Q2 2023 Globus Medical Inc Earnings Call

August 3, 2023

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Welcome to Globus Medicals second quarter 2023 earnings call at this time all lines will be on mute and a Q&A session will be held after the prepared remarks I will now turn the call over to Brian Kearns Senior Vice President of business development and Investor Relations Mr. Kearns.

Please go ahead.

Thank you Didi and thank you everyone for being with US today, joining todays call from Globus medical will be Danske Debello, President and Chief Executive Officer, and Keith Pfeil, Senior Vice President and Chief Financial Officer.

This review is being made available via webcast accessible through 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 from the 2022 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 projected in 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 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.

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 Dan <unk>, our president and CEO .

Thanks, Brian and good afternoon, everyone.

Globe has had a fantastic second quarter setting a new sales record of $292 million, increasing 11% or $28 million versus Q2 22 non.

non-GAAP EPS increased to 63 up 12% and we had a strong free cash flow of $17 million up 31% versus Q2 'twenty two.

Adjusted EBIT for the quarter was 33%.

Through the first half of 'twenty three global Sage has delivered $568 million, an increase of 15% or $74 million over Q2.

First half of 'twenty two.

non-GAAP EPS was $1 15 up 18%.

Free cash flow of $54 million was up 44% versus first half 'twenty two.

These outstanding results are due to the hard work of our dedicated team members across the company and our focus on driving sustainable and profitable growth.

Keith will cover these achievements further in his section.

U S spine grew 6% in Q2 with notable gains across our product portfolio and biologics mif's in pedicle screws and three D printed implants. This above market growth is driven by competitive rep productivity and robotic pull through.

In Q2, we launched three new products reflect Marvel and Asa fuse.

Reflect is a humanitarian device designed to correct progressive scoliosis in young patients, while preserving motion maintaining stability and <unk>.

Now for future modulate it growth.

Unlike rigid metal rods for fusion.

System uses flexible durable cord tension on the <unk> side of the spine to harness the power of patient growth for curve correction.

This is a groundbreaking technology that is now available for children in the U S.

Technology has been used in over 5000 procedures worldwide and is quickly becoming a very attractive option for parents and children, who can now avoid or delay a fusion.

Marvel growing rods are designed for patients under the age of 10 with early onset scoliosis to obtain and maintain correction, while allowing continued growth through minimally invasive distraction.

Powerful geared expansion mechanism access through a small incision provides tactile feedback and a large expansion capability for reliable distraction and minimal soft tissue disruption.

Reflecting Marvel are part of our strategy to increase innovation and our presence in the pediatric deformity market Asa fuse.

HSA or high surface area is composed of 100% allograft bone without an added synthetic carrier the demineralized cortical fibers have a unique architecture with high surface area for cellular attachment and multiple handling.

<unk> is a key component in our growing biologic portfolio.

As we move into the second half of 2023 and into 2024, I anticipate a strong cadence of product launches throughout our portfolio.

Enabling.

Technology had record sales of $35 million up 18% versus prior year, driven by robotic and imaging system sales robotic penetration and adoption continued to be strong as we open new accounts and markets worldwide.

We continue to make positive inroads with our Celsis three D imaging system in the U S. And we're also seeing increased interest in sales in combination deals with both <unk> and <unk>.

Surgeons see the advantage of our seamless integrated offering.

Robotic procedures continued to accelerate growing 41% versus prior year and exceeding 54000 robotic procedures performed to date driven by strong procedural adoption of pedicle screw placement.

Your body placement and cranial applications.

We're also expanding our investment in enabling technology product development to enhance our ecosystem offering and bring about more functionality in our imaging navigation robotics current and future portfolio.

We are well positioned to partner with our surgeons to bring meaningful innovation into this space.

Market interest remains high for our state of the art technologies, and we're entering Q3 with a strong pipeline.

Our international spine business, excluding Japan had a record quarter in Q2 growing 29% on a constant currency basis compared to prior year Regeneron.

We generated double digit growth and strong momentum in most markets, Spain, U K, Australia, Ireland, India, and Poland, all produced growth of 30% or more for the quarter. In addition, Japan had 9% constant currency growth for Q2.

We expect to see gains in Japan throughout the year as we focus on above market gains to recapture share.

Our trauma business delivered its 14th consecutive quarter of sequential growth generating 63% growth versus Q2, 2002 and 12% sequentially.

Trauma performance is driven by sales force expansion and strong uptake in all product lines with substantial growth throughout our portfolio.

We have a robust product pipeline in trauma and I anticipate several meaningful launches in the second half of 'twenty three.

To update you on merger status as mentioned in our last earnings call. Both Globus medical invasive shareholders voted overwhelmingly in support of the merger with over 99% voting for the transaction.

We received a second request from the FTC in May and have been focused on providing the necessary responses, while continuing with cross functional integration planning, we remain fully committed to the merger and our expected Q3 'twenty three closure date remains unchanged.

In summary, we remain focused on the core elements for long term sustained growth innovative new product introductions.

Robot in imaging system sales competitive rep recruiting and merger integration planning.

<unk> 2023 is all about focus on execution to deliver value to our customers and drive growth I know, we are 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.

Thanks, Dan and good afternoon, everyone. I am pleased to report that Globus concluded on an exceptionally strong second quarter momentum from the first quarter continued into the second quarter, resulting in record revenue and earnings.

Revenue in the second quarter of 2023 was $291 6 million growing 10, 6% as reported versus the second quarter of the prior year.

Net income was $57 $7 million, resulting in fully diluted earnings per share of <unk> 57.

non-GAAP net income was $63 $6 million delivering 63 of fully diluted non-GAAP earnings per share, resulting in 12, 3% growth over the prior year quarter.

Q2, muscular skeletal revenue was 256.

$1 million growing nine 7% as reported compared to the prior year quarter led primarily by our spine business globally as well as trauma.

Enabling technologies revenue was $34 8 million in the second quarter of 2023, growing 18, 2% as reported compared to the prior year quarter.

Sales growth was led mainly by our <unk> imaging system as well as continued robotic system penetration primarily in the U S.

Q2 U S revenue was $245 5 million growing 9% versus the prior year quarter led by U S spine and enabling technologies.

International revenue in the second quarter was $46 1 million growing 22% as reported and 22% on a constant currency basis, and largely due to expanding implant sales.

Sales growth was led by our key focus countries, including Spain, The U K, Australia, India, Poland, and Japan regionally growth is primarily driven in the EMEA region as well as APAC.

Moving further into the P&L second quarter gross profit was 73, 8% compared to 74% in the prior year quarter.

The decline in gross profit rate was driven mainly by the mix of products, namely strong growth in capital sales as well as a growing mix of international implant sales.

Despite the decline in gross profit rate gross profit dollars grew 10, 2% in the quarter in line with our 10, 6% revenue growth.

Over the long term. However, our continued expectation is that we are mid seventy's gross profit rate business.

Research and development expenses were $21 3 million or seven 3% of sales in the second quarter of 2023.

Compared to $17 4 million or six 6% of sales in the prior year quarter.

The resulting increase in spend was largely focused on spine and enabling technologies and is reflective of head count growth as we work to develop new technologies to drive continued platforms for future growth.

SG&A expenses in the second quarter were $121 million or <unk> 41, 2% of sales compared to $106 7 million or 45% of sales in the second quarter of the prior year.

The increased spending is reflective of higher sales compensation costs, driven by volume competitive rep conversions and higher G&A costs, driven by increased legal expenses as well as bad debt expense.

The effective income tax rate for the second quarter was 22, 7% essentially in line with the 22, 6% noted in the second quarter of the prior year.

Adjusted EBITDA for the quarter was 33% lower than the 34, 9% noted in the prior year quarter and is reflective of my earlier comments on sales mix changes increased R&D investments as well as increased G&A spending.

As we think about globus over the long term the leadership has and will continue to strive for mid <unk> adjusted EBITDA consistent with history during periods of heavier investment our adjusted EBITDA will track to the lower range of the mid <unk>. The long term goal remains steadfast we will focus on continued investment to drive future sales, while delivering above market profitability for our.

Shareholders.

non-GAAP EPS in the second quarter of 2023 was <unk> 63, or 12, 3% higher as compared to the prior year quarter.

Our second quarter 2023, and includes an approximate <unk> <unk> tailwind of nonoperating items, mainly driven by higher interest income adjusting for this our normalized non-GAAP EPS would have been 59.

Net cash provided by operating activities was $35 million and free cash flow of $17 2 million. The increase in free cash flow is driven primarily by lower capital expenditures and additional working capital investments, namely inventory as well as the timing of higher payables spending.

At this time the company is revising its full year Standalone 2023 guidance. We now expect full year net sales to be $1 <unk> 5 billion.

Our stand alone fully diluted non-GAAP EPS guidance remains unchanged at $2 30 per fully diluted share.

Our Q2 results serve to highlight our collective strength record revenue record earnings and record adjusted EBITDA dollars, all while seeing continued improvement in free cash flow when compared to the prior year.

Our record revenue was distributed across the business as strength was seen both in the U S and international as well as across our musculoskeletal and enabling technologies portfolios.

We continue to lead the market with investments in product development and seek to expand our position as a leader in disruptive technology.

Thank our global team members for driving operational excellence and focus while continuing to plan and prepare for our pending merger with new basis.

Operator, we will now open the call for questions.

Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.

One moment for our first question.

And our first question comes from Mr. Hogan Tsang of RBC capital markets. Please go ahead.

Hi, Congrats on a nice quarter. This is kendall on fresh again.

I had one quick question about the SEC.

And the deal closing I was wonder if you can give any other commentary about the deal and any other hurdles you might have going forward and the deal closed in Q3 and also wanted to ask about guidance in the second half.

The implied guidance.

I was wondering if there was any room for upside given the <unk> momentum in the second quarter. Thank you so much.

Thanks, Ken This is Dan I'll start with that and I'll hand, it over to Keith. So no. There are no other hurdles related to the upcoming merger having gone through what we need it with the SEC obtained what we needed with the shareholders and now working with and responding to the FTC, we feel like that would be the last step for us to move for.

Forward we've.

We've seen no reason to deviate from our planned third quarter that we stated based on the cadence and the amount of activity back and forth.

We still think that that's a reasonable date for us to look forward to.

Well I'll take the second part thanks for the question and thanks for your comments on the quarter.

As I think about the new guidance at $1 <unk> $5 billion that implies about five 3% growth in the second half of the year. We feel we feel good about that I would say that globus remains conservative as a company, but when you step back and look at the full year. The full year would put us up 999%. We've always said that we seek to be a mid to high single.

Digits grower.

That puts us at the high end of the range and we think that the guidance that we're putting out there is appropriate given where we're at.

Thank you one moment for our next question.

Okay.

And our next question comes from Matt <unk> of Barclays. Please go ahead.

Hi, Thanks for taking the question and congrats on a really.

Most of the quarter.

So I wanted to get an idea.

Two.

<unk>.

Was this was this quarter does this seem like a surprising quarter to you.

The way it played out.

The cadence in the quarter.

Was it more.

In line with your expectations.

And any any color or commentary you can give us I think a lot of people are trying to figure out are we seeing a bigger summer vacation. This year are we seeing more seasonal dip in Q3.

Without trying to quantify the July comment from you is maybe anything you can you can give us on your <unk>.

So far as to what Q3 should shape up to be relative to what was a very strong Q2 and I have one quick follow up if I could.

Thanks, Matt.

We're going to give you this answer right, we're not going to comment on the current quarter just because we are in the process of it. So there is nothing there we will disclose with that.

I would tell you that.

Q2, I Wouldnt consider a surprise I think we had a solid quarter. There was a lot of great activity throughout the months therein.

Throughout the businesses, so whether you look at spine or our enabling technology or trauma, all of those things where well.

The international is just solid every single month, it's really I think doing well with the investments we put in this traction. So I would say we were pleased throughout through each one of those three months and like I said.

Stay tuned for Q3, we will have to get through those hurdles before we talked about that one.

Thank you one moment for our next question.

Yes.

Okay.

And our next question comes from Matt Blackman of Stifel. Please go ahead.

Hi, This is Emily on for Matt.

Just was hoping you could talk a little bit about inbound surgeon training volume, whether on the enabling tech side or the core spine side, and maybe any specific color on uptake and interest from newborn Doug.

Thanks.

Well thanks for the question Emily we have a lot of surge in traffic that occurs throughout the week.

Usually heavier towards the end of the week, but I would tell you that nothing.

Unusually heavy or lighter than the normal flow in which we do I think we're pleased with the amount of throughput that we do whether that be cat of air training or a hands on with the robot or everything in between I would say, it's pretty good that way.

With new base of itself Theres still a separate entity and so we haven't done a lot more can we do a lot with them where their surgeons with planning along those ways. We will expect an uptick when it is approved and we will go out that in a heavier pace, but.

But right now we're staying within our lane and just focusing on the surgeons that we have.

Great. Thank you.

Thank you one moment for our next question.

Okay.

And our next question comes from Caitlin Conan of Canaccord Genuity. Please go ahead.

Hi, This is Caitlin <unk> on for Kyle Ross Congrats on an awesome quarter just to touch on this topic, given where others have called out have you been experiencing any recent supply chain challenges.

Hey, Caitlin. Thanks. This is Dan I would say no just the opposite we're very pleased with the strength of our supply chain, both external and internal whether it be the ability to replenish.

As post surgery.

Building I would tell you that we're arguably one of our strongest periods. Thanks to the hard work of our operations team throughout the world, but in particular here, So I would say.

Went through Q2, and we're entering Q3 at a point of strength.

The only thing I would add to that is if you comp back to last year with some of the supply chain challenges that were called out there in the market I think.

We feel better positioned about where we are this year versus last year and it really ties back to the statements Dan just made.

Awesome and then just a quick one on the pediatric deformity <unk> launched recently any plans to watch any of their products. How do you really view the attractiveness of this market. Thank you.

I think if I heard you correctly first the two products that I referred to which are reflect in marvell. We're very excited about that because it's going to give you a lot of options on how to treat those young patients in a way that should hopefully reduce surgeries or further incisions and different items like that in a controlled fashion.

So look this is a market that needs innovation, where we're leaning into that innovation. There is no doubt that when the right time comes in the FTC approves. This will bring together, our renewable portfolio and come out with an even stronger offering these.

These two products reflect a marvel are definitely key for us and we're really excited to get those pushed into the hands of the surgeons in the U S.

Thank you.

As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced one moment for our next question.

Okay.

And our next question comes from Richard <unk> of tourists Securities. Please go ahead.

Hi, it's actually Ling.

Rich so.

First of all congrats on the great quarter.

So we heard some comments on capital slowdown in the market just wondering if you could.

And like where you are sending data.

This is Keith Thanks for the question I think just.

Repeat what you said you asked if there was if we are seeing capital slowdowns in the market.

I'll start this and Dan feel free to add I mean, I think that we're at today, we're extremely happy with the uptake of our <unk> system as well as our robot.

If I look at where we're at today versus last year at this time on a year to date basis I would say that we're ahead and we're happy with where we're at we're continuing to try to sell more but.

I wouldn't say that we've seen a slowdown in the market, especially when we comp to prior year.

To build on that I think COVID-19 created some disruption in the market and I think thats carried through the years.

Not quite solidified an equalized when it comes into the hospitals with what they are struggling with that said, we're not seeing this year or this quarter any difference as Keith said, it's just out there and we'd all like it to be stronger, but theres nothing noticeable in change for us in Q2 that we would call out as a significant difference.

That's helpful. Thank you.

A follow up on Japan.

Could you provide us some color Mike.

Surely Joel boss John there. Thanks.

I'd say the strength in Japan is really the business is really starting to take holding as we think about what we've done the last couple of years. Our go to market plan of controlling the territories with the reps that we have that is really taking hold and really we're starting to see growth because we saw a period of time, where we saw consecutive sales declines were.

Now going the other way and we think that our strategy starting to take hold.

Thank you.

Thank you one moment our next question.

Okay.

And our next question comes from Steven Lichtman of Oppenheimer and company. Please go ahead.

Hi, guys. This is Ron on for Steve Congrats on the great quarter.

I wanted to ask if you guys see any signs of salesforce concern or losses because of the pending deal.

Are there any initiatives you're putting in place for some signs you Tien tsin.

Ron Thanks for the question no we have not seen anything right now with our sales force being globus and having concerns with that.

Really the best approach that we have is to develop and launch products get them in their hands pay them as we do and look to supply them in a stronger supply chain that way in doing that and creating that level of innovation and support we feel like we're one of the best places to be.

I think we have to be mindful of what can happen in the future certainly there is concern with that and so.

We're communicating and we're making sure that we interact with our field at a higher rate just so they're aware of what's going on and where we're going our commitment to them and how they will remain vital to us and one of our main growth engine and so we're really just kind of reminding them of how great. They are making sure that we can provide them with what they need so that we can drive this forward while we're waiting.

To get the approval and certainly need their hands on and driving as we get through the post approval.

Things that add to that as you look ahead.

You are bringing together two companies that are committed to product development and that's something we see going forward as well as surgeon education and you are bringing together two innovators when it comes to product I think that should continue to drive excitement across across both sales forces.

Great. Thanks, guys.

Just a follow up maybe you guys can give us some commentary about pricing trends in the U S.

In the quarter.

Trends pricing trends pricing trends really it's really low to low single digit decline I wouldnt say that thats really any different as we think about globus, what we've done to offset price erosion is really launch new products or knows the market. We've done that with some of the product launches Dan talked about earlier as well as things that we have planned for the remainder of this year.

I would just add we've seen no significant change in pricing pressures or shifts with that as we look over the past multiple quarters, it's been fairly consistent for us.

Thanks, guys.

Thank you.

No further questions that concludes the Globus medical earnings call. Thank you for participating and you may now disconnect.

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Q2 2023 Globus Medical Inc Earnings Call

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