Q3 2021 NuVasive Inc Earnings Call
Good day, ladies and gentlemen, and welcome to the new basis third quarter 2021 earnings Conference call.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
I would now like to introduce your host for today's call Ms. Julia Cunningham, Vice President of Investor Relations at New basis. Please go ahead Ms Cunningham.
Thank you good afternoon, everyone and welcome to our third quarter 2021 financial results Conference call. Joining me today are Chris Barry Chief Executive Officer, and Matt Harbaugh, Chief Financial Officer.
Chris will provide an overview of new based on recent business results and trends and Matt will review, our detailed third quarter financial results and our updated financial guidance.
And we will 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 on our IR website.
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 are subject to risks and uncertainties.
Actual results may differ materially from those expressed or implied by such forward looking statements.
Please note we assume no obligation to update these forward looking statements.
Please refer to our SEC filings for a detailed discussion of risk.
In addition, this call will include certain non-GAAP financial measures.
<unk> of these measures to the most directly comparable GAAP financial measures is included in our third quarter earnings release.
And with that I'd like to introduce Chris Barry.
Thank you Juliet and good afternoon, everyone.
Earlier today, we reported third quarter 2021 financial results, while progress during the quarter shows that our technology is advancing new basis competitive position in our key markets. Our financial performance reflects continued pressure on our elective surgical procedures due to COVID-19.
Health care staffing shortages and global impact from new bases specialized orthopedics product availability.
Matt and I will provide more color on third quarter results and our view of the current environment and its impact on elective surgical volumes.
But first.
Let me update you on progress, we're making with our vectors of growth and the commercialization of the pulse platform and simplify cervical disc.
Despite a challenging quarter I'm proud of our team's progress on our strategic growth drivers.
As the leader in spine innovation we're.
We're dedicated to advancing the standard of care and anterior posterior cervical spine surgery.
Through the introduction of novel Technology.
This starts with driving growth in sub segments, where.
Where we historically had underrepresented market share such as cervical and posterior.
We are committed to expanding our presence in the $2 $6 billion cervical sub segment.
And see continued runway in the coming years.
In fact, not only do we expect to take share in this important segment.
But we believe the differentiated technologies and <unk> hundred 60, our comprehensive portfolio for anterior and posterior cervical spine surgery will.
Will help expand our market opportunities and allow more patients to benefit from these technologies.
Third quarter gains show, we are heading in the right direction in the U S.
Cervical delivered double digit growth as we continue to see momentum from <unk> hundred 60, <unk> led by the simplified this.
We are encouraged by surgeon adoption and demand for <unk> hundred 60, and are now on track to deliver higher net sales for simplify and our original 2021 expectations.
During the third quarter, the simplified desk, one level investigational device exemption study data was published in the international journal of spine surgery.
This study further validates the strong clinical data behind this simplified desk and why it is the most clinically effective technology and the C. T R procedure segment.
We've made great progress integrating this device into our supply chain are ahead of schedule to meet current and expected customer demand.
We're working to ramp our manufacturing capacity into 2022 to continue driving growth in cervical and bringing a superior technology to more patients.
Yeah.
Moving to posterior spine, which represents a $1 6 billion dollar opportunity, we continue to expand our portfolio to meet surgeon and patient needs.
We recently announced the commercial launch of Cohere T Lippo and cohere <unk>, both of which are for speaker and plans for the <unk> procedure.
As part of our advanced materials Science portfolio. This brings new base has extensive expertise in material engineering and proprietary porous peek technology. The most widely utilized posterior spine procedure.
<unk> is the only company to offer both forespeak enforced titanium implants for our posterior spine surgery.
As the global market leader in lateral spine surgery, we are well positioned to continue leading in this $900 million anterior spine subsegment.
Modulus Ala our latest three D printed porous titanium implant launched earlier this year and we expect this new product introduction to continue driving positive momentum in our interior portfolio.
Overall, our Oracle lumbar business experienced pressure in the third quarter due to increased competitive environment as well as lower than anticipated elective surgical volumes and health care staffing shortages.
In response to this we've ramped up and made improvements and surgeon and commercial training year over year.
And we have continued evolving our interior spine innovation roadmap to support all procedural types from lateral to prone to ala with new implants, and enabling technologies to bring our procedure of value to more surgeons providers and patients.
Turning to our pulse platform the.
The integration of enabling technology into our procedural or offering has been foundational to the success of new basin first with Neuromodulators and excellent.
And now with pulse.
We commercially launched pulse in the third quarter, the culmination of years of research and development from our internal teams with input from surgeon experts to build a first of its kind solution that integrates all of these essential tools to our former spine surgery and one condensed footprint.
Pulse is a software ecosystem that integrates multiple hardware technologies into a single platform in the operating room.
Unlike other navigation or robotic systems on the market pulse.
<unk> provides surgeons the freedom of faster decision, making through integrated technologies that inform on another producing a seamless and efficient workflow.
As an example, a surgeon can take a full spinal film intra operatively and perform sagittal alignment measurements use advanced neuro monitoring integrated into navigation to improve screw placement and.
And utilized infrared tracking for navigation.
Take low dose radiation images with less rate and shape rods using computer assisted technology with Modini all through one camera.
So this single unit of capital technology, with two fixed screens and wireless device connectivity makes all of this possible, which minimizes the number of technologies and space needed in the operating room.
Pulses extensible nature maximizes the value for the hospital with one initial capital investment and the possibility to add future surgical applications.
While it's still in early days the first commercial cases with the pulse platform have taken place successfully at multiple hospitals across the U S.
It's incredible to hear the impact pulse is having in the operating room, especially from surgeons as several have recently presented at <unk> estimates and other societies on their experience with the differentiated capabilities of the platform.
We're still on track to deliver net sales consistent with our original expectations for pulse this year and.
And have a strong commercial pipeline of future orders in the U S Europe, and Asia Pacific leading us into 2022.
We believe pulse coupled with our comprehensive procedures will help transform the future of spine care.
As a market leader in surgeon education, we know our continued investments in training will further our ability to change more patients' lives.
In Q3.
There was an increase in surgeon trainings when compared to the prior year and a 2019.
These trends are encouraging and a reflection of surgeon interest in adoption and our differentiated surgical procedures.
With the recent opening of our East Coast experience Center, we have even more opportunities to expand our training capacity.
I commend our team's commitment to deliver disruptive innovation and educate our surgeon partners, which.
Which fuels our ability to scale around the world.
Our globalization efforts remain a substantial opportunity for both growth and value creation.
Now, let me speak to our third quarter performance.
Net sales were $278 million down eight 3% year over year on both reported and constant currency basis.
Our expectation coming into the quarter was for continued COVID-19 recovery and normal third quarter seasonality. However.
However, as previously stated in our September Investor update there were substantial unexpected challenges for elective surgical procedures in July and August.
And we did not see the volume levels return as we would normally expect in September.
Instead, we saw a decline in September, which we typically expect to be our largest volume month in the quarter.
This was primarily due to the resurgence of the COVID-19 Delta Varian health.
Health care staffing shortages and higher seasonality in the summer months after a long period of travel restrictions.
All of this created for a difficult operating environment for our surgeons and had a significant impact on the company's third quarter performance.
Throughout the pandemic, we've kept in close contact with our key surgeon partners across the U S to understand what they are experiencing in our hospitals and respective regions. They've shared two key themes. One the COVID-19 Delta very resurgence was a factor in Q3's elective surgical.
Procedure slowdown.
And two staffing shortages had a substantial impact on the health care system, including elective surgical volumes.
While this slowdown was felt across the globe some of our strongest U S markets experienced this more acutely, which in turn put pressure on our results.
However, our international core spine business grew double digits year over year in the third quarter led by Asia Pacific and Europe, which both delivered double digit growth.
The Japan team continues to execute and gain market share.
While we see ongoing market recovery across Europe.
This growth was largely offset due to NSO product availability in the third quarter.
We recently started returning precise titanium products to market and expect to be in a majority of our key markets by end of year.
Matt will share additional commentary on NSO in his remarks.
While we saw sequential improvement from September to October in the U S stability of elective surgical volumes is still uncertain.
We anticipate this to linger in the fourth quarter.
Although these factors are outside of our control we are diligently working with our teams surgeons and providers to manage what is in our control to build a strong foundation for 2022 and beyond.
We remain focused on our long term strategy and progressing on multiple vectors of growth within our business.
This is led by advancing our leadership position in interior and less invasive surgery, expanding our market presence and opportunistic growth segments and integrating enabling technology as.
As well as scaling our business globally.
Given the successful commercialization of the pulse platform.
Continued adoption of our <unk> hundred 60 portfolio, featuring a simplify cervical disc and recent product expansion within our advanced materials science portfolio.
We are confident in our organization's ability to deliver the strongest innovation cycle in years.
Now I'll turn the call over to Matt to discuss the company's third quarter financial results in more detail.
Thanks, Chris and good afternoon, everyone I'll begin by reviewing our third quarter 2021 results and will refer to both GAAP and non-GAAP measures.
Total net sales for the third quarter for $278 million.
A decrease of eight 3% on both a reported and constant currency basis, when compared to the prior year period.
The year over year decrease roughly half was driven by Covid related headwinds and half was a result of limited new base. Some specialized orthopedics product availability due to accompany ship hold.
Our expectations coming into the quarter were four continued COVID-19 recovery and relatively normal third quarter seasonality.
When we communicated adjusted expectations externally in early September we indicated that July and August were more challenging than expected and we were not seeing the return to volume levels. We would normally expect in September.
That trend continued and pressured our results in the third quarter.
U S spinal hardware net sales were $145 $1 million in the third quarter of 2021, representing a 10% decrease compared to the prior year period.
We continue to invest in differentiated spine products and expanded our advanced materials science portfolio with the recent launches of modulus a live <unk>.
<unk>, Oh, and cohere T lift a.
Notably during the quarter, our cervical portfolio achieved 13, and a 5% growth over the prior year period, driven by <unk> hundred 60, and continued strong performance of the simplified desk.
As Chris said, we were pleased with the early adoption and momentum of the simplified desk and are on track to deliver greater than $5 million in net sales this year.
U S surgical support net sales were $65 million in the third quarter, representing a decrease of 13% from the prior year period.
This performance was primarily driven by the impact from new base of clinical services experiencing a reduction in case volumes due to COVID-19.
The decline in surgical volume also led to lower net sales associated with biologics and other products and services during the quarter.
Also included in U S surgical support as our pulse platform, which was commercially launched during the third quarter.
We are excited that the first commercial cases have been successfully performed in hospitals across the U S.
And we continue to expect to deliver $5 million in net sales this year weighted more in the fourth quarter.
While COVID-19 clearly impacted our international business as well, we did not see the decline in volumes that we saw in the U S. During the third quarter in.
In fact, our corresponding net sales in Asia Pacific Europe, and Latin America grew double digits. However, our international results did not reflect the underlying strength due to limited product availability and our.
NSO business.
We are making good progress on the path to remedy this challenge and expect to be back in the majority of markets by the end of this year.
Excluding NSO international would have grown in the double digits.
Turning now to profitability.
Gross profit was $182 $2 million compared to $210 $6 million in the prior year period.
The year over year decrease was primarily attributable to a $14 2 million inventory charge related to certain NSO products that we withdrew from the market.
The withdrawn products have not been material to our net sales historically.
Non-GAAP gross profit was $197 million.
Compared to $210 $6 million in the prior year period.
Non-GAAP gross margin was 72, 7% an increase of 140 basis points compared to 71, 3% in the prior year period.
The year over year improvement was primarily driven by lower inventory reserves compared to the prior year and increased manufacturing efficiencies.
We expect further benefit in the future as we continue to fully integrate manufacturing and distribution of the simplified desk into our Ohio and Memphis facilities.
Non-GAAP operating expenses were $166 $6 million, an increase of one 5% compared to the prior year period.
SG&A expenses were flat compared to the prior year as we maintained discipline on variable expenses.
These reductions were offset by infrastructure investments and a moderate return to necessary business travel.
Non-GAAP R&D expenses increased 12, 1% to $21 $9 million year over year or eight 1% of net sales as we increase targeted spending to support multiple technologies, including our pulse platform pulse robotics and simplified developmental efforts.
Non-GAAP operating margin was 11, 2% a decrease of 460 basis points from 15, 8% in the prior year period.
The year over year decline was primarily due to lower volumes and continued investments in the business.
Non-GAAP other income and expense in the third quarter of 2021 was $7 1 million of expense compared to $9 $1 million in the prior year period.
The year over year decrease was attributable to lower cash interest expense. Following the settlement of the 2021 convertible notes upon maturity in the first quarter.
This reduction was offset by higher unrealized foreign currency losses, driven primarily by the Brazilian real.
Non-GAAP tax expense in the third quarter was $6 4 million compared to $9 2 million in the prior year period, resulting in an effective tax rate of 27, 5% versus the prior year tax rate of 24, 4%.
The year over year increase was primarily driven by higher valuation allowances and an income tax reserve in the prior year period that did not repeat in the third quarter of 2021.
We reported GAAP net loss of $21 6 million or diluted net loss per share of <unk> 42.
Compared to GAAP net income of $5 9 million.
Our diluted earnings per share of <unk> 11 in the prior year period.
Non-GAAP net income was $16 9 million or diluted earnings per share of <unk> 32.
This compares to non-GAAP net income of $28 3 million.
Our diluted earnings per share of <unk> 55 in the prior year period.
Free cash flow for the third quarter was $33 2 million versus $54 3 million in the prior year period, which was primarily related to lower sales volume and increased capital investments to support anticipated 2022 growth.
We ended the third quarter with cash and cash equivalents of $234 6 million and an undrawn $550 million revolving credit facility. This positions us well from a capital resource allocation perspective.
Based on performance year to date.
And given the limited visibility for elective surgical volumes for the remainder of 2021, we have updated our full year 2021 financial guidance to reflect these ongoing environmental pressures.
As a result, we now expect net sales to be in the range of 113 2 billion to $1 $1 2 billion.
Which represents growth of eight 2% at the midpoint of the range compared to full year 2020.
Non-GAAP operating margin of 12, 5% to 12, 9% and non-GAAP diluted EPS of $1 73 to $1 83.
As the COVID-19 impact lessons, we are confident that the investments we have made position us to deliver stronger returns and above market growth.
In 2022, we expect tailwind from our pulse platform market expansion with our strong cervical portfolio continued growth in our international business and the return of NSO products in key markets. We are very excited about the opportunities ahead and look forward to seeing many of you either virtually or in person.
At upcoming Investor events.
With that I'll ask the operator to open the call up for the Q&A session.
Thank you at this time, we will be conducting a question and answer session.
I'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue.
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In the interest of time and being able to answer as many questions as possible. Please limit yourself to one question. Thank you.
At this point.
For people to poll for questions.
Our first question comes from the line of Mathew Blackman with Stifel. You May proceed with your question.
I appreciate it thanks, so much.
For me I'm, just curious I appreciate the comments on October improved.
Improving over September any way to sort of characterize the procedures that are coming back are you seeing lower intensity cases come back faster versus more complex cases or is it fairly well balanced.
Hey, Thanks, Matt.
I appreciate the question so far it's been relatively balanced I would say that the mix.
It has been fairly consistent if you looked at the the relative impact over the course of Q3.
I've talked about this a little bit in the past.
Certain parts of the country or certain geographies were hit harder than others. So those regions have come back obviously much faster because they were down much greater but as far as the mix of procedures.
You know, it's been fairly uniform now I'd say that caveat with trauma.
And intense or complex deformity. Some of those cases may have been flowing through a lot of the more elective DJ in cases were down more sharply over the past several months. So the natural mix will probably reflect that but it hasnt you havent seen a pronounced spike in any given procedure why over the last four weeks.
I appreciate it thank you.
Sure.
Our next question comes from the line of Matt Mcclintock with Credit Suisse. You May proceed with your question.
Hi, Thanks for taking the questions.
So.
Chris if I could just done.
Some of the.
I think everyone is wondering about sort of regional color.
Similar to Matt's question, just now on the types of procedures that are coming back.
Is that where most hardest hit.
Was there is there anything to say about that.
Cervical versus lumbar.
South versus north or other.
In other parts of the geography, where you feel like you might have more concentration in we're just hit a little bit harder.
And some of your competitors.
Yeah. Thanks, Matt.
Try to answer this clearly it's hard to unpack in this environment really looking over the last several quarters, it's been hard to sort of compare and contrast.
Against other competitors because of the different mix you may have in any given geography because of the different variability we've seen coming out of geographies and that's both a global statement, but also just within the U S.
Clearly if you look at geographically.
We saw harder hit markets in the southeast part of the country over the last several months, we've talked about that less so on the northeast.
That was sort of flowing into September the northwest was.
Hit relatively hard but for varying reasons, we pointed to cope with variant then we also started hearing about staffing shortages. So the concentration of our business is probably.
In some ways in some situations reflective of the decline we see in our markets, but it's moved around so much that in any given month. You may have you may have a shortfall in northwest versus the southeast. So I would say generally I don't know that we've been treated any any better or worse based on the situation than maybe our competitors, but clearly.
Documents I want to can I get past this idea that.
That we are back to normal when you feel it one part of the world when we get to new to hear anecdotally challenges in other parts. So we've got a ways to go to feel we're back but but the good news is I am cautiously optimistic that we're seeing the trend start to move in the right direction, which needs to that continue throughout the rest of this quarter.
And then just one follow up if I could post.
I think most folks understand your strength of new <unk> physician and and lateral and minimally invasive lumbar can you talk about.
What you see is the potential proposed to kind of expand your position in a given center.
Out of out of that base to a bigger range of procedures that when he needs. It might not have been considered sort of the go too.
Go to partner.
Yeah, there's a couple of things there you sort of mentioned, where we've had strengthened mif's and lateral I think this enhances the sweet of technology that we procedure lies within its been at the same I think the strengths that we've that we've had as a company is looking more comprehensively looking at instrumentation looking at implants looked at the surrounding sweet of technology required of the procedure.
Oh I think is is a force multiplier within that space.
Having said all that we have in many ways the company straight or being a disruptive force, creating this excellent market this lateral market.
Through through Paul's and through some of the other investments in areas like cervical posterior we think we have a much broader comprehensive portfolio to leverage within any given system. So we hope to we hope to have a greater position bye Bye hospital by facility by provider because of the scale and scope of our technology.
And the scale and scope of our portfolio. So we're excited about 2022, and what we're able to unpack and unlock with investments. We've made clearly just need to get out of this cycle of some of the environmental conditions I think we've all faced in the industry.
Right. Thank you.
Thanks, Matt.
Our next question comes from the line of Josh Jennings with Cowan and you May proceed with your question.
Hi, Good evening good afternoon, thanks for taking my questions.
Four question sorry.
Just wanted to ask about the new visa specialists orthopedics product availability issue sorry, if I missed it so I just Wanna make sure I'm clear can you just quantify the headwind that you experienced in the U S and internationally and then what's baked in.
To the implied for acute guide for that so product availability and what are the steps that need to be taken to fill that hole you get that product back back to where where it was that ability availability back to where it was sorry, one question, but with three parts. Thanks for fixing it.
Josh Good to hear your voice and it was great to see you in person in the third quarter.
This is Matt Chris.
Chris feel free to add Ah, but my answer to you or attempt to answer your three questions. There was.
If you think about the year over year.
Decrease in net sales the 8% that we talked about earlier roughly half was driven by the COVID-19 related headwinds, including the staffing shortages and the other things that Chris mentioned and then the other half.
As a result of.
NSO product availability due to the company ship hold and so if you do that math, Josh That's Gonna show you a detriment to net sales on a year over year basis of somewhere between 10, and 15 million I'll, let you do the math.
And a greater portion or percent of that was in the international market versus in the U S.
So it was significant.
To answer your question around how are we thinking about it in the fourth quarter.
Based on what we see today, we won't have an outsized impact like we saw in the third quarter. The third quarter last year for NSO was one of the strongest.
Quarters, we've ever posted in that business and so that's why you see this outsized impact and to be clear in.
In September when we.
We're resetting expectations based on what we were seeing.
We still were not 100% certain as to how the ship hold was going to play out what we know now is that it stretched into the fourth quarter.
Yeah to add onto that Josh.
As far as path to get back we feel good you clearly the situation extended through September.
Lot of reasons why the regulatory.
Workload is is a little challenge to predict right now with all the challenges I think we're we're facing but good news is.
Magic is back in the U S. We expect the broader portfolio back and some and some reasonable timeframe I don't want to put an exact date because I tend to have been wrong on this a few times.
And we're back with our precise family in the international markets with the expectation that will will continue to return.
With the majority of the detainee and product.
And then they're very near future and the impact of the queue for will be non material. We did have a we had an acute situation in Q3 exacerbated by the Covid situation, which resulted in the eight three that Matt mentioned.
Thanks for those extra detail Christian.
Our next question comes from the line of Matthew O'brien with paper Sandler You May proceed with your question.
[noise] afternoon. Thanks for taking my question, so as I looked at the guidance here I.
I'm not overly surprised by the top line coming down, but I think what is is surprising is the magnitude of the EPS reduction. So clearly you are going to continue spending. Despite the revenue shortfall here is your kind of prep for 22, so where are and as I look at SG&A, specifically, it's at about 62 million bucks year over year, where.
Where's that incremental dollar going to is it cervical pulse and then what can you do as we head into 22 to ensure that you know your lateral business in the U S is in under too much pressure you got a competitor down the road with the new system. It's clearly targeting you guys. What can you do from a spending perspective from a.
And operational perspective to ensure that that business does it deteriorate too much. Thank you.
[laughter].
Before when I answered it in reverse order of what you asked and I'm not talking about lateral first one I'll have Matt talk about.
Some of the spending and worthy and incremental dollars going in the short term.
And listen on historically as you know knew who was primarily kind of a one procedure company and clearly there is increased competitive pressure.
We believe we have 40, 50% of the market share X lift is still a primary primarily a U S procedure, we continue to globalize that in international markets, but it's as far as the the the percentage U S versus percentage O U S. It's still a relatively a specialized use procedure and so we've done a couple of things number one the.
Execution of our primary strategy.
To to ensure that we're playing more holistically across all key Subsegments just as a reminder of the interior segment is about $900 million segment half of which is X lift half of it which we consider to be a lap and prone.
So we've continued to make good progress in the broader portfolio strategy circle poster, enabling tech. We've also continue to enhance our interior portfolio through <unk> well, we have some key launches on the ex left side of the of the procedural segment next year, we continue to make progress and prone so I believe with the broader portfolio strategy.
<unk> and then making some some clearer enhancements to a lateral business I think we're very well positioned.
To defend our share and grow our share going forward, but clearly.
Those two strategies, both enhancing our interior and minimally invasive segment.
Portfolio and playing more broadly are both the central for us to continue to to not only protect our business, but growth business broadly.
Talk about spin sure absolutely so with regard to operating expenses.
Split it between SG&A and R&D and as it relates to Sg&a's.
We have kept in the controls.
That we that we've talked about on previous calls as it relates to what we learn at the height of Covid in the second quarter of 2020.
And from an SG&A perspective.
We were really flat year on year, despite inflation and other expenditures that took place. So if you look at Q3 20 in Q3 21, it's remarkable they came in $100000 different on a year on year basis, and we have absorbed incremental cost in there so that.
Tells you that 10 million that we took out from a permanent savings perspective, we've been able to offset that with with some expense and if you go back to the queue. Three of 19, even we spent over $150 million. So we think we're getting some good leverage they're on SG&A, but we're always looking for more opportunities there Turner.
To R&D.
I just want to remind you when we did the simplify acquisition, we said that we would incur roughly $10 million in incremental expense that was not budgeted because obviously, we bought that business.
And the latter part of the first quarter.
Half of that 10 million was going to go against SG&A and half of the other half was going into R&D, we are definitely spending to those levels.
But with the performance, we're seeing with the simplified disk and the market. That's good money spent well I would say.
And so that's in that R&D number and then the other thing I would add is we're spending a fair bit of money on robotics for pulse and we expect that trend to continue so I've tried to be very consistent.
One quarter. After the next to say do not expect R&D expenditures to go down because we're at a period, where we've got so many vectors of growth as we go into 2022, we want to make sure whether it's what Chris was talking about in surgical or poster or whatever that we're investing to win and that's that's really what's kind of.
Going on and the SG&A in the R&D.
Thank you.
Our next question comes from the line of Alan Gong with J P. Morgan you May proceed with your question.
Hey, guys. So I guess I have a question kind of just on the trajectory that you're seeing for the COVID-19 recovery.
I think so I mentioned already but it's kind of a surprising to see the impact you saw this quarter, but we have gotten some different racers on your expectations into what the fourth quarter recovery will look like whether or not that will accelerate and we can reach you quote unquote normalized trends before the end of the year or if it will take into the first half of 2022 or even longer into 2000.
22, so I understand you're not providing 2022 guidance and that it can be a little bit hard to predict but based on the true nature. We're seeing today, what is your own expectations for that kind of recovery.
Yeah. Thanks Allen.
I guess I've I've listened, obviously as you guys have around the differing perspectives of kind of where we think things are going I would say, we're sort of in the middle of the road I I believe we have felt and we continue to feel some level of lingering impact of COVID-19 that to the extent and the longevity of how that how how that impacts us.
Is still to be determined I use the word durability, we're seeing better trends, but when you see those trends continue and increase to get back to normalize levels.
There is variability about geography still today, if you've seen Australia has been sort of start and stop Germany has at least started anecdotally reporting some some concerning information on spikes they've had.
Areas like the northwest Seattle, some staffing shortages continue to to.
B things that we've heard and continue to here. So we're seeing we're waiting to see durability and hopefully see the amplitude or the magnitude and the volume of some of these some of these issues start to start to decline.
To get back to normal operating environment.
The challenge I've got right now and the challenge I think that a lot of the med Tech world specifically with the like the procedure based companies.
We're going into the last quarter of the year December is our largest month.
And I can I can predict our capability I can't predict staffing shortages and the impact with some of those issues in the month of December where we normally see the largest volume so.
I still think the queue for is going to have that lingering impact I think it will you be obviously less than what we experienced in Q3, but I think it'll be something that will that will mute some of the opportunity that we see hopefully we continue to make strides through the quarter that progresses into Q1 of 2022.
And ultimately we move past it but.
So long long winded way I think we're likely probably the middle of the road of what I've heard I am not overly pessimistic, but I'm, but I'm, but I'm not.
Blindly optimistic either so we've got to kind of see things play out the.
The only other thing I would say is we've tried to take this into consideration with the guidance that we've given you. We hope will be penalised for having been conservative. This is the best that we know right now and just to be clear from Josh is question earlier.
We're assuming no material impact from NSO in the in the guidance that we've provided today on the fourth quarter.
Got it and I also had a bit of a piggyback off a question asked earlier it certainly seemed like despite the top line, you're continuing to spend in the fourth quarter to drive growth, which does make sense, but when we think about 2022 potentially growing off of this.
Lower base attention is still seeing recovery trends.
How should we think about the floor for margins will.
Will you commit to continuing to spend to drive the top line. If if it means not hitting kind of that 2019 floor that I think we've heard from you before or.
Or is getting that floor backups, you know that 58% I O N.
Priority for you guys. Thanks a lot.
Yeah. Thank you we remain committed to that long term operating income as a percent of sales of.
20%.
And a non COVID-19 environment, yes, we still view. The 15.8 is a floor here are a few things to think about the first thing is is on simplify I think we can easily plant the flag that with the trajectory of that product just in this year alone. We had said when we did the acquisition that it was going to be.
Accretive in the second year of acquisition with the growth we've seen we're going to we're going to see that leverage. So yes, we took approximately $10 million an expense. This year that we could not offset with the net sales. Obviously earlier today, we said, we're going to be about 5 million.
So obviously the expense is going to be more than the net sales, but we're gonna turn that into an operating profit generator in 2022 Similarly for pulse.
With where that is.
Trending we also will be driving positive momentum on the bottom line international continues to grow that's going to generate more positive bottom line.
Really pleased with the international results. It's Unfortunately, we had the NSO issue that kind of clouds, it but that international business growing double digits that low to mid double digit range that we've put out there we still feel pretty good about now obviously, Germany and Australia is there, but in general I would say, yes, 15, 8% is.
Soundly in our minds as we're thinking about driving operating income and we've got great sectors of growth as we get into 22 that are going to help that cause.
Our next question comes from the line of Joanne.
With city you May proceed with your question.
Alright. This is Anthony awkward Joanne thanks for taking a question.
Can you just discuss some of the early feedback on impulse, so far into longterm anything that surprised you get on a negative or positive side. Thanks [noise].
<unk>.
Exactly we've been we've been very pleased with the feedback so far it's something we've been very deliberate in our in our approach to the market, but we've talked about the software ecosystem, we've talked about the integrated hardware technology and single platform.
The extensible nature and how we're how we think that maximises value through a hospital be amateur park is a capital would have that capital live on and create more value along with our innovation pipeline.
Early feedback has been good it's been it's been it's been a.
A a a a value proposition that really resonates around the workflow the efficiency all things that we had hoped for and the integration of these technologies together. So a lot a lot more to go a lot more to offer and to integrate into the system, but early early signs in early feedback have really validated the value prop.
Position that that we went to the market with.
As a reminder, in the interest of time, please limit yourself to one question. Thank you. Our next question comes from the line of David Saxon with need them income you May proceed with your question.
Good afternoon, and thanks for taking my question.
And that you mentioned robotics and an answer to it an earlier question. So I'll I'll ask 100 product arm.
Can you just give us any more specificity in terms of timing of that person that you and I think you've said 2022 in the past so any.
More detail around that and then following that versus human where to go next milestones.
Until you launch kinda launch be something we see in 22 or 20.
23, thanks, so much.
Thanks, David I'll I'll take it it's there's been no real change to our previously communicated timeline targeting person human in 2022.
Think I've said I think it's going to be later in 2022, what's been kicks us through a lot of regulatory activities and milestones that we have to we have to execute on.
I would think it more about it as I was getting in and really launching in the 2023 timeframe for material revenue and things of that nature, but we've got to get into the into the clinical setting we've got to execute our regulatory pathway.
We've got a lot of work to do between now and then we will continue to update as we move into 2022.
On more specifics coming out Q4 will have more to talk about but at this point.
We continued to really drive the value pulse.
You really great create the pipeline for a lot of where we think we will take a robotic technology and that's going well. So we're as we kind of talked about what we consider robotics, a key application, but not the only application of pulse system. So we're focused on launching the pulse launching the pulse system effectively and then creating net value chain.
Through things like robotics, other key smart technologies.
That enhance the value over time, so so no changes today will continue to update you in future quarters.
Alright.
Our next question comes from the line of Sam Brodowski with Truest you May proceed with your question.
Okay.
Hi, Thanks for taking the question.
Just stick to simplify here if you could just.
Does any incremental color you could provide in terms of where the company that in the manufacturing transition and then how that should color or thoughts in terms of the ability to sequentially grow.
And the year and then through 22 that'd be great. Thank you.
The exam Super excited about where we are with simplify across the entire plan.
We're ahead, we spoke about being ahead on some of the some of the revenue.
That we've generated this year. We also are very much on track and and are and are moving forward with our manufacturing integration two steps of that process first was.
Really optimizing the current supply chain that we that we inherited through due to the acquisition second piece will be integration into our west Carrollton facility, both unlock substantial capacity and are very much in the timeline. We've talked about so we will continue to see we believe.
Incremental.
Capacity through the fourth quarter that continues to open up in the next year and it's very much aligned with what we've talked about as far as as far as meeting the demand that we are hearing and seeing from our customer so.
Full steam ahead.
The maths early point on expense, we've executed on the expense around creating the capacity that we believe will then support the demand that we're seeing we get a lot of we've got a lot of interest.
We continue to ramp.
And we felt like we are very much on track to to really take full advantage of the opportunity in 2022, yeah and Sam just to finish.
Finish up on your question as it relates to the net sales that we envision for simplify for this year, obviously in our prepared remarks, we talked to the product would be above 5 million. As you may recall, we are tad under $2 million in the second quarter came in the same ballpark in the third quarter. So.
We're anticipating seeing some of that strength in that volume in the fourth quarter.
Okay.
Okay I appreciate it.
Our next question comes from the line of Matt Taylor with UBS. You May proceed with your question.
Hey, guys. Thanks for taking my question.
So I want to get your feedback you just said you have visibility on a regional basis.
And some of the areas that are actually doing well.
<unk> Covid impacted the stage what are what are they doing how are they doing versus 2019.
And what could that mean for when we do have more COVID-19 recovery in 2022.
[noise] Hey matter.
August I'll just take it for regional we're talking global regions I'm, assuming just to make sure I just.
He anecdotal examples I mean, if you could just say now in Boston things are fine and sub 10% versus 19 are there any things like that but you could point to that could be directed to think about how things will recover.
Yeah. I mean, you just saw just our perspective is obviously, our business and our and our hardware volume.
But we also have good insight there NCS business of just macro volumes and the range of of decline.
Totality last quarter was was roughly.
R and last quarter's around 610%, but it varied if you go to the southeast it was in the high teens to 20% range in the northeast was much lower than the more of the single digits. The recovery we've seen.
Reflects that we've seen strong bounce back in southeast part of the country. So far again, it's only for over four that I'm talking about really September versus October.
But it's reflective of the downturn, we saw in the course of the quarter, but.
The standouts, where the southeast was the hardest hit the northeast was the least hardest hit.
Mid Atlantic was somewhere in the middle and the northwest was was was on the higher side.
Regionally.
It's been sore to start and stop Australia has had good moments and bad moments Europe's been fairly stable and sort of climbing out Japan's been unusually or maybe surprisingly strong throughout.
We continue to see that and continue to be impressed with the team and how they're managing through through the through the pandemic.
So it's it's still a bit of a tale of where you are at any given month in any given quarter of kind of how things are progressing.
<unk> was the most variable last quarter, the most volatile last quarter and it was very volatile region to region within the U S.
Great. Thanks for the color.
Thanks, Matt.
Our next question comes from the line of Anthony patrolling the Jeffries you May proceed with your question.
Great, Thanks, and I hope everyone's doing well one on.
Simplify and then a follow up just on pricing.
On simplified just a level set when we look at the 2.6 billion dollar.
Sort of global Tam for cervical.
Where it is what is the current percent of fusion versus disc replacement in there.
And where do you think that mixed can go over the next three years, just trying to kind of level set the the size of the opportunity for simplify and then when we think about pricing theirs to kind of.
Of of notable data points won their supply chain pressures.
On manufacturers, which could lead to that being pushed to customers, but he on the other hand, we're hearing hospitals have upward inflationary pressure due to labor shortages. So.
So when you look at that in the context of price heading into next year do you think that's a wash or does it net out too.
Potentially a slight slightly greater headwind thanks.
Thanks Anthony.
As far as the kind of the anterior posterior cervical spine surgery versus the TDI market DDR still relatively small we say probably tend to 10% to 15% of the market. Now is that is the T. D R market.
As far as what it could be we've talked a lot about this I think it could be substantially higher.
You've had some natural headwinds in that business from a from a from a.
Scuse me from a reimbursement perspective that have largely been diminished.
And has resolve itself over time I also think us entering the market.
With our training or education. Another player on the market I think we'll also spark a lot of interest as we've seen.