And with that, I'll turn it back to Jon for some important additional information and where you guys can find that.
Jonathon M. Singer -- Chief Financial and Administrative Officer
Yeah. This is kind of like anybody that's a fan of Marvel movies, this is like the secret trailer. The proposed transaction will be submitted to the shareholders of RTI Surgical Holdings for their consideration. In connection with the proposed transaction, RTI Surgical Holdings will file a proxy statement and other materials with the SEC. This communication is not a substitute for the proxy statement or any other documents that RTI Surgical Holdings may send to its shareholders in connection with the proposed transaction.
The rest is in capitals. RTI Surgical Holdings' shareholders are advised to read the proxy statement for the proposed transaction when it is filed. And any amendment or supplement therefore that may be filed with the SEC because they will contain important information about RTI Surgical Holdings in the proposed transaction. All such documents when filed are available free of charge at the SEC's website, www.sec.gov, from the Company at its website, www.rtix.com or by contacting the Company's Investor Relations at (847) 530-0249. There is more. Participants in solicitation, RTI Surgical Holdings and its respective directors and executive officers may be deemed to be participants in the solicitation of proxies of respective of the proposed transaction.
Information concerning RTI Surgical Holdings' participants is set forth in the proxy statement filed March 25, 2019 for the Company's 2019 annual meeting of stockholders as filed with the SEC and schedule 14A. Additional information regarding the interest of such participants in the solicitation of the proxies in respect of the proposed transaction will be included in the proxy statement and other relevant materials to be filed with the SEC when they become available. Thank you.
Camille I. Farhat -- President and Chief Executive Officer
Appreciate everybody again. Have a great day everybody.
Operator
[Operator Closing Remarks].
Duration: 28 minutes
Call participants:
Jonathon M. Singer -- Chief Financial and Administrative Officer
Camille I. Farhat -- President and Chief Executive Officer
Craig Bijou -- Cantor Fitzgerald -- Analyst
Lee Cooperman -- Omega Family Office -- Analyst
Jim Sidoti -- Sidoti & Company -- Analyst
Lucas Grant Baranowski -- Craig-Hallum Capital -- Analyst
