Q2 2023 NuVasive Inc Earnings Call
Good day, ladies and gentlemen, and welcome to <unk> second quarter.
Earnings Conference call.
I would now like to introduce your host for today's call Ms. Juliet Cunningham, Vice President of Investor Relations.
Please go ahead Ms Cunningham.
Thank you good afternoon, everyone with me today are Chris Barry Chief Executive Officer, and Matt Harbaugh, Chief Financial Officer.
Chris will provide an overview of new base for the second quarter, 'twenty twenty-three business results and trends as well as innovation highlights.
Matt will review, our detailed financial results and full year 2023 outlook and then we'll host a question and answer session.
The earnings release, which we issued earlier. This afternoon is posted on the IR section of our website and has been filed on form 8-K with the SEC.
We have also posted supplemental financial information.
As a reminder, this call is being recorded and an archive will be available on our IR website later today.
Before we get started I'd like to remind you that our comments. During this call will include forward looking statements, which are based on current expectations and involve risks and uncertainties assumptions and other factors, which could cause actual results to differ materially from those expressed or implied.
Such forward looking statements.
The factors that could cause actual results to differ materially are described a new basis of news releases and periodic filings with the SEC.
Except as required by law, we assume no obligation to update any forward looking statements or information, which speak of their respective date.
In addition, this call will include certain non-GAAP financial measures reconciliations of these measures to the most directly comparable GAAP financial measures are included in today's earnings release and on the supplemental financial information both of which are accessible on <unk> website.
And now I'd like to introduce Chris Barry.
Thank you Juliet and good afternoon, everyone.
Earlier today, we reported second quarter 2023 financial results on today's call.
I'll review our performance for the quarter.
Sure Howard differentiated product portfolios and continued commercial execution position us well for the pending combination with Globus medical and discuss where we are in the merger process and our current views of timing.
After my remarks, Matt will share additional financial detail on the quarter.
Innovation delivered second quarter 2023, net sales of $317 $8 million, an increase of two 4% on a reported basis or three 1% on a constant currency basis compared to the prior year period.
In combination with our first quarter performance, we delivered in line with our expectations for the first half of 2023.
Despite a challenging Q2, 2022 comparison and merger related competitive noise did invasive team delivered a solid quarter.
Our U S business achieved approximately 6% growth in U S. Spinal hardware led by more than 20% growth from cervical for the seventh straight quarter.
And our international business, we achieved approximately 10% growth on a constant currency basis compared to the prior year period.
This performance was driven by core spine and led by double digit growth in Europe .
Well, a solid contribution from Latin America, and Asia Pacific.
We remain focused on our commitment to delivering core group.
The pillar of our previously communicated growth strategy.
We're competing with discipline through our global teams are remaining resilient through the pending merger.
Thank you to our teams for a job well done.
Within core spine, we continue to address the significant opportunities in key procedural segments with our 360 portfolios X 360 C 360 <unk>.
360 and complex.
Our innovation gives our commercial team has a strong competitive position to take share across each spine segment.
And anterior we've continued to celebrate 20 years ever flagship excellent procedure and five years of our extra 60 procedure.
Cross the Globe Excellence continues to demonstrate superior and more predictable outcomes and traditional spine fusion procedures.
Adding the five years of clinical validation surrounding lateral single position surgery and X 360 S. P. S. A 23 three study published in the spine journal shows that lateral S. P. S.
Additional fusions have similar outcomes two years post operatively, while reducing perioperative complication and improving efficiency.
Our knowhow and experience in trading procedural solutions have only benefit of our strategy in segments like cervical Osteria and complex.
And post area U S inner body sales delivered double digit growth driven by a P 360 portfolio.
Key products, including the commercial launch of the new basic Tim system and the introduction of our next generation posterior expandable Cage MA X P. L have supported a renewed momentum in our chiller business.
Turning to U S cervical our entire see 360 portfolio continues to deliver above market growth.
Led by increased surgeon adoption of the simplify cervical disc underlying cervical.
As anticipated simply by cervical disc is a door opener for our commercial teams.
Through additional procedural opportunities and driving greater density and cervical accounts.
And complex, we're making progress in the pediatric deformity, subsegment, which rely on three D, which delivered double digit growth.
Our posterior fixation system for deformity correction unifies deformity techniques into one powerful and efficient procedure.
And enabling technology pulse continues to make its impact across the globe.
<unk> sells and several new European geographies in our first case completed in Singapore, We're seeing increased global surging interest in pulse.
Following the platform is 2023 summer software release surgeons have share positive feedback on the enhancements to their operating rooms.
You hardware enhancements were also released to further optimize our differentiated navigation patient right, allowing us to better support revision pediatrics and complex deformity cases.
The software and hardware introductions highlight our commitment to continuous innovation of the platform.
And our new basis specialized orthopedics business. Recent achievements include the reentry of the precise system in the U K and the CE Mark reinstatement of precise bone transport.
It's all internal solution extends our precise technology trading segmental bone effects caused by tumors in trauma.
Yeah, So business continues to be well positioned for long term growth.
Turning to our planned combination of Globus medical we remain excited and committed to creating an innovative global musculoskeletal company together.
As demonstrated by the overwhelming support for the merger by both company shareholders. The pending combination will accelerate our near and long term strategy.
Our commitment to the deal are steadfast in our belief that this merger will benefit all stakeholders remains unchanged.
As previously communicated on May 3rd we received a second request from the Federal Trade Commission in connection with the FTC's review of the merger the clubs.
Over the past three months, we and Globus I've gone to great lengths to prepare our respective responses to the second request and I'm very proud about our teams have accomplished in a short period of time.
During the Q1 earnings call, we indicated that we expected to close the transaction in the third quarter.
Based on our progress with the response to the second request, we're not backing off that timing and we're doing everything we can to make that happen.
Given the recent M&A headlines I've heard a lot of commentary about the FTC has approached the deals generally.
As well a speculation about what action the FTC will take and the new basic Globus merger.
There's a range of potential outcomes on the FTC is reviewing our transaction we remain optimistic on a Q3 close.
Now.
I'll turn the call over to Matt.
Thank you, Chris and good afternoon, I'm going to provide commentary on our second quarter results and full year 2023, net sales guidance, which remains unchanged from what we provided on February 22nd.
Our detailed financial results have been provided in today's press release and supplemental information today I will discuss both GAAP and non-GAAP measures. Please see our press release for GAAP to non-GAAP reconciliations.
Unless otherwise noted all comparisons are to the prior year period.
Second quarter 2023 worldwide net sales were $317 $8 million, which was a 2.4% increase as reported and a three 1% increase on a constant currency basis foreign currency negatively impacted our net sales performance by $2 $2 million during.
In the quarter.
International net sales for the second quarter were $78 $6 million, an increase of six 8% over the prior year period on an as reported basis and nine 8% on a constant currency basis from a regional perspective International growth was led by of course by net sales in Europe and Latin.
America.
Asia Pacific growth, primarily in Australia was offset by reimbursement pricing headwinds in Japan as discussed previously.
Overall procedure volumes in Japan grew above market and our market position continues to be strong.
Turning to U S. Net sales, let me provide key highlights by product line.
U S spinal hardware net sales for the second quarter of 2023, $474 $1 million, representing a five 5% increase year over year U S. Surgical continued its proven and ongoing track record of achieving greater than 20% growth led by simplify cervical disc in <unk>.
<unk> cervical.
U S. Surgical support net sales were $65 1 million a decrease of nine 3%, primarily driven by lower biologics attachment rates as well as payer mix and new basic clinical services or Mcs move.
Moving to operating results second quarter, non-GAAP gross profit was $228 $3 million compared to $224 $7 million in the prior year period.
non-GAAP gross margin as a percentage of net sales for the second quarter of 2023 with 71, 8% a.
Decrease of 60 basis points compared to 72, 4% in the prior year period.
Year over year decline was primarily driven by lower NCS not sales pricing.
Pricing pressure remained consistent with historical levels in the low single digits.
Second quarter, 2023, non-GAAP operating expenses increased 1% $286 $1 million compared to $184 $2 million in the prior year period.
non-GAAP operating margin during the second quarter of 2023 was 13, 3% an increase of 30 basis points compared with 13% in the prior year period.
Overall higher net sales and intentional expense control generated favorable operating leverage more than offset the gross margin pressure.
non-GAAP other income and expense for the second quarter was two and a half million dollars of expense.
<unk> to $8 $4 million in the prior year period, the year over year decrease was primarily driven by less impact from unrealized foreign currency gains in the current year period.
non-GAAP tax expense for the second quarter of 2023 was $9 $9 million compared to $7 $2 million in the prior year period.
Our second quarter 2023, effective tax rate was 25% compared to 22, 5% in the prior year period.
Year over year increase was driven by higher tax reserves and valuation allowances.
Currently we expect our annual effective tax rate to be in the mid 20% range.
For the second quarter of 2023, we reported GAAP net income $7 $4 million or diluted earnings per share of 14th sense.
<unk> GAAP net loss of slightly less than a million dollars or diluted loss per share of two cents in the prior year period. As a reminder, the prior year period included unfavorable impacts of foreign currency exchange fluctuations.
Proximately $25 million associated with the weakening of the Australian dollar against the U S dollar.
This was principally related to our 2021 acquisition with simple biomedical.
The impact was approximately $2 million in the current year period.
<unk> largely in the overall improvement in GAAP net income.
On a non-GAAP basis, we reported net income of $29 $8 million with diluted earnings per share of 56 cents.
Paired to non-GAAP net income of $24 $8 million or diluted earnings per share of <unk> 47 in the prior year period. The year over year increase was driven by operating profit growth as well as the favorable impact of unrealized foreign currency gains.
Turning now to the balance sheet, we had cash and cash equivalents of $80 $7 million as of June 32023. During the second quarter, we repaid in full the $450 million convertible notes due in early June using $350 million from borrowings.
Under our credit facility combined with cash on hand.
Free cash flow during the second quarter was $3 million compared with $26 million in the prior year period.
Decrease was primarily due to lower operating cash flow offset by capital expenditures as compared to the prior year period. We continued our investments in capital expenditures to support our net sales growth as well as current and future product launches.
As I mentioned at the beginning of my prepared remarks, our full year 2023 financial guidance remains unchanged from February 22nd which was worldwide net sales growth of between 6% to 8% on both a reported and constant currency basis compared to the prior year.
This is based on foreign currency exchange rates being neutral for the full year based on rates as of July 31 2023.
Lastly, I'd like to wrap up by reiterating what Chris said about our excitement with our continued progress towards finalizing the merger with Globus medical it's great to see the teams from both companies working closely together towards integration planning for successful combined company and we continue to expect the merger to.
Close in the third quarter.
And now I'll ask the operator to please open the call for questions.
Thank you we will now be conducting a question and answer session.
I would like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from Vicki.
All participants.
Gentlemen, you may be necessary to pick up.
Question from before pressing the star keys.
One moment please.
Questions.
Our first question comes from Matt <unk> with Barclays. Please go ahead.
Hey, good evening, thanks, so much for taking the questions.
So.
Chris I wanted to ask about.
Yeah.
Some of the business trends.
You talked a little bit about in your prepared remarks.
But if.
If you could maybe speak to.
Yeah anything in the results are in the operations or in the organization that you would say yes.
Neither indicates that yeah. The the thing that folks might be fearful up here ahead of ahead of a pending transaction might be happening.
In other words, you know rats, peeling away and taking another another opportunity or whether that's not happening so any color on.
And you know how you felt about performance and whether or not it was affected by anything like that and then I have one follow up.
Yes, Thanks, Matt.
Happy to answer that question.
The simple answer is we're feeling very good if you kind of dig below the surface of the 3% you look and see the U S hardware grew roughly 6%.
Growth in cervical.
Starting to see a growth in our posterior strategy with P. 367, that's offset by the U S support business partial or is the NSO or I'm, sorry, NCS business, which had some contractual headwinds we have seen some port slowdown.
As likely as a result of some of the sign to close our merger related anxiety from our customers is also likely some capital slow down generally in the market I'm anxious to hear what others say there because we're still somewhat nascent in the capital sales process, but we saw slower than expected sales there, but the underlying strength of the U S business is still solid so.
Cited about that.
Which actually speaks to the fact that we're retaining the top talent in the sales organization seems to be very excited about the future combination and what that holds for them individually international still you know double digit growth that's with a our second largest market in Japan really being offset from a good solid volume growth as Matt talked about in his prepared remarks.
<unk> dealing with the transitory pricing headwind that that should come and go over the course of this year. So if you really look at the underlying strength of the business, 6% growth in the U S spinal hardware business and still double digit growth in the international segment with Japan.
Coming under some pressure this year from a pricing perspective, so those things indicate to me that the business is holding its own. We're minimizing distraction people are excited about them combination, but we're taking it one step at a time.
Okay. That's helpful.
And just a follow up.
So to make sure we're thinking about you.
Expectations for Q3 here you mentioned.
And that other folks had mentioned the possibility of the.
Maybe more or the August lull in more seasonally softer Q3, I have more vacations that sort of thing.
Yeah.
If we would normally model to a flat to down and.
The third quarter.
Is that does that.
Down mid single digits is that down more than that because of what you're starting to see or just any color in the back half cadence would be super helpful.
Yeah, I mean unfortunately.
Probably the worst person to talk to you in this particular subject I did mentioned in Q1, we saw less seasonality December to January that was really interesting I would say Q2 showed signs of return to pre COVID-19 seasonality, meaning you had the June summer in July summer.
And then our first quarter tends to be the lightest. So we do expect some law to use your word in August .
With regard to your first question and the one thing I did want to highlight though isn't cresses prepared remarks is and I know you guys don't see her internal plan, but from what did we expect when we set the budget you know back in the January timeframe versus where we landed it doesn't get much closer than where we landed.
In the first six months of the year. So we're tracking right in line with where we thought we were going to be.
The next question.
Thanks.
Okay.
I have canceled all my kids.
Ahead.
Okay can you hear me okay.
Okay. Perfect I was just wondering if you can shed some light on any conversations updated conversation that you're having with the F. C C.
Still requesting documentation you know is it is it more specific or more broad.
Sound more confident in the commitment to the beat of clothing in Q3, and I'm just trying to get a sense of you know what's driving that thank you for taking the questions.
Thanks, Jargon I mean, I've said before we we walked into this eyes wide open.
Very confident in in the in the combination of these two businesses. Our team has done a great job preparing our sponsors to the second request et cetera request is something that is clearly not out of the ordinary for the F. T. C. So we are we are working feverishly to make sure that we're doing everything we can to fulfill the comment that I made earlier, which is.
Our confidence in doing ever you can to make sure that we do deliver and close the deal in Q3, there's a range of potential outcomes. Obviously the F. T C. As in dynamic situation, but we remain very optimistic and the Q3 close the teams done a lot of work will continue to to to meet the request as they come.
It's a dynamic situation.
But one that we feel confident competent and and are working very hard to to make sure. We're resolved in the meantime, you know like I said, we continue to make progress on the integration planning to the extent, we can with Globus and and both teams are working closely together.
Great and then just one on guidance.
Believe it.
Up in the back half if I'm correct can you just talk to the confidence in the back half you know what's driving that thank you.
Yeah shocking as mat as I mentioned earlier, when you were talking with Matt our fourth quarter tends to be.
And a normalised world.
It tends to be our strongest quarter.
Particularly in the November December timeframe, so, yes, it will pick up.
Particularly in that fourth quarter.
Thank you.
You bet.
Question.
Comes from.
J P Morgan.
Go ahead.
Hi, This is actually Lily on Sir Alan Thanks, So much for taking the question, maybe just taking a little deeper into.
Surgical support and your prepared remarks, you come out headwinds from biologics and Mcs. So maybe if you could just dig a little deeper into what happened there and electric the weakness and how should we be thinking about that bouncing back in the back half of the year.
Yeah, It was a bit pronounced in the.
Second quarter, So I would expect it to soften as we get in the back half of the year.
Part of it is is we had a pretty strong second quarter last year.
And we have had some pricing pressure and NCS, but I would say, we would expect in future quarters for that to a more.
Normalized to lower single digits on the negative side.
Thanks Lily.
Great. That's helpful. And then maybe just as it could follow up you know spinal hardware I think with good but.
Maybe not as strong as one might expect just give them. The <unk> procedure that we've been hearing about so is there anything specific market or to new visa that you'd call out the dread that thank goodness.
Oh just continued growth.
We we're happy with the growth would continue to see and cervical we're obviously standing up R. P 360 strategy and saw some good results there.
So you're coming off a bit of a rebound year, but generally speaking this U S bundle hardware business is on track and where we thought it would be.
As we talked about and that kind of speed you spoke of earlier the one area that we are managing as the pulse system.
The customer base, that's using the system is very happy, but obviously designed to close peered in the merger created some level of pause probably coupled with some level of capital pullback in the market, we're still looking at but generally speaking.
U S businesses is on track, where we thought it would be.
Great. Thank you.
Next question comes from Josh. Please call then please go ahead.
Hi, This is Eric home for Josh Thanks for taking the question.
Was hoping to hear a little bit more on simplifies adoption and commercial success in recent quarters and then more broadly what would you say about the durability of your U S cervical spine business continuing to deliver 20 per cent plus growth going forward and then if I could squeeze one last question. There are you able to share the runway run rate excuse me for simplify.
Thank you.
Eric all of the answers many of those as I can.
Listen we're very happy we continue to see the ramp up with simplify we believe that the CTD our portion of the cervical market is the strongest subsegment area of growth in that very large market.
Think we've got the leading technology with simplify and we continue to see growth I think we've seen consistent growth over the last several quarters. That's really led the 2000 plus per cent growth in the overall cervical business as far as as far as the durability I will just continue to point back at the overall cervical segments still a 2.6 billion.
Segment.
If I had to characterize the seats Dr market and I think I did this at our.
Analysts.
Day, our strategy session, we did back in October .
I think it was upwards of a $400 million segment of a 2.6 billion dollar market segment with a lot of.
Capability to cannibalize the Acs procedure.
For those reasons andi relatively low position and market share position I do think it's a durable growth engine for us for some period of time looking forward I'm not going to put a date on it.
But but I'm happy to continue to see growth.
We continue to reach and use it as a door opener for new customers and so it's a force multiplier for us as a as a company obviously following <unk> hundred 60 with P. 360 is also the next phase of our growth to really reinvigorate our tela business. So.
The strategy, we laid out over the last several years as the team's executing on so we feel good about as far as the run rate for simplify.
I don't think we've given that in the past I would just say, we're well above and well ahead of our deal model that we put together some years back.
Okay understood. Thank you.
Thanks.
Next question comes from that Taylor weeks Japanese. Please go ahead.
I got it thanks for taking the question.
I guess I was talking.
Talking about confidence in Q3 close is there anything that you can give us kind of inside the response.
Response that you did it gives you the confidence back and forth with.
<unk> and what are what are some of the range of outcomes that you see with potentially happening. If you do not closing Q3, why why would that happen.
I mean, I'm not going to go into any specific commentary clearly it's like I said, it's a dynamic situation that team is working very hard.
To make sure that we're getting everything that's ask of us.
And I think we've done so effectively up to this point.
As far as the range of outcomes clearly.
The SEC review the information that we that we provided and ultimately come back to us at some point.
I'm not you know.
I'm confident in Q3 time timeframe, because I feel like everything I've said before I don't believe this is Anna to competitive I think there's lots of competitors I think there's a low bar of entry for competitors coming into this space and for all those reasons. The combination of us in Globus I think actually is much better for patients. It actually opens up the opportunity further innovate.
And ultimately change patient outcomes, which is our focus as a as a company.
If for some reason if it doesn't which I'm not going to speculate it won't but I've said, all along our strategy executing on core growth, enabling tech pursuing market opportunities and strengthening our bottom line all of which are executing on as we speak.
The merger accelerates our strategy, but it doesn't it doesn't negate it or in any way change. It so the execution, you're seeing in core growth or.
[noise] focus on enabling tech the opportunities that we see in the market strength and obviously by the merger with Globus.
And building strengthen our bottom line and disciplined to expense managers some of the things Matt talked about those things stay intact, so whatever happens going forward.
We feel very very confident in where we are and where we're going.
Alright, Thank you very much.
Yes.
Next question comes from.
Wells Fargo. Please go ahead.
Hey, good afternoon. Thanks for taking the question to me here.
I'm just wondering how much of a benefit you had from backlog recapture in Q2 and what your expectations are for the rest of the year and.
Matt I heard you talk about pricing.
Earlier in the call, but I'm just wondering how you think about pricing for the rest of the year and are you able to take price in the inflationary environment. Thank you.
Thanks for the question the vehicle cover the first hand over to Matt.
You know I've been looking at backlogs for three years now.
And I don't know that I can see.
Any difference between normal volume a backlog volume anymore. It's all a blur and you can always go back over the last years ago.
Obviously foregone a certain amount of volume.
But it has ebbed and flowed and as I've always said that.
The demand supply relationship dictates the throughput and I don't think.
I don't think there is a significant strong demand or I don't think there is significant amount of supply either way.
<unk> is about the volume right now so I wish I could tell you more and sort of discern what is normal volume what is backlog volume.
I don't know that it's worth really looking at I think obviously all.
All med tech is benefiting from some level of rebound over the last let's say 345 quarters, how long it will take to normalize and actually go through any sort of a backlog scenario.
I think it will be I think it will be an even cadence to that and not a bowl is type of event. So hard for me to answer that question, but but.
But something that we've looked at but I dunno, if it's worth looking at too much.
Vic with regard to your question around pricing.
I'll just echo what I said in the prepared remarks were in.
The low single digits and having been with the company now for a number of years generally it's kind of been for us and the U S market kind of in that minus one to minus 2% in any given quarter.
But as far as your question as it relates to the back half of the year.
It may be I think it will be in the same ballpark. It may have some more volatility around it but.
You know having seen so many quarters in a row or the pricing has been relatively consistent.
I'm hopeful and believe that that is likely how we will continue to play out in the back half of the year.
Alright next question.
Okay.
I would like to turn that far back.
Barry.
My closing comments.
Exit Soria and thanks, everyone for joining us today on the queue during skull.
And earlier I believe we're making great progress on the plane combination Globus medical.
As I've said many times, we believe the new organizational created a leading global muscular skeletal company that is well positioned to change even more patients lives. So with that thank you for all for joining and have a great day.
This concludes.
She may disconnect your lines at this time, thank you for participation.
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