Globus Medical, Inc. (NYSE:GMED) Q2 2023 Earnings Call Transcript

Globus Medical, Inc. (NYSE:GMED) Q2 2023 Earnings Call Transcript August 3, 2023

Globus Medical, Inc. beats earnings expectations. Reported EPS is $0.63, expectations were $0.6.

Operator: Welcome to Globus Medical’s Second Quarter 2023 Earnings Call. At this time, all lines will be on mute and a Q&A session will be held after the prepared remarks. I will now turn the call over to Brian Kearns, Senior Vice President of Business Development and Investor Relations. Mr. Kearns, please go ahead.

Brian Kearns: Thank you, Didi 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 Pfeil, Senior Vice President and Chief Financial Officer. This review is being made available via webcast accessible through 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 from the 2022 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.

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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 include certain financial measures that are not calculated in accordance with generally accepted accounting principles or GAAP. We believe these non-GAAP financial measures provide additional information pertinent to our business performance. These non-GAAP financial measures should not be considered replacements for and should be read together with the most directly comparable GAAP financial measures. Reconciliations to the most directly comparable GAAP measures are available in the schedules accompanying the press release and on the Investor Relations section of the Globus Medical website.

With that, I’ll now turn the call over to Dan Scavilla, our President and CEO.

Dan Scavilla: Thanks, Brian and good afternoon everyone. Globus had a fantastic second quarter, setting a new sales record of $292 million, increasing 11% or $28 million versus Q2 ’22. Non-GAAP EPS increased to $0.63, up 12% and we had a strong free cash flow of $17 million, up 31% versus Q2 ’22. Adjusted EBITDA for the quarter was 33%. Through the first half of ’23, Globus has delivered $568 million, an increase of 15% or $74 million over Q2 — first half of ’22. Non-GAAP EPS was $1.15, up 18% and free cash flow of $54 million was up 44% versus first half ’22. These outstanding results are due to the hard work of our dedicated team members across the company and our focus on driving sustainable and profitable growth. Keith will cover these achievements further in his section.

US Spine grew 6% in Q2, with notable gains across our product portfolio in biologics, MIS and pedicle screws and 3D-printed implants. This above-market growth is driven by competitive rep productivity and robotic pull-through. In Q2, we launched three new products, REFLECT, MARVEL and Ossifuse. REFLECT is a humanitarian device designed to correct progressive scoliosis in young patients while preserving motion, maintaining stability and allowing for future modulated growth. Unlike rigid metal rods for fusion, the system uses a flexible durable cord tensioned on the convex side of the spine to harness the power of patient growth for curve correction. This is a groundbreaking technology that is now available for children in the US REFLECT technology has been used in over 5,000 procedures worldwide and is quickly becoming a very attractive option for parents and children who can now avoid or delay a fusion.

MARVEL growing rods are designed for patients under the age of 10 with early-onset scoliosis to obtain and maintain correction while allowing continued growth through minimally invasive distraction. The powerful geared expansion mechanism access through a small incision provides tactile feedback and a large expansion capability for reliable distraction and minimal soft tissue disruption. REFLECT and MARVEL are part of our strategy to increase innovation and our presence in the pediatric deformity market. Ossifuse HSA or high surface area is composed of 100% allograft bone without an added synthetic carrier. The demineralized cortical fibers have a unique architecture with high surface area for cellular attachment and multiple handling. Ossifuse is a key component in our growing biologic portfolio.

As we move into the second half of 2023 and into 2024, I anticipate a strong cadence of product launches throughout our portfolio. Enabling Technology had record sales of $35 million up 18% versus prior year, driven by robotic and imaging system sales. Robotic penetration and adoption continue to be strong, as we open new accounts and markets worldwide. We continue to make positive inroads with our Excelsius3D imaging system in the US and we’re also seeing increased interest in sales and combination deals with both ExcelsiusGPS and E3D as surgeons see the advantage of our seamless integrated offering. Robotic procedures continued to accelerate growing 41% versus prior year and exceeding 54,000 robotic procedures performed to-date, driven by strong procedural adoption of pedicle screw placement, interbody placement and cranial applications.

We’re also expanding our investment in enabling technology product development to enhance our ecosystem offering and bring about more functionality in our Imaging, Navigation, and Robotics current and future portfolio. We’re well positioned to partner with our surgeons to bring meaningful innovation into the space. Market interest remains high for our state-of-the-art technologies. And we’re entering Q3 with a strong pipeline. Our International Spine business excluding Japan had a record quarter in Q2 growing 29% on a constant currency basis, compared to prior year. We generated double-digit growth and strong momentum in most markets. Spain, UK, Australia, Ireland, India and Poland all produced growth of 30% or more for the quarter. In addition, Japan had 9% constant currency growth for Q2.

We expect to see gains in Japan throughout the year as we focus on above-market gains to recapture share. Our trauma business delivered its 14th consecutive quarter of sequential growth, generating 63% growth versus Q2 ’22 and 12% sequentially. Trauma performance is driven by sales force expansion and strong uptake in all product lines with substantial growth throughout our portfolio. We have a robust product pipeline in trauma and I anticipate several meaningful launches in the second half of 2023. To update you on merger status, as mentioned in our last earnings call both Globus Medical and NuVasive shareholders voted overwhelmingly in support of the merger with over 99% voting for the transaction. We received a second request from the FTC in May and have been focused on providing the necessary responses, while continuing with cross-functional integration planning.

We remain fully committed to the merger and our expected Q3 2023 closure date remains unchanged. In summary, we remain focused on the core elements for long-term and sustained growth Innovative New Product introductions, Robotic Imaging System sales, competitive rep recruiting and Merger Integration planning. 2023 is all about focus on execution to deliver value to our customers and drive growth. I know we are well positioned to achieve our mission of becoming the pre-eminent musculoskeletal company in the world. I will now turn the call over to, Keith.

Keith Pfeil: Thanks Dan and good afternoon everyone. I am pleased to report that Globus concluded on an exceptionally strong second quarter. Momentum from the first quarter continued into the second quarter, resulting in record revenue and earnings. Revenue in the second quarter of 2023 was $291.6 million growing 10.6% as reported versus the second quarter of the prior year. Net income was $57.7 million, resulting in fully diluted earnings per share of $0.57. Non-GAAP net income was $63.6 million delivering $0.63 of fully diluted non-GAAP earnings per share resulting in 12.3% growth over the prior year quarter. Q2 musculoskeletal revenue was $256.9 million growing 9.7%, as reported, compared to the prior year quarter led primarily by our Spine business globally as well as trauma.

Enabling Technologies revenue was $34.8 million in the second quarter of 2023, growing 18.2% as reported, compared to the prior year quarter. Sales growth was led mainly by our E3D imaging system as well as continued robotic system penetration primarily in the US. Q2 US revenue was $245.5 million, growing 9% versus the prior year quarter led by US Spine and Enabling Technologies. International revenue in the second quarter was $46.1 million, growing 20.2% as reported and 22% on a constant currency basis and largely due to expanding implant sales. Sales growth was led by our key focus countries including Spain, the UK, Australia, India, Poland and Japan. Regionally, growth was primarily driven in the EMEA region as well as APAC. Moving further into the P&L, second quarter gross profit was 73.8% compared to 74% in the prior year quarter.

The decline in gross profit rate was driven mainly by the mix of products namely strong growth in capital sales as well as a growing mix of international implant sales. Despite the decline in gross profit rate, gross profit dollars grew 10.2% in the quarter in line with our 10.6% revenue growth. Over the long-term however, our continued expectation is that we are a mid-70s gross profit rate business. Research and development expenses were $21.3 million or 7.3% of sales in the second quarter of 2023 compared to $17.4 million or 6.6% of sales in the prior year quarter. The resulting increase in spend was largely focused on Spine and Enabling Technologies and is reflective of head count growth as we work to develop new technologies to drive continued platforms for future growth.

SG&A expenses in the second quarter were $120.1 million or 41.2% of sales compared to $106.7 million or 40.5% of sales in the second quarter of the prior year. The increased spending is reflective of higher sales compensation costs driven by volume, competitive rep conversions and higher G&A costs driven by increased legal expenses as well as bad debt expense. The effective income tax rate for the second quarter was 22.7% essentially in line with the 22.6% noted in the second quarter of the prior year. Adjusted EBITDA for the quarter was 33% lower than the 34.9% noted in the prior year quarter and is reflective of my earlier comments on sales mix changes, increased R&D investments as well as increased G&A spending. As we think about Globus over the long-term, the leadership has and will continue to strive for mid-30s adjusted EBITDA.

Consistent with history during periods of heavier investment our adjusted EBITDA will track to the lower range of the mid-30s. The long-term goal remains steadfast. We will focus on continued investment to drive future sales while delivering above-market profitability for our shareholders. Non-GAAP EPS in the second quarter of 2023 was $0.63 or 12.3% higher as compared to the prior year quarter. Our second quarter 2023 includes an approximate $0.04 tailwind of non-operating items mainly driven by higher interest income. Adjusting for this our normalized non-GAAP EPS would have been $0.59. Net cash provided by operating activities was $35 million and free cash flow was $17.2 million. The increase in free cash flow is driven primarily by lower capital expenditures and additional working capital investments namely inventory as well as the timing of higher payable spending.

At this time the company is revising its full year standalone 2023 guidance. We now expect full year net sales to be $1.125 billion. Our standalone fully diluted non-GAAP EPS guidance remains unchanged at $2.30 per fully diluted share. Our Q2 results serve to highlight our collective strength record revenue, record earnings and record adjusted EBITDA dollars all while seeing continued improvement in free cash flow when compared to the prior year. Our record revenue was distributed across the business as strength was seen both in the US and international as well as across our musculoskeletal and enabling technologies portfolios. We continue to lead the market with investments in product development and seek to expand our position as a leader in disruptive technology.

I want to thank our Globus team members for driving operational excellence and focus while continuing to plan and prepare for our pending merger with NuVasive. Operator, we’ll now open the call for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] One moment for our first question. And our first question comes from Shagun Singh of RBC Capital Markets. Please go ahead.

Unidentified Analyst: Hi. Congrats on a nice quarter. This is Kendall on for Shagun. I had one quick question about the FTC and the deal closing. I was wondering if you can give any other commentary about the deal and any other hurdles you might have going forward have the deal closed in Q3. And I also wanted to ask about guidance in the second half of the implied guidance. I was wondering if there’s any other room for upside given the business momentum in the second quarter? Thank you so much.

Dan Scavilla: Thanks, Kendall. This is Dan. I’ll start with that and I’ll hand it over to Keith. So no there are no other hurdles related to the upcoming merger having gone through what we needed with the SEC, obtained what we needed with the shareholders and now working with and responding to the FTC, we feel like that would be the last step for us to move forward. We’ve seen no reason to deviate from our planned third quarter that we stated based on the cadence and the amount of activity back and forth. But we still think that that’s a reasonable date for us to look forward to.

Keith Pfeil: I’ll take the second part. Thanks for the question, and thanks for your comments on the quarter. As I think about the new guidance $1.125 billion that implies about 5.3% growth in the second half of the year, we feel good about that. I would say that Globus remains conservative as a company. But when you step back and look at the full year the full year would put us up 9.99%. We’ve always said that we seek to be a mid- to high single-digits grower, I think that that puts us at the high-end of the range and we think that the guidance that we’re putting out there is appropriate given where we’re at.

Operator: Thank you. Our next question comes from Matt Miksic of Barclays. Please go ahead.

Matt Miksic: Hi. Thanks for taking the question and congrats on a really impressive quarter. So I wanted to get an idea as to was this quarter — did this seem like a surprising quarter to you the way it played out the cadence in the quarter. Was it more in line with your expectations? And any color or commentary you can give this I think a lot of people are trying to figure out are we seeing a bigger summer vacation this year. Are we seeing more seasonal dip in Q3. Just without trying to get quantify July comment from you is maybe anything you can give us on your sense so far as to what Q3 should shape up to be relative to what was a very strong Q2? And I have one quick follow-up if I could.

Dan Scavilla: Thanks, Matt. So you know we’re always going to give you this answer, right? We’re not going to comment on the current quarter, just because we’re in the process of it. So there’s nothing there we’ll disclose with that. I would tell you that Q2, I wouldn’t consider a surprise. I think we had a solid quarter. There was a lot of great activity throughout the months therein throughout the businesses. So whether you look at spine or our enabling technology or trauma all of those things were well. The international is just solid every single month. It’s really I think doing well with the investments we put in this traction. So I would say we were pleased throughout each one of those three months. And like I said, stay tuned for Q3. We’ll have to get through those hurdles before we talk about that one.

Operator: Thank you. Our next question comes from Matt Blackman of Stifel. Please go ahead.

Unidentified Analyst: Hi. This is Emily [ph] on for Matt. Just was hoping you could talk a little bit about inbound surgeon training volumes whether on the Enabling Tech side or the core spine side. And maybe any specific color on uptick in interest from NuVa docs? Thanks.

Dan Scavilla: Well, thanks for the question Emily. We have a lot of surge in traffic that occurs throughout the week, usually heavier towards the end of the week. But I would tell you that nothing unusually heavy or lighter than the normal flow in which we do. I think we’re pleased with the amount of throughput that we do, whether that be cadaveric training or hands on with the robot or everything in between. I’d say it’s pretty good that way. With NuVasive itself, there’s still a separate entity. And so we haven’t done a lot nor can we do a lot with them or their surgeons with planning along those ways. We will expect an uptick when it is approved and we’ll go at that in a heavier pace. But right now we’re staying within our lane and just focusing on the surgeons that we have.