Globus Medical, Inc. Class A

Welcome to Globus Medical's second quarter 2020 earnings call. At this time, all lines will be on a mute, and a Q&A session will be held after the prepared remarks. To ask a question at that time, please press star and then the number one on your telephone keypad. I will now turn the call over to Brian Kearns, Senior Vice President of Business Development and Investor Relations. Mr. Kearns, please go ahead.

Thank you, Catherine, and thank you, everyone, for being with us today. Joining today's call from Globus Medical will be Dave Demski, President and CEO, Dan Scavilla, Executive Vice President, Chief Commercial Officer, and Keith Feil, Senior Vice President and Chief Financial Officer. This review is being made available via webcast accessible through the investor relations section of the Globus Medical website at www.globusmedical.com. Before we begin, let me remind you that some of the statements made during this review are or may be considered forward-looking statements. Our Form 10-K for the 2019 fiscal year and our subsequent filings with the Securities and Exchange Commission identify certain factors that could cause our actual results to differ materially from those projected in any forward-looking statements made today. Our SEC filings, including the 10-K, are available on our website. We do not undertake to update any forward-looking statements as a result of new information or future events or developments. Our discussion today will also include certain financial measures that are not calculated in accordance with generally accepted accounting principles for GAAP. We believe these non-GAAP financial measures provide additional information pertinent to our business performance. These non-GAAP financial measures should not be considered replacements for and should be read together with the most directly comparable GAAP financial measures. Reconciliations to the most directly comparable gap measures are available in the schedules accompanying the press release and on the investor relations section of the Globus Medical website. With that, I will now turn the call over to Dave Dembski, our president and CEO.

Thank you, Brian, and good afternoon, everyone. I'm very excited to report an outstanding performance by the Globus team in Q2. While it was the most challenging external environment in our 17-year history, I could not be more proud of the way our team responded to the challenge. Revenue for the quarter was $149 million, down 23% from Q2 2019. Musculoskeletal solutions was up by 21%, while enabling technologies was down by 55%. Non-GAAP EPS was $0.07 per share, and adjusted EBITDA was 15% for the quarter. While the growth and earnings metrics are low compared to our typical results, in light of the circumstances and relative to our peers, they are outstanding accomplishments. Our U.S. final implant business was down by 21% for the quarter, but the trends we saw within the quarter and continuing into July are encouraging. The business bottomed in mid-April and continued a steady climb upward through the quarter. April revenue was down by roughly two-thirds, May improved dramatically to finish off by 25%, and June rebounded into double-digit growth compared to June of 2019. Growth in July accelerated into the mid-teens, even as certain areas began restricting elective surgery again. Our growth is a function of a number of factors. New product launches, competitive recruiting, and robotic pull-through. Our spine product development team built on their strong performance in 2019 by launching six new products in 2020. We have seen tremendous uptake in the Hedron line of our 3D-printed interbody spacers, as well as Sable, our fourth-generation expandable MIS T-lift device. Adoption has been so successful that we are doubling our 3D manufacturing capacity, which should come online in Q4. Robotic usage continues to grow, mirroring the trends we experienced in the overall business during the quarter. Competitive recruiting and onboarding remained strong during the second quarter. Our pace for the first half of this year matched that of the first half of 2019, a record recruiting year for us. Now more than ever, Globus is the destination of choice for the best in the industry. I want to take a moment to recognize the dedication and commitment of our manufacturing and operations team members who have steadfastly supported our customers, patients, and sales reps during this difficult time. As essential workers, they have continued to deliver product in record amounts in anticipation of the bounce back in procedures we have expected and are now beginning to see. Our international spinal implant business was down by 30% for the quarter. Most markets are beginning to come back, but generally speaking, the bounce back in procedures began later and has not been as pronounced as the U.S. Similar to the U.S. trends, our international spying business had a strong June and improved further in July. Our trauma business was a bright spot in Q2, nearly tripling sales over the second quarter of 2019, posting 179% growth. We are continuing to invest in this business, expanding our geographic footprint by adding sales reps, launching new products and making improvements to systems already launched. During the second quarter, we completed the purchase of a developmental stage finished company called Synoste. Synoste engineers have developed a limb lengthening system that utilizes night and all technology to facilitate incremental nail expansion that can be accomplished outside of the clinical setting. They have studied patients implanted with the system in a limited clinical trial in Europe. We are excited about the potential to apply this technology to treat orthopedic trauma and deformity patients, as well as the potential to develop growing rods for pediatric spine deformity patients in the future. We are working to commercialize the limb lengthening system with a targeted market launch of 2022. Revenue from enabling technologies was $5.4 million in the quarter. While the economic impact of COVID-19 to hospitals has created some uncertainty around capital budgets, we are encouraged by the fact that we continued to close deals in June and July. During the quarter, we saw continued strong surge in interest in our robotic technology, hosting a number of webinars that focused on the advantages of Excelsis GPS and the capabilities of our interbody module. Now more than ever, the benefits that robotic surgery promises in terms of MIS procedures, shorter hospital stays, less time in the OR, and reduced cognitive load on busy surgeons are demonstrating value in the technology. We are seeing that hospitals can and will invest in capital that improves patient care and benefits surgeons. While this time has been challenging to navigate, we have used the opportunity to critically evaluate all aspects of the business and make adjustments to position ourselves well for the future. Our strong liquidity position and lean organization structure have enabled us to financially support all of our people during this crisis. We have not laid off or furloughed anyone. Since the start of the year, we have made several strategic moves to strengthen our company for the future. One, we purchased a building that will double our manufacturing footprint. Two, we continue to hire competitive recruits at a record pace. Three, we completed the acquisition of Synoste. And four, we bought back over $100 million of our stock at depressed prices. In addition, we have been able to donate millions of dollars to support communities and frontline workers who have been impacted by COVID-19. While no one knows what the second half of this year will bring regarding the coronavirus, I can say with certainty that Globus is stronger now than we have ever been and looking forward to the future, whatever that might be. I will now turn the call over to Keith.

Thanks, Dave, and good afternoon, everyone. While the macro environment was impacted by COVID-19, I am extremely pleased with the way Globus has weathered the storm and am encouraged with how we finished Q2. Though the impact of COVID-19 negatively affected sales and profitability, we improved upon our free cash flow compared to the prior year, driven by continued working capital improvements and decreased capital expenditures. In addition, as Dave mentioned earlier, we were able to complete the acquisition of Synoste, a developmental stage finished company. Our Q2 revenue was $148.9 million, a decrease of 23.4% as reported, or down 23.3% in constant currency compared to the second quarter of 2019. On a day-adjusted basis, sales were lowered by 23.5% with the same number of selling days in the U.S., but one more selling day in Japan. Our Q2 net loss was $20.8 million and includes a $24.4 million pre-tax charge related to the acquisition of Synoste, which is reflected within our research and development expense. The total consideration for Snow State was $25.3 million, and included $22.8 million of cash paid at closing, plus a $2.5 million contractual holdback. Non-GAAP net income was $6.9 million, delivering 7 cents of fully diluted non-GAAP earnings per share. Adjusted EBITDA was 14.7%, and our free cash flow was $13.1 million. Moving into sales, our second quarter U.S. revenue was $125.2 million, are 21.8% lower than the second quarter of 2019, driven by the impacts of COVID-19 across our business. The COVID-19 impacts were greatest in the earlier part of the quarter. As we progressed in Q2, overall sales improved sequentially, led by our U.S. spine business. As Dave noted, we concluded June with double-digit growth in our U.S. spinal implant business as compared to June 2019. International revenue for the second quarter was $23.8 million, down 31.2% as reported, or lower by 30.5% in constant currency. Again, the primary driver of lower sales was the impact of COVID-19. In addition, and as expected, we did not repeat the large distributor orders placed in the first half of last year, thus driving difficult year-over-year comps internationally. Our second quarter gross profit was 66%, compared to 77.4% in the second quarter of 2019. The decline in gross profit was driven by a combination of factors. One, the deleveraging of fixed costs due to lower revenues as a result of COVID-19. Two, higher inventory reserve expenses focused primarily on our trauma and spine businesses. Three, higher depreciation expenses. And four, the write-off of fixed manufacturing expenses. It is important to note that the deleveraging impact will affect other areas of our P&L including R&D and SG&A. Consistent with our first quarter and as expected for 2020, the higher depreciation expense was the result of additional instruments and sets within our spine and trauma businesses. When revenues returned to pre-COVID levels, we would expect a mid-70s gross margin in line with historical results. Research and development expenses for the quarter were $39.5 million, or 26.5% of sales, and includes the impact of the San Jose acquisition, which I commented on earlier. Adjusting for the acquisition, research and development expenses were $15.1 million, or 10.1% of sales, compared to $15.7 million, or 8.1% of sales, in the second quarter of the prior year, with the decreased spending driven primarily within our INR and trauma businesses. SG&A expenses for the second quarter were $80 million, or 53.7%, compared to 88.4 million or 45.4% in the second quarter of 2019. The decreased SG&A spending was driven by lower sales compensation expense and lower expenses within travel and training. These were partially upset by increases to bad debt expense as well as COVID-19 related expenses, primarily donations and costs associated with PPE, which were approximately $2 million in the quarter. The effective income tax rate for the quarter was 5% as compared to 19% in the second quarter of 2019. The lower effective tax rate was driven by the Sonosta acquisition and its discrete treatment, resulting in no gap tax impact for the quarter, as well as additional stock comp windfalls compared to the prior year. Adjusted EBITDA margin for Q2 was 14.7%, which is reflective of my earlier comments, including the deleveraging impact driven by lower sales as a result of COVID-19. The company has continued its review of its business performance and related cost structures to identify cost savings opportunities. Looking ahead to 2021 and beyond, assuming a more normalized non-COVID environment, we would expect a return to a mid-30s adjusted EBITDA range. We ended the quarter with $636.2 million of cash, cash equivalents, and marketable securities. Net cash provided by operating activities was $23.1 million. and free cash flow was $13.1 million, both improvements over the prior year driven by lower capital expenditures as well as working capital improvements, primarily AR as well as the timing impact of a delayed federal tax payment resulting from the CARES Act. During the quarter, the company spent $30.8 million to repurchase its Class A common shares in connection with the previously authorized and announced share repurchase program. We have not purchased any additional shares since the conclusion of Q2 and currently have $95.3 million remaining on its original $200 million authorization. Thus, we have spent $104.7 million year-to-date on repurchases. As noted last quarter, the company will fund the share repurchases with its operating cash flows and excess cash. Looking back on the quarter, Globus performed exceptionally well in the COVID environment, a testament to our underlying business strength. We will continue to meet the challenges faced by the market and will take the prudent steps necessary to further improve our business while maintaining focus and discipline around cash flows, liquidity, and profitability. We will now open the call for questions.

Ladies and gentlemen, just as a reminder, if you'd like to ask a question, please press star and then the number one on your telephone keypad. And your first question comes from the line of Matt Mixick with Credit Suisse.

Hey, good evening. Thanks for taking the questions. Can you hear me okay?

Yes, Matt.

Great. Thanks. So I wanted to follow up on a couple things. You know, I think there's been a surprising amount of activity in the second quarter reported by yourself and other companies around robotic surgery and I think, Dave, you mentioned interest among surgeons, but in the end it seemed like it closed several other companies, not to compare, but it closed larger numbers of deals in the quarter. Can you talk a little bit about the cadence of those and how you'd expect them to develop or come to fruition? And then I have one follow-up.

Sure. Well, it's been challenging to get in front of the executives, given the environment, and to get their attention, given the other things on their minds. But as we noted, we were able to close some deals. And activity is opening up now, just even kind of as we speak. more and more access. There's certainly interest on the part of surgeons and I think executives as well to get the technology. It's just a matter of grabbing their attention and making it happen in the interim.

That's helpful. Then the follow-up just was on the volumes. I think you almost right out of the gate as companies start talking about the recovery, I think you were one of the teams that was seeing maybe a, I hate to call it a snapback, but sort of a faster rise of activity when you reported first quarter. And it seems like you're providing some color around June, July that are a bit, maybe a bit above what some of your peers are talking about across, you know, different specialties maybe, but you know, same zip code, orthopedics is fine. And just love to understand what you think is driving that, you know, it's hard to imagine there's a share element to this, although, you know, you do have a lot of new technology reaching the marketplace at the moment. So what, do you feel like you're relatively stronger than some of your peers in terms of, you know, how you're picking up a pace again or any color would be helpful in those comments?

Yeah, I think our results are a function of the market coming back, but we're clearly taking share in this environment. If you look at the results of our peers in the spine space, and if you recall, before COVID hit in the first quarter, we were on pace for about 15% growth. So we are continuing to take share, even though we've lost ground versus last year, but versus our competition, we're growing. I think that's what it is.

Okay, super. Thank you, Dave.

Your next question comes from the line of Shagun Singh with Wells Fargo.

Thank you so much for taking the questions. So I wanted to touch on the cadence of growth that you saw in June, July. Thank you for sharing that. Could you help us understand how much of it was backlog versus a healthy and normalized mix of new patients returning? into the funnel. And then how should we think of trends in the second half of the year, just given the ebbs and flows in COVID cases? Are you a little bit more immune to that, given your geographic mix? You know, how should we think about that? And then the last part of my question is, you know, are you willing to share, you know, what percentage of the deferred procedures have already been performed? I think the number we heard was about 40%, 50%. So it's a tie that we have about that much still remaining in the funnel. So any color there would be helpful there. Thank you for taking the questions.

Sure, Shagan. We don't really have insight into whether the case was a deferred case or a new case. That's really the surgeons. But I think I can help you a little bit in terms of understanding the future. We've been talking to our surgeons, and we did a little informal survey of our own. Throughout the country, we tried to grab about 30 surgeons from a diverse geographic And we asked them two questions. We asked them, what is your clinic flow today versus pre-COVID? And then the second question is, if the clinic flow that you're seeing now continues through the end of the year, will you have a full OR schedule? And the average in terms of the clinic flow versus pre-COVID is about 85%. that ranged from 50 to 100%, with a few outliers at 50. So it came in around 85%, which is very strong, in my opinion, given where we are with the pandemic. And then the answer to the second question, will they maintain a full operating schedule if they continue at that clinic rate, was about 78% of them said yes, they would be busy through the end of the year. So I find both of those data points very encouraging in terms of where we are. Certainly, if the COVID environment improves, I think you'll see that go back to 100% in the clinic, and it does leave some room for a little bit of a drop back as well. I think the other thing you see there is spine is a profitable procedure for the hospital. So even if there is some restriction on the electives, I think spine goes to the front of the line in terms of getting procedures done. So I think all of those factors bode well for our segment.

Thank you for the color.

Your next question comes from the line of Richard Newiter with SBV Lutheran.

Hi, thanks, guys. Thanks for taking the questions. Just to piggyback off of the kind of June, July, pretty strong growth that you're talking about there, as we look to the back half, I mean, appreciating that maybe double digits in June and July reflect some backlog work down, some of that recovery isn't extrapolable purely into the back half. But are we thinking about kind of growth, you know, in the second half for your business? Is that reasonable in your view based on what you see today?

I think it's definitely a possibility for us. It's really challenging to predict the external environment, but with the way that we're taking share and the trends we're seeing, I think it's certainly possible.

Okay, very encouraging to hear. And then on trauma, it sounds like that launch is going pretty well. I guess, Dave, are you surprised by the performance of that business even during the COVID period? Was that kind of in line with where you had hoped you would be previously? And if you could just update us a little bit on where you are on kind of the full commercialization there, several limitations you have on manufacturing, and the outlook into the back half. Thanks.

Hey, Rich. It's Dan. I'll jump in for that one. So thanks for the question. We're certainly pleased with the progress and the inroads we're making with sales growth. I think there's a long way to go. Certainly COVID is impacting us while there's still trauma surgeries occurring. Getting together with pricing committees or getting those type things approved through the hospitals that are inundated right now, certainly something hindering us. So I think there's actually more growth we had and we could have beaten that, I believe, if we weren't pulled back by COVID with that. So we'll continue to go. I would say it's on track for what we predicted for this year. But again, I think the potential is even stronger. You had asked about manufacturing. We had overcome those hurdles last year. We continue to have a very strong manufacturing facility that's capable of putting this out without hindrance. And to date, we have 12 of the product family launched. We have a few filed up with the FDA with the potential of getting two to three more out by the end of this year if all works well.

Great. Thanks for the update.

Your next question comes from the line of Kayla Crum with Truist Securities.

Hey guys, thanks for taking our questions. So can you just give a little bit more detail on this recent acquisition? Just any sense for potential contribution from this new area and just what prompted the timing of that purchase now? And then I guess tied to those questions, are you still evaluating other deals today?

Sure, Kayla. Thanks. It's something we've been looking at for a while. It's, I think, going to be an exciting product for our trauma sales force to begin carrying. And the technology itself, the NITINAL, we think there's definitely an opportunity to expand that into the treatment of pediatric deformity in terms of growing rods. So it is going to be a while before we get to the market. It's probably going to be until the end of 2022 before we can get it into the U.S. market, and maybe a little bit before that in Europe, but not much. In terms of other deals, yeah, we've been active. We're looking at a number of things, nothing transformative. Again, just tuck-ins and things that could improve our business.

Great. Thank you. And I mean the fact that you guys still generated cash during this time is also kind of a rarity just looking across our space. So I'd love to hear your approach to spending new investments at this time and just how you're thinking again about capital allocation from here. Thank you.

Thanks for the question. This is Keith. You know, we continue to look at our business and run it in normal course. So, you know, as it relates to some of the improvements that we generate in free cash flow this quarter, we took a hard look at AR. Coming into the quarter, no one knew what was going to happen with COVID, and we felt that the most important thing we could do is manage our balance sheet and cash flows, and there was a concerted effort to really focus on bringing cash into the business. We've taken an approach to continue to build inventory in preparation for a bounce back, but really it's just active management of trying to identify what are the things you can control within your business. That's really the approach we took for the quarter.

thanks guys and congrats on the quarter thank you your next question comes from the line of matthew o'brien with piper sandler afternoon thanks for taking my questions um i guess you know dave why the kind of cautious tone on growth in the back half just given what you're seeing here in july how how are there outbreak areas that you're really worried about i mean why wouldn't you be growing and then This share-taking in the U.S. is pretty demonstrable. I know you've got a lot of reps and products and so forth, but can you just give us a little bit more as far as where that's coming from, large companies that you're getting share from, small companies going bankrupt, the robot? I mean, what's really driving it? Because, again, it's a clear standout.

Yeah, thanks, Matt. Well, I'll tell you my tentative answer. answer is because of COVID. I mean, it just seems like day to day we have a different plan as a country. And you just want to not get over our skis here. But I'm excited about our business. Our business is really strong relative to our peers. So I don't want that to seem like I have any doubts about how we're going to perform relative to others. But it's really we're clicking on a number of cylinders. It is competitive recruiting, which is mainly focused on, when I say competitive, I'm really looking at the larger competitors. We really have a lot of respect for those competitors, and to become a competitive recruit at Globus, you have to come from one of the bigger companies. We don't even count it if it's from the smaller one. So that's where it's coming from, and I think reps are really attracted to, Our technology, our leadership in implants has been known for a while, but the enabling technologies has really differentiated us in their eyes over the last several years. And they can see that that's the future, and they want to be part of that. I would add to that we've had some great launches this year on the implant side. So that's something that we had, I think, back in 18, we probably didn't have as strong of a year as we did typically. We came back last year, and now we're really firing up. multiple cylinders and then it's not just the technology when it comes to enabling technology there's the pull-through aspect of the robotic deployments that we have and as that installed base grows you're going to see that pull through grow kind of exponentially if you will okay thank you and then as a follow-up on the on the robotic side of things you know you talked about closing a lot of deals in in June I'm assuming you know everything you printed here today happened in June

You've done some more in July. Is there a willingness among hospitals to be, you know, buying capital equipment in this environment? Do you have to get aggressive on the economic side in terms of what you're going to give up on the front end to get more volume on the back end? And then one of your competitors announced a delay to their robotic system yesterday. Has that been any kind of gating factor where people are kind of waiting to see that one versus... versus going ahead and executing a Celsius purchase, and now that they're delayed, do you think there could be maybe a little bit more push to get access to your product?

Yeah, let me see if I can keep track of the questions. In terms of pricing, we haven't done anything more aggressive than we normally would to get systems placed. And to characterize hospitals as willing or not, that's dangerous because... there's an entire spectrum. There's CEOs who say, I can't even think about this right now. So, you know, I have too many things going on with COVID and too many problems to address, so you need to come back in a quarter. And there's other ones who maybe aren't as impacted by the COVID environment themselves that see an opportunity to differentiate their hospitals even more to pull more patients to them that are maybe not able to be treated at other places. So, It's an entire spectrum. Generally speaking, though, it's challenging to get their attention right now versus the way it was six months ago. And then finally, to the competitor you mentioned, I don't think we've seen that yet, but I think as a result of continued delays, the reality is that we don't really know when that's coming, if it's coming. That'll be useful for our sales force in terms of addressing those folks who might be waiting. Got it.

Very helpful. Thank you.

Sure.

Our next question comes from the line of Matt Taylor with UBS.

Hi. Thanks for taking the question. Congrats. So I wanted to ask more about the recruiting. You continue to have record levels of recruiting, and you mentioned some of the reasons. just now. I just was curious how you're able to maintain that, you know, during, during this time. And is the bigger difference in your performance going to make that continue and make it easier for you in some ways? I mean, what are you seeing your competitors do on the recruiting side?

Um, you know, they, they do seem to have, um, backed off a bit. I, I, that's nearly anecdotal, but our, but our guys are a hundred percent focused on that. And it's a credit to, uh, Greg Harris, our executive VP of U.S. sales and his team, just the focus they've had in this period to really accentuate the strength of our company in terms of our financial strength, our technology strength, and just the culture that we've built to bring people over. When things become uncertain, people are looking for security, and they've been able to convey that to folks and continue to generate that interest and And we've been willing to be aggressive and make a bet on ourselves that things are going to come back and those bets are going to pay off in the future. Yeah, yeah.

And then I was just hoping to get an update on the robotics program in large joints, if you can talk about that and the timelines at all and anything on expectations for contribution from it.

Yeah, that's a ways out. We're probably not going to see that for a good bit at this point. We've been challenged. In earlier stages of development there, the team is fairly dispersed, so it's been challenging to get into the labs and do the labs that we need to on those early stages to get the products finalized. That has been a bit of a casualty of COVID. I don't have a timeline to tell you at this point, but we are further behind than we were, I'll say, six months ago.

Okay. Fair enough. Thank you.

Sure.

Your next question comes from the line of David Lewis with Morgan Stanley.

Hi, this is Mason on for David today. Thanks for taking the questions. Just a quick clarification. When you talk about June up double digits year over year, that's obviously very encouraging. I just wanted to check, is there any additional selling days clouding that comparability? Some device companies have called out differing days in June, specifically year over year.

Yeah, Mason, good question. That's the day adjusted rate I gave you.

Great.

It's higher than that now, normally.

Got it. That's helpful. And then just as a quick follow up, July accelerating off of this, obviously encouraging to see that growth rate continuing. Are you seeing a plateau as you look week to week as backlogs continue to be worked through or the growth rates still accelerating off of this in the back half of July and into August?

Thanks so much. Another good question. Yeah, it's plateaued in terms of our sequential week-to-week. We seem to be at a certain level. July is typically a month where we tail off for vacation, so sequentially we're We're plateauing, but we're up against maybe easier comps for July. So we'll enjoy those easy comps in August, and then September, obviously, that's when people would normally come back. So the comps will get harder for us come September.

Understood. Thanks.

Our next question comes from the line of Jason Wittes with Northland Capital.

Hi, thanks. Just two questions. One, follow-up on recruitment, which is obviously very important to the story. Did you say that your competitors for talent are pulling back? And at the same time, can you describe kind of the way you see the situation forming at the larger companies where you're poaching talent?

I don't know for sure if they're pulling back. They don't seem to be as aggressive when we are talking to folks. You usually ask them if they're thinking about making a move it usually behooves them to shop around a bit. And it doesn't feel like we're really in competition with a lot of folks at this point. They're narrowing their choice. And that may just be because we've differentiated ourselves enough that they know where they want to end up and not anything our competition is doing. And then I apologize, but I didn't catch that.

I guess related to that was, and I had a quick follow-up, related to that was, what's the situation at the larger companies where you generally poach from? Is there a fair amount of uncertainty that's driving a lot of movement, and is that something you kind of anticipate to continue for the rest of this year and even into next?

I don't know if it's uncertainty. I think it's just clear from the larger folks that they're buying technology if they're moving at all, and then maybe on the more peer-related, there just seems to be a lack of some of the key elements in terms of where the future is. So I think it's our culture here and the technology that we have, the implants that we have for them to sell, combined with the power of the enabling technology, the imaging, the navigation robotics platform that we're building, I think it's it's what we're doing more than what, and maybe what they're not doing versus something that they're actively doing.

Okay. And then just quickly on trauma, impressive numbers. You know, when I originally spoke to you guys, you kind of mentioned that, you know, it took a while to get things in place. Things are in place now, but it's kind of a bit of a waiting game for contracts to expire. And is that kind of what we're seeing here, that you're picking up sort of new contracts as they expire or, Or is there other drivers of the growth that are kind of behind that number?

Hey, Jason, it's Dan again. It's really multifaceted, right? It's going to be about recruiting and bringing reps on board so you penetrate a market, given that we're small, so you're able to get into new territories. It's certainly about creating access, whether that's at ASCs or at hospitals or through GPOs. All of those things are working for us. And, of course, it's getting more products and more sets out into the market in a regulated fashion. that allow us to continue to get more usage and more trials as we build surgeon relationships. So all of those are really working. It's not necessarily that a contract's expired and we jump on and do it. It is part of it, but it's not the sole reason.

Okay, thank you very much.

Your next question comes from Kyle Rose with Canaccord.

Great, thank you very much for taking the questions. I wanted to follow up on one of the earlier questions on enabling technologies. I appreciate the comments on the timing for the robotic side, but maybe any additional insight with respect to procedure-specific indications in the spine arena, and then any update on timing with respect to the imaging platform as well.

Sure. Thanks, Kyle. Yeah, we're actually just in the soft launch of our interbody module, if that's what your reference to procedure specific was. And it's going quite well. We've done a half a dozen cases this week, and by all accounts, we'll be in full commercial launch during this quarter if it continues at that rate. The imaging system is also going well. We're in sort of the final stages of testing with the agency right now. which is the last step before we go to the FDA. So assuming that goes well and we don't see any major hiccups there, we will be fine with the FDA within the next couple of months.

Great. I appreciate the update. And then just a follow-up on the trauma side for Dan. Dan, when you're going into accounts and trying to get on contract, Are you taking, I guess what you characterize as smaller bites of those contracts, you know, one to two product lines, or are you able to go in and compete against, you know, the full-line trauma players when we think about, you know, entering a level one facility and taking material share in one of those facilities?

Yeah, we're not in a position yet to take and displace a full large player. We're working towards that as we build out the portfolio. But at most places, you're going to begin with one or two products, get usage, depending on the surgeon, if he's in upper extremity or lower, obviously. and then kind of expand through there. So again, with 12 product families launched, we can do quite a bit, but we still need to continue to put more out on the market before we can disrupt or displace the bigger competitors.

Great. Thank you for taking the questions.

Your next question comes from the line of Ryan Zimmerman with BTIG.

Hey, guys. This is actually Max on for Ryan. I just wanted to go back to he, John, and Sable. I know you mentioned that you're really encouraged by the rollout of both products during the quarter, but just wondering if you could talk a little bit more about how those products contributed to the top line and whether there was anything different you did with those rollouts given the COVID environment that might be able to take forward to additional product launches here in the back half of the year.

Yeah, thanks, Matt. Nothing we really did any differently than our norm. I will say that I blew it on the projection of how much we'd sell, and I undershot that. So we've kind of exhausted our set capacity at this point. Those are producing a lot, but we need to make more. And for that, we needed to expand our manufacturing capacity. So we've got the orders in, and those machines and that capacity is coming on board. We should see the impact of that in Q4. And again, nothing different than the normal. And we typically don't give you the granularity in terms of what the components of our growth are. I will tell you that new products are contributing significantly this year.

Got it. Thank you. That's very helpful. And then switching over to the emerging technology segment, you know, given that the cranial module is now approved, can you just provide some more detail around your commercial strategy and the model itself? Is it a software upgrade and some hardware, or is it a separate unit entirely? Just kind of help us think through that, please.

Yeah, it rides on the Excelsior's platform. It does require some different hardware, but the core unit's the same. And it's obviously different software. They're putting the final touches on the rollout of the software. We're probably going to roll it out into the fourth quarter. I don't expect any meaningful revenue from it this year. And we're probably going to go initially to customers who have a unit to expand their capacity and buy the cranial module. We'll also be addressing neurosurgeons who just focus on brain procedures. But that's a new area, a new call point for our folks. So I don't anticipate anything. meaningful revenue from that segment until we really get out there and get some good clinical data on the system. Got it.

Thank you.

Sure.

Your next question comes from Mike Mattson with Needham.

Yeah, hi. This is David Saxon on for Mike. Thanks for taking the questions. I just had a follow-up on the imaging system. Just wondering, can you give a timeline to commercialization And then also, how are you thinking about the risks or opportunities in launching in the current environment?

Thanks, David. Yeah, we'll be out in the first quarter with that, along with the navigation that goes with that. Yeah, are there risks in launching capital in the current environment? I think there are. But at the same time, I think the This is going to end at some point, and we're excited about what this technology can do. It's been an issue for us competitively not having this system as we go up against our number one competitor. So this is going to put us on equal or greater footing once it gets to the market. So we can't wait to get it out there.

Great. Thank you. And then as a follow-up, just on gross margins, You know, as revenue starts to recover, how should we think about the ramp back to kind of normal gross margins? Thanks so much for taking the questions.

This is Keith. Thanks for the question. You know, I think on a normalized basis, again, we have no reason to believe that we're not a mid-70s business. But I err on saying how quickly we return there, given that we still don't know what the second half is going to bring. Yes. We do see some optimism with sales so far in July, but looking ahead, I err on providing a specific target for the back half of the year. I think what I would say is on a go-forward basis in a non-COVID environment, we should be a mid-70s business.

And your last question comes from the line of Steve Lickman with Oppenheimer and Company.

Hey, thanks for taking the question. This is actually dated on for Steve. Just maybe one for me. Any color you can provide on Japan during the second quarter? Have you begun selling Excelsior units? And if so, how much of an impact should we expect for that rollout in the second half? Thank you.

Yeah, thanks, David. We are marketing it there. We have not sold a unit yet in Japan, but we have a pretty nice pipeline of potential leads and are optimistic about the future with it there. Did you have a follow-up question?

No, that's it. Thank you.

Okay, good. Thank you.

And ladies and gentlemen, there are no further questions, and this does conclude today's Globus Medical's second quarter earnings call. Thank you for your participation, and you may now disconnect.