NuVasive, Inc. (NASDAQ:NUVA) Q2 2023 Earnings Call Transcript

NuVasive, Inc. (NASDAQ:NUVA) Q2 2023 Earnings Call Transcript August 2, 2023

NuVasive, Inc. misses on earnings expectations. Reported EPS is $0.47 EPS, expectations were $0.56.

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 second 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 our 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 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 on 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 second quarter 2023 financial results. On today’s call, I will review our performance for the quarter, share our differentiated product portfolios and continued commercial execution position us well for the pending combination with Globus Medical and discuss where we are in the merger process and our current views of timing. After my remarks, Matt will share additional financial details on the quarter. NuVasive delivered second quarter 2023 net sales of $317.8 million, an increase of 2.4% on a reported basis or 3.1% on a constant currency basis compared to the prior year period. In combination with our first quarter performance, we delivered in line with our expectations for the first half of 2023.

Despite a challenging Q2 2022 comparison and merger-related competitive noise, the NuVasive team delivered a solid quarter. Our U.S. business achieved approximately 6% growth in U.S. Spinal Hardware, led by more than 20% growth from Cervical for the seventh straight quarter. In our International business, we achieved approximately 10% growth on a constant currency basis compared to the prior year period. This performance was driven by core spine and led by double-digit growth in Europe, as well as solid contributions from Latin America and Asia Pacific. We remain focused on our commitment to delivering core growth, a pillar of our previously communicated growth strategy. We’re executing with discipline through our global teams who are remaining resilient through the pending merger.

Thank you to our teams for a job well done. Within Core Spine, we continue to address the significant opportunities in key procedural segments with our 360 portfolios, X360, C360, P360 and Complex. Our innovation gives our commercial teams a strong competitive position to take share across each spine segment. In Anterior, we continue to celebrate 20 years of our flagship XLIF procedure and five years of our X360 procedure. Across the globe, XLIF continues to demonstrate superior and more predictable outcomes than traditional spine fusion procedures. Adding to five years of clinical validation surrounding lateral single-position surgery and X360 SPS, a 2023 study published in the Spine Journal shows that lateral SPS and traditional fusions have similar outcomes two years postoperatively while reducing perioperative complications and improving efficiency.

Our know-how and experience in creating procedural solutions have only benefited our strategy in segments like Cervical, Posterior and Complex. In Posterior, U.S. interbody sales delivered double-digit growth, driven by our P360 portfolio. Key products, including the commercial launch of the NuVasive Tube System and the introduction of our next-generation posterior expandable cage, MOD XPL, have supported our renewed momentum in our T lift business. Turning to U.S. Cervical, our entire C360 portfolio continues to deliver above-market growth, led by increased surgeon adoption of the simplified cervical disc and Reliance Cervical. As anticipated, a simplified cervical disc is a door opener for our commercial teams, pulling through additional procedural opportunities and driving greater density in cervical accounts.

In Complex, we’re making progress in the pediatric deformity sub-segment with Reline 3D, which delivered double-digit growth. Our posterior fixation system for deformity correction unifies deformity techniques into one powerful and efficient procedure. An enabling technology, Pulse continues to make its impact across the globe, with commercial sales in several new European geographies and our first case completed in Singapore, we’re seeing increased global surgeon interest in Pulse. Following the platform’s 2023 summer software release, surgeons have shared positive feedback on the enhancements to their operating rooms. New hardware enhancements were also released to further optimize our differentiated navigation patient array, allowing us to better support revision, pediatric and complex deformity cases.

These software and hardware introductions highlight our commitment to continuous innovation of the platform. In our NuVasive Specialized Orthopedics business, recent achievements include the reentry of the Precise system in the UK and the CE Mark reinstatement of precise bone transport. This all-internal solution extends our precise technology, treating segmental bone defects caused by tumors and trauma. The NSO business continues to be well positioned for long-term growth. Turning to our planned combination with Globus Medical, we remain excited and committed to creating an innovative global musculoskeletal company together. As demonstrated by the overwhelming support for the merger by both companies’ shareholders, the pending combination will accelerate our near- and long-term strategy.

Our commitment to the deal is steadfast, and our belief that this merger will benefit all stakeholders remains unchanged. As previously communicated on May 3, we received a second request from the Federal Trade Commission in connection with the FTC’s review of the merger with Globus. Over the past three months, we and Globus have gone to great lengths to prepare our respective responses to the second request. And I’m very proud of what our teams have accomplished in a short period of time. During the Q1 earnings call, we indicated that we expected to close the transaction in the third quarter. Based on our progress with the response to the second request, we are not backing off that timing, and we are doing everything we can to make that happen.

Given the recent M&A headlines, I’ve heard a lot of commentary about the FTC’s approach to deals generally, as well as speculation about what action the FTC will take in the NuVasive-Globus merger. While there is a range of potential outcomes when the FTC is reviewing our transaction, we remain optimistic on a Q3 close. Now I will turn the call over to Matt.

Matt Harbaugh: Thank you, Chris. And good afternoon. I’m going to provide commentary on our second quarter results and full year 2023 net sales guidance, which remains unchanged from what we provided on February 22. Our detailed financial results have been provided in today’s press release and supplemental information. Today, I will discuss both GAAP and non-GAAP measures. Please see our press release for GAAP to non-GAAP reconciliations. And unless otherwise noted, all comparisons are to the prior year period. Second quarter 2023 worldwide net sales were $317.8 million, which was a 2.4% increase as reported and a 3.1% increase on a constant currency basis. Foreign currency negatively impacted our net sales performance by $2.2 million during the quarter.

International net sales for the second quarter were $78.6 million, an increase of 6.8% over the prior year period on an as-reported basis and 9.8% on a constant currency basis. From a regional perspective, international growth was led by Core Spine net sales in Europe and Latin America. Asia-Pacific growth, primarily in Australia, was offset by reimbursement pricing headwinds in Japan, as discussed previously. Overall, procedure volumes in Japan grew above market, and our market position continues to be strong. Turning to U.S. net sales, let me provide key highlights by product line. U.S. Spinal Hardware net sales for the second quarter of 2023 were $174.1 million, representing a 5.5% increase year-over-year. U.S. Cervical continued its proven and ongoing track record of achieving greater than 20% growth, led by the simplified cervical disc and Reliance Cervical.

U.S. surgical support net sales were $65.1 million, a decrease of 9.3%, primarily driven by lower biologics attachment rates as well as payer mix in NuVasive Clinical Services, or NCS. Moving to operating results. Second quarter non-GAAP gross profit was $228.3 million compared to $224.7 million in the prior year period. Non-GAAP gross margin as a percentage of net sales for the second quarter of 2023 was 71.8%, a decrease of 60 basis points compared to 72.4% in the prior year period. The year-over-year decline was primarily driven by lower NCS net sales. Pricing pressure remained consistent with historical levels in the low single-digits. Second quarter 2023 non-GAAP operating expenses increased 1% to $186.1 million compared to $184.2 million in the prior year period.

Non-GAAP operating margin during the second quarter of 2023 was 13.3%, an increase of 30 basis points compared to 13% in the prior year period. Overall, higher net sales and intentional expense control generated favorable operating leverage that more than offset the gross margin pressure. Non-GAAP other income and expense for the second quarter was $2.5 million of expense compared to $8.4 million in the prior year period. The year-over-year decrease was primarily driven by less impact from unrealized foreign currency gains in the current year period. Non-GAAP tax expense for the second quarter of 2023 was $9.9 million compared to $7.2 million in the prior year period. Our second quarter 2023 effective tax rate was 25% compared to 22.5% in the prior year period.

The year-over-year increase was driven by higher tax reserves and valuation allowances. Currently, we expect our annual effective tax rate to be in the mid-20% range. For the second quarter of 2023, we reported GAAP net income of $7.4 million or diluted earnings per share of $0.14 compared to GAAP net loss of slightly less than $1 million or diluted loss per share of $0.02 in the prior year period. As a reminder, the prior year period included unfavorable impacts of foreign currency exchange fluctuations of approximately $25 million associated with the weakening of the Australian dollar against the U.S. dollar. This was principally related to our 2021 acquisition with Simplify Medical. The impact was approximately $2 million in the current year period, resulting largely in the overall improvement in GAAP net income.

On a non-GAAP basis, we reported net income of $29.8 million or diluted earnings per share of $0.56 compared to non-GAAP net income of $24.8 million or diluted earnings per share of $0.47 in the prior year period. The year-over-year increase was driven by operating profit growth, as well as the favorable impact of unrealized foreign currency gains. Turning now to the balance sheet, we had cash and cash equivalents of $80.7 million as of June 30, 2023. During the second quarter, we repaid in full the $450 million convertible notes due in early June using $350 million from borrowings under our credit facility, combined with cash on hand. Free cash flow during the second quarter was $3 million compared to $26 million in the prior year period. The decrease was primarily due to lower operating cash flow, offset by capital expenditures as compared to the prior year period.

We continued our investments in capital expenditures to support our net sales growth, as well as current and future product launches. As I mentioned at the beginning of my prepared remarks, our full year 2023 financial guidance remains unchanged from February 22, which was worldwide net sales growth of between 6% to 8% on both a reported and constant currency basis compared to the prior year. This is based on foreign currency exchange rates being neutral for the full year based on rates as of July 31, 2023. Lastly, I would like to wrap up by reiterating what Chris said about our excitement with our continued progress towards finalizing the merger with Globus Medical. It’s great to see the teams from both companies working closely together towards integration planning for a successful combined company, and we continue to expect the merger to close in the third quarter.

And now I will ask the operator to please open the call for questions.

Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] First question comes from Matt Miksic with Barclays. Please go ahead.

Matt Miksic: Hey good evening. Thanks so much for taking the questions. So, may be Chris I wanted to ask about some of the business trends that you talked a little bit about in your prepared remarks. But if you could maybe speak to anything in the results or in the operations or in the organization that you would say either indicates that the thing that folks might be fearful of here ahead of a pending transaction might be happening. In other words, reps peeling away and taking another opportunity, or that that’s not happening. So any color on how you felt about performance and whether or not it was affected by anything like that. And then I have one follow-up.

Chris Barry: Yes. Thanks Matt. Happy to answer that question. The simple answer is we’re feeling very good. If you kind of dig below the surface of the 3%, you look and see the U.S. Hardware grew roughly 6% and continued growth in Cervical, we’re starting to see a growth in our posterior strategy with P360. Some of that’s offset by the U.S. support business, partial is the NSO or I’m sorry, NCS business, which had some contractual headwinds. We have seen some Pulse slowdown as likely as a result of some of the time to close or merger-related anxiety from our customers. There’s also likely some capital slowdown generally in the market. I’m anxious to hear what others say there because we’re still somewhat nascent in the capital sales process.

But we saw slower-than-expected sales there, but the underlying strength of the U.S. business is still solid. So we’re excited about that, which actually speaks to the fact that we’re retaining that top talent, and the sales organization seems to be very excited about the future combination and what that holds for them individually. International; still double-digit growth, that’s with our second largest market in Japan, really being offset from a good solid volume growth. As Matt talked about in his prepared remarks dealing with the transitory pricing headwind that should come and go over the course of this year. So if you really look at the underlying strength of the business, 6% growth in the U.S. Spinal Hardware business and still double-digit growth in the International segment with Japan coming under some pressure this year from a pricing perspective.

So those things indicate to me that the business is holding its own. We’re minimizing distraction. People are excited about the combination, but we’re taking it one step at a time.

Matt Miksic: That’s helpful. And just a follow-up to sort of make sure we’re thinking about expectations for Q3 here, you mentioned, and other folks have mentioned the possibility of maybe more of an August low and more seasonally softer Q3 more vacations that sort of thing. If we would normally model sort of flat to down in the third quarter is that – is that down mid-single-digits? Is that down more than that because of what you’re starting to see? Or just any color on the back half cadence would be super helpful.

Chris Barry: Yes. I mean, unfortunately it’s probably – I’m probably the worst person to talk to in this particular subject. I did mention in Q1 we saw less seasonality, December to January. That was really interesting. I would say Q2 showed signs of return to pre-COVID seasonality, meaning you had the June summer and July summer vacation. You saw some of that starting to take shape. The problem is I’ve gone three years of either a COVID-related, now a merger-related disruption to our business. So it’s a little hard for me to sort of see through some of this and really identify market trends. But I would just say in general, my perspective is the market is moving back to normal seasonality. So for that, I would expect some softness generally compared to market from a normal seasonality perspective that you saw likely previous to the COVID years.

But we’ll see as it unfolds. I would say the Q2 seasonality looked more consistent than Q1 from previous years that were affected by COVID, if that helps.

Matt Harbaugh: Yes. Matt, the only other thing I would add is, typically our fourth quarter is our biggest quarter followed by the second quarter. And then our first quarter tends to be the lightest. So yes, we do expect some lull to use your word, in August. With regard to your first question, the one thing I did want to highlight that was in Chris’ prepared remarks is, and I know you guys don’t see our internal plan. But from what did we expect when we set the budget back in the January time frame versus where we landed? It doesn’t get much closer than where we landed in the first six months of the year. So we’re tracking right in line with where we thought we were going to be.

Chris Barry: To next question.

Operator: Next question comes from Shagun Singh with RBC Capital Markets. Please go ahead.

Shagun Singh: Great. Can you hear me okay?

Chris Barry: Yes.

Shagun Singh: Okay. Perfect. I was just wondering if you can shed some light on any conversations, updated conversations that you’re having with the FTC. Are they still requesting documentation? Is it more specific or more broad? You did sound more confident in the commitment to the deal closing in Q3, and I’m just trying to get a sense of what’s driving that? Thank you for taking the questions.

Chris Barry: Thanks Shagun. I mean, I’ve said before we walked into this eyes wide open. We’re very confident in the combination of these two businesses. Our team has done a great job preparing our responses to the second request. The second request is something that is clearly not out of the ordinary for the FTC, so we’re working feverishly to make sure that we’re doing everything we can to fulfill the comment that I made earlier, which is our confidence in doing everything we can to make sure that we do deliver and close the deal. There’s a range of potential outcomes. Obviously, the FTC is a dynamic situation but we remain very optimistic in the Q3 close. The team has done a lot of work. We’ll continue to meet the requests as they come.

It’s a dynamic situation, but one that we feel confident and are working very hard to make sure we resolve. In the meantime, like I said we continue to make progress on the integration planning to the extent we can with Globus and both teams are working closely together.

Shagun Singh: Great. And then just one on guidance; I believe it implies a step-up in the back half, if I’m correct. Can you just talk to the confidence in the back half, what’s driving that? Thank you.

Matt Harbaugh: Yes. Shagun, it’s Matt. As I mentioned earlier when we were talking with Matt, our fourth quarter tends to be in a normalized world. It tends to be our strongest quarter, particularly in the November-December time frame. So yes, it will pick up, particularly in that fourth quarter.

Shagun Singh: Thank you.

Matt Harbaugh: You bet.

Operator: Next question comes from Allen Gong with JP Morgan. Please go ahead.

Unidentified Analyst: Hi. This is actually Lily on for Alan. Thanks so much for taking the question. Maybe just digging a little deeper into surgical support; in your prepared remarks you called out headwinds from Biologics and NCS. So maybe if you could just dig a little bit deeper into what happened there and what drove the weakness? And how should we be thinking about that bouncing back in the back half of the year?

Matt Harbaugh: Yes. It was a bit pronounced in the second quarter. So I would expect it to soften as we get in the back half of the year. Part of it is we had a pretty strong second quarter last year and we have had some pricing pressure in NCS. But I would say we would expect in future quarters for that to more normalize to lower single digits on the negative side. Thanks Lily.

Unidentified Analyst: Great. That’s helpful. And then maybe just as a quick follow-up. Spinal Hardware, I think was good, but maybe not as strong as one might expect, just given the tailwinds to procedures that we’ve been hearing about. So is there anything specific to the spine market or to NuVasive that you’d call out that drove that? Thanks.

Chris Barry: Just continued growth, we’re happy with the growth we continue to see in Cervical. We’re obviously standing up our P360 strategy and saw some good results there. So you’re coming off of a bit of a rebound year but generally speaking, this U.S. Spinal Hardware business is on track and where we thought it would be. As we talked about and Matt kind of spoke of earlier, the one area that we are managing is the Pulse system. The customer base that’s using the system is very happy. But obviously, the sign to close period in the merger created some level of pause, probably coupled with some level of capital pullback in the market we’re still looking at. But generally speaking, the U.S. business is on track where we thought it would be.

Unidentified Analyst: Great. Thank you.

Operator: Next question comes from Josh Jennings with Cowen. Please go ahead.

Unidentified Analyst: This is Eric on for Josh. Thanks for taking the question. I was hoping to hear a little bit more on Simplify’s adoption and commercial success in recent quarters. And then more broadly, what would you say about the durability of your U.S. Cervical Spine business continuing to deliver 20%-plus growth going forward? And then if I could squeeze one last question there, are you able to share the run rate, excuse me, for Simplify? Thank you.

Chris Barry: Thanks Eric. I’ll answer as many of those as I can. Listen, we’re very happy. We continue to see a ramp-up with Simplify. We believe that the cTDR portion of the cervical market is the strongest sub-segment area of growth in that very large market. We think we’ve got the leading technology with Simplify and we continue to see growth. I think we’ve seen consistent growth over the last several quarters. That’s really led to 20%-plus growth in the overall Cervical business. As far as the durability, I would just continue to point back at the overall Cervical segment, still a $2.6 billion segment. If I had to characterize the cTDR market, and I think I did this at our Analyst Day, our strategy session we did back in October, I think it was upwards of a $400 million segment of a $2.6 billion market segment with a lot of capability to cannibalize the ACDF procedure.

For those reasons and our relatively low position and market share position, I do think it’s a durable growth engine for us for some period of time looking forward. I’m not going to put a date on it, but I’m happy to continue to see the growth. We continue to reach and use it as a door opener for new customers. And so it’s a force multiplier for us as a company, obviously. Following C360 with P360 is also the next phase of our growth to really reinvigorate our TLIF business. So the strategy that we laid out over the last several years is – the team is executing on, so we feel good about it. As far as the run rate for Simplify, I don’t think we’ve given that in the past. I would just say we’re well above and well ahead of our deal model that we put together some years back.

Unidentified Analyst: Okay. Understood. Thank you.

Chris Barry: Thanks Eric.

Operator: Next question comes from Matt Taylor with Jefferies. Please go ahead.

Matt Taylor: Hi guys. Thanks for taking the question. I guess you talked about confidence in the Q3 close. Is there anything that you can give us, kind of inside the response that you did that give you the confidence or back-and-forth with the FTC? And what are some of the range of outcomes that you see potentially happening if you do not close in Q3? Why would that happen?

Chris Barry: I mean, I’m not going to go into any specific commentary. Clearly, it’s like I said, it’s a dynamic situation. The team is working very hard to make sure that we’re getting everything that’s asked of us and I think we’ve done so effectively up to this point. As far as the range of outcomes, clearly, the FTC reviewed the information that we provided and ultimately come back to us at some point. I’m not – I’m confident in the Q3 time frame because I feel like everything I’ve said before, I don’t believe this is anti-competitive. I think there’s lots of competitors. I think there’s a low bar of entry for competitors coming into this space. And for all those reasons, the combination of us and Globus, I think actually is much better for patients.

It actually opens up the opportunity to further innovate and ultimately change patient outcomes, which is our focus as a company. For some reason if it doesn’t, which I’m not going to speculate it won’t, but I’ve said all along, our strategy is what we’re executing on. Core growth, enabling tech, pursuing market opportunities and strengthening our bottom line, all of which we’re executing on as we speak. The merger accelerates our strategy, but it doesn’t – it doesn’t negate it or in any way change it. So the execution you’re seeing in core growth, our focus on enabling tech, the opportunities that we see in the market strengthened, obviously by the merger with Globus and building strength in our bottom line and discipline to expense manage, some of the things Matt talked about, those things stay intact.

So whatever happens going forward, we feel very, very confident in where we are and where we’re going.

Matt Taylor: All right. Thank you very much.

Chris Barry: Yes.

Operator: Next question comes from Vik Chopra with Wells Fargo. Please go ahead.

Vik Chopra: Hey good afternoon. Thanks for taking the questions. Two for me here; I’m just wondering how much benefit you had from backlog recapture in Q2. And what your expectations are for the rest of the year. And then Matt, I heard you talk about pricing earlier in the call, but I’m just wondering how you’re thinking about pricing for the rest of the year. And are you able to take price in this inflationary environment? Thank you.

Chris Barry: Thanks for the questions, Vik. I’ll cover the first and then hand over to Matt. I’ve been looking at backlogs for three years now. And I don’t know that I can see any difference between normal volume and backlog volume anymore. It’s all a blur. And you can always go back over the last three years and go – we’ve obviously forgone a certain amount of volume. But it’s ebbed and flowed and as I’ve always said, the demand-supply relationship dictates the throughput. And I don’t think – I don’t think there’s a significant strong demand or I don’t think there’s a significant amount of supply. Either way, the volume is about the volume right now. So I wish I could tell you more and sort of discern what is normal volume, what is backlog volume.

I don’t know that it’s worth really looking at. I think, obviously, all med tech is benefiting from some level of rebound over the last, let’s say, three, four, five quarters, how long it will take to normalize and actually go through any sort of a backlog scenario. I think it will be an even cadence to that and not a bolus-type of event. So hard for me to answer that question, but something that we’ve looked at, but I don’t know if it’s worth looking at too much.

Matt Harbaugh: Yes, Vik, with regard to your question around pricing, I’ll just echo what I said in the prepared remarks; we’re in the low-single digits. And having been with the company now for a number of years, generally, it’s kind of been for us in the U.S. market kind of in that minus 1% to minus 2% in any given quarter. As far as your question as it relates to the back half of the year, it may be – I think it will be in the same ballpark. It may have some more volatility around it, but having seen so many quarters in a row where the pricing has been relatively consistent, I’m hopeful and believe that that is likely how it will continue to play out in the back half of the year.

Chris Barry: Next question?

Operator: There are no further questions. At this time, I would like to turn the floor back over to Chris Barry, NuVasive CEO, for closing comments.

Chris Barry: Thanks Victoria, and thanks everyone, for joining us today on the Q2 earnings call. As mentioned earlier, I believe we’re making great progress on the planned combination with Globus Medical. As I’ve said many times, we believe the new organization will create a leading global musculoskeletal company that is well positioned to change even more patients’ lives. So with that, thank you all for joining, and have a great day.