Globus Medical, Inc. (NYSE:GMED) Q4 2022 Earnings Call Transcript

Globus Medical, Inc. (NYSE:GMED) Q4 2022 Earnings Call Transcript February 21, 2023

Operator: Thank you for standing by and welcome to Globus Medical’s Fourth Quarter and Full-Year 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. I will now turn the call over to Senior Vice President of Business Development and Investor Relations, Brian Kearns. Please go ahead.

Brian Kearns: Thank you, Latif and thank you, everyone for being with us today. Joining today’s call from Globus Medical will be Dan Scavilla, President and CEO; and Keith Pfeil, Chief Financial Officer. This review is being made available via webcast, accessible through the Investor Relations section of the Globus Medical website at www.globusmedical.com. Before we begin, let me remind you that some of the statements made during this review are or may be considered forward-looking statements. Our Form 10-K for the 2021 fiscal year, and our subsequent filings with the Securities and Exchange Commission identifies certain factors that could cause our actual results to differ materially from those projected in any forward-looking statements made today.

Our SEC filings, including the 10-K are available on our website. We do not undertake to update any forward-looking statements as a result of new information or future events or developments. Our discussion today will also include certain financial measures that are not calculated in accordance with Generally Accepted Accounting Principles or GAAP. We believe these non-GAAP financial measures provide additional information pertinent to our business performance. These non-GAAP financial measures should not be considered replacements for and should be read together with the most directly comparable GAAP financial measures. Reconciliations to the most directly comparable GAAP measures are available in the schedules accompanying the press release and on the Investor Relations section of the Globus Medical website.

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

Dan Scavilla: Thanks, Brian, and good afternoon, everyone. Globus finished 2022 with a strong fourth quarter. Revenue for the year was a record $1.23 billion, crossing the $1 billion threshold for the first time. We delivered $65 million or 7% as reported and 8% constant currency growth for the full-year. This is above last year’s difficult post-COVID comp, where we grew 21% for 2021. We achieved record sales, while maintaining industry leading profitability generating a record $2.06 in non-GAAP EPS and an adjusted EBITDA of 33% even as we continue to invest heavily in INR, trauma, competitive recruiting and absorb significant currency headwinds. We also launched seven new products in 2022, four of the launches occurred in the fourth quarter.

Revenue for the quarter was $275 million, up 10% as reported or 12% in constant currency. Non-GAAP EPS was $0.59, up 20% versus prior year Q4. And adjusted EBITDA was 33%. U.S. Spine grew 10% in Q4 with notable gains across our product portfolio in expandables, biologics, MIS screws, 3D printed implants and cervical and lateral offerings. The gains were driven by competitive rep conversions and robotic pull through. We had a strong competitive recruiting year surpassing the hiring levels in 2020 and 2021. This is usually a leading indicator of growth in the coming years and we’re excited about the potential of the team we’ve on boarded in 2022. In Q4, we launched our pro lateral patient positioning system as part of our focus on the continuum of care.

It is an interactive adjustable bed mount that enables a single position, single stage, lateral surgical approach for direct and indirect decompression. Designed to maximize operational efficiencies, increase ease of implant placement and minimize surgeon fatigue. It integrates seamlessly with our ExcelsiusGPS and E3D solutions and enables significant capabilities in non-robotic procedures. When combined with our Excelsius platform and our range of expandable interbody offerings, we have unique and customizable lateral solutions available to our surgeons. Enabling technology sales were $30 million, up 20% on a constant currency basis versus prior year, driven by robotic and imaging system sales. This was our highest quarter since launching Enabling Tech surpassing last year’s Q4 sales that delivered 40% post-COVID growth.

We continue to see increased interest in placements with significant international gains of ExcelsiusGPS in EMEA and the U.K. that we feel will lead to future implant pull through and strong market share gains. Robotic procedures continue to accelerate growing 25% for the full-year, and exceeding 43,000 robotic procedures performed to-date. We launched Excelsius3D imaging system in Q2 of this year and continue to penetrate the market throughout the year. Surgeons have said this is a game changer. Excelsius3D is a three in one imaging platform offering three image modalities in a single cart with high maneuverability, a large field of view, a seamless integration with our ExcelsiusGPS robotic system. It is a key component of the Excelsius ecosystem in the operating room.

An ecosystem that is designed and built from the ground up to communicate together seamlessly. Market interest remains high for the state-of-the-art technology and customer orders continue to grow. Excelsius3D is positioned to be a major growth driver as we enter 2023. Our international spinal implant business, excluding Japan, delivered record sales in Q4 growing 20% on a constant currency basis compared to prior year. We delivered double-digit growth in most markets, and continue to see strong growth in key markets ranging between 25% and 50% for the quarter with U.K., and Australia being major contributors. Our trauma business delivered its 12th consecutive quarter of sequential growth, delivering 70% growth for Q4 and 71% for full-year.

Trauma performance is driven by sales force expansion and strong uptake in all 14 product lines, delivering high double-digit growth in each product offering. In Q4, we launched the AUTOBAHN EVO femoral nail systems, the integrated nail is designed to be a standalone and the retrograde nails designed for either standalone or plate now combo procedures with our Anthem Distal Femur system. Initial surgeon feedback is strong and we expect the next generation of male to be a key growth driver in 2023. Our product development engine continues to make progress focusing on procedural solutions, designing implants, instrumentation and procedures that will focus together within our Globus ecosystem for a seamless and comprehensive approach in spine, trauma and joints.

Photo by Piron Guillaume on Unsplash

At the same time, we’re expanding our solutions throughout patient entire continuum of care, supporting surgeons in preoperative planning, intraoperative execution and postoperative patient care to capture outcome data for future surgical planning. While this complex approach has extended development time lines beyond our historical rapid pace, I believe the upcoming launches will have greater significance and shaping procedures of the future. Moving into 2023. Globus Medical and NuVasive are planning to combine in an all-stock transaction to create a global musculoskeletal company focused on rapid innovation, addressing unmet clinical needs and improving offerings to our surgeons and patients. The all-stock structure preserves cash to deleverage the company and accelerate investment in assets to fuel growth.

The combination capitalizes on our complementary commercial organization, where we see little territory overlap, and should allow us to accelerate our globalization strategies to increase customer reach and strengthen our surgeon relationships. We plan to bring together the best-in-class technologies from our portfolios to create a differentiated and comprehensive procedural solution offering as part of our approach to address unmet clinical needs and support our surgeons and patients. Our product development engines will combine and increase our focus on rapidly developing innovative solutions throughout the continuum of care from preoperative planning through to purse surgical monitoring. Our operational footprints are highly complementary, allowing us to better leverage each other’s manufacturing and supply chain resources to increase internal production, while reducing the amount of capital investment required as stand-alone, so we can redirect investment and improve cash flow.

Over the past several months, it has become clear to me that both organizations have more in common than they are different. The complementary strengths of Globus engineering with NuVasive certain relations, education and training will combine for a truly potent innovation company. We will continue to outpace the market growth where we compete and gain share while maintaining financial discipline to drive sales growth, continue mid-30s EBITDA, accelerate EPS growth and increased cash flows for our investors. As an update on the merger status, we are currently preparing our HSR submission and the joint proxy statement. Cross-functional integration planning has ramped up, so we can pivot to integration implementation once the merger is approved when we clear HSR, secure shareholder approvals and meet closing requirements.

We expect to close the deal in mid-2023. In closing, we remain focused on core elements for long-term growth, innovative new product introductions, robot imaging system sales, competitive rep recruiting and merger integration planning. 2023 is all about focus and execution to deliver value to our customers and drive growth. I know we are well positioned to achieve our mission of becoming the preeminent musculoskeletal company in the world. I will now turn the call over to Keith.

Keith Pfeil: Thank you, Dan, and thank you to everyone for joining us on today’s call. Globus achieved a milestone in 2022, growing to over $1 billion in sales, despite strong currency headwinds and lingering COVID impacts earlier in the year. Full-year 2022 revenue was $1.023 billion, growing 6.8% as reported and 8.2% on a constant currency basis with the same number of selling days in 2022 and 2021. Currency impacts were unfavorable to revenue by $14 million in 2022. Net income was $190.2 million, resulting in fully diluted earnings per share of $1.85. Non-GAAP net income was $211.6 million, generating $2.06 of fully diluted non-GAAP earnings per share. 2022 adjusted EBITDA was 33.2%, and we generated $104.4 million of free cash flow for the full year.

Q4 2022 revenue was $274.5 million, growing 9.8% as reported and 11.7% on a constant currency basis. Net income was $50.1 million and non-GAAP net income was $60.1 million. Q4 2022 fully diluted earnings per share was $0.49, while our fully diluted non-GAAP earnings per share was $0.59. Adjusted EBITDA was 32.8%, and we generated $45.6 million of free cash flow for the quarter. U.S. revenue in the fourth quarter of 2022 was $233.2 million, growing 9.5% as reported compared to the prior year quarter, led by growth in U.S. spine, biologics and trauma. International revenue for the fourth quarter was $41.3 million, growing 11.4% as reported and 24.2% on a constant currency basis, driven by increased INR and implant sales. Gross profit in the fourth quarter was 74.3% versus 75.3% in the prior year quarter and is consistent with expectations.

The 100-basis point decline was driven primarily by product mix and higher freight costs partially offset by lower inventory reserves and depreciation expenses. Full-year 2022 gross profit was 74.2% compared to 75% in 2021. The 80-basis point decrease was driven by product mix, primarily higher capital sales and higher freight expenses. Research and development expenses in Q4 were $19.5 million or 7.1% of sales, compared to $51 million or 20.4% of sales in the prior year quarter. The lower spending is driven by decreased IP R&D spending in Q4 €˜22 versus Q4 ’21. On a normalized basis, Q4 €˜21 R&D spending was $16.7 million or 6.7% of sales. The resulting quarter-over-quarter increase is driven primarily by higher continued investments in R&D, mainly driven by increased headcount across our spine, INR and trauma portfolios.

Our full-year 2022 research and development expenses were $73 million or 7.1% of sales, compared to $97.3 million or 10.2% of sales in the prior year. Adjusting for acquisitions made in both periods, R&D expenses in 2022 were $72.9 million or 7.1% of sales, compared to $63 million or 6.6% of sales in the prior year. The increased spending is consistent with my comments on Q4 2022, namely headcount investments across our portfolio. SG&A expenses in the fourth quarter were $118.1 million or 43% of sales, compared to $106.6 million or 42.6% of sales in the prior year quarter. The increase is primarily higher selling costs as a result of higher compensation costs from competitive recruiting, as well as higher travel expenses. Full-year SG&A expenses were $432.1 million or 42.2% of sales, compared to $408.1 million or 42.6% of sales.

The increased dollar spending is primarily driven by volume impacts from higher sales growth, as well as higher sales compensation expenses and higher travel. SG&A spending decreased 40 basis points versus 2021, driven by leverage on fixed spending, partially offset by higher sales costs and training expenses. The income tax rate for the quarter was 19.4%, compared to 23.8% in Q4 of 2021, driven primarily by lower international tax expenses. Our full-year 2022 income tax rate was 21.7%, compared to 17.3% in the prior year, with the resulting increase driven by lower benefits associated with stock option exercises. Fourth quarter net income was $50.1 million and non-GAAP net income was $60.1 million. Q4 diluted earnings per share was $0.49 and non-GAAP diluted earnings per share was $0.59, compared to $0.49 in the prior year quarter.

The $0.10 increase in Q4 2022 non-GAAP EPS includes a net $0.04 of non-operating favorability driven by a lower tax rate and higher interest income, partially offset by currency translation impacts. On a normalized basis, non-GAAP EPS in the fourth quarter was $0.55, compared to $0.49 in the prior year quarter, growing 12.2%, driven primarily by sales volume growth, as mentioned earlier. Full-year 2022 diluted earnings per share was $1.85 and non-GAAP diluted earnings per share was $2.06, compared to $2.04 of non-GAAP EPS in 2021. Our full-year 2022 non-GAAP EPS is inclusive of $0.14 of non-operating items, which includes unfavorable currency impacts worth $0.11, a higher tax rate worth $0.10, partially offset by higher interest and other income worth $0.05 and a lower share count worth $0.02.

Full-year 2022 adjusted EBITDA of 33.2% includes 90 basis points of unfavorable currency impacts, resulting in a normalized 34.1% adjusted EBITDA for the year. Net cash provided by operating activities were $64 million in the fourth quarter of 2022 and $178.5 million for the full-year. Free cash flow was $45.6 million in the fourth quarter and $104.4 million for the full-year 2022. Our 2022 free cash flow was impacted by higher capital expenditures, as well as investments in working capital, namely inventory and accounts receivable. The company remains debt free. At this time, the company is establishing its full-year stand-alone 2023 guidance. We are projecting full year 2023 sales guidance of $1.1 billion, representing 7.5% growth versus 2022.

We are guiding to a full-year fully diluted non-GAAP earnings per share of $2.30, representing 11.7% growth versus 2022. Our 2022 results are reflective of continued investment across our business. R&D spending increased as we seek to bring more new and guiding products to market. Our sales and marketing spending increased as we continue to grow our sales force and our CapEx spending increased to meet increased demands for product output and set deployment. In closing, I’ll briefly add a few comments in addition to Dan’s earlier comments as it relates to our February 9 announcement that we’ve entered into a definitive agreement to combine in an all-stock transaction with NuVasive. Once shareholder and regulatory approvals are obtained and the transaction closes, we expect to deliver 20-plus percent non-GAAP EPS accretion by the completion of the first full-year.

This assumes likely near-term sales dissynergies from rep and account disruptions, partially offset by revenue synergies around complementary implant sales and additional INR sales of Globus Capital and NuVasive accounts. In addition, this includes delivering on $170 million of cost synergies, of which we expect to achieve 50% by end of year 1, 75% by the end of year 2 and 100% by the end of the third year. Operator, we will now open the call for questions.

See also 15 Battery Startup Companies to Watch and 15 Best Value Stocks to Buy According to Bill Miller.

Q&A Session

Operator: Our first question comes from the line of Shagun Singh of RBC Capital Markets. Your line is open.

Shagun Singh: Great, thank you so much and congratulations on exceeding $1 billion in sales. So I guess my first question is, I guess, we’ve all had some time to digest the deal, but just given the stock reaction, I’m wondering if you could comment on where you see the disconnect in your thinking versus investors on deal rationale financials and/or strategy? And one of the other things that’s come up is, if you may, sweeten the deal, could you just talk about the flexibility and willingness to close the deal here? Any comments would be helpful. Thank you so much.

Dan Scavilla: Thanks, Shagun. So just keep in mind as we did this and as we’ve talked about during our announcement, you’re really looking at what we believe is a complementary global scale, the ability to expand customer reach with minimal overlap. We’ve talked about being able to develop a comprehensive and innovative portfolio in spine and orthopedics when we combine these out. And we remain committed to innovative product development and surgeon education. We’re saying that the operational capabilities fit nicely together in this and actually can benefit us as a combined. And when you look at that and you combine us out the compelling upside of revenue and what even Keith mentioned with the EPS and accretion that’s all out there for value opportunity, that’s what we see.

The disconnect, I can’t say, I can’t speak for Wall Street, they’ll point to several unrelated deals and look at that, but that’s okay. It’s certainly they’re proguative to do it. As for what we would do in a market and change in stock is something we wouldn’t be in a position to actually comment on and with something we’ll have to evaluate and see when that time comes.

Shagun Singh: Got it. And just as a follow-up question. Can you just talk about the relative contribution from rep recruitment versus NPIs versus pull-through from Enabling Tech to U.S. implant sales? And then are you parsing out final implant and imaging sales for Q4? And thank you for taking the questions.

Dan Scavilla: Thanks, Shagun, to be honest with you, I wouldn’t have the ability to pull all those things apart and really tell you what they were. Again, since we’re running the business as a whole. I think the fact that we’ve significantly outpaced the market with continued growth is probably more important as to the sum of the parts.

Shagun Singh: Got it.

Operator: Thank you. Our next question comes from the line of Matt Taylor of Jefferies. Your questions please, Matt.

Matt Taylor: Great. Hi, thanks for taking the question. So I wanted to see if you could address more specifically, I think the main concern a lot of investors have is about the dissynergies, the turnover that you talked about. Can you talk a little bit about how you can mitigate that? And then also how you may be able to offset that with some of the revenue synergies that you discussed here and maybe the timing of this?