Globus Medical, Inc. Class A

Q2 2022 Earnings Conference Call

8/4/2022

spk01: Welcome to the Globus Medical's second 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. To ask a question during this session, you will need to press star one one on your telephone. You will then hear an automated message advising that your hand is raised. Please be advised that today's conference call is being recorded. I will now turn the call over to Brian Kearns Senior Vice President of Business Development and Investor Relations. Mr. Kearns, please go ahead.
spk06: Thank you, Hope, and thank you everyone for being with us today. Joining today's call from Globus Medical will be Dan Scavillo, President and Chief Executive 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.globismedical.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 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 on 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.
spk03: Thanks, Brian, and good afternoon, everyone. It's good to connect with you again to review our solid results for the second quarter. Q2 was a record sales quarter for GLOLUS, with revenues reaching $264 million or 5% growth, surpassing the difficult Q2-21 comp where we had achieved 69% growth. In addition, Q2 had 14% sequential growth versus Q1, with stronger performance throughout the portfolio, setting a new monthly sales record in June where we exceeded $100 million in monthly sales for the first time. Adjusted EBITDA was 35%, and non-GAAP EPS was $0.56, including significant non-operational headwinds for currency and tax rate that Keith will discuss further in his section. U.S. spine had a record quarter with 2.5% growth against a challenging prior year comp of 64% growth. The primary drivers of U.S. gains were competitive rep conversions and robotic pull-throughs. Our recruiting pipeline is strong and should lead to a record rep recruiting year. I feel we are well positioned to deliver strong second half growth this year in our U.S. spine business. Enabling technology sales were $29 million, up 44% on a constant currency basis versus prior year. Setting new quarterly records in both domestic and international sales. Robotic procedures and implant pull-through continue to accelerate, growing 30% versus prior year. and surpassing approximately 35,000 robotic procedures performed since launch. Entering Q3, our pipeline is strong for both robots and imaging systems, but we recognize that the remainder of the year contains several macro risks, including inflation, labor shortages, supply chain disruptions, and potential recession that may impact us and our customers' purchasing cycles. We'll continue to work with our customers to get the best technology in their hands as we all work through these environmental challenges. In May, we shipped our first Excelsius 3D imaging systems and continue to sell units throughout the quarter. We've successfully completed over 150 procedures in Q2. Surgeons have said this is a game changer. Excelsius 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 a seamless integration with our Xcelcius GPS robotic navigation system. It is a key component to realizing the Globus ecosystem in the operating room, an ecosystem that is built and designed from the ground up to communicate together seamlessly. Market interest is high for this 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 grew 8% on a constant currency basis compared to the second quarter of prior year. We delivered double-digit growth in several markets, including Belgium, Brazil, India, and Poland, where growth rates exceeded 40% for each market. International growth was partially offset by continued declines in Japan, a trend we identified last year and expect to continue through the third quarter. We remain positive on the progress and 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 67% annual and 5% sequential growth, driven by Salesforce expansion, strong uptake of our Anthem mini fragment plating system, and the second quarter launch of Anthem distal femur fracture system. We achieved double-digit growth in every product family, We're on track to launch meaningful products throughout the rest of 2022, and our recruiting pipeline is strong. Despite being faced with supply chain challenges, we've been able to offset vendor delivery delays and supply shortages without significant impact of sales. To remediate the extended vendor lead times, we've altered our ordering pattern to increase inventory levels. The electronic component market remains difficult, but has been offset so far by a nimble procurement team. In addition to these disruptions, freight surcharges continue to impact our cost of goods sold. We continue to seek to mitigate the impact of these challenges where possible. As we move into the rest of 2022, we remain focused on three core elements for long-term growth. Innovative new product introductions, robot imaging placements, and competitive rep recruiting. I am pleased with the record sales in the quarter, the highest monthly sales record in June, and the successful launches of the Excelsis 3D imaging system and Anthem distal femur fracture system. The second half of 2022 is all about focus and execution to deliver value to our customers and drive growth. I feel 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.
spk13: Thank you, Dan, and good afternoon, everyone. Globus completed a strong second quarter, building momentum across its portfolio, especially with the initial launch and rollout of our E3D imaging system. We saw revenue growth and profitability improvements despite difficult prior comps and macro headwinds. Revenue in the second quarter of 2022 was a record $263.6 million, growing 5% as reported versus Q2 of 2021 and 6.5% on a constant currency basis. Sales on a day-adjusted basis also grew by 5%, as we had the same number of selling days in the U.S. and international. I call specific attention to our record sales in Q2 and the associated 5% growth when compared to the prior year quarter, given the tough comp in Q2 of 2021, where we grew 68.6% when compared to Q2 of 2020 and 29% when compared to Q2 of 2019. Second quarter net income was $54.6 million, growing 31.4%, over the second quarter of the prior year. Non-GAAP net income was $57.3 million, delivering 56 cents of fully diluted non-GAAP earnings per share, which was flat to the prior year. However, I do note 9 cents of non-operating headwinds in this figure, driven by a higher tax rate and unfavorable foreign currency impacts. Adjusting for these non-operating items, our non-GAAP BPS would have grown 16% versus the prior year quarter. Adjusted EBITDA for the second quarter was 34.9%, and we generated $13.1 million of free cash flow. Drilling further into sales, our second quarter U.S. revenue was $225.3 million, growing 4.7% as reported when compared against the second quarter of the prior year. This growth is reflective of continued share-taking within U.S. Spine, higher sales of our enabling technologies robotic systems, new sales related to the rollout of our e3d imaging system and continued growth within our trauma business international revenue for the second quarter was 38.4 million dollars growing 6.9 percent as reported and 17.3 percent on a constant currency basis when compared to the second quarter of the prior year and is reflective of the continued global expansion of our robotics portfolio international implant sales were essentially flat to the prior year with growth noted in many countries as Dan commented earlier. However, this growth was offset by lower Japan revenue. Musculoskeletal revenue grew 1.7% as reported and 3.1% on a constant currency basis in the second quarter of 2022 as compared to the prior year quarter. The as reported growth was driven by spine and trauma implant portfolios, partially offset by constant currency impacts and lower sales in Japan as mentioned earlier. We have and continue to drive market share growth across our portfolio of products and remain confident in our ability to deliver a strong second half. Second quarter enabling technologies revenue grew by 41.7% as reported and 44.4% on a constant currency basis as compared to the prior year quarter. Consistent with our Q1 call comments, our robotics pipeline saw sequential improvement between the first and second quarters resulting in higher sales of robotic units when compared to the prior year quarter. In addition, Enabling Technologies revenue was also favorably impacted by the initial shipment and sales of our E3D imaging system. The initial shipments have been received well by our customers, and as Dan noted, market interest remains extremely high in this new and exciting product. Moving further into the P&L, our second quarter gross profit was 74% compared to 74.6% in the second quarter of the prior year. The decline in gross profit was driven by continued freight inflation and higher product costs. These headwinds were partially offset by lower inventory reserves driven by one-time write-offs in the prior year quarter that did not repeat in the current year. Research and development expenses for the quarter were $17.4 million, or 6.6% of sales, compared to $15.5 million, or 6.2% of sales, in the prior year quarter. The increase in spend is in line with expectations and consistent with earlier comments made regarding our continued investment in R&D across our portfolio as we drive planned spending increases on future growth drivers. SG&A expenses for the second quarter were $106.7 million, or 40.5% of sales, compared to $107.3 million, or 42.7% of sales, in the second quarter of the prior year. The decreased spending is reflective of lower compensation and benefit costs, partially offset by higher travel and meeting expenses. In addition, SG&A is lower as a percentage of revenue due to the leverage impact of higher sales. The effective income tax rate for the quarter was 22.6% versus 15.1% in the second quarter of 2022. The increased tax rate in Q2 is reflective of tax benefits realized in the prior year quarter related to stock option exercises, which did not repeat in the current year quarter. During the quarter, the company spent $144.5 million to repurchase its Class A common shares in connection with its previously authorized and announced share repurchase program. We currently have $150.8 million remaining on the share repurchase authorization. The company will fund its share repurchases with operating cash flows and excess cash. We ended the quarter with $881.7 million of cash, cash equivalents, and marketable securities. Net cash provided by operating activities was $36.9 million, and free cash flow was $13.1 million. The lower free cash flow is reflective of continued investments in working capital, namely inventory, as well as increased CapEx investment, predominantly in machinery and equipment. The company remains debt free. We are reaffirming our previously provided full year 2022 guidance of $1.025 billion in net sales, and $2.10 in fully diluted non-GAAP EPS, which includes estimated currency impacts. Looking back on the second quarter, I am pleased with our performance and note the resilience of our employees and partners as we manage through inflationary pressures, supply chain challenges, and currency fluctuations. As we enter the back half of 2022, we are focused on driving continued share-taking across our in-plant businesses while we continue to expand on the sales of our technology to the marketplace. Driving operational performance, managing execution, and maintaining cost discipline are key focus items for our team as we continue throughout 2022, which will drive long-term shareholder value. We remain focused on improving musculoskeletal care through the delivery of products that serve and improve the lives of patients, and I remain thankful to our Globus team in their pursuit of excellence. We will now open the call for questions.
spk01: Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. Our first question comes from the line of Shagan Singh with RBC Capital Markets. Your line is open. Okay.
spk08: Great. Thank you so much for taking the questions. I was wondering if you could provide any color on procedure volumes into Q3. Have you seen any impact from COVID and or staffing shortages? And then on enabling tech, how much was spinal robotics versus imaging in Q2? And then just my last question is on guidance. Can you just help us understand the magnitude of some of the macro pressures you're seeing. You called out FX as inflation supply. How much are you absorbing and what's built into your guidance? Thank you for taking the questions.
spk03: Hey, Shagun. Thanks. It's Dan. I'll start and I'll pass it off to Keith. So we won't comment, obviously, about Q3 where we're in strides. But I would tell you, honestly, to date, we've not seen anything impactful yet that we would comment on related to your question of procedural volumes being significantly off. Our eyes are on that. You never know when that can change, but that's kind of where we are right now, lightly. For enabling tech, the intent is not to really break out robot from imaging, but you would imagine that the vast majority of it being robotic at this point. We'll see how that moves over time as both of those volumes adjust, but that's really where we are. As far as guidance, I'll hand it to Keith.
spk13: Yes, just one other thing I would add on enabling tech, Shagan, is that when you look, I made a specific comment in there that we saw higher sales of our robotic units in Q2 versus prior year. So that is a call-out that our robot business did grow. As I look to the full year from a guidance perspective, we're factored in, give or take, I would say $0.09 of currency, but offsetting it, you have to remember we had the share repurchase and we had some additional items planned in the year, but really currency is getting offset by that share repurchase, which is why we felt comfortable to still finish at the $2.10 from a guidance perspective.
spk08: Thank you so much.
spk01: Please stand by while we get the next question. Our next question comes from Vic Chopra with Wells Fargo. Your line is open.
spk04: Hey, good afternoon, and thanks for taking the question. Just two for me. Can you just talk about some of the trends you're seeing in the capital, on the capital side, and I would love to get your take on the capital environment heading into the back half of the year. And my second question is on the imaging system. Are any of these chip shortages, any supply chain issues impacting your ability to meet demand for the orders? Thanks so much.
spk03: Hey, Vic. Thanks. It's Dan again. So I'll kind of go through a few things. You know, Somewhat tough to predict, right, when we still have some of the uncertainty out there with COVID. So if you look at last year, while it was a better year for us, we would say that was due to market penetration and certainly some pent-up demand that carried over because of COVID. We obviously weren't overly pleased with the first quarter, but I think our momentum and what we've seen has improved in the second quarter. And as we look out through the year, assuming no significant disruptions of a pandemic, Our intent is to surpass what we had done in 2021. The environment, you know, we've called out before somewhat elongated cycles from hospitals. They're distracted with many things. But nonetheless, we're able to work through that so far without coming meaningfully off any of our projections. I would just tell you with CHIP shortages, there are certainly day-to-day issues that arise. They need to pivot to go through things. We've been working through those daily for months now, as has everyone else. To date, we have had all of the materials that we need to build all of the systems for sales, so we have not been hindered to date. But again, that's just a shout-out to an incredibly strong procurement team that's making that possible.
spk01: Thank you. Please stand by while we grab our next question. Our next question is from Richard Newitter with Truist. Richard, your line is open.
spk02: Hi. Thanks for taking the question. I was hoping maybe, you know, you reiterated your guidance, but I know that there's been a lot that's changed, you know, since you originally provided that outlook. I was wondering if you could just talk through U.S. spine, international spine, and your enabling tech and the pieces there. Where are you feeling, like, relative to your original expectations, a little better, a little worse, that ultimately you're getting to the same place? Or is it all kind of playing out the way that you thought it would? Thanks.
spk13: Thanks for the question. This is Keith. You know, as we look further out, you know, we don't give a ton of insights into the parts and pieces, but what I would say is, As we look back, you know, we had a soft cue on from enabling tech business, but as we talked about last quarter, we saw the maturation of that pipeline from a robotics perspective, and we did realize that coming into the second quarter. When you look at our robot business, we feel good. We're cautiously optimistic as we look out through the remainder of the year for that business. We know that last year may have had a little bit of a bolus from COVID overhang, and the business came back and hospitals used money. And we also realized that the hostels may look maybe a little bit more cautious this year, but all in all, we still feel good that we have a robotic business that could grow year over year. On top of that, the enabling tech business, that's going to land pretty much kind of where we think, uh, where we thought it would land. Stepping back. When you look at the musculoskeletal business, key driver there has, and still remains to be our us spine business, you know, out of the gate here, uh, growth looks a little bit lower, but again, I would call out the, the growth that we saw last year. When you look to the back half of the year, we feel that we're bullish on the back half of the year and feel that we're going to get back to that high single-digit growth across our spine portfolio.
spk02: Got it. And then I guess the missing link there is international, because by my math, if you're going to end up in the constant currency international low-digit range, that would imply the back half needs to be, for U.S. spine, double digits or about 10%. Right. Is it maybe that international is a little stronger than you would have thought and the back half ramps to high single digits instead of low double digits? Or do you feel good with that original assessment, maybe 10% in the back half?
spk13: I caution on splitting it out. As I think about the rest of the year, we remain extremely positive about where we are. We're landing six months in where we thought we would. and we're planning on finishing strong the rest of the way.
spk02: Okay. Last one, what about EBITDA margin, just given the currency? Is EBITDA margin still kind of mid-30% range next?
spk13: Yeah, we're still turning to our mid-30s EBITDA margin. Thank you.
spk01: Thank you, Richard. Please stand by for our next question. Our next question will come from David Saxton with Needham & Co. David, your line is open. David, are you there?
spk15: Yep. Sorry, I was just on mute. Thanks for taking the questions. I'll start with enabling tech. Just now that you have multiple systems in the bag there, I was just curious, you know, are you being success kind of selling the kind of combined ecosystem or are you still kind of selling, you know, each system individually? And then, you know, In the back half of the first quarter, you know, you obviously saw the order book weekend strengthened into the second quarter here. Can you just comment on, you know, how the order book's looking as we go into the third quarter?
spk03: Thanks, David. It's Dan. So it's a great question. And, yeah, we certainly have seen a combo opportunity with this, even as we just began launching this in the second quarter. So we are seeing that. And it is the intent, because you do hear us use the phrase ecosystem, and that still needs to be built out further. But these are intended to be used seamlessly together. And the value there is in using them together, that smooth activity. And so the intent will be to continue to do that and to push that and make inroads that way. Do you want to handle the second half?
spk13: The second half, as it relates. Could you repeat the second part of your question? Yeah, just on the order book, how you're feeling about it. Yes. Yeah, the order book. So when you look at a year, still historically, Qs1 and 3 are historically the slower quarters. We are actively quoting, and the order book is building. But I would caution that Q3 is typically a slower quarter than Qs2 and 4. But the activity around robotics enabling tech remains robust.
spk15: Okay. And then maybe a related question just on the knee robot. Maybe latest on timing, you know, how you're thinking about the launch strategy and if you want to talk about the feature set relative to some of the existing robots on the market. Thanks so much.
spk03: It's no problem. Well, listen, I would tell you that it's under development. It's not been approved yet, so I'm not going to walk out and talk about the features of it just yet with where it is. It's progressing well, and actually we're looking forward to getting it out on the market. Our initial estimates, if everything goes as planned, that we would have it out in the first half of next year of 2023. That's really what it will be. It is certainly going to be a market appropriate and add several benefits. But again, we need to go through get approvals before we want to talk more about exact features.
spk15: Got it. Thank you.
spk01: Thank you, David. Please stand by for our next question. Our next question is from Ryan Zimmerman with BTIG.
spk10: Hey, good afternoon. Thanks for taking my questions. I want to start Maybe a little higher level for you, Dan, as stepping into the CEO role. I appreciate Keith's comments around adjusted even margins being in the mid-30s and certainly expect you guys to continue to be there. But I guess I'm curious about your view around reinvestment for growth and whether you want to push a little bit on that lever, maybe at the expense of adjusted even margins longer term as we look out. and 23 and beyond. And as you make these inroads into joint recon and bigger positions and trauma, et cetera, it would be helpful to get your perspective on that.
spk03: Thanks, Ryan. I appreciate the question. Again, we do enjoy being profitable in the mid-30s is one of those items that we tend to move by. We're not hampered by it. And as we asked today and as you've seen through other quarters, We spend and invest for the long term, and if that means short-term downs, we're okay with that for the long-term growth. I think there would always be opportunities to invest on a longer ramp and go through that over time. But ultimately, everything that we work on to date, we feel that we can leverage up and grow to where we can remain within that mid-30s EBITDA. So at this stage, I don't see a reason to signal us coming off of that. And in particular, I don't feel like we're hindering or hampering any levels of investments that would set us off in a negative fashion for growth.
spk10: Okay. That's helpful perspective. Oh, please.
spk13: There's one thing I would add to that. When you look at our numbers, at the quarter as an example, our R&D spending is up about 12% year over year. So we are investing. I think, as Dan said, you can't forget that we've been continually investing in our business. We grew the robotics portfolio. That took a lot of R&D. And as those businesses continue to come online, we're looking to go reinvest in the next big thing.
spk10: I appreciate that, Keith. That's good color. And then just as a follow-up, I mean, you guys did repurchase some shares this quarter. You still have, I think we said, $150 million, Keith, remaining. But, you know, you're sitting on a lot of cash, and you have signaled, at least last year, I think, around your intent to be more aggressive, particularly on the M&A front. And so I'm curious, kind of, does the share repurchase signal that there's not items out there or assets out there that are attractive to you at this time? Because, again, you've been sitting on this cash for a while, and we really haven't seen you guys get incrementally more aggressive on the M&A front as we would have probably expected.
spk13: Yeah, it's a great question. I mean, we took We took the opportunity to buy back some shares during the quarter, but that doesn't really signal a change in our long-term strategy. We're going to continue to grow organically. We're going to continue to make complimentary acquisitions. One thing I would call out is that coming into COVID, one would have thought that the evaluations would have become more favorable. They didn't. They really went the other way. We continue to look around and stay on the sidelines, but now where we're sitting with interest rates going up, the cost of borrowing is going to increase for some of these companies. IPO market has slowed down. I think it's going to create more opportunities for us. And for a company like us sitting with that amount of cash, I think in any sort of a recessionary environment, it's going to create a better opportunity for us.
spk03: Yeah, Ryan, I'll just add to that too, right? I think you know us. We don't feel the pressure to act because of that cash. With the right move for the long-term strategic growth, we'll use it. And to date, we've not seen anything that we're willing to use it for, but it will happen over time. But just again, we're not going to make a move for the sake of it. It's got to be the right move.
spk10: Appreciate you taking the questions. Thank you.
spk01: Our next question comes from Kyle Rose with Canaccord.
spk14: Great. Thank you for taking the questions. So I just wanted to talk a little bit more about, you know, guidance as it pertains to the supply chain, where you stand now. It sounds like one of the biggest, I guess, headwinds would be electrical components. Obviously, you've got new products launching with the E3D. Maybe just help us understand, what are you assuming in your top-line guidance relative to the supply chain and constraints, if that situation worsens and or gets better through the end of the year?
spk13: Thanks for the question. From a top-line perspective, as we look out, we remain very confident in our ability to fulfill the year. We're keenly aware of the supply chain challenges, and Dan commented earlier that our team has really done a really nice job of working around and dealing with these challenges. But as it looks right now and as I look at guidance, we feel comfortable that we can deliver even in spite of the supply chain challenges.
spk14: Okay. And then one of the things that some of the larger ortho peers commented on earnings when they were talking about capital sales was an increasing trend, at least in the total joint space, of moving towards, you know, earnouts, rentals, placements of that sort. Any commentary you're seeing there? And then I'll ask my last question as well, which is, you know, which is building a little bit on Ryan's question regarding M&A. I mean, historically, you've had a build, you know, versus buy bias, but you have, you know, made acquisitions. And we think about, you know, Excelsius and, you know, TTOC from a biologics perspective. Is it fair to think that any, you know, external inorganic purchases would come more on tangential type of assets or products rather than existing markets that you're in now.
spk13: Thank you. Let me answer the second part of the question first. The second part is from an M&A perspective, we're continuing to look at all things. You think about our mission. We want to be a musculoskeletal company. We grew up in spine. We're known as a spine company. The company is continuing to diversify itself We did a joint acquisition a couple years ago. But also within enabling tech, there's complementary pieces of technology out there that could help advance the Excelsior story. So it's really focused on buying things that we think are appropriate for our business at any point in time. Could you expand a little bit more on the first part of your question?
spk01: It looks like we might have lost him. I'm going to go ahead and move on to our next question. Our next question comes from Jason Witt with Loop Capital.
spk12: Hi, thanks for taking the questions. Just a quick follow-up. I think you made it clear that you're still in the market and you're going to be disciplined in terms of what you potentially buy out there. But if I look at the share repurchase, I think this is the first one I've seen from you, at least in recent memory. I assume you were just being somewhat opportunistic given where the share price is and additionally as a way to offset FX. Is that the right way to think about it?
spk03: Jason, we've done this in the past, if you look back last year as well. So we did make some moves prior to this. This is not the first. And, you know, with this, we were just setting out, believing that the stock was undervalued versus our long-term look. And so we felt it was, you're right, an opportunistic buy to actually clean some of this off and make it that way because we think in the long term it's going to be worth more.
spk12: Okay, thanks for the clarification. And then on the trauma business, I don't know if you can – sort of size it where it is right now for us? And additionally, in terms of your product portfolio, I know you've talked about filling it out. Do you think you're kind of a critical mass at this point with trauma?
spk03: Almost. Right on the cusp of it. How's that? Really pleased with how we've filled it out in the past year or two and have certainly put out some meaningful products that will enter us in the larger markets. Honestly, the mini-frag and the distal femur are significant steps for us. The launches that we anticipate at the latter part of this year, second half of this year, I think will really get us to critical mass. And while there's still more families of products to develop, I would tell you exiting 2022, I believe we have enough product family offerings to compete directly.
spk12: And then last question, I appreciate you putting a stake in the ground in terms of when you'd be launching the larger joint robotics piece. can we assume that there's going to also be large joint implants accompanying that launch, or how should we be thinking about how that's positioned?
spk03: No, that's exactly right, Jason. We need to build the basic bag in joints like we had done with trauma, and we are in progress with those. Our anticipation is that those implants would be approved in time for the robot, close to it in timing too, not very much in advance, but at that point when the robot comes out, we will offer our implants to be used with that robot.
spk12: Great. I'll jump back in queue. Thank you very much.
spk01: Please stand by for the next question. Our next question comes from Matt Mizik with Barclays.
spk05: Hey. Thanks so much for taking the questions. I have one follow-up on your enabling technology and robots and everything as you go into the back half. I think, you know, the comments made about Q1, it seems like some of that pipeline came through here in the second quarter. I would love to just make sure we are all understanding how to think about the sequence in Q3 and whether there was any you know, Q1 pulled into Q2 or any thinking like that that should inform our backup estimates in terms of cadence, and then I had one follow-up.
spk03: Matt, thanks. So, you know, I tell you, when we talked about Q1, we had felt like we had come into Q1 with a weaker pipeline as we had exited Q4. If you remember, that's really what we're feeling. The team had rebuilt that and had gotten good traction, as you can see, for Q2. What I commented on is I feel like we're exiting Q2 with a stronger pipeline, and so always hard to predict, and nor would we actually break out the quarters, but I would say as we enter Q3, the pipeline is stronger, certainly stronger than it was as we kind of were in the Q1, and our eye is on that. The demand is high, and I think that's very helpful with us. So can't quite say when it would occur. We don't know, but I would say as we exit this second quarter into the third, we have more potential than we had done when we delivered in Q1.
spk05: Okay, but then tempered by your comment earlier on seasonality, Q1 and Q3 typically being the weakest, you know, that seasonality is still in place, right? You're pipelined enough to grow below past that or should we expect to see that same kind of, not a pause, but sort of sequential or something like that off maybe a little sequential and then up into Q4 is just the way these fields seem to flow.
spk03: No, your assumption is right because that isn't necessarily the impact of a pipeline. That's human nature of vacations and suddenly at the end of the year the need to use capital. So I don't think there's anything that would shift that type of seasonality, and I would plan for that if I were you.
spk05: Great. And then just one question on color around the growth that you saw in spine, I mean, which not everybody saw sort of a squeaky clean, you know, growth into Q2. I think there was a fair amount of strength in volumes across your peers in musculoskeletal implants, but you seem to do maybe better than average, especially given your comps. And I just look to get any color you can give on sort of mix of procedures, geographic, regional cadence or differences across the U.S. or anything like that that you noticed in Q2 versus, you know, previous quarters or, you know, during the recovery perhaps. Thanks.
spk03: Yeah, thanks. I would tell you that there was nothing significantly skewing it geographically or even that it was cervical versus lumbar or anything like that with it. It's really driven by the two main factors. We go out and we recruit reps throughout the year, and so you're seeing the fruit of, you know, the recruits that you had done in 2021 coming online and acting and giving activity in 2022. That's one of the new lifts that are out there. As I mentioned in my script as well, you know, the robot placements and then that, as you know, greater than average pull-through related to robot is really part of that thing to come over. You know, I can't express enough how pleased I am that we actually exceeded Q2 of last year into this year. It was such a hurdle and such a peak for us. I really think it's a testament of the team in the field to have gotten that done and achieved it.
spk05: Well, congrats on a solid quarter, and thanks for taking the questions. Thank you.
spk01: Thank you, Matt. Please hold for our next question. Our next question comes from Steve Lichman with Opco.
spk11: Hey, everyone. It's Amir on for Steve. I just had a question around, you know, we've seen players in the orthopedic robot space, you know, talk about a shift in installations from sales to placements. And I was just wondering if that's something that you guys are seeing on the ground and also the follow-up. What are you seeing overall in terms of the appetite for CapEx at a hospital?
spk03: Hey, thanks, Amir. It's Dan. I would tell you that to date we continue to sell and we've always had different mechanisms for the customer in which to purchase. We haven't shifted off of that and we haven't seen the pressure to shift off of that to date.
spk11: Okay, that makes sense. And just as a quick follow-up also on gross margins, you know, based on what you guys are seeing today in terms of the cost of materials, and I know you guys also called out chip, do you guys see an opportunity for gross margin expansion in 2023? And also as a quick follow-up to that, are you seeing any opportunities to take pricing action to help offset the headwinds?
spk13: That's a great question. This is Keith. You know, as we look at gross margins, We've always said we're a mid-70s gross margin company, and we remain there. We are seeing some inflation this year with freight and some product costs. But as we look, we're a mid-70s business. I don't really want to get too far into 2023. As it relates to price, we're locked into a lot of contracts with a lot of our customers. If there are places for us to take advantage of price, we will. But at the end of the day, we drive price through new product introductions. We're locked into a lot of contracts. with a lot of our customers. If there are places for us to take advantage of price, we will. But at the end of the day, we drive price through new product introductions. That helps offset the decline you see in older products.
spk02: Great. Thank you, guys. Thank you.
spk01: Thank you, Amir. Please hold for the next question. Our next question comes from Drew Ranier with Morgan Stanley. Drew, your line is open.
spk07: Hi, Dan and Keith. Thanks for taking the questions. Just on E3D for a moment, I know it's very early days, but could you talk about where you're selling these to? Is it existing customers of Globus? Are you seeing any competitive wins? And just maybe talk a little bit more about what that incremental pull-through might look like for an account with E3D. And sorry to piggyback off just the prior question in terms of pricing, but as you're rolling out E3D, I mean, is this another opportunity for you to take advantage of pricing looking ahead?
spk03: I'll take that, Drew. So, you know, a couple things. Certainly placing the initial units into Globus users is a benefit for us and for them and a chance to work together, and that's kind of where the first wave went, certainly getting into competitive areas as well, and that will accelerate over time, going through both. So there was not a concerted strategy of just go to these spots, but again, the first few are in the global people's hands, and then I think from that we began to branch out that way. You know, the pull-through is an interesting question because I think the technology itself will be just a benefit to the hospitals and customers in many procedures, not just spine. And again, it is part of the ecosystem that we've designed and been talking about. So when you do combine it with our robots and soon to be our hub and other technologies, it's just going to be that seamless flow of data. It's going to hopefully be footprint beneficial to the customers and a way for them to actually save time, have better quality data, and all work together. So I do believe that as we put these pieces out, it will generate the sale of pull-through of other capital equipment and obviously then lining up and using implants.
spk07: Got it. And then just maybe on Japan, I believe it resets kind of in the third quarter anniversaries. Could you just talk maybe about the expectations you have for the country going forward? Maybe just help set us or level set our expectations there. Thank you.
spk03: Thanks. No, I'll tell you, I'm very bullish on Japan. I think what we should see is this slowdown of what we've been experiencing. I would expect to be neutralized possibly in the fourth quarter and then begin some reasonable growth in 2023. But given the market, the strength of that economy, the offerings that we have planned and have been working through, I think it can be a major sized market for us over the next five years. I can't quite predict what happens per year. But one of our strategic focuses is to make that one of our top markets over the next five years.
spk05: Thank you.
spk01: Thank you, Drew. Please stand by for the next question. Our next question comes from Dave Turkley with JMP Security.
spk00: Great. I just had two really quick ones on enabling, if I could. You mentioned the combo potential, and as we think about our model, I would imagine it's got to be over half, but I don't know if there's any number, I know it's early, that you would throw out there, but could the combo be 80% moving ahead in terms of you saw in the E3D and the robot, and the follow-up would just be as you compare those two together as a platform and you look at peers, can you maybe just refresh our memory on sort of where you think that sits, maybe even versus some of the bigger folks like Medtronic? Thank you.
spk03: Hey, Dave. So, you know, a couple of things. It is too early for me to even venture the guess as to what that combo would be and how to model that out. I'm probably going to leave that to you. And as we get more data and get past the very first quarter, we can certainly all refine that. So, right now, I don't really have a decent answer to guide you to. It is part of the plan, but I just don't know what that would fall out to along those lines. You know, as far as benefits and something I had said is remember that both of these have been designed from the ground up by us with our engineers, with our software, with our thoughts. The intent of it to work seamlessly together as one unit as you bring these together is from the start as opposed to buying alternative technologies and trying to patch them. So I think the benefit there for us is having started with a blank sheet and designed them up. We would think that not only is the technology more advanced and the outcomes better for you as far as the images that can be taken or the options that are out there, but loading that data into your planning packages will be much more of a benefit than where I think competition currently is.
spk00: Thank you.
spk01: Thank you very much. Please stand by for our next question. Our next question comes from Craig Beu with Bank of America.
spk09: Great. Good afternoon, guys. Thanks for taking the question. Apologies if you guys have discussed this, but it's really a follow-up on some of the sentiment that you have on the back half in U.S. Correspondence. So, you know, you guys obviously, numbers have been a bit lower in the first half than what you've seen in prior years and what we're normally used to seeing. And I believe you're expecting a big second half or a rebound and an acceleration from So, you know, maybe, Dan, if you can just go into a little bit more detail about, you know, what gives you the confidence in that ramp in the second half and, you know, is it signs within the market or just what you're seeing internally that makes you feel good about that ramp?
spk03: Yeah, thanks, Craig. You know, I would tell you, look at it holistically. It's been, you know, over the past couple of years, such a confusion with the pandemic. So you look at what occurred last year. You had had a strong Q1, an extreme spike of strength in Q2, and then somewhat of a leveling in the second half of the year. So even as you just look at the comps you're coming off of, we're exiting out of what was probably a 40-plus percent growth for us in the first half of 2021, and that wouldn't be repeated in the second half of 2021. So just by maintaining the sales levels you have, by just maintaining them, you would get to the growth that you're used to seeing from us. That's what really gives me the confidence of that. then given the strength that we're going to do with our launches and our recruiting and our drives, I don't see why we wouldn't have a couple of strong levers to get into, you know, stronger deliveries in the second half of the year.
spk09: And just to follow up, and again, sorry, I was hopping around, so you might have answered this already, but just the spine market, procedure recovery, there's been some comments, you know, it's hard to parse through what everyone's saying. Some people calling out a little bit of softness, some sluggishness. Just wanted to get your thoughts from where you guys sit.
spk03: That's a great question. And listen, there is a level of uncertainty out there. We have record weeks. I called out that June was a record month. Then you'll come in and there's some soft weeks. So the procedures are certainly not fully stabilized, certainly not throughout the country. I think we continue to monitor it. where we're going with that, but certainly a lumpy move as we get through the second half of the year and what we've experienced in the first half of the year.
spk09: Great. Thanks for taking the questions, guys.
spk01: Thank you for your question, Craig. As a reminder, if you would like to ask a question, you need to click star 1-1 on your telephone. Our next question comes from Kyle Rose with Conaccord. Go ahead, Kyle.
spk14: Great. Hopefully my mute button works this time. Just wanted to ask you two follow-up questions. One was on the Salesforce conversions that you talked about or the pipeline. I just wanted to see, it's encouraging to see continued robust hiring. Where are they coming from? What kind of reps are you seeing? Is it more on the spine side or is it weighted on the on the other parts of the business with respect to trauma and imaging?
spk03: So I called them out in kind of two different things. And they are obviously different sources. So trauma is having a lot of competitive conversions. And, again, if you went market appropriate and looked at who the players are, that's where you see a lot of that sourcing come. I think with spine as well, that would be the same comment. It's almost based on the market share. There are certainly quarters where it's heavier for one versus the other. But if you map it out over time, it's pretty appropriate just given the amount of reps they are for those sizes that you see that kind of pro-rated recruiting type effort.
spk14: Great. And then you mentioned something earlier that I don't think I, at least I had heard before. You talked about the hub product with respect to enabling tech. Just wonder if you could kind of flesh that out for us. Thank you very much.
spk03: Well, you know what, there's a navigation system that we had had approved last year. We're still finishing up a few things before we go out. We had mentioned that in a few previous earnings calls. And it's just part, again, of that ecosystem that we'll bring out. So we've always talked about the robotic solutions, whether it be for spine or orthopedic. And then with that comes the imaging. And then, again, the hub will be a subpart of that at the right time. We'll look to bring that to the market and make sure that we can drive that growth as well.
spk02: Thank you.
spk01: With no further questions, that concludes Global Medical's second quarter conference call. Thank you for joining us and have a good evening. You may now disconnect.
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