NuVasive, Inc. (NASDAQ:NUVA) Q1 2023 Earnings Call Transcript May 10, 2023

NuVasive, Inc. beats earnings expectations. Reported EPS is $0.47, expectations were $0.43.

Operator: Good day, ladies and gentlemen, and welcome to the NuVasive First Quarter 2023 Earnings Conference Call. I would now like to introduce your host for today’s call, Ms. Juliet Cunningham, Vice President of Investor Relations at NuVasive. Please go ahead, Ms. Cunningham.

Juliet Cunningham: Thank you. Good afternoon, everyone. With me today are Chris Barry, Chief Executive Officer; and Matt Harbaugh, Chief Financial Officer. Chris will provide an overview of NuVasive’s first quarter 2023 business results and trends as well as innovation highlights. Matt will review our detailed financial results and full year 2023 outlook, and then we’ll host a question-and-answer session. The earnings release, which we issued earlier this afternoon, is posted on the IR section of our website and has been filed on Form 8-K with the SEC. We have also posted supplemental financial information. As a reminder, this call is being recorded, and an archive will be available on the IR website later today. Before we get started, I’d like to remind you that our comments during this call will include forward-looking statements, which are based on current expectations and involve risks and uncertainties, assumptions and other factors, which could cause actual results to differ materially from those expressed or implied by such forward-looking statements.

The factors that could cause actual results to differ materially are described in NuVasive’s news releases and periodic filings with the SEC. Except as required by law, we assume no obligation to update any forward-looking statements or information, which speak as of their respective date. In addition, this call will include certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP financial measures are included in today’s earnings release and the supplemental financial information, both of which are accessible on NuVasive’s website. And now I’d like to introduce Chris Barry.

Chris Barry : Thank you, Juliet. And good afternoon, everyone. Earlier today, we reported first quarter 2023 financial results. On today’s call, I’ll review our performance for the quarter. Share how our continued growth positions as well for the proposed merger and discuss the next steps in our pending combination with Globus Medical. After my remarks, Matt will share additional financial details on the quarter. NuVasive delivered first quarter 2023 net sales of $307.7 million, an increase of 5.8% on a reported basis, or 7.7% on a constant currency basis compared to the prior year period. Our company’s performance reflects increased procedure volumes and continued surge in demand for our innovative portfolio. In particular, our US business had a strong quarter, including approximately 9% growth and US funnel hardware led by thoracolumbar and more than 20% growth from cervical for the sixth straight quarter.

In our International business, we achieved 8.3% growth on a constant currency basis compared to the prior year period. This performance was driven by core spine resulting in double digit growth in Europe and solid growth in Asia Pacific offset by reimbursement pricing headwinds in Japan. We remain focused on the three fundamentals of our growth strategy, core growth, intelligent surgery, and market opportunities, while improving our financial profile over time. Starting with core growth, we have significant opportunities in key procedural segments that we continue to target with our 360 portfolios. X360, C360, P360 and Complex. Our innovation gives us a strong competitive position to extend our leadership in anterior and take share in segments where we historically have been underrepresented.

In anterior, we continue to celebrate 20 years our flagship XLIF procedure, in five years of our X360 procedure. As the leader in lateral with more than 500 peer reviewed publications and more than 60 products launched, XLIF continues to demonstrate superior and more predictable outcomes than traditional spinal fusion procedures. Just as we proceed to realize XLIF, we’re also taking our know-how and experience and applying it to additional opportunistic segments including cervical, posterior and complex. In Cervical, our C360 portfolio continues to deliver well above market growth. Not only has the Simplify Cervical Disc consistently performed, but we saw impressive year-over-year growth in the entire C360 portfolio. The launch of Reline Cervical is driving double digit growth within the posterior cervical fusion subsegment, the additional occipital system enhancement has been receiving positive feedback since its launch in the fourth quarter of 2022.

Following a targeted commercial launch in Japan with the Camber Laminoplasty System, we recently introduced Camber in the US and are receiving positive feedback in the beta launch. This is a prime example of our globalization strategy, providing prioritized regional markets with the differentiated solutions they need to compete locally, and identifying how to scale those unique solutions to additional markets. We continue to see definitive procedural pull through in hospitals that have adopted Pulse. While our surgeons can use Pulse in 100% of spine procedures. We’re committed to innovating the platform to provide more intelligent surgery and improve clinical operational and financial outcomes to better support our customers and patients. The next system level software release for Pulse has received positive feedback from our initial sites, giving surgeons and their OR teams enhanced line of sight for navigation, new instrument compatibility, improved remote support and services, and a further streamline OR team experience.

The commercial rollout will begin this summer. In our NuVasive Specialized Orthopedic business, recent achievements include the precise system received pediatric clearance in the US and the precise bone transport system was commercially launched in several countries in Europe. These are key milestones for NSO. And with the support of more than 100 peer reviewed studies, the business is well positioned for long term growth. Turning to our plan combination with Globus Medical, we are pleased that both NuVasive and Globus Medical shareholders approved a proposed merger to create an innovative global musculoskeletal company. As demonstrated by the overwhelming support of the merger by both company shareholders, the pinning combination greatly accelerates our near and long term strategy.

With a presence in more than 50 countries and supported by more than 5,000 employees, the new organization will advance patient care around the globe and deliver on our commitment of prioritizing compelling market opportunities. As it relates to the antitrust approval, we recently received a SEC request from the US Federal Trade Commission regarding our HSR filing. As a result, the expected close of the merger has shifted from mid-2023 to the third quarter of 2023. While the timing may have changed slightly, our commitment to the deal is steadfast. And our belief that this merger will benefit our stakeholders remains unchanged. As a reminder, this complementary combination expands our reach to surgeons and patients around the world with limited commercial overlap in key [Tech Difficulty] create a comprehensive portfolio of innovative spine and orthopedic technologies, furthers our commitment to meaningful innovation, expands our operational capabilities and creates a strong financial profile and value creation opportunity for our shareholders.

We remain confident in the future vision of our combined company and the opportunity to provide superior service to our surgeon and hospital partners to advance patient care. Now, I’ll turn the call over to Matt.

Matt Harbaugh : Thank you, Chris. And good afternoon. I’m going to cover our first quarter highlights and provide color on our latest thinking around the full year 2023 net sales guidance range, which is unchanged from our guidance provided on February 22. Our detailed financial results have been provided in today’s press release and supplemental information. During my remarks, I will be discussing both GAAP and non-GAAP measures. Please see our press release for GAAP to non-GAAP reconciliations. Unless otherwise noted, all comparisons are to the prior year period. We had a strong start to the year delivering worldwide net sales of $307.7 million in the first quarter, a 5.8% increase as reported, and a 7.7% increase on a constant currency basis.

Foreign currency negatively impacted our net sales performance by $5.6 million during the quarter. International net sales for the first quarter were $71.9 million, which was relatively flat to the prior year period on an as reported basis, and an increase of 8.3% on a constant currency basis. From a regional perspective, international growth was led by core spine net sales in Europe, and solid growth in Asia Pacific. Growth in Asia Pacific was primarily driven by Australia and New Zealand, which was partially offset by reimbursement pricing headwinds in Japan. Latin America grew modestly with Brazil and Colombia leading the way. Turning to US net sales. Let me provide key highlights by product line. US final hardware net sales for the first quarter of 2023 were $170.1 million, representing a 9.3% increase.

Our cervical business achieves net sales growth of greater than 20% for the sixth consecutive quarter, led by the C360 portfolio, specifically the Simplify Cervical Disc. US Surgical Support net sales were $65.7 million, an increase of 3.3%. The NuVasive Clinical Services grew nicely, primarily driven by higher case volumes. Biologics net sales declined slightly year-over-year due to case mix. Moving to operating results, first quarter non-GAAP gross profit was $221.3 million, compared to $212.2 million in the prior year period. Non-GAAP gross margin as a percentage of net sales for the first quarter of 2023 was 71.9%, a decrease of 110 basis points compared to 73% in the prior year period. The year-over-year decline was primarily driven by an increase in excess and obsolete inventory related reserves.

Pricing pressure remained consistent with historical levels in the low single digit percent range. First quarter 2023, non-GAAP operating expenses increased 4.7% to $186.6 million, compared to $178.2 million in the prior year period. The increase was mainly driven by variable expenses associated with net sales growth and higher depreciation costs from significant investments made in surgical instrument sets last year to deliver on our long range targets. Non-GAAP operating margin during the first quarter of 2023 was 11.3%, a decrease of 40 basis points compared to 11.7% in the prior year period. The year-over-year decrease was primarily driven by the decrease in gross margin as discussed earlier. Non-GAAP other income and expense for the first quarter was $2.1 million of expense, compared to $2.6 million of income in the prior year period.

The year-over-year change was primarily due to unrealized foreign currency losses in the first quarter, compared to the favorable impact of unrealized foreign currency gains in the prior year period. Non-GAAP tax expense for the first quarter of 2023 was $7.9 million, compared to $8.4 million in the prior year period. Our first quarter 2023 effective tax rate was 24.1% compared to 23% in the prior year period. For the first quarter of 2023, we reported GAAP net loss of $1 million, or diluted loss per share of $0.02, compared to GAAP net income of $19.2 million, or diluted earnings per share of $0.35 in the prior year period. Included in Our GAAP results were net unrealized losses from foreign currency exchange fluctuations, and incremental merger related expenses.

On a non-GAAP basis, we reported first quarter net income of $24.8 million, or diluted earnings per share of $0.47, compared to non-GAAP net income of $28.2 million, or diluted earnings per share of $0.54 in the prior year period. The year-over-year change was largely driven by unrealized foreign currency gains in the prior year period, which contributed $0.10 to diluted earnings per share in Q1 of 2022. Turning now to the balance sheet, we had cash and cash equivalents of $181.2 million as of March 31, 2023. During the first quarter, we made our first net sales milestone payment of $56.5 million related to the acquisition of Simplify Medical. Free cash flow during the first quarter was negative $33.2 million, compared to negative $26.7 million in the prior year period.

As a reminder, the first quarter is historically the lowest free cash flow quarter of the year, and typically negative. Additionally, a portion of our contingent consideration payments, which includes the net sales milestone payment, for the Simplify Medical acquisition is presented within cash from operations. Absent that portion, free cash flow would have been negative $7.7 million for the quarter, representing a $19 million improvement over the prior year period principally due to stronger collections in the United States. As our $450 million 2023 convertible notes mature on June 1, 2023. We plan to use a combination of cash on hand and are currently undrawn $550 million credit facility to satisfy that commitment. Turning to the full year, following the announcement of our pending merger with Globus Medical, we provided net sales guidance for 2023 when we reported our full year 2022 results in late February.

At this time, we continue to expect full year standalone worldwide net sales growth of between 6% to 8% on both a reported and constant currency basis compared to the prior year. As we sit here today, we expect the impact of foreign currency exchange to be relatively neutral on a full year basis, with greater impact in the first half of the year. This expectation is based on foreign currency exchange rates as of April 30, 2023, and is consistent with our full year net sales guidance. We’re excited to progress toward our plan merger with Globus Medical, which is expected to close in the third quarter of 2023. We remain focused on maintaining business continuity, and advancing integration planning to ensure a successful combined company. Operator, we are now ready to open the call for questions.

Q&A Session

Operator: [Operator Instructions] And the first question will come from Matt Miksic with Barclays.

Operator: The next question will come from Vik Chopra with Wells Fargo.

Operator: The next question will come from Allen Gong with JP Morgan.

Operator: The next question will come from Joshua Jennings with TD Cowen.

Operator: The next question will come from Shagun Chadha with RBC.

Operator: The next question will come from David Saxon with a needle please go ahead.

Operator: The next question will come from Matt Taylor with Jefferies.

Operator: The next question will come from Matthew Blackman with Stifel.

Chris Barry : Thanks, Chuck. And thank you all for joining us on our Q1 earnings call today. As we mentioned earlier, we’re making great progress on the plan combination and working with Globus toward an expected closing in the third quarter of 2023. We believe that this merger will create a leading global musculoskeletal company that is well positioned for growth and success in the years ahead. I look forward to speaking with you all next quarter. Thank you.

Operator: The conference is now concluded. Thank you for your participation. You may now disconnect.