Globus Medical, Inc. Class A

Thank you for standing by. Welcome to the Globus Medical first quarter 2024 earnings call. At this time, all lines will be on mute and a question and answer session will be held after the prepared remarks. To ask a question, you will simply need to press star 11 on your telephone and then wait for the automated message to advise that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference 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.

Thank you, Crystal, 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, Chief Operating Officer 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 2023 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 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'll now turn the call over to Dan Scavilla, our president and CEO.

Thanks, Brian, and good afternoon, everyone. Globus delivered a tremendous Q1 as we push into 2024, with sales of $607 million, growing 119% were $330 million. Non-GAAP EPS was 72 cents, increasing 36% versus prior year, even with the 32% increase in outstanding shares driven by the merger. Adjusted EBITDA was 28%, and free cash flow was $24 million for the quarter. Q1 is the first quarter where we integrated the Globus and Nuvesa field organizations into one formidable team, rolling out new reporting structures globally, combining product portfolios to create best-in-class offerings to our surgeons, reorganizing support organizations, implementing common systems, and beginning to unlock synergies to drive future growth. Through all of this change, Globus launched five new products in Q1 and has set the stage for a record number of launches in the coming months. These results are a testament to our incredible team working tirelessly around the clock to drive integration, overcome challenges, and create scalable solutions so that we can reach steady state quickly and shape the markets in which we compete. We will increase our focus on earnings per share and free cash flow over adjusted EBITDA in this and future earnings calls. While we remain committed to achieving a strong mid-30s adjusted EBITDA, as we've been able to consistently accomplish for over 20 years, we feel that delivering sustained Profitable growth combined with strong and consistent free cash flow is the real measure of potential and shareholder value, especially for companies that have been in operation for several years. Moving into the performance of our business areas, U.S. Spine grew 100% in Q1, with notable gains across our product portfolio in expandables, biologics, MIS screws, 3D printed implants, and cervical offerings. This above-market growth is driven by the strength of our combined product offering, competitive rep recruiting from prior quarters, and increased implant usage through robotic pull-through. Competitive rep recruiting has significantly increased in Q124. Now, more than any point in our history, the most successful and tenured competitive professional reps are seeking to join our team. Competitive reps with over 10 years of tenure, once a rarity to recruit, are seeing the power and future we can offer them as a destination of choice for innovation and growth. 2024 has the potential to be a record recruiting year and is off to a great start. On the product development front, we continue to execute and introduce new products from our prolific R&D pipeline, launching five products this quarter. The combined GMED Nuva product development team is beginning to hit its stride with meaningful collaboration in developing and launching new products, and we expect product launches to continue at an accelerated pace going forward due to improved internal development processes. I want to share these recent meaningful launches with you. The first products are DuraPro and Vizera power tool systems for hard and soft tissue preparation that represent our initial entries into the power tools market. Beyond entering a new market, these two systems greatly complement our enabling best-in-class robotic navigation, innovative musculoskeletal implant solutions, comprehensive biomaterial offerings, and interoperative imaging tools. as we seek to proceduralize spine, orthopedic, and cranial surgery. The DuraPro oscillating drill system is a game changer for our surgeons, allowing them to perform safe bone and disc removal around neurovascular anatomy through an open or MIS approach with optional robotic navigation using Excelsis GPS. The system uses oscillating drill technology that cuts bone easily while being harmless to soft tissue structures. The disc removal tips enable fast and easy disc and cartilage removal while providing a tactile sensation upon reaching subchondrial bone. The first cases have gone extremely well, and surgeons who have seen our technology are eager to start using it. We look forward to a full rollout in the coming weeks. For Sarah, high-speed drills are used for controlled drilling, burying, and removal of heart tissues at speeds up to 80,000 RPMs. The foot-controlled power drills offer robotic navigation using Excelsis GPS and various interchangeable birth styles designed for clinical applications in spine and orthopedics including joint arthroplasty and trauma. Feedback on this system has been excellent and we are ramping up distribution over the coming months. In spine, the ReLine 3D system for complex spinal deformity was launched in Q1 and perfectly augments the ReLine platform as our latest evolution in complex spine reducer technology. that allows for three-dimensional control of the spine. It is designed for usability as well as efficiency to reduce the cognitive load even of the most complex cases. The extremely low profile and versatile reducer is ideal for complex cases with significant axial rotation and Cobb angle correction, where access to the screws is limited by anatomical constraints. Adira Efflix plate system Introduced in February, provides a rigid coupling to a variety of inner body spacers to enhance construct stability and promote repeatable placement. The system allows for easy in situ attachment of inner body spacers, significantly reducing the risk of spacer migration, and creating a standalone construct when used with two bone screws. It offers compatibility with a range of static and expandable inner body spacers, bone screws, and bone anchors, facilitating a versatile surgical approach. Additionally, the ability to insert The plate spacer as a single construct streamlines the procedure by reducing the number of instrument passes. On the trauma side, we launched the Anthem Distal Radius System with additional plating options and more streamlined plate fitting, improving our existing offering of older plates and rounding out the wrist portfolio. It is receiving great clinical feedback and has had a strong start since introduction. We expect it to be the flagship plate of our wrist fracture fixation portfolio. In enabling technology, sales were $32 million, up 27% versus prior year, driven by higher robotic and imaging system sales. This was our highest Q1 since launch, and we have not yet seen the positive tailwind effects of new evasive accounts, which we believe will begin later this year. Robotic procedures continue to accelerate, growing 15% versus prior year, and exceeding 71,000 robotic procedures performed since launch. Our international spinal implant business delivered record sales in Q1, growing 193% on a constant currency basis compared to prior year. In 2022 and 2023, we increased our investment in our international business for people, products, and sets, and we have achieved consistent above-market growth through these regions as a result. We have yet to fully harness the power of the combined Globus Innovative product offerings internationally and feel this will be a significant tailwind moving forward. The combined trauma and NSO business delivered 308% growth for Q1, driven by the continued strong performance and market penetration of our base trauma business, combined with the fast uptake of the Nuvaso specialty orthopedic growth nail. The combination of these two businesses is one of the strengths of our merger, offering a broad range of product and market changing innovation. Moving into the integration status in January, we implemented the realigned U.S. and international sales team structure to support surgeons worldwide. We're investing in our field sales teams with product cross-training and enabling tech hands-on experience so they can increase their growth opportunities and offerings to their surgeons. In addition, we rolled out our common operating system in the U.S. this quarter, allowing us to work as one company and one team. Like any system implementation, there are areas working well, areas that require debugging, and areas to enhance our future productivity. I want to thank the field team and the in-house support groups for their dedication and speed in implementing the structure and systems, quickly pushing towards steady state as we continue to improve this platform. I especially want to call out our Memphis team, who not only implemented a new operating system and new processes, but quickly pushed their post-implementation daily shipments to record levels. Cross-selling our existing portfolio is beginning to take root as newly formed teams cross-train and share products to offer surgeons more options for treating their patients. In 2023, we made significant investments in key product sets and enabling tech long lead time components in preparation for higher demand and are ready to support increases in these areas. In product development, we carry forward the rich history of rapid development to remain an industry thought leader as we work with our surgeon partners who address unmet clinical needs. From pioneering the XLIF procedure that is now the gold standard of lateral surgery, leading the market in expandable spacer technology, and developing the best spinal robot and the most advanced intraoperative CT imaging, we're working to create surgical proceduralization of all key spine surgeries to create the standard of care across the spine industry. Our intellectual property portfolio has been number one in the spinal industry for the last decade, and we are committed to further expanding this lead, especially in enabling tech arenas as we continue to be at the forefront of imaging, navigation, and robotics. To accomplish this, we remain committed to continuing existing projects and will have a strong, ongoing PD presence on the West Coast, focused on spine and enabling tech solutions. I believe our long-term prospects as a leading innovator have never been stronger with the combination of our R&D people, our deep GMED and NUVA IP portfolio, and the revamped development process. We're enhancing our surgeon engagement programs to increase our impact with surgeons and further strengthen how we interact with them in all aspects of our business. Our professional affairs team has been expanded, and we've added scientific affairs, marketing, and communications teams, all with talented individuals. In addition, we're increasing our research and clinical investments and expanding the coordination of education programs and enhancing our presence in teaching institutions. Operations remains the strength of the merger. We've begun expanding in-house capabilities of the West Carrollton production facility as part of our ongoing synergies. The Memphis Distribution Center is now on our common system and increasing its role in the overall business. We will continue to invest in high-tech manufacturing equipment for our implant, instrumentation, and enabling tech production capabilities. We're also working to consolidate volumes and orders with third-party vendors to accelerate delivery times and drive cost savings. All of these activities are progressing as planned. As you can see from the first quarter results, synergies have been identified and actions have begun to realize benefits, focusing on out-of-pocket spending and prioritized investments to match future growth plans. In-house organizational structures are being implemented and should reach steady state by mid-year 2024. While some employees have been impacted by the merger and reorganization, the merger payback is not driven by deep employee or spending cuts. We remain focused on building an organization to support long-term, sustained, profitable growth. I believe the potential for Globus has never been greater. It's up to us to harness our resources and shape the future of our markets. We have at our fingertips everything we need to realize this. I want to thank the worldwide Globus team for your dedication and support delivering an incredible Q1 and furthering the pathway to becoming the preeminent musculoskeletal technology company in the world. I will now turn the call over to Keith.

Thanks, Dan, and good afternoon, everyone. Our first quarter results point to a strong start in fiscal 2024, with sales and earnings growth both exceeding expectations. Our team was and remains focused on executing against key integration objectives, namely sales retention and alignment, process standardization, and synergy capture. I will focus my comments this afternoon on one, Q1 2024 results, two, provide updates on integration and synergy goals, And three, comment on insights as to our performance for the remainder of 2024. Now, turning our attention to Q1 results, our first quarter revenue was $606.7 million, growing 119.3% on an as-reported basis and 119.8% on a constant currency basis over the prior year quarter. The Q1 gap net loss was $7.1 million, resulting in a gap loss of 5 cents per share. Our first quarter results were impacted by merger-related costs restructuring charges, as well as in-process research and development expense. Our Q1 2024 non-GAAP net income was $98.1 million, which drove 72 cents of non-GAAP diluted earnings per share. The non-GAAP EPS of 72 cents includes a one-time six-cent favorable non-cash adjustment, which I will comment on further when I provide my update on Q1 gross profit. Our first quarter non-GAAP net income grew 82.4%, while non-GAAP EPS grew by 36.4%. Excluding the one-time impact worth approximately $9.5 million, non-GAAP EPS grew by 25% compared to the prior year quarter. The primary drivers of growth are core sales volume increases coupled with lower-than-planned sales dis-synergies, the inclusion of new basis results, and the realization of cost synergies partially offset by a higher share count. To illustrate, our Q1 2024 share count was 135.4 million shares compared to 102.2 million shares in the prior year quarter. Our first quarter adjusted EBITDA was 27.5%, and free cash flow totaled $23.8 million. Muscular skeletal sales in the first quarter of 2024 were $574.7 million, or 128.4% higher versus the prior year quarter, driven primarily by the contributions from the Newvasive merger. On a proforma basis, assuming the invasive was in our prior period results, musculoskeletal sales grew 3.3% versus the prior year quarter of the prior year. Performa growth was driven primarily from our U.S. and international spine businesses, as well as trauma products. Our first quarter enabling technology sales totaled $32 million, growing 27.5% versus the prior year quarter, driven primarily by increased sales of Excelsius GPS and our E3D system. the first quarter saw a return to more historical norms with the vast majority of transactions being outright purchases. The pipeline was strong coming into the quarter and remained so as we closed Q1 and entered Q2. A focus of Q1 was driving further development of legacy invasive customers into the eGPS pipeline. We believe this cross-selling activity will set us up for future success as we push further into 2024 and beyond. First quarter U.S. sales totaled $482.9 million, growing 106.3% as reported. On a pro forma basis, US sales grew 2.8%, led by growth in US spine, trauma, and enabling technologies. International sales were $123.7 million in the first quarter of 2024, growing 190.7% as reported. Looking at international revenue on a pro forma basis, sales grew 8.1%, led by spinal implant growth in key focus countries, including Spain, Italy, Belgium, Ireland, Germany, Saudi Arabia, and Poland. GAAP gross profit in the first quarter was 60.2% compared to 74.4% in the prior year quarter. Consistent with the prior year, the decrease in gross profit is largely associated with the evasive merger, namely step-up amortization. Excluding the impacts of step-up amortization, adjusted gross profit was 69%. Included in adjusted gross profit is a one-time favorable non-cash adjustment to depreciation expense worth approximately $9.5 million, impacting non-GAAP EPS by $0.06 and adjusted gross profit by 1.5%. This relates to a purchase accounting measurement period adjustment of the useful lives of assets acquired through the invasive merger. Excluding this one-time impact, adjusted gross profit would have been 67.5%. The decline in adjusted gross profit versus the prior year quarter is driven by the inclusion of NuVasive in our consolidated results, partially off-step by cost energy actions, which I will discuss later in my prepared remarks. Consistent with my comments during our Q4 earnings call, we still expect full-year adjusted gross profit rate to be in the mid to upper 60s for the full year 2024. Research and development expenses for the quarter were $57.3 million, or 9.4% of sales, which includes a $12.6 million charge related to the acquisition of in-process research and development. Excluding the IPR&D charge, research and development expenses for the quarter would have been $44.7 million, or 7.4% of sales, compared to $21.1 million, or 7.6% of sales in the prior year quarter. The increase in spending is again driven by the inclusion of NAVASIVE in our results, partially offset by cost energy actions taken during the quarter. The acquisition of IP R&D during the quarter is a testament to our commitment in seeking out new technology and innovation which aligns with our mission and go-to-market. We applaud our internal teams in driving this forward while the business remains focused on achieving its merger integration objectives. For the full year, we still expect R&D expense to be in the range of 7.5% to 8% consistent with prior comments. SG&A expenses in the first quarter of 2024 or $248.7 million, or 41% of sales, compared to $122.4 million, or 44.2% of sales, with the increase being driven by the impacts of the evasive merger, partially offset by cost actions taken. Our continued expectation for 2024 is that SG&A expenses will improve one to two percentage points over full year 2023 SG&A expense. Gap restructuring costs incurred during the first quarter of 2024 totaled $19.1 million and non-gap restructuring charges totaled $6 million in the quarter compared to zero in the prior year quarter. The costs incurred relate primarily to workforce reductions as well as facility and lease termination costs. Net interest expense during the first quarter was $1.9 million compared to interest income of $6.5 million in the prior year quarter. The decreased net interest income is a result of a lower cash balance driven by the pay down of the former nuvasive line of credit at merger close as well as interest expense from the senior convertible note. FX loss during the quarter totaled $15.4 million compared to the prior year quarter. $11.2 million of this FX loss relates to a non-cash acquisition related impact associated with a former nuvasive deal prior to the merger. The GAAP tax rate for Q1 2024 was 16.8% versus 22.3% in the prior year quarter. The reduced tax rate for the quarter was driven by a combination of lower GAAP pre-tax profits as well as discrete items, predominantly the IP R&D acquisition during the quarter. As we look further into the year, we expect our non-GAAP tax rate to be approximately 23% for the full year 2024. Moving over to cash and liquidity, Our cash, cash equivalents, and marketable securities were $485.7 million at March 31, 2024. We did not have any short-term borrowings against our line of credit, and our only long-term debt consists of the 0.375% senior convertible notes due in 2025. Our intent remains for these notes to be part of our capital structure until they are due to be settled in March 2025. Q1 net cash provided by operating activities was $52.4 million and free cash flow was $23.8 million. We expect a temporary impact to operating cash flow as a result of higher accounts receivable balances driven by our systems integration and the resulting U.S. go-live. We note this as a temporary delay which will impact the first and second quarters and be reflected as a higher working capital investment in accounts receivable. We have no concerns regarding collectability and view this as a temporary systems go-live impact. Capital expenditures during this quarter were $28.6 million, or 4.7% of revenue. Our full year expectation remains that CapEx will be in the range of 5% to 6% of sales. During the first quarter, we spent $83.3 million to repurchase approximately 1.6 million shares of our Class A common stock. Since the merger with NuVasive closed on September 1st, we have spent approximately $308.9 million to repurchase 5.9 million shares of stock. To put this into context, this share repurchase equates to approximately 15% of the dilution created as a result of the stock-for-stock merger. This demonstrates our continued belief in this deal and our conviction to drive a successful outcome in bringing these two great companies together, further separating ourselves from the competition. We have $191.7 million remaining on our authorized share repurchase program. Turning our attention to integration and synergies, significant progress was made during the quarter on driving cost synergies. We again reaffirm our commitment to achieving $170 million in cost synergies and have fully acted upon actions which will result in our achievement of realizing 40% of that total figure or $68 million during 2024. Operationally, approximately $12 million will favorably impact gross margins in fiscal 2024 and are predominantly the result of supply chain efficiencies namely contract renegotiations and facility consolidations. The remaining $56 million are expected within OPEX and will be primarily achieved through actions around headcount reductions as well as discretionary spending through the rollout and implementation of revised spending policies, systems consolidation, and a reduction in third-party consulting expenses when compared to pro forma legacy spending of the combined organizations. As we think about next steps, we are now turning our attention to driving manufacturing and material cost reductions. This will be achieved through an examination of processes, manufacturing insourcing, material cost renegotiations, and cross-training of our manufacturing facilities to expand production of both legacy Globus and legacy Novavis products at all locations. This will drive enhanced efficiencies while also creating a stronger supply chain to prevent potential future manufacturing disruptions due to this cross-training. We expect actions to be taken in 2024 and 2025, which will drive P&L savings later in 2025 and 2026. Lastly, I'd like to make some brief comments on our performance for the remainder of the year. As a result of our strong first quarter and continued growing confidence, we are updating our previously provided guidance. We now expect 2024 net sales to be in the range of $2.46 billion to $2.485 billion and our fully diluted non-GAAP EPS to be in the range of $2.75 to $2.85 per share. Our revised net sales guidance implies 2.7% to 3.7% growth over pro forma 2023 revenues totaling $2.396 billion. As commented on last quarter, our revenue guidance includes the impact of a potential $150 million revenue dis-energy as a result of the merger. Though our confidence level increases the further we move into 2024, we remain appropriately conservative in our projections as we see the year further develop. The revised non-GAAP EPS guidance implies 18.5% to 22.8% EPS growth over the prior year non-GAAP EPS of $2.32. Our revised guidance includes an estimate of approximately 137 million shares for the full year. My closing comments will be brief. We are thrilled with our strong first quarter performance and are extremely confident in delivering against our commitments for the year. Dan and I both touched on our Q1 achievements, and our commentary should leave you with our steadfast commitment to driving execution, not only on the merger integration, but also on driving new product launches, expanding our sales force, and achieving further penetration of Excelsior's products, while continually driving expansion further into the musculoskeletal market to achieve our mission. All of this will be done in a financially responsible manner consistent with the Globus history of driving strong profits and free cash flow while maintaining a strong balance sheet. Thank you to the entire Globus team for their tireless efforts in driving this tremendous Q1 progress as we continue to achieve our mission of becoming the preeminent musculoskeletal company. Operator, we'll now open the call for questions.

Thank you. We are now going to shift to our question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, you'll simply press star 11 again. Please stand by while we compile the Q&A roster. Thank you for holding. I do would like to mention that we ask participants to please limit their questions to one question and one follow-up. Our first question comes from the line of Matt Blackman of Stifle. Your line is now open.

Good afternoon, everybody. Thanks so much for taking my question. Can you hear me okay? Yes. Great. Keith, I heard you say qualitatively that you saw, I think, lower synergies in the first quarter. and then you sort of talked to the original dis-energy number. I'm just curious, you know, you didn't lower that number, that $150 million number, but should we take the fact that you bumped guidance by about $10 million as a reflection of maybe dis-energies in that magnitude being lower than you expected? Just any way to help us think through the dis-energy number and then the follow-up.

Yeah, that's a great question, and I would say we called out the $150 million because we wanted a level set. That's what we commented on last quarter. But, you know, coming out of this first quarter, we were really pleased with the performance. And to your point, we did tick up full-year revenue guidance. So it really goes back to what I said earlier. The further we get into the year, the more confident we're feeling, but we are still applying some appropriate globus conservatism.

And, Matt, what I would build on to that is we're raising it because of the performance throughout the business. While we called that 150 out, that was primarily U.S. spine and a little bit of international, but The raise reflects the strength throughout all of our business here.

And the other important thing that I would raise is that as you think about the last time we got together to talk and give you an update on Q4, we haven't seen any material, what I would say, reproductions or anything like that that would cause us to believe that the situation was going the other way. We remain positive and confident as we finish Q1.

That's really helpful. I appreciate all that, Collar. And I guess to follow up, you did mention – maybe getting after the new evasive Excelsior's cross-selling opportunities in the second half of the year. I guess the first part is, is that still contingent or not on getting approvals for the implants on the robot? And then I guess the other question is, how do we think about that opportunity set? I mean, we've done some work. It seems like a really big number of potential new evasive accounts that don't have a robot, but it all seems like a very distinctly unique opportunity set from perhaps some of your competitors that may be coming later this year or into next. Just any way you could think you could frame the opportunity for us on the cross-selling side of selling the robot into Nuva accounts. Thank you.

Hey Matt, it's Dan. So listen, one of the premise that we talked about when we did the whole merger was the fact that we would rapidly grow our Salesforce and our customer base. In fact, significantly accelerating what we've done through our usual competitive recruiting. So this was a leap forward. with the intent for us to not only build the best bag of existing products, but to actually open up these new accounts for us as Globus for enabling technology. We've made moves already to bring ReLine with guided instruments and those appropriate implants onto the robot. We're working through that and should have that ready for the second half of the year. We're making sure that, as I mentioned in my comments, Our reps are trained with hands-on and know and are very familiar with this technology to further help accelerate that in in the second half of the year.

All right. Thank you very much.

Thank you for your question. Please stand by for our next question.

Thank you.

Our next question comes from the line of Shugun Singh of RBC. Your line is now open.

Hi, everyone. This is Kendall on for Shugun. Thanks for taking my question and congrats on a nice quarter. I have one quick question on upcoming spine robots coming to the market. I know there's potentially two new competitive spine robots coming to the market from larger market players, and one of them has been a major share donor over the last several years. How do you expect the new systems to compete in the market, and especially against your spine robot? And what do you think of implant share dynamics as these companies have a better ability to defend their position in the market? Thank you so much.

Ken, it's a tough one to answer through. I would tell you that we're focused more on the fact that we do have the best enabling technology. And we have a pathway to do this through the merger that we've set up. We're going to stay focused on that and drive into a relatively new market that has very low penetration in total. But we feel like we're best poised to continue with the cadence we have and actually increase the velocity. We've always recognized the competition would someday come and may someday come. That's not a deterrent for us to stay or change anything. We're going to remain on course with our heavy investments. our focus and belief in our sales team and the ability to get in and get the best technology in the surgeon's hands.

And the only thing I would add to that is, you know, I think we're extremely well positioned to compete here because we still feel we have a best in class robot. But more importantly, the thing to think about here is that we're still investing in our product line from an implant perspective. So as we think about coming to market, we're coming to market with the robot. We're continuing to invest in implants and R&D. And that really gets back to some of the core reasons why we wanted to bring these companies together. because we still believe that we're working to drive innovation and moving the business forward with our product portfolio innovation.

I'm just going to add one thing to that, too. As you heard me announce the DuraPro and the Visera-type power tools, that is a significant game-changer when coupled up with our existing enabling technology that's going to further just create differentiation throughout what we're going to offer.

Thanks so much for the color. And then I just have one quick follow-up. What were you seeing from the capital spending environment in Q1 and what have you seen in the early parts of Q2 especially? I have a couple questions also about have you seen more upfront sales or are you seeing more leases on that side?

Thanks for the question. The capital environment remains robust. Our pipeline coming out of Q4 and the Q1 was strong. And we felt the same way coming out of Q1 into Q2. You know, I commented on the fact that really during the quarter, not only did we close the deals that we did, we're really starting to bring together that pipeline of the formative basis customer. And I also commented on during the quarter, we saw more of a return to normalcy where the vast majority of our sales in the first quarter were outright purchases.

Great. Thank you so much for the call.

Thank you for your question. Please stand by for our next question.

Our next question comes from the line of Matt Taylor of Jefferies.

Your line is now open.

Hi. Thank you for taking the question. I just wanted to ask about the guidance raised on the top line. It's why you didn't raise by as much as the strong beat that you had in Q1. Is that conservatism, or is there anything else that you're considering there?

Thanks for the question. This is Keith. Yeah, I would say that it's conservatism. We came out of the quarter extremely thrilled with where we landed, but as we look into the year, it's still early. We just closed the first quarter, but like I said earlier, there's nothing right now that leads me to believe that my enthusiasm shouldn't change as I look ahead.

Yeah, and Matt, I would tell you, if you look at us historically, we do not usually raise on the first quarter no matter what our results are, but we're sending a signal as to our belief here by putting this out.

And just to follow up, you mentioned this could be a record year for hiring, which may surprise some people. Maybe just talk about how that's evolving and when we would start to see that matriculate.

You know, I don't know if it would be any different than the norm with that is we have a lot of interest coming at us proactively. And again, you've got a great team who goes out as well and seeks out those type of things. And so I would tell you the portfolio of active recruits is stronger than I remember seeing in recent history. The folks that we've onboarded in the first quarter would be a record. I'm not going to reveal that amount. And like anything, you make sure that they get onboarded properly. You adhere to all contractual obligations. And what you usually see from these is a lift in the current year and then a stronger one in the second year, and you kind of level out in the third year. I would think we would follow that course. The signaling of this is the fact that we're saying that it's a precursor to what we believe can be a strong year in the second half and into next year. Great.

Thanks so much, and congrats.

Thank you.

Thanks.

Thank you for your question. Please stand by for our next question.

Our next question comes from the line of Ryan Zimmerman of BTIG. Your line is now open.

Hey, guys. Congrats. Nice to see. Just proving some doubters. I want to start with gross margins, actually, Keith. You know, it looks like you guys are, you know, sequentially really improving gross margins. I know there was a one-time benefit in there. But just talk to me about kind of, you know, behind the scenes you know you talked a little bit about consolidating vendors enhancing manufacturing you know how long does this kind of take you to work through when do we really see those benefits and and you know to your guidance language Keith I think last quarter you said about 65 to 70 percent for guidance for gross margins and now you kind of said around high 60s if I'm not mistaken so you know just want to understand kind of your thinking specifically around the gross margin cadence for this year and as we move into 25?

Thanks, Ryan. It was a great question. So my messaging on mid to high 60s gross margins for the year is consistent with what I communicated last quarter. But as you think about kind of where we're at, the things that we look to knock off quickly was getting the U.S. system done, driving standardization from a warehousing perspective, and going out and renegotiating contracts for things that impact supply chain around freight, things of that nature. The insourcing and contract renegotiation to expand manufacturing takes a little bit longer. So one of the things that you have to drive is you have to drive first buying additional machinery and equipment. We've taken actions to do that. Those machines have to get delivered, get put online. That puts you into the second half of the year. You're going to start producing as you get into Q3 and Q4. as well as Qs 1 and 2 next year. So that basically is going to show first in terms of where you're insourcing. You're going to see inventory step up, but you're not going to see that roll through the P&L until it pushes through the P&L. That's why I had the comments of you're not going to see that until you get into 2025 and 2026. But the actions that you're taking are actions that we've been very aggressive with to date. I also commented in some of my earlier statements about just really focusing on spending. you know, as we think about getting everyone commonized around one approach, one of the things that I would expect to see is more of what I call legacy globalist approach to spending and really kind of sweating a lot of the costs that are out there. Those are all things that are going to help us really improve the gross margin, but the big savings to us doesn't occur until really into getting the next year.

Very helpful. And then, Dan, one for you. You know, I was at AANS, I got to see Excelsior's hub, some of the power tools, it was nice to see. This feels a little bit like an extension, you know, on the margin away from spine, maybe into some more of the core neurosurgery. You guys have kind of had outward pushes in the past and imaging and trauma and, you know, just curious, kind of understand your view of where you want to, you know, go with the business and not to downplay the combined spine business, but It does feel almost as if you're pushing outward away from core spine and would appreciate your thoughts on kind of the longer term vision.

Thanks, Ryan. You know, look, one of the things we've always said and will continue to say is, you know, while we look to become a musculoskeletal technology company, meaning that we'll go out into all those areas, we recognize that we will always be predominantly spine. And we're never going to lose focus of being spine with what we do. These things can all enhance spine, but they also have other applications. So even the power tools you refer to, the fact that they're applicable to orthopedics, trauma, cranial, those things help a lot. And even the hub itself, again, that can help in different areas, but, again, also has applications at ASCs or in other things within spine. And I think at the end of the day, if you keep in mind that the – Even the capital that we're doing is all about driving the core spine and creating those and standardizing procedural solutions that we do. So I would tell you, you know, we're not trying to move away from this or signal anything with spine other than we're all in. We have opportunities to take great technology beyond those borders, and that's what we're doing.

Thanks, guys. Congrats on the quarter.

Thank you.

Thank you for your question. Please stand by for our next question. Our next question comes from the line of Steve Lichtman of Oppenheimer & Company. Your line is now open.

Thank you. Evening, guys. I guess this first question, as we look at the U.S. spine business, as you look at that low single-digit pro forma number, how much in the synergies would you sort of peg game through in the first quarter itself?

Steve, I'll take that. We actually probably won't disclose that. I mean, you know, there's always different areas where things are going good or not with the area overall. But I would tell you it's kind of tough to tease through what that would be to give you a whole number with it. I mean, so I don't really have something I could honestly give you and say I know for certain here's what it is. At the end of the day, you know, we're just looking for growth everywhere, and we've put a lot on the U.S. team in particular. And so... There's a level of distraction when you've created a new team with new products, with new folks, with new procedures, with a new system. And I think that's really what we're looking to do with this. But I really don't have a number that I could say with certainty here's what's driven from a dis-energy impact.

Got it. And then just a follow-up on your comment about shifting the dialogue from adjusted EBITDA and more toward EPS and free cash flow. On the latter, can you level set us on what your expectations are for free cash flow this year and then over the medium term, whether talking about on a free cash flow conversion basis or on an absolute dollar basis? Appreciating, Keith, your comments about AR in the first half.

Yeah, so I think the way to look at this, thanks for the question first off. If I look at fiscal 23, I want to say we generated, give or take, $180 million of free cash this The way I think about that over the longer term is we also identified $170 million of synergies. So you kind of put those two numbers together. That's where you kind of see yourself going over the long term. Near term, you know, the focus is on really driving cash savings that are going to contribute to EPS. So I would, again, look at last year and think about some of the things that I commented on related to the synergies that we'll realize this year.

Got it. Thanks, guys.

Thank you for your questions.

Please stand by for our next question.

Our next question comes from the line of Vic Chopra of Wells Fargo. Your line is now open.

Hey, this is Simran on for Vic. Thank you guys for taking the questions and congrats on a A great quarter. Maybe just starting off on the robotics side, I don't think I heard, you know, a latest update on the recon robotics or recon robot. So what are the latest timelines there?

That's a great question. Thanks for asking. We actually filed the recon robot. It's with the FDA. And so we're at a stage now where we're awaiting approval. What we're doing while we're awaiting approval is we're building inventory, getting ready to roll it out. So, you know, we're always waiting for the FDA. I don't have an exact date I could give you. My thought would be, you know, the second half of the year, probably towards the later part of the third quarter is really what we're looking for. But that remains, again, beyond the power tools, one of the most exciting things I think we'll get out the door this year.

Okay, great. Very helpful, Collar. And maybe just how should we think about growth in your enabling technologies business? in 2024 and, you know, how are you thinking about seasonality across that business?

I think that the growth, I mean, the growth is going to be consistent with bringing the nuvasive business into the fold. I mean, the seasonality or the pipeline doesn't really change. We still expect Q2 and Q4 to be the key drivers, but from a growth perspective, you would expect to convert some of the legacy Nuva customers into that eGPS portfolio or Excelsior's portfolio. and drive the business going forward. I mean, when you think about the robot, you have E3D, then you have new products coming, so the cadence for that business in terms of long-term growth should be very positive. You'd expect it to grow at a higher rate than the overall business.

Great, thank you. Thank you for your question.

As a reminder, to ask a question, simply press star 11 on your telephone and wait for your name to be announced. To withdraw your question, you may press star 11 again. We do ask that all analysts limit their questions to one question and one follow-up. Please stand by for our next question. Our next question comes from the line of Craig Bajou of Bank of America Securities. Your line is now open.

Good afternoon, guys. Thanks for taking the questions. So I wanted to start with your comments on the integration going better than expected. And maybe Keith or Dan, just trying to understand when you guys may feel more comfortable either taking down that 150 number or that you're not going to see or essentially that you've kind of moved past some of the potential gaps disruption areas with the integration of the Salesforce.

You know, Craig, my first thought was December 31st. But what I would tell you is, again, as we get through and get the cadence going, I think you'll see us get more comfortable, really happy with where we are for the first quarter. I would think we're going to feel the same way for the second quarter. But again, you just don't know. So we're trying to be responsible to the shareholders and make sure that we get through these phases. But, you know, personally, I would think that deep into the third quarter is when I personally will feel better.

And I would agree with Dan. You know, as we get through the year, we remain positive with where we're at so far here entering the second quarter. I would feel probably most comfortable as we get through the third quarter.

Got it. That's helpful, guys. And, you know, as a follow-up on the enabling tech, obviously the revenue, you know, is – Pretty good revenue. Very good. One of the highest quarters you guys have ever had, and you typically don't see that in Q1. And I know you've talked a little bit about it, but what are some of the drivers? Are you seeing just more adoption by surgeons? uh using robotic technology and that's kind of driving the capital um acquisitions by by hospitals i mean anything that you're seeing kind of on the ground that may be you know pushing your robotics a little bit more um you know a little bit deeper within spine i would say the answer to that is yes i mean as we think about the last couple of quarters one of the things we consistently saw was even when we were just still standalone globus the pipeline was

was strong and the pipelines remain strong. There's a lot of interest. The capital sales force is very active in their accounts, not only on Excelsis, but also E3D. And as we look forward, you're bringing in those new base of customers. The deals haven't closed yet, but the pipeline for the legacy Nuva customer is now adding to the legacy Globus pipeline. So as we look ahead, we see a lot of positivity in having that business grow the next couple of quarters.

And, Craig, I would just add that I think the market has moved through its curve, its adoption curve, and you've gone past the early adopters at this point. These technologies are proven. And so there is more willingness for surgeons to actually use this as well as hospitals to bring it in as something that they feel is a benefit to the patients. So, you know, I think that we're moving along that maturity curve for people willing to use it.

Great. Thanks for taking the questions, guys. Thank you.

Thank you. Thank you for your question.

Please stand by for our next question.

Our next question comes from the line of Caitlin Cronin of Canaccord Genuity. Your line is now open.

Hi, thanks for taking the questions and congrats on a great quarter. Thank you. Yeah, awesome. Just to start off, have you begun to think about discontinuing any redundant product lines? And in that vein, and kind of towards the enabling tech theme as well, what about Pulse? Any updated color and updated plans for this product as well?

Caitlin, thanks for the question. So, we'll take it into two pieces. No, we've stated openly that we are not going to proactively drive SKU or product rationalization. We're going to offer everything out to customers. And I think over time, customers will migrate a certain direction that we will follow. I don't feel like I'm in a position to prescribe to surgeons what products they can use. I think we have to stay focused on what they need for their own good. So that piece will continue on the path we are, which is no planned rationalizations. You know, enabling tech over time always has different purposes than we can look at. So again, we don't have anything we would state today that we feel like we're going to obsolete or replace or pull out at this given time. I think Pulse has a great step forward. There's a lot of applications globally that we're looking for it now. We're fine-tuning some plans. We've made it clear that we're going to integrate it into our enabling technology offerings and use some of its capabilities going forward. And as we build further strategies, we have a feeling that there's a good place for this long term. I don't think it will be a major growth driver of us, but I think there are things in it that can help us further penetrate the market.

Awesome. Thank you. And then just a quick one. Any updates on the timing for the augmented reality headsets?

I would say still back half of the year. That's one where we need to get that filed and approved through. We feel good about it. We're ready to do it, but it's in queue right now just to get through our processes.

Got it. Thank you. Thank you for your question. Please stand by for our next question.

Our next question comes from the line of Matthew O'Brien of Piper Sandwich. Your line is now open.

Hey, this is Phil on for Matt. Thanks for taking our questions, and congrats on the great quarter. Just for starters on the EBITDA and EBITDA margin, one quick clarification point. Does the 1.1665 number include the one-time adjustment of 9.5 million? And I guess there's a bigger picture. You said in the past that, you know, on year three post the closing, you'd be back in the kind of mid-30s as far as EBITDA margin goes. So a lot of leverage that, you know, you're expecting over the next, I guess, three years to get it to just even 33%. So just talk about the confidence in getting back to that mid-30s EBITDA margin.

Thank you. I want to make sure I understood the first part of your question. You said the $9.5 million, was that included or excluded?

Yes, in the EBITDA.

Yeah, that was depreciation expense, so that would not be part of EBITDA. So that would not be in the results for EBITDA or adjusted EBITDA. As we think about longer term, getting back to mid-30s, we believe that we can absolutely get back to mid-30s. You're going to see cost leverage occur with the business as you drive the synergies forward, and you're going to still expect to drive sales growth. I mean, our intent here this year is, as Dan stated earlier, a little bit of a transition from the standpoint of bringing the sales forces together and driving disruption. But as you look ahead, the goal is to get back to the high level of just growth as a combined organization that will help drive additional cost leverage on top of the cost savings to get you back into that mid thirties range.

Yeah. And Phil, I'll just add into, I feel pretty good with this. Um, what we're saying through our script and through our, our answers, we're investing everywhere that we need to invest to bring these to reality. We have the capabilities of doing this, whether it's machines for in-house manufacturing or renegotiations of some of our services or even third-party activities for some of our instrumentation. Everything's in play that would take us on the path. And I think both Keith and I feel really confident that we have multiple pathways or levers to get us up into the ranges where we want to be.

That's helpful. And I guess just my last question, as it pertains to stock purchases in the quarter, Curious to get your take if that was more opportunistic given where the stock price is at or more ongoing and then how that impacts your ability to do any tuck-in M&A, which you've called out as a priority in the past.

Yeah, I'm going to answer that one too. So the answer is a little bit of both, but we're absolutely taking advantage of what we feel is an undervalued stock, and we are going to take that back and remove some of the dilution we created and even add more earnings per share power as we go forward in the future. I think that's one of the strongest things that we're doing here is using a strong cash flow to take advantage of something that we think has been overdone so that we can actually benefit from it over the long term.

And as it relates to tuck-in acquisitions, as I look at where we're at right now, the business is generating strong cash. We're sitting on still a large cash balance. The business is generating profits. And as we look ahead, we're really not limited by our balance sheet to go do tuck-ins. You know, we have ample cash on hand, plus we have an untapped line of credit should we want to do anything. So I don't see that limiting us as we look at tuck-ins moving ahead. Thanks so much. Thank you.

Thank you for your question. Please stand by for our next question.

Our next question comes from the line of Richard Newiter of Truist Securities. Your line is now open.

Hi, good evening. This is in for Rich. Thanks for taking the question. So I guess I had questions on the robot, both the current and potential future robot that's coming to market. Could you maybe, on kind of excelsis, could you help paint a picture maybe around utilization in terms of what you're seeing with accounts that have now had this for a few years versus new accounts and where things can go for new placements. And then around the future robot, I believe I heard you say that you're kind of contemplating inventory build right now ahead of approval. How should we think about the impact to gross margin once sales begin post approval? Thank you.

So Rob, I'll answer that. So let's start with the latter part of that is the ortho robot coming out. Again, I think what that will be is in a different marketplace that will allow us to have more volume ramp up of our implants of knees and hips. And so I think that there'll be a benefit there to the overall business that we look at that way coming forward. I don't see it as any type of significant degradation on where we're going pressure-wise along those lines. If you get back to your first part of the utilization for the Excelsia spine robot, obviously it's different in different accounts with different needs, but what we've seen is a growing strength and growing usage. There are sites that have multiple robots at this point, and not just one or two sites, but several, where they build this in and really integrate it and get enough usage that they need more than one or two or even three in some cases. So we are really seeing a lot of activity of high usage and sites that are buying multiple robots at this point.

Okay, thank you.

This does conclude today's conference, the Globus Medical Earnings Call. Thank you for participating. You may now disconnect.