Q1 2020 Earnings Call
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Ladies and gentlemen, this as the operator today's conference is scheduled to begin momentarily until that time your lines will again be placed on musical. Thank you for your patience.
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Ladies and gentlemen, thank you for standing by.
Welcome to Globus Medicals first quarter 2020 earnings conference call.
At this time, all participants are in listen only mode.
Later, we will conduct a question and answer session.
In order to ask a question at the time simply press Star then the number one on your telephone keypad.
If at any point you wish to withdraw your question. Please press the pound cake.
Thank you I'll now turn the call over to Mr., Brian current senior VP of Investor Relations. Please go ahead Sir.
Thank you Maria Thank you everyone for being with US today, joining us for today's call from Globus medical will be Dave Demski, President and CEO, Dan Scavilla Executive Vice President Chief Commercial officer, and keep file senior Vice President and Chief Financial Officer.
This review is being made available via webcast accessible through the Investor Relations section of the Globus Medical website, Www Dot Globus Dot com Globus medical Dot com.
Before we begin let me remind you that some of the statements made during this review our or maybe considered forward looking statements.
Our form 10-K for the 2019 fiscal year and our subsequent filings with the Securities Exchange Commission identifies certain factors that could cause our actual results to differ materially from those projected in a forward looking.
That's made today.
Our 60 filings, including the turn Kerry are available on our website.
Do not undertake to update any forward looking statements as a result of new information or future events or developments.
Our discussions today will also include certain financial measures that are not calculated in accordance with generally accepted accounting principles or gap.
We believe these non-GAAP financial measures provide additional information pertaining 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 Dave Demski, our president and CEO.
Thank you, Brian and good afternoon, everyone.
I want to start off by thanking everyone on the call through continued interest in support of Globus medical and these challenging and uncertain times.
People that our company has remained relatively safe during this crisis, there's only a handful of our team members have contracted the virus and don't have required hospital care.
Probably the way our team has responded to this opportunity.
We have made patient care and safety, our top priority with a focus on how we can help.
We have continued to drive technology innovation remarkably launching three new products in the last five weeks.
Well at current revenue has been substantially disrupted our manufacturing and supply chain teams have built inventory at record levels in anticipation of a bounce back in electric procedures in the near future.
Our conservative financial philosophy has positioned us well to write out this difficult time without having to reduce our commitment to any important long term growth initiatives.
Back to given our strong liquidity position, we have taken the opportunity to repurchase over $100 million of our own stock and we're seriously evaluating several tuck in acquisition opportunities.
We also use the downtime to strengthen our clinical and technical document of our salespeople.
As we introduce record numbers of surgeons to new products and techniques.
Carefully analyze all aspects of our business to increase efficiencies and aggressively look for opportunities to serve and support the communities that we are a part of.
In short I believe Globus will emerge from this time as a stronger and more cohesive company that we have ever better.
Our business was strong in the first quarter as we built on the momentum we have created in 29 <unk>.
Revenue for the quarter was 190 point Sixmillion, an increase of 4% over the first quarter of last year.
Muscular skeletal solutions increased 3.9%, while enabling technologies grew by 11.8%.
The cobot 19 crisis significantly impacted revenue in March.
Just over two weeks in March remaining our internal projections indicated that we would finish with 15% growth for the quarter, including double digit growth and our U.S. spinal implant business.
Strong recruiting pull through from robotics and traction from new products all contributed to the U.S. by performance.
Well, enabling technologies did grow over last year the impact of code was particularly significant in this segment as a disproportionate number of deals typically close in the last two to three weeks of every quarter.
We launched three new spine products in Q1 and two more in April.
We're seeing strong interest in several products from our he brand family. The most comprehensive portfolio Threed printed interbody spacers in the industry.
In the quarter, we also launched stable our fourth generation expandable am I S. T. The interbody spacer that was met with strong demand and great feedback.
The international spine business declined by 6.5% in Q1.
The only work the business significantly impacted by Coburn magazine, we were also up against very challenging counts from Q1 of 2019 as alluded to on our call last quarter.
Drama business continues to make steady progress by over 150% from Q1, 2019 and up sequentially over Q4.
We're on track them on several new products this year and expect to double the size of our sales footprint in the second half a year.
Well could cause some delays in iron ore development efforts, we made significant progress into commercialization of several systems.
Expect to rule out the Interbody module and the second quarter.
And the third quarter, we plan to submit the imaging system to after <unk> and we anticipate that FDA clearance of the cranial module for Excelsius GPS.
As we look forward to the remainder of the year, it's too early to assess when we might be back to normal, but we're encouraged by the upward trend and procedural volumes over the last month.
Are you on spine business bottomed in the first of all week of April off by about 70% from our pre Kobin pace.
Since that point weekly volumes have steadily risen several states have begun to allow elective surgeries to commence again.
Volumes for the current week around piece to reach roughly two thirds of our pre koby levels.
At some point over the next two to three quarters, we expect to prolong spike in procedures as surgeons work to treat the growing backlog of patients in need of surgical intervention.
Interesting robotics remains extremely strong even during the pandemic.
We've had a record attendance at virtual market development events in recent weeks.
We have not lost any deals, but do expect some delays in the purchasing process as hospitals work through the financial implications of this crisis.
Our strong balance sheet enables us to be flexible in response to hospitals capital constraints.
From a clinical standpoint, now more than ever the promise of robotics is compelling.
Whether that's the potential to shorten hospital stays for patients concerned about being in a hospital.
Oh, the reduction of cognitive load I busy surgeons and trying to treat their backlog of patients.
Got it offers a tremendous value and clear payback.
Well this time has been challenging to navigate we're thankful that the only impacted the globus family has been economic about health related.
Also grateful that we'd have the financial strength in liquidity to maintain a healthy business infrastructure, which will provide the platform for strong growth in the latter half of this year.
We are well positioned to capitalize on our technology lead in key sectors.
Most confidence in our team to execute well this unique time.
Ill now turn the call over to Keith.
Thanks, Dave and good afternoon, everyone.
No Globus was impacted by Cobot 19, the company continued its trend of topline growth driven bikes longstanding commitment to technology and innovation.
Profitability was impacted primarily by sales losses stemming from cobot 19, however, free cash flow improved over the prior year quarter as a result of working capital improvements and lower capital expenditures.
Our Q1 revenue was 190.6 million growing 4.2% as reported or 4.4% in constant currency compared to the first quarter of 2019.
As Dave mentioned earlier, our March revenue was significantly impacted by Cobot 19.
Estimate the sales impact of covert 19 to be approximately $20 million for the quarter.
Net income was $25.9 million and non-GAAP net income was $29.7 million delivering 29 cents a fully diluted non-GAAP earnings per share.
Adjusted EBITDA was 26.5 person on our free cash flow was $20 million.
Shipyard section to sales you watch revenue was 158.4 million or 7.4% higher than the first quarter of 2019 result of the kidney continued strength of our U.S. find business driven by the combination of impacts from recruiting implant pull through and the launch of new products.
International revenue for the quarter was 32.1 million down 9.3% as reported our lower by 8.3% in constant currency.
As Dave mentioned earlier in addition to the impact of Cobot 19, we were faced with difficult year over year comps internationally driven by large distributor orders placed in the first half of last year that were not expected to repeat in 2020.
Our first quarter gross profit was 74.4% compared to 77.1% in Q1 of 2019.
The decline in gross profit was driven primarily by higher plan to depreciation expense within our spine and trauma businesses from instruments and sets.
Additional labor costs stemming from a warehouse transition and higher product costs. The result of product mix within our muscular skeletal business.
Research and development expenses for the quarter were 15.4 million or 8.1% of sales compared to 14.3 million or 7.8% of sales in the first quarter of the prior year, driven primarily by increased investments within our eye on our platform.
Yes, Gina expenses for the first quarter were 93.5 million or 49.1 per cent compared to 85.8 million or 46.9% and the first quarter of 2019, driven primarily by continued investments within our spine and robotic sales infrastructures.
The effective income tax rate for the quarter was 20.2% inline with the 20.3% rate in the first quarter of the prior year.
Adjusted EBITDA margin for Q1 was 26.5%.
This was driven primarily by the impacts of cobot, 19, which yet which we estimate was negatively impacted revenue by approximately 20 million across our business as previously noted.
That coupled with the previously mentioned impacts the gross margin and increase investments within the spine and robotics infrastructures resulted in an unusually low adjusted EBITDA margin for the quarter.
To help address the impact of Cobot 19, the company has taken proactive steps to institute cost containment measures across the business as it relates to discretionary spending some of the actions taken include the elimination of non essential travel.
Installation of search related education events.
Hiring freezes of all non sales related functions and reduction of our temporary for temporary labor spending.
In addition, we will further scrutinize our capex spending all remaining opportunistic as we move ahead.
We remain committed to investing in all areas that will drive strategic long term growth, particularly in the area of research and development.
We ended the quarter with 657 million of cash cash equivalents and marketable securities net cash provided by operating activities was 42 point Threemillion and free cash flow was 20 million.
During the quarter. The company spent 73.9 million to repurchase its class a common shares in connection with the previously authorized at announced share repurchase program.
Since the conclusion of Q1. The company has spent an additional $30.8 million to repurchase shares and currently has approximately $95 million remaining on its original 200 million authorization.
The company will fund the share repurchases with its operating cash flows and excess cash.
As we previously announced on April 16th the company has withdrawn its fiscal year 2020 guidance.
It's time to company cannot reasonably predict specific extend or duration of the cobot Ninee cobot 19 impact on its financial and operating results. We'll now open the call for questions.
[noise] again, ladies and gentlemen, if you wish to ask a question. Please press Star then the number one on your telephone keypad again that a star one.
Our first question comes from a line of met necessity of credit Suisse.
Hey.
Thanks for taking the questions I'm, Joe and love to get used to and you mentioned.
The purging trends kind of since the first week of April and that.
Trends tracking this week can you can you talk de lever or Dan at all about where youre seeing that kind of progress what areas of the country what types of centers potentially and then I have one follow up.
Thanks, Matt well, it's following where the economy is being open back up So Oh, Texas was was early on.
California from from an elective standpoint is back on and I think it's just a Georgia there's another one.
It's following the pattern that the governors are using to open up states.
Got it and the types of centers is in sort of large academic centers or you know the question keep circling around Dallas fees are you seeing any traction there or.
That is that a less important Marriott recovery, just just because it made maybe the.
Lack of I didn't know if there's lack of lumbar cases any cover any color on legacy channel or other types of alternative sites.
I think theres a lot less bureaucracy to go through to open up on AMC. So that that can open up quicker, but we're seeing opening up a full service hospitals, it's really just in the areas where there. The hospital itself is still under a significant ur cobot pressure that they're there for they're not doing it and they probably won't.
For awhile, but but it's across the board and.
Medical centers as well as they say.
Okay, and then just a follow up on on robot trends and I got your comment about a you know these deals often happened in the last two or three weeks or is it in your and your alter your comments on the interest there still the high but you have a sense of are these things.
Being pushed out you know weeks today being pushed out month or budgets being we examine because how what kind of color or since you have for how the how the demand or were budget for these robot project.
It's holding up for the rest of the year [noise].
Yeah. Thank you.
Hi, it's really just kind of on hold right now until we get through the the crisis and then we start to see the elective surgeries come about I think that's been the focus of the administrators and even the surgeons are really good thing to get back. So there's not there's not a definite time period, but I I don't think it will be.
Many months I think it'll be in the in the work order between.
We said at a month or two before they start to go back and evaluated and then we're gonna have to understand just where their balance sheets are and how much flexibility. They think they have.
Fair enough. Thank you for the color.
Thanks.
Our next question comes from one of Chauvin Singh of Wells Fargo.
Oh. Thank you so much for taking the question I guess, I guess and I was hoping to get more color. On me you know could you could you discuss the trends that you're seeing in spinal implants, and enabling technologies you know specifically in may.
Sure.
I alluded to on on a in my remarks, we we bottomed out really the first full week and every every week. Since then we've seen an increase but we've seen a a particularly strong increase this week over last week, So I think as new state.
Coming on and opening up.
We're seeing the immediate impact on that's where we're at roughly two thirds of the level, we were pretty cool, but for this week.
In terms of emerging technologies I, we aren't running out some deals for the quarter I I do think we will close on a it'll be down significantly from where we had.
Expected, though early on the year before the crisis, but.
There's still some activity going on emerging.
Order any reason why we shouldn't expect you able to get back to to the mid 30 per study, but our margin level.
I would hesitate to to answer that at this point until we get further along into the air to see how we do respond.
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Let me just to make sure we understand your question you you.
Thing once once volumes get back to <unk>.
<unk> levels.
Well what would already be Darby.
Yeah I just one is there any we hope.
We model out the the the trajectory of your recovery wet weather you know it hadn't been the fourth quarter or the first corner of next year is there any reason to think we're not saying.
We're not able to predict when that's going to happen, but one there up on the volume's at that level, we will we will be done mid thirties. Thanks.
Yeah.
Our next question comes from one of mine O'brien Piper Sandler.
Bins, I'd love to expand a little bit odd you're prepared remarks on the trauma side of your business no you've done a lot of work you know building out the sales force in the instrument sets for that business itself and it seems like Everything's you know, making good progress there but I'd.
Love to hear more color Red stuff, you know what what's been going on during this period of disruption for trauma and really what you're expecting for 20 within that business you know from a high level that'd be really helpful. Thank you.
Hey, Madness dance Carville, Thanks for your question.
Pleased with the progress is Dave called out we've made significant growth year on year, and even sequentially versus queue for with where we're going I, that's really going to be driven by three factors. The first discontinued market access into account.
Followed by wreck recruiting and into a new product launches. We then progressing with our next wave of product launches in Buildouts that are probably at where I would anticipate we had a strong recruiting quarter with a where we want to be although certainly a long way to go and I had some great access plays into more of the A.S.C.'s we're committed.
Any type hospitals right now still working on some other G.P.O. split pleased with a quarter on the right trajectory as we exit Q1, and you know we haven't really released a number for the for 2020, and especially with all this activity I'm going to refrain from that but I certainly see the plans in place and the action in place to say, we're on track with the growth.
He wants to get too.
That's really helpful. Thank you for the color I appreciate that and I had one follow up if you don't mind [noise].
You know you're in a really good position being a you know well capitalised spying company, but you know there's other smaller players that are less capitalized and so maybe some form of marquee consolidation not play here. So how are you thinking about that dynamic you know as it's an opportunity for you to get aggressive with you know you wrap additions or you know taking taking some market share gain.
Color there would be really helpful. During the recovery.
Yeah, I'm, a already hearing something about some opportunities on both of those fronts as as the hospitals book the hotter hotter reactors.
Actually looking to prepare Mac vendors and then there.
Considering cutting some of the smaller players.
And then the the wraps that are are working for companies that don't have the capital structure that some of the large ones do our our our thinking about their future on where they where they want to be as as we navigate through this time. So the other opportunities already being created out there good question.
Our next question comes on line of <unk> <unk>.
Great. Thanks, guys for taking the questions. They're just just to clarify on the on that last question on spending <unk> with your cash on hand, you know you mentioned a hiring for you the <unk> except for the sale function.
Are you guys are you guys are sort of Backpedaling rap or you know do you think that that you know it'd be spending a higher kind of in track with <unk> with prior plans or are you out sort of actively potentially hiring more than than maybe you would have sort of pre coal bed I'm would like to get your thoughts there.
We're we're hiring as many wraps as as we think are qualified to drive business force. There's there's no limit on we we we fully expect to come back.
Portfolio and if we can add to our team with quality people, we're we're going to do it.
Awesome. Thank you and then just on I'm in a I'm curious how you guys are thinking about in a in the context, it's environment. Thank you.
From the standpoint enough of them in a again I'll refer back some of the comments we had in in our snapped prepared remarks, you know we remain opportunistic when when when we think about where we're at we believe these are unprecedented unprecedented times, but we're in a position where we have a very strong balance sheet and we have the ability to act upon opportunities that are put in front of us so as we look at.
Add how many opportunities that are out there will review them and act. If we believe that they are in the best interests of of us from a strategic long term perspective.
Thanks, guys.
Thank you.
Our next question comes from one of my Mattson of need them and company.
Thanks, just want to follow up my kilos collection, there on M. and eight so you mentioned you're looking at a couple potential tucking deals or anything additional you can tell us about those and you know given that you're looking at several and you know maybe doing something here in the near term do you think you're able to get a better.
Kind of price in this current environment there were in.
Oh. This is Keith I would just really refer back to what they've said and and his prepared remarks, we are revealing opportunities I will continue to review them and yeah should they fit our criteria. We will move ahead, but I don't really want to go further and to this point.
Alright, that's fine.
And then just with regard to the gross margins as your manufacturing volumes potentially slow and the second and third quarter.
How's that going to affect gross margins both in the those quarters and then you know the two four and into 21 would there be any lingering impacts from the slower production.
Keith what what I would say to that is you know coming into this we did not slow down production, we actually kept producing because it is our view that this demand will come back. So okay. Look ahead at you know as we look ahead I don't really see there being any impacts for from the slowdown hitting our slater in here.
Okay, Great. That's all I have thank you.
Our next question comes from on a Stephen Lichtman Oppenheimer.
Hi, guys.
<unk> in time for you guys over last number <unk> when if you give me a little <unk>.
<unk> on the ground <unk> Hmm relates to proceed to volumes.
It dumped connection steam maybe you could.
Repeat it you're you're breaking up.
[noise] [noise], Hey, Dave can you hear me a little bit better yeah, Yeah, that's right.
Alright, alright.
Japan, obviously been important driver for you guys over last number quarters wondered if you could just give us a you know in particularly in in that country, what what you're seeing on the ground with respect to a procedure volume.
Because there are a little bit behind those things I mean, the other good April relative to the first of the world and they but they are they're getting some more severe restrictions right. Now. So we'll have to see how may goes but relative to the rest of the business. They have been much healthier and in terms of the the impact of covert there.
Okay got it and then just to secondly on on March again, you're just getting your comment about you know sort of continuing on these sales force hiring front, how should we think about for the opera X. margin impact.
Oh you here in the very near term maybe another way to ask you can you give us a sense of what percentage of your your <unk> variable or any sort of color you can give in terms of what to drop through would would be on the lower sales that could be helpful.
This is Keith a weekly like like Dave said, we are going to continue to add wraps that we feel are fit for our company can help us drive sales, but I hesitate to break out the off X. percentage as as we look ahead. So we we think there's still too many unknowns.
Okay, apparently thanks guys.
Our next question comes from one of Matt Taylor of U.B.S.
Yeah, Yeah, only incremental thanks for taking all question.
Maybe just to.
<unk> the bit about [noise].
Comments, you made about centers that have open up with some of the earlier stage I'm just kind of curious can you talk a little bit about their initial rant and capacity are they operating as much as possible or is it a more of a staggered and slower around.
I I think that depends on on the impact that they've experienced from cove. It so where the where they've had a a relatively.
Challenging.
Situation, they they're they're stepping back into it more slowly both in those other areas, where they haven't had seen such an impact their their full on.
Okay. That's helpful. And then I guess in terms of any procedural changes in the facilities have you picked up anything in terms of you know any additional burden set the facilities for the staffers have to have to do in order to perform there are cases.
<unk>.
Times in the whole are no longer because of this.
Oh, it's really too early to tell given the the relatively small volume <unk> you know some of the logistical challenges around Oh sitting our staff with P.P. is is is one difference.
At this point, we're still too too new to the comeback to see if there's really going to be any other potential changes.
Okay. Thank you very much.
Sure.
And there appears to be no further questions I'd like to <unk>. Thank everyone front join in today's Clovis Medical quarterly earnings call. Please disconnects airlines at this time and have a wonderful day.
Yeah.
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