Globus Medical, Inc. Class A

Welcome to the Globus Medical's first quarter 2022 earnings call. At this time, all lines will be on mute, and a Q&A session will be held after the prepared remarks. During the question and answer session, if you have a question, please press 01 on your touchstone phone. I will now turn the call over to Brian Kearns, Senior Vice President of Business Development and Investor Relations. Mr. Kearns, you may begin.

Thank you, Richard, and thank you, everyone, for being with us today. Joining today's call from Globus Medical will be Dan Scavilla, President and Chief Executive Officer, and Keith Fowle, 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 2021 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 or 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 GAAP measures are available in the schedules accompanying the press release and on the investor relations section of the Globus Medical website. With that, I'll now turn the call over to Dan Scavilla, our president and CEO.

Thanks, Brian, and good afternoon, everyone. Q1 sales were $231 million, or 1.4% growth, with non-GAAP EPS of 42 cents a share and an adjusted EBITDA of 32%. These results reflect modest revenue growth against a difficult prior year comp coupled with COVID-related revenue impacts in key countries and a slower capital purchasing quarter. While these revenue headwinds impacted EPS and adjusted EBITDA results, it is important to point out that we remain unaltered in investing in our strategy of above-market growth by increasing investments in R&D resources, competitive rep recruiting, and surge in education, focusing on the goal of sustained long-term growth. U.S. spine grew 3% for the quarter against headwinds of a challenging Q1 prior year comp of 20% growth, coupled with additional COVID impacts. January was slow, as noted in our Q4 earnings call. February showed sequential improvement, and March became our highest sales month on record. The strong performance continued in April, where we achieved our highest average daily sales. In addition, our competitive recruiting pipeline is strengthening, which is a leading indicator of future growth. Enabling technology sales were $13 million, down $2 million from prior year, due to lower placements in the quarter. After a record Q4, we experienced a slowdown in hospital purchasing as administration focused more on COVID and staffing shortages in Q1. Robotic procedures and implant pull-through continue to accelerate, growing 27% versus prior year, and surpassing approximately 31,000 robotic procedures performed since launch. Entering Q2, our pipeline is stronger and we're focusing on driving robotic sales throughout the rest of the year. In May, we began shipment of our Excelsis 3D imaging system and successfully completed the first surgeries in several sites. Surgeons have said this is a game changer. Excelsis 3D is a three-in-one imaging platform offering three image modalities in a single cart with high maneuverability, a large field of view, and seamless integration with our Xcelcius GPS robotic navigation system. It is a key component to realizing the Globus ecosystem in the operating room. Market interest is high on the state-of-the-art technology and customer orders continue to grow. Xcelcius 3D is positioned to be a major growth driver for us as we continue to penetrate the market. On the international front, our spinal implant business was flat in Q1. Strong mid-teens growth driven by the UK, Italy, Belgium, and Brazil was offset by declines in Japan, a trend we identified last year and expect to continue through the third quarter. We remain positive on the potential of our international business for long-term growth as we continue to reset the Japanese market. Our trauma business delivered its strongest quarter to date, with 61% annual and 28% sequential growth, driven by Salesforce expansion, strong uptake of our Anthem MiniFrag plating system, and double-digit growth in every product family. We're on track to launch meaningful products throughout the rest of 2022, while investing in future product lines and Salesforce expansion. In Q1, we launched Hedron T, a 3D-printed articulating lumbar interbody spacer, adding to our hedron portfolio, one of our fastest-growing product lines, as well as increasing the articulating spacer offering along with Signature and Altera. As we move into the rest of 2022, we remain focused on three core elements for long-term growth, innovative new product introductions, robot and imaging placements, and competitive rep recruiting. I'm pleased with the record U.S. sales in March, April's highest average daily sales record, the Excelsius 3D imaging system launch, and the strengthening competitive rep pipeline. Globus Medical is well positioned to achieve our mission of becoming the preeminent musculoskeletal company in the world. I will now turn the call over to Keith.

Thank you, Dan, and good afternoon, everyone. Our Q1 results reflect continued growth, coming off strong prior year comps, all while facing COVID impacts through much of the quarter. Our business remained resilient and our core approach and fundamentals remained intact. Q1 revenue was $230.5 million, growing 1.4% as reported and 1.9% on a constant currency basis. Ongoing COVID impacts affected procedural volumes in the early part of the quarter, which began to improve in February. However, we did not see consistent momentum building until March. Our capital business also experienced softness in Q1. reflective of slow development of our robotics pipeline in the early part of the quarter, with many hospitals limiting access and shifting their focus to managing through the uptick in COVID cases, while also managing staffing shortages. As we approached the middle of March and entered into the second quarter, our pipeline showed improvement as deal activity and discussions ramped up. We remain confident in driving this business forward as we progress through 2022. Moving further into sales, our Q1 musculoskeletal revenue was $217.4 million, growing 2.3% as compared to the prior year quarter, driven primarily by growth in our U.S. spine business, which was partially offset by lower Japan sales. The declines in Japan are primarily related to our continued Japan commercial transition to a direct sales force. Q1 enabling technology revenue was $13.1 million, or 11.9% lower as compared to the prior year quarter, and is reflective of my earlier comments around our robotics pipeline. First quarter U.S. revenue was $196.4 million, growing 1.6% as compared to the first quarter of 2021, driven by growth within U.S. spine, partially offset by lower INR revenue related to robotic sales. International revenue for the quarter was $34.1 million, essentially flat to the first quarter of 2021, which was driven by my earlier comments around our Japan sales transition and in line with our expectations. Excluding Japan, our international business grew in the mid-teens as we continued to drive deeper penetration of spine within our focus countries, mainly within Western Europe and Latin America. First quarter gross profit was 74.3% compared to 75.8% in Q1 of 2021. The lower gross profit was primarily the result of manufacturing inefficiencies related to our new plant, higher inventory write-offs, increased freight costs, and product mix. The higher inventory write-offs are primarily related to increased scrap costs, within our biologics business and implant manufacturing, while the increased freight expense was driven by fuel surcharges and a freight mix change. We estimate a roughly 30 to 40 basis point impact to gross profit as a result of inflation, which is primarily the increased freight costs, as well as some slightly higher raw material costs. Looking ahead, we expect gross profit to remain in the mid-70s as we progress through 2022. Our research and development expenses for the quarter were $17.4 million, or 7.6% of sales, compared to $14.9 million, or 6.6% of sales in the first quarter of the prior year. The increase in spending, both in dollars and as a percentage of sales, is consistent with comments made in 2021 regarding our plans to increase investment across our business, primarily within spine and enabling technologies, which will further position us to drive our class leading capabilities. SG&A expenses for the first quarter were $100.7 million or 43.7% of sales compared to $97.9 million or 43.1% of sales in Q1 of 2021. The increased spending is primarily due to a return of pre-COVID levels of spending around travel and entertainment, meeting expenses, and training events. This increase in spending is partially offset by lower comp and benefit costs as well as lower bad debt expenses. Overall, this increased level of spending is consistent and in line with our expectations. The effective income tax rate for the first quarter was 22.1% compared to 20.7% in the first quarter of 2021. The increased rate was driven by lower tax benefits associated with stock option exercises. GAAP net income for the quarter was $38.1 million, and non-GAAP net income was $43.9 million, which delivered 42 cents of fully diluted non-GAAP earnings per share. Adjusted EBITDA was 32.2% and is reflective of my earlier comments on sales, gross profit, R&D, and SG&A impacts. We ended our first quarter with $1.02 billion of cash, cash equivalents, and marketable securities. Our Q1 net cash provided by operating activities was $44.7 million and free cash flow was $24.7 million. Our Q1 free cash flow is reflective of working capital investments in inventory mainly within our INR business, as well as higher CapEx focused primarily on machinery and equipment. The company remains debt free. Our full year 2022 guidance remains unchanged at $1.025 billion in net sales and $2.10 in fully diluted non-GAAP EPS. Looking ahead, we remain extremely positive around our expectations for the remainder of the year, and we will remain well positioned to execute and drive growth against our objectives. Our team is committed to driving value over the long term for our patients, our customers, and our employees. We will now open the call for questions.

Thank you. We will now begin the question and answer session. If you have a question, please press 01 on your touchtone phone. If you wish to be removed from the queue, please press 02. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press 01 on your touch screen. And our first question online comes from from RBC Capital Markets.

Great. Thank you so much for taking the question. I'm going to start with one on capital. You know, it does seem that Q1 was soft, and we've heard it from several other companies. Can you just put a final point to it? How much of it was pulled through to Q4 due to, I guess, remaining COVID dollars? How much of it was typical seasonality versus the COVID-related delays that you talked about due to staffing shortages? And what trends are you seeing in Q2? You did mention that the pipeline is strengthening, but will Q1 and Q2 kind of net out to where you expect it to be? And any comments you can provide on your outlook for 2022 it does appear that hospitals are facing more margin pressure. So, you know, do you expect it to impact spending on medical devices in any way? And then I have a follow-up.

Okay, thanks again. This is Keith. I'll take the first part of that. You know, capital, as I mentioned a couple weeks ago, you know, the capital business, the pipeline really didn't develop in Q1. You commented that some of other competitors made comments regarding the capital environment. Really, what we didn't see was the maturation of the pipeline. So as we get through a quarter, we want to see deals progress, and we didn't see that happening during the quarter. And, you know, the feedback we were getting is hospitals were turning their attention to dealing with COVID for fear of a potential uptick, but also dealing with staffing shortages and focusing on that being the critical thing they needed to work through. We saw that really start to improve as we got to the back end of the quarter. And as I sit here in the second quarter, the pipeline, what we're seeing that we didn't see in Q1 is that maturation of it. as we progress through the quarter. So we feel better about where we're at with robotics and capital entering Q2. Plus, the other thing to think about is we have our imaging systems that are starting to ship. That's creating a bolus of discussion around the global ecosystem and enabling technologies. There might have been one or two other points I didn't catch there, Shugun, but that's my general overview.

I'll add to that, Shugun. I would think back to your latter half of that question. Very difficult for us to predict what hospitals could or would do. We don't know what the environment is. We'll keep our eyes on that. But as we're signaling today by keeping our guidance consistent, we believe we have enough muscle to actually deliver these results, albeit we may throw levers differently to get there. But to date with capital, we're not seeing any reason why we'd want to back away.

Got it. That's really helpful. And just as a follow-up, can you just talk about the cadence of growth through the balance of the year for sales and EPS. I think consensus is looking for 262 in sales and 53 cents in EPS and Q2, and it implies a pretty rapid sequential increase of 14 and 27% higher than what it has been pre-pandemic. Obviously, Q1 was soft as well, but any color on cadence would be helpful. Thank you for taking the questions.

Thanks, Shagan. This is Keith again. We haven't really given quarterly guidance, and we don't really plan to start. I think where we're at today is we're reaffirming guidance for the full year. We remain positive about where the business is and really look forward to getting further into the year.

Thank you. Thank you.

Thank you. Our next question online comes from Matthew O'Brien from Piper Sandler. Good afternoon.

Thanks for taking the questions. You know, either Dan or Keith, the total spine number that you're projecting for the year, I think that is kind of applied by guidance. is a is a you know is less than what you guys saw in 19 and you know again i don't have perfect numbers here but in 19 you did you're up about 68 million dollars year over year in spine this year i think it's more like 41. i know ous is a headwind but you've got the 3d tailwind so why is it that you know the the spine business would be slower kind of than what we saw at 19 and is there is there specifically anything on the expandable side which i think is a couple hundred million bucks for you guys that where you're seeing incremental pressure

Yeah, I mean, this is Keith. Thanks for the question. I would say that, you know, we haven't really gotten into, you know, trending out and projecting what our U.S. buying business is going to be for the year. But when we step back and look, we've grown pretty significantly between 19 to 20 and then 20 to 21. We obviously had a great year. You know, as we look at the dollars that we've added to our business, really the primary drivers of that are, again, our new product launches, our competitive uprecruiting, and the pull-through from Robotics. We don't see that changing. We're going to continue to double down and work to increase the business.

Yeah, Matt, I would just say maybe we could have a conversation later. I'm probably not lining up with your calculations on that because we see very strong growth, continued growth of our sales, our spine, including new product launches, which are going to be fairly strong this year. So I don't think I would come up with that same conclusion.

Okay. And, Dan, you're still doing well in expandables?

Absolutely. Keep in mind that we've got so many generations of that. That's one of the main drivers for us to date.

Okay. And then quick follow-up is on 3D. You know, feedback on that one that we get is unbelievably strong. Should we expect that to be a $15, $20 million product for you guys this year? Thanks.

As we look out to the year, you know, we haven't given specific guidance on what we felt the sales would be this year. I will say that we still have more than double-digit orders. The enthusiasm is great. Every time someone sees this product, they want to buy one. And, you know, we remain excited to achieve our year and our guidance.

Got it. Thank you. Thank you. Our next question on line comes from David Saxon from Needham & Company.

Good afternoon, and thanks for taking the questions. Maybe I'll start with the spine business in Japan. I think, if my memory serves, last quarter you were expecting that business to return to growth. In the second half, it sounds like that might be pushed to maybe third or fourth quarter. So just wondering if anything's changed there, or I guess, what's the plan to kind of get that business back on track?

Thanks, David, for the question. So obviously, fourth quarter is the second half of the year. And so we're going to continue on that path. Nothing's really shifted with that other than I've gotten a little more precise as to the quarter since last time we spoke. That said, I will tell you, I'm bullish on Japan. When I look at the leadership team we're putting in place, the sales team we have in place, the surge in interest from recent events that we've had, I do see this as a very large area for us over the next coming years. And so we're going to do what's right by cleaning up and going direct. And with that, we'll continue to contract to that point. And then once we stabilize, I expect significant growth going forward.

Okay. That's helpful. And then maybe I'll just ask my follow-up on the recon robot. Any update there? in terms of timeline, and then, you know, how should we think about the robot launch? Do you feel like you have enough, you know, in the StelCats portfolio today to support that launch? And then any, you know, plans for hiring ahead of that expected launch? Thanks so much.

Okay. So I would tell you that we're progressing well with the robot. We have yet to file and get approval, so it would always be difficult to call out where that is at this point in the acceptance rate But I will tell you that with the features and the feedback as we develop it with surgeons, it's very promising, and it will be a major part of our portfolio. Doubtfully this year, though, as we go with that. At the same time, we have been reinvigorating the Stelcast, or now Globus Ortho, portfolio to match with that. And that is paired to be filed and launched in unison with the robot to give us that way of And yes, you are correct. We have plans to expand our commercial team, and that's something that we'll most likely get more active with in the latter part of this year as we get more product status and decide when to pull that trigger.

Great. Thank you. Thank you. Our next question online comes from Kyle Rose from Canaccord.

Great. Thank you for taking the questions. I just wanted to ask one about capital allocation. I mean, we've seen some big dislocations of valuations in the public markets. You've got a billion dollars in cash in the balance sheet, no leverage. You've talked in the past about being acquisitive strategically. I just wanted to see You know, if the weakness we're seeing in the public markets, if that's creating a buying opportunity, and if you think that we should expect, you know, an increased period of M&A on the part of Globus moving forward.

Thanks for the question. This is Keith. I would say that that's accurate from the standpoint of thinking about M&A. You know, we're always out there looking at M&A. You know, one would have thought when COVID happened that there would have been great buying opportunities, but the market really took off. As we're seeing rates climb, we're seeing, generally speaking, inflation. There's talk about a slowdown and a recession. As rates go up, I think that smaller companies out there that might be laden with debt would become opportunities for us to potentially look at and acquire. In terms of where, I think it's, again, looking at our ortho portfolio. From a spine perspective, looking at some small spine companies, looking at R&D that's really not fully developed yet. I think those are the places that you would think about us looking to do acquisitions and obviously complementary pieces of technology that would help with our enabling technologies business. But I think that your assertion overall is accurate, directionally speaking.

Thank you. And then when we think about the leads and the pipelines you have for the 3D product, can you maybe just talk to us about what that looks like? Is it current robotic Globus users? Is it current robotic competitive users? Is it people that haven't used robots in the past? Just trying to really understand where the demand is coming from. Thank you.

Thanks, Kyle. You know, it's really a mix of all the above that you just called out. It's not particular to just the people who have our robots. We've seen interest all around with this. And as you know, it's applicable throughout. It's not tied just to our Excelsius robot. So the good news is it's really coming from multiple directions.

Thank you for taking the question. Thank you. Thank you. Our next question comes from Jason Wittes from Loop Capital.

Hi, thanks. If I could just start with a follow-up. On acquisitions, in terms of adjacent orthopedic technologies, Could that potentially be a hip and knee type technology like an implant type company, or is that something that you look to build internally like as you've done so far in trauma?

Jason, I guess it depends really on what the opportunity would be. It needs to be something innovative, something that would actually shift our timeline meaningfully, and we would take a look at that. So it's possible, but as we pursue today, most of what we're using and what we're planning on is internally built. But again, it really just depends on if the opportunity is the right one and it makes a meaningful difference, we would consider it.

Fair enough. I appreciate that. And then in terms of the visibility on the capital equipment from order to install, has that changed at all? Or generally speaking, what kind of visibility do you have? Is it a full quarter visibility? Is it a six-month visibility? Just trying to get a sense of, you know, you mentioned you have double-digit booking orders. How good the visibility is in terms of when you can actually install them?

Oh, okay. Sorry. This is Keith. We're trying to follow your question there for a second. In terms of visibility, really, there's a rollout plan. So we've done our soft launch sites. We're getting those installed. They're doing cases, and there'll be a cadence from there that we start to roll out the robots. We know what our double-digit orders are. We know how they're going to ship. The key thing is, since it's a new product, getting it out there. I've said before, this is a really important launch for us, so we want to make sure that we don't miss anything. So we want to make sure that the training is there for the hospital staff, so our staff will be there to get them on board. But we have basically a launch timeline. As we continue to get new orders, once we work through the backlog, we'll begin to sell those or ship those as well. But to me, by the time we work through the backlog, you're into the third quarter and probably a little bit into the fourth.

And I'll just build on that, Jason, too, is to date, because these are sensitive pieces of equipment, but they have shipped well, they've been received well, and they've been installed with minimal effort so far. So we're pleased with the ability to get them up and running. I would second what Keith said, is I think it's more about the training and getting used to it as opposed to actually getting the piece of capital functioning.

Great. Thank you.

I'll jump back into you. Thank you. Our next question online comes from Richard Newiter from Truist.

Hi, thanks for taking the questions. Excuse me. Maybe the first one to start off on margins. You know, Dan, you've always suggested that during investment periods, your EBITDA margin would, you know, could go as low as 30, you know, low 30s or 32% in flex periods or payoff periods. It could, you know, should trend in the 37 to 38% range. I'm just trying to, figure out the 32% EBITDA margin. Would you consider this kind of more in that discretionary investment period? And now that we have kind of one of your key products launching, we should see kind of the payoff and move more towards the mid or even upper 30s into the quarters ahead?

Rich, I do. You know, again, I think what I was signaling when I opened up with my script is even with the lighter sales that we had against tougher headwinds, We did not step back in our spending, our investment of R&D people, of recruiting, et cetera. And so to your point, what we've called out through the years, this is a great example of that, where we continue to invest for long-term and willing to take these lower EBITDAs. I think as the volumes pick up, it will naturally lift. And so I feel comfortable with what Keith has been saying, that we will remain focused in the mid-30s.

Yeah, and just to add on to what Dan said, you know, 33 to 37 is the range that's been talked about in the past. Sitting here today, coming in with 32.2, this would obviously be at the lower end of that, but as I sit here and look out at the rest of the year, I'm still confident that we're in mid-30s EBITDA business. Quarter was a little bit light from an EBITDA perspective, but again, we talked about increasing our investment in R&D. We did that. I called out some things in gross profit that we saw, but the thing that I wanted to raise there is that I did make a comment on inflation, on raw material inflation, and it's really immaterial to the bigger picture. So that, to me, is an important message to get out there because as I look up and down our P&L, that mid-70s gross profit is very important to us because that's going to help drive profitability for the rest of the business.

Thanks for the color there. And just one on the environment, the spine market in the U.S. So, you know, you guys were pretty outsized share gainers in the spine market throughout most of last year. It appears that you guys got impacted along with the rest of the spine market, but even relative to some other players that also had tough comps, smaller than you, granted, you grew a little bit slower than maybe even some of them. So I guess I just want to get a feel for what you're seeing that drove your performance back up to a record march. Do you feel like that's just some delayed recapture of procedures for the underlying markets? Or is that something that's specific to your business where you're back into the share game mode that maybe you had been in previously, or is it some combination? I'd love to just hear some commentary on March and April trends. Thanks.

Yeah, thanks, Rich. I would think for sure there's some recapture of a slower January, February that's come into March and April. I think that would be logical, although very difficult for us to quantify, but it's an assumption I would go with. I would also tell you that competitive rep recruiting, which was decent in the first quarter, bared fruit in both of those March and April months as well and will continue to do so. And I think as well we've seen through the news a drop down in the concerns or the cases of COVID, which I think opened up some of those surgeries. So I think it's a combination of those things mainly in the March-April timeframe.

Okay, thank you.

Thank you. Our next question online comes from Vic Chopra from Wells Fargo. Please go ahead.

Hey, good afternoon, and thanks for taking the questions. I guess one, Dan, you had touched on new product launches. I'm just kind of wondering which ones, besides the imaging system, will be most impactful to growth this year. And just remind us what the growth contribution of new products is to total growth, and I have one follow-up after that. Thank you.

Okay. So, Vic, we don't actually break out, obviously, product detail or their contributions for growth. Certainly, 3D imaging is a major plan that we had to get out there, and I think that'll be one of the main drivers. I would tell you that we do have planned upward of 10 plus spine launches just for this year. And as I said, Trauma, quite frankly, has got a great portfolio that they plan to roll out through kind of the second half of the year. all of those have been factored in really as main drivers for us to not only meet but possibly beat as we get through the rest of this year.

Okay, great. And then my follow-up is on your international business. We'd just love to gauge your confidence on your international business. You know, how should we think about the contribution from Japan this year, and do you still see a pathway to recovery in the back half of the year and return to that mid-teens growth in your international business? Thank you.

Thanks. So I would tell you that with Japan, and I had gone deep with this, again, I feel very confident as to the plan we have in place, who we're recruiting, the surge in interest, and actually the sales force replenishment. All of those things are very strong. I think we still have to work through account access, and that's why I'm saying that would possibly go out and begin neutralizing in the fourth quarter. I don't anticipate Japan being a contributor when it comes into the rest of this year so much as a reset and stronger growth as we get into next year forward. That's really it. On the rest of the world, again, we had some really good results and some fairly significant COVID headwinds. You know, people will tell you that in Australia the government paid hospitals not to do surgeries. There's different areas like that. that once I look at our internal estimates of those impacts and what it could have been without, I feel very bullish that rest of world will be a decent contributor for us in the second half of the year without any significant COVID resurgence.

And we have no further questions at this time. And with that, thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.