Q1 2022 Globus Medical Inc Earnings Call
Welcome to the Globus Medicals first quarter 2022 earnings call at this time all lines will be on mute and a Q&A session will be held after the prepared remarks. During the question and answer session. If you have a question. Please press zero one on your Touchtone phone.
I'll now turn the call over to Brian Kearns Senior Vice President of business development and Investor Relations. Mr. Kearns you may begin.
Thank you Richard and thank you everyone for being with us today.
Joining todays call from Globus medical will be dance, Cabello, President and Chief Executive Officer.
Keith Pfeil, 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 at Www Dot Globus medical Dot com.
Before we begin let me remind you that some of the statements made during this review are or may be considered forward looking statements. Our Form 10-K for the 2021 fiscal year and our subsequent filings with the Securities and Exchange Commission identify certain factors that could cause our actual results to differ materially from those.
<unk> and any forward looking statements made today.
Our SEC filings, including the 10-K are available on our website.
We do not undertake to update any forward looking statements as a result of new information or future events or developments.
Our discussion today will also include certain financial measures that are not calculated in accordance with generally accepted accounting principles or GAAP.
We believe these non-GAAP financial measures provide additional information pertinent to our business performance.
non-GAAP financial measures should not be considered replacements for and should be read together with the most directly comparable GAAP financial measures.
Conciliations 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 Dan <unk>, our president and CEO .
Thanks, Brian and good afternoon, everyone.
Q1 sales were $231 million or one 4% growth with non-GAAP EPS of <unk> 42, a share and an adjusted EBITDA of 32%.
These results reflect modest revenue growth against a difficult prior year comp coupled with COVID-19 related revenue impacts in key countries and a slower capital purchasing quarter.
While these revenue headwinds impacted EPS and adjusted EBITDA results. It is important to point out that we remain unaltered and investing in our strategy of above market growth by increasing investments in R&D resources competitive rep recruiting and surgeon education.
Focusing on the goal of sustained long term growth.
U S spine grew 3% for the quarter against headwinds of a challenging Q1 prior year comp of 20% growth coupled with additional COVID-19 impacts.
January was slow as noted in our Q4 earnings call.
February showed sequential improvement in March became our highest sales month on record.
The strong performance continued in April where we achieved our highest average daily sales.
In addition, our competitive recruiting pipeline is strengthening which is a leading indicator of future growth.
Enabling technology sales were $13 million down 2 million from prior year due to lower placements in the quarter.
After a record Q4, we experienced a slowdown in hospital purchasing as administration focus more on Covid and staffing shortages in Q1.
Robotic procedures and implant pull through continued to accelerate growing 27% versus prior year and surpassing approximately 31000 robotic procedures performed since launch.
Entering Q2, our pipeline is stronger and we're focusing on driving robotics sales throughout the rest of the year.
In May we began shipment of our <unk> three D imaging system and successfully completed the first surgeries in several sites.
Surgeons have said this is a game changer.
<unk> three D is the three in one imaging platform offering three image modalities in a single cart with high Manoeuvrability, a large field of view and seamless integration with our Celsis GPS robotic navigation system.
It is a key component to realizing the globus ecosystem in the operating room.
Market interest is high on the state of the art technology in customer orders continue to grow <unk> is positioned to be a major growth driver for us as we continue to penetrate the market.
On the international front, our spinal implant business was flat in Q1 strong mid teens growth driven by the U K, Italy, Belgium, and Brazil was offset by declines in Japan, a trend we identified last year and expect to continue through the third quarter.
We remain positive on the potential of our international business for long term growth as we continue to reset to Japanese market.
Yes.
Our trauma business delivered a strongest quarter to date was 61% annual and 28% sequential growth driven by sales force expansion strong uptake of our anthem, many frac plating system and double digit growth in every product family.
We're on track to launch meaningful products throughout the rest of 2022, while investing in future product lines and sales force expansion.
In Q1, we launched <unk>, a three D printed articulating lumbar interbody spacer, adding to our <unk> portfolio, one of our fastest growing product lines as well as increasing the articulating spacer offering along with signature and altera.
As we move into the rest of 2022.
We remain focused on three core elements for long term growth.
Innovative new product introductions.
<unk> and imaging placements.
And competitive rep recruiting.
I am pleased with our record U S sales in March April's highest average daily sales record the Excelsior three D imaging system launch and the strengthening competitive rep pipeline.
Globus medical is well positioned to achieve our mission of becoming the preeminent muscular skeletal company in the World I will now turn the call over to Keith.
Thank you Dan and good afternoon, everyone.
Our Q1 results reflect continued growth coming off strong prior year comps, all while facing COVID-19 impacts through much of the quarter.
<unk> business remained resilient and our core approach and fundamentals remained intact.
Q1 revenue was $235 million growing one 4% as reported and one 9% on a constant currency basis on.
Ongoing COVID-19 impacts effective procedural volumes in the early part of the quarter, which began to improve in February. However, we did not see consistent momentum building until March.
Our capital business also experienced softness in Q1 reflective of slow development of our robotics pipeline in the early part of the quarter with many hospitals limiting access and shifting their focus to managing through the uptick in Covid cases, while also managing staffing shortages as we approach the middle of March and entered into the second quarter, our pipeline showed improvement as deal activity in.
Discussions ramped up we remain confident in driving this business forward as we progress through 2022.
Moving further into sales our Q1 muscular skeletal revenue was $217 $4 million growing two 3% as compared to the prior year quarter, driven primarily by growth in our U S spine business, which was partially offset by lower Japan sales the.
The declines in Japan are primarily related to our continued Japan commercial transition to a direct sales force.
Q1, enabling technology revenue was $13 $1 million or 11, 9% lower as compared to the prior year quarter as reflective of my earlier comments around our robotics pipeline.
First quarter U S revenue was $196 $4 million growing one 6% as compared to the first quarter of 2021, driven by growth within U S spine, partially offset by lower INR revenue related to robotics sales.
International revenue for the quarter was $34 $1 million essentially flat to the first quarter of 2021, which is driven by my earlier comments around our Japan sales transition and in line with our expectations exclude.
Excluding Japan, our international business grew in the mid teens as we continue to drive deeper penetration of spine within our focus countries, mainly within Western Europe and Latin America.
First quarter gross profit was 74, 3% compared to 75, 8% in Q1 of 2021.
The lower gross profit was primarily the result of manufacturing inefficiencies related to our new plant.
Higher inventory write offs increased freight costs and product mix.
The higher inventory write offs are primarily related to increased scrap costs within our biologics business and implant manufacturing while the increased freight expense was driven by fuel surcharges in our freight mix change.
We estimated roughly 30 to 40 basis point impact to gross profit as a result of inflation, which is primarily the increased freight costs as well as some slightly higher raw material costs. Looking ahead, we expect gross profit to remain in the mid seventies as we progressed through 2022.
Our research and development expenses for the quarter were $17 4 million or seven 6% of sales compared to $14 9 million or six 6% of sales in the first quarter of the prior year.
The increase in spending both in dollars and as a percentage of sales is consistent with comments made in 2021 regarding our plans to increase investments across our business, primarily within spine and enabling technologies, which will further position us to drive our class leading capabilities.
SG&A expenses for the first quarter for $100 7 million or 43, 7% of sales compared to $97 9 million or <unk> 43, 1% of sales in Q1 of 2021.
The increased spending is primarily due to a return of pre COVID-19 levels of spending around travel and entertainment meeting expenses and training events.
This increase in spending is partially offset by lower comp and benefit costs as well as lower bad debt expenses.
Overall this increased level of spending is consistent and in line with our expectations.
The effective income tax rate for the first quarter was 22, 1% compared to 27% in the first quarter of 2021.
The increased rate was driven by lower tax benefits associated with stock option exercises.
GAAP net income for the quarter was $38 1 million and non-GAAP net income was $43 $9 million, which delivered 42 of fully diluted non-GAAP earnings per share adjusted.
Adjusted EBITDA was 32, 2% and is reflective of my earlier comments on sales gross profit R&D and SG&A impacts.
We ended our first quarter with $1.02 billion of cash cash equivalents in marketable securities. Our Q1 net cash provided by operating activities was $44 $7 million and free cash flow was $24 $7 million.
Our Q1 free cash flow is reflective of working capital investments and inventory, mainly within our INR business as well as higher capex focused primarily on machinery and equipment.
The company remains debt free.
Our full year 2022 guidance remains unchanged at $1.0 billion to $5 billion in net sales and $2 10, and fully diluted non-GAAP EPS.
Looking ahead, we remain extremely positive around our expectations for the remainder of the year and we will remain well positioned to execute and drive growth against our objectives. Our team is committed to driving value over the long term for our patients our customers and our employees. We will now open the call for questions.
Yeah.
Thank you we will now begin the question and answer session.
If you have a question. Please press zero one on your Touchtone phone, if you wish to be removed from the queue. Please press zero huge if youre using a speakerphone you may need to pick up the handset first before pressing the numbers. Once again, if you have a question. Please press zero one on your touch.
And our first question on line comes from Chicken King from RBC capital markets.
Great. Thank you so much for taking the question I'm going to start with one on capital you know it does seem that Q1 was soft and we've heard it from several other companies can you just put a final point do it how much is still.
Two through Q4 do you do I guess remaining COVID-19 dollars how much of it was typical seasonality versus the COVID-19 related delays that you talked about due to staffing shortages and what trends are you seeing in Q2, you did mentioned that the pipeline is strengthening but will Q1 and Q2 kind of net out to where you expect it to.
And any comments you can provide on your outlook for 2022. It does appear that hospitals are facing more margin pressure. So do you expect it to impact spending on medical devices in anyway, and then I have a follow up.
Okay. Thanks again this is Keith I'll take the first part of that capital as we as I mentioned a couple of weeks ago, you know the capital business. The pipeline really didn't develop in Q1, you had commented that some of other competitors may comments regarding the capital environment really what we didn't see was a maturation of the pipeline so as we get through a quarter.
We want to see deals progress and we didn't see that happening during the quarter.
The feedback we're getting is hospitals are turning our attention to dealing with COVID-19 for fear of a potential uptick, but also dealing with staffing shortages and focusing on that being the critical thing they needed to work through we.
We saw that really start to start to improve as we got to the back end of the quarter and as I sit here in the second quarter. The pipeline what were seeing that we didn't see in Q1 is that maturation of it as we progressed through the quarter. So we feel better about where we're at with robotics and capital entering Q2, plus the other thing to think about is we have our imaging systems. They are starting to ship that is creating a bolus.
The discussion around the globus ecosystem and enabling technologies.
There might been in one other one or two other points I didn't catch their shagong, but thats My general overview I'll I'll add to that sheer guns is I would think back to your latter half of that question very difficult for us to predict what hospitals could or would do we don't know what the environment is we'll keep our eyes on that but as we're signaling today by keeping our guidance consistent.
We believe we have enough muscle to actually deliver these results, albeit we may throw leavers differently to get there but to date with capital we're not seeing any reason why we would want to back away.
Got it that's really helpful.
Can you just talk about the cadence of growth through the balance of the year for sales and EPS I think consensus is looking for $2 60, due in sales and <unk> 53 cents in EPS in Q2, and it implies a pretty rapid sequential increase of 14 and 27% higher than what it has been pre pandemic, obviously Q1 was softer.
But any color on cadence would be helpful. Thank you for the questions.
Thanks, John This is Keith again, we Havent really given quarterly guidance and we don't really plan to start I think where we're at today is we are reaffirming guidance for the full year, we remain positive about where the business is.
And really look forward to getting further into the year.
Thank you.
Thank you. Our next question online comes from Matthew O'brien from Piper Sandler.
Afternoon, Thanks for taking the questions.
Either either Dan or keep the total spine number that you are projecting for the year I think that this kind of implied by guidance is.
As a as you know is less than what you guys saw in 19 and again, having a perfect numbers here, but a 19 you did you are up about $68 million year over year in spine. This year I think it's more like 41, I know <unk> is a headwind that you've got the <unk> tailwind. So why is it that the spine business would be slower.
What we saw in 19 and is there is there specifically anything on the expandable side, which I think is a couple hundred million Bucks for you guys that where youre seeing incremental pressure.
Yes, I mean this is Keith thanks for the question.
I would say that there we haven't really gotten into trending out in projecting what our U S spine business is going to be for the year.
But when we step back and look we've grown.
Pretty significantly between 19, and 20, and then 'twenty to 'twenty, one, we obviously had a great year.
As we look at the dollars that we've added to our business really the primary drivers of that are again, our new product launches are competitive rep recruiting and the pull through from robotics, we don't see that changing we're going to continue to double down and work to increase the business, Yes, Matt I would just say maybe we could have a conversation later I'd, probably not lining up with your calculations.
On that because we see very strong growth continued growth of our.
Sales of our spine, including new product launches, which are going to be fairly strong. This year. So I don't think I would come up to that same conclusion.
Okay, and Dan Youre still doing well and expandable.
Absolutely.
In mind that we've got so many generations of that that's one of the main drivers for us to date.
Okay, and then quick follow up is on <unk>.
Feedback on that one that we get is unbelievably strong should we expect that to be $15 million to $20 million product for you guys. This year. Thanks.
As we look out to the year, we haven't given specific guidance on what we felt our sales would be this year I will say that we still we have more than double digit orders. The enthusiasm is great every time someone seasons product they want to buy one and we remain excited to achieve our year and our guidance.
Got it thank you.
Thank you. Our next question on line comes from David Saxon from Needham <unk> Company.
Good afternoon, and thanks for taking the questions.
Maybe I'll start with the spine business in Japan.
Memory serves last quarter, you were expecting that business to return to growth in the second half it sounds like that might be pushed to maybe third or fourth quarter. So just wondering if anything's changed there.
Or.
I guess whats the plan to kind of.
Get that business back on track.
Thanks, David for the question. So obviously first quarter is the second half of the year.
So we're going to continue on that path nothing has really shifted with that other than I have gotten a little more precise as to the quarter since last time, we spoke.
That said I will tell you I'm bullish on Japan, when I look at the leadership team, we're putting in place.
The sales team we have in place the surgeon interest from recent events that we've had I.
I do see this as a very large.
Area for us over the next coming years, and so we're going to do what's right by cleaning up and going direct and with that we will continue to contract at that point and then once we stabilize I expect significant growth going forward.
Okay. That's helpful. And then maybe I'll just ask my follow up on the.
Recon robot any update there.
In terms of timeline and then how should we think about the robot launch.
Do you feel like you have enough.
In the <unk> portfolio today to support that launch and then any.
Plans for hiring ahead of that.
Second launch thanks, so much okay.
So I would tell you that we're progressing well with the robot we have yet to file and get approval. So it always be difficult to call out where that is at this point in the acceptance rates.
I'll tell you that with the features and the feedback as we develop it with surgeons is very promising and it will be a major part of our portfolio.
Fully this year, though as we go with that at the same time, we had been reinvigorating distill caster now below this worth of portfolio to match with that and that is paired to be filed and launched in unison with the robot to give us that way and yes. You are correct, we have plans to expand our commercial.
The team and I know, that's something that will most likely get more active with in the latter part of this year as we get more product status and decide when to pull that trigger.
Great. Thank you.
Yes.
Yes.
Thank you. Our next question on line comes from Kyle Rose from Canaccord.
Great. Thank you for taking the questions.
I just wanted to ask one about capital allocation.
<unk> seen some big dislocations or valuations in the public markets.
You've got $1 billion in cash in the balance sheet no leverage you've talked in the past about.
Being acquisitive strategically I just wanted to see.
If the weakness we're seeing in the public markets, if that's creating a buying opportunity and if you think that we should expect an increased period of M&A on the part of Globus moving forward. Thanks.
Thanks for the question. This is Keith I would say that year, that's accurate from the standpoint of thinking about M&A.
We're always out there looking at M&A, you know one would've thought when COVID-19 happened that there would've been great buying opportunities, but the market really took off as we're seeing rates climb we're seeing general generally speaking inflation, there's talk about a slowdown in a recession as rates go up I think that smaller companies out there that might be laden with debt would become.
The opportunities for us to potentially look at and acquire in terms of where.
Again looking at our ortho portfolio.
From a spy perspective looking at some small spine companies looking at our R&D, that's really not fully developed yet I think those are the places that you would think about us looking to do acquisitions, and obviously complementary pieces of technology that would help with our enabling technologies business, but I think that your assertion overall is accurate directionally speaking.
Thank you and then when we think about the leads in the pipeline do you have for the <unk> product can you maybe just talk to us about what that looks like is it current robotic globus users at the current robotic competitive users is it people that haven't used robots in the past just trying to really understand where the demand is coming from thank you.
Thanks, Carl you know, it's really a mix of all the above that you just called out it's not particular to just the people who have a robot we've seen interest all around with this and as you know it's applicable throughout its not tied just to our Celsius robot. So the good news is it's really coming from multiple directions.
Thank you for taking the question.
Thank you.
Thank you. Our next question when it comes from Jason Wittes from loop capital.
Hi, Thanks, if I could start with a follow up on acquisitions in terms of adjacent orthopedic technologies could there potentially be a hip hip and knee type technologies like that implant type company or is that something that you look to build internally like as you've done so far in trauma.
Jason I guess it depends really on what the opportunity would be it needs to be something innovative something that would actually shift our timeline meaningfully and we would take a look at that so it's possible, but as we pursue today most of what we're using and what we're planning on is internally built but again it really just depends on if the opportunity is the right one and it makes a meaningful difference.
Would consider it.
Fair enough I appreciate that and then in terms of the visibility on the capital equipment.
From order to install.
Has that changed at all are generally speaking what kind of visibility do you have is it a full quarter visibility that six month visibility just trying to get a sense of.
You mentioned you have double digit booking orders how good the visibility is in terms of when you could actually install them.
Oh, Okay. Sorry. This is this scheme, we're trying to follow your question there for a SEC.
In terms of visibility really theirs.
A rollout plan. So we've done our soft launch sites, we're getting those installed they're doing cases and there'll be a cadence from there then we start to rollout the robots, we know what our double digit orders are we know how they're going to ship. The key thing is since it's a new product getting it out there and I've said before this is really important launch for us. So we want to make sure that we don't Miss anything so we want to make sure that the train.
Is there for the hospital staff, so our staff will be there to get them on board, but we have basically a launch timeline.
As we continue to get new orders once we work through the backlog, we'll we'll begin to sell those or ship those as well, but to me by the time, we work through the backlog. If you are into the third quarter and probably a little bit into the fourth and I'll just build on that Jason too is to date. Because these are sensitive pieces of equipment, but they have shipped well they've been received well and they've been installed with a minute.
Efforts, so far so we're pleased with the ability to get them up and running.
Second what Keith said is I think it's more about the training and getting used to it as opposed to actually getting the piece of capital functioning.
Great. Thank you I'll jump back in queue.
Thank you. Our next question on line comes from Richard <unk> from Trust.
Hi, Thanks for taking the questions.
Excuse me, maybe the first one to start off on margins.
Dan you've always suggested that during investment periods your EBITA margin would could.
Could go as low as 30, low, 30%, 32%, an influx periods or pay off periods.
Should trend in the 37% to 38% range I'm just trying to figure out this 32% EBITDA margin would you consider this kind of more in that discretionary.
Investment period, and now that we have kind of one of your key products launching we should see kind of the payoff and move more towards the mid or even upper thirties into the quarters ahead.
Hey, Rich I do you know again I think what I was signaling when I opened up with my script is even with a lighter.
<unk> that we had against tougher headwinds, we did not step back in our spending or investment of the R&D people have recruiting et cetera, and so to your point, what we've called out through the year. As this is a great example of that where we continue to invest for long term and willing to take these lower EBITDA.
Think as the volumes pick up it will naturally left and so I feel comfortable with what Keith has been saying that we will remain focused in the mid <unk>, yes, and just to add onto what Dan said.
33 to 37 is the range thats been talked about in the past sitting here today coming in was 32. Two this would obviously be at the lower end of that but as I sit here and look out at the rest of the year I'm still confident that were mid Thirty's EBITDA business.
Quarter was little bit light from a EBIT perspective, but again, we talked about increasing our investment in R&D, we did that I called out some things in gross profit that we saw but the thing that I wanted to raise there is that I did make a comment on inflation on raw material inflation and is really immaterial to the bigger picture. So that to me is an important message to get out there.
As I look up and down our P&L that mid seventies gross profit is very important to us I guess, that's how can I just can help drive profitability for the rest of the business.
Thanks for the color there.
And just one on the environment the spine market in the U S. So.
You guys were pretty outsized share gainers in the spine market throughout most of last year.
It adheres debt.
You guys got impacted along with the rest of the spine market, but even even relative to some other players that also had tough comps smaller than you are granted you grew a little bit slower than maybe even some of them. So I guess I just wanted to get a feel for what youre seeing that drove your performance back up to a record March do you feel.
<unk>.
So some delayed recapture of procedures for the underlying market or is that something that's specific to your business, where you're back into the share gain though that maybe you had been in previously or is it some combination I'd love to just hear.
Some commentary on March and April trends. Thanks, Yes.
Yeah. Thanks, Rich I would think for sure. There is some recapture of a slower January February thats come into March and April I think that would be logical a little difficult for us to quantify but it's an assumption I would go with I would also tell you that competitive rep recruiting which was decent in the first quarter bears fruit in both of them.
Those in March and April months, as well and we'll continue to do so and I think as well we've seen through the news a dropdown in the concerns of the cases of Covid, which I think opened up some of those surgeries. So I think it's a combination of those things mainly in the March April timeframe.
Okay. Thank you.
Thank you.
Our next question online comes from Vik Chopra from Wells Fargo. Please go ahead.
Hey, good afternoon, and thanks for taking the questions.
One Dan you had touched on new product launch and I'm, just kind of wondering which one.
Side imaging system will be most impactful to growth this year, and just remind us what the growth contribution of new products.
To tell the growth in that and I had one follow up after that thank you.
Okay. So vik, we don't actually breakout obviously product detail are the contributions for growth.
Certainly three D imaging as a major plan that we had to get out there and I think that'll be one of the main drivers.
I would tell you that we do have planned upward of 10, plus spine launches just for this year and as I said trauma quite frankly has got a great portfolio that they plan to rollout through kind of the second half of the year all of those have been factored in really as main drivers for us to not only meet but it possibly beat as we get through the rest of this.
Sure.
Okay, Great and then my follow up is on your international business would just love to gauge your confidence.
On your international business, how should we think about the contribution from Japan. This year and do you still see a pathway to recovery in the back half of the year and return to that mid teens growth.
Your international business. Thank you.
Thanks, So I would tell you that with Japan I had gone deep with this again I feel very confident as to the plan we have in place who were recruiting the surgeon interest.
The sales force replenishment all of those things are very strong I think we still have to work through.
Talent access and Thats, why im, saying that would possibly go out and begin neutralizing in the fourth quarter I don't really anticipate Japan being a contributor.
When it comes into the rest of this year, such so much as a reset and stronger growth as we get into next year forward. That's really it on the rest of the world again, we had some really good results in some fairly significant.
Covid headwinds say people will tell you that in Australia.
The government paid hospitals not to do surgeries theres different areas like that that once I look at our internal estimates of those impacts and what it could have been without I feel very bullish that rest of world will be a decent contributor for us in the second half of the year without any significant COVID-19 resurgence.
Hi.
Yeah.
And we have no further questions at this time.
And with that I. Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.