Tornier Tops Estimates and the Street

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By Jessica Schultz on May 19, 2014 Consumer Staples, Energy & Solar, S&P 500

Tuesday evening, Tornier reported first-quarter results that easily topped our estimates and the Street. Revenue guidance for the full year was raised, though management tried to temper expectations somewhat given the potential for more near-term disruption associated with its salesforce transition plans.

First-Quarter Review. Revenue. Total first-quarter sales of $89.0 million (up 7.7% reported and 6.8% on a constant currency basis) beat our target by $8 million, driven by strong extremities and large joint performance. Segment Split—Upper & Lower Extremities, Large Joints, Sports Med & Biologics – The upper extremities business (roughly 60% of sales) delivered growth of 10.3% (ahead of our 5.0% target).

Management indicated that it did not experience the level of disruption during the first quarter that it had expected with two distributors it reached transition agreements with late last year. However, both entities are now carrying competitive lines, which will result in a sales step down during the second quarter. From a product perspective, the company’s Ascend Flex, which assuages its competitive disadvantage in convertible shoulders (this includes a press-fit reverse option, which is a segment of the market where the company has not been able to compete) continues to see strong uptake and was a source of meaningful growth during the first quarter.

The product is still in the early days of launch (the initial batch of instruments was just recently deployed) but it continues to track ahead of expectations. In fact, it appears that interest in the Flex is above levels where Tornier can successfully support the product at the moment (both on the instrument set and sales representative sides) but as this pressure dissipates, we anticipate that growth of this key new system will remain brisk. Further, we believe that Tornier stands to benefit from the proposed merger of two large orthopedic providers that is expected to close in early 2015 as both have sizable shoulder businesses and will likely realize sales representative and physician dislocation that is associated with virtually all of these deals.

Lower extremities sales of $15.1 million this quarter, flat year-over-year, beat our estimate of $13.0 million. This performance was quite good in light of the ongoing salesforce transition that has negatively affected the overall extremities business in recent quarters, though we suspect that cross-selling opportunities in the United States (where it can now sell legacy Tornier products) and internationally (the company just recently began its rollout of the OrthoHelix product line outside the United States, where OrthoHelix products have never been sold) is helping buoy growth and should accelerate performance in the coming years.

We continue to view the OrthoHelix acquisition as a smart strategic decision and anticipate it will significantly add to the value of the company in the coming years. May 07, 2014 Stock Rating: Outperform Company Profile: Aggressive Growth Symbol: TRNX (NASDAQ) Price: $17.87 (52-Wk.: $15-$22) Market Value (mil.): $867 Fiscal Year End: December Long-Term EPS Growth Rate: 20% Dividend/Yield: None 2013A 2014E 2015E Estimates EPS FY $-0.59 $-0.49 NA CY $-0.49 Sales (mil.) 311 320 NA Valuation FY P/E NM NM NA CY P/E NM NA Trading Data (FactSet) Shares Outstanding (mil.) 48 Float (mil.) 28 Average Daily Volume 273,472 Financial Data (FactSet) Long-Term Debt/Total Capital (MRQ) 0.0 Book Value Per Share (MRQ) 10.8 Return on Equity (TTM) -7.6 Two-Year Price Performance Chart Sources: FactSet, William Blair & Company estimates 12/31/12 12/31/13 $0 $5 $10 $15 $20 $25 Tornier, based in the Netherlands with North American headquarters in Edina, Minnesota, provides extremity, trauma, sports medicine, and orthobiologic products on a worldwide basis.