Globus Medical Inc (GMED) 2014 Q2 法說會逐字稿

Welcome to the Globus Medical second quarter earnings call.

(Operator Instructions)

I will now turn the call over to Ed Joyce, Investor Relations Director. Please go ahead.

Thank you for being on our call today. Joining today's call from Globus Medical will be David Paul, Chairman and CEO; Dave Demski, President and COO; and Richard Baron, Senior Vice President of Finance and CFO. I will now read our required legal disclaimers.

During this call, certain items may be discussed that are not based entirely on historical facts. These items should be considered forward-looking statements, and are subject to many risks, uncertainties, and other factors that are difficult to predict, and may affect our businesses and operations. As a result, our actual results may differ materially and adversely from those expressed or implied by our forward-looking statements.

A discussion of some of these risks, uncertainties, and other factors is set forth in our Forms 10-Q and 10-K on file with the SEC. These documents are available at www.SEC.gov.

We undertake no obligation, and do not intend to update any forward-looking statements as a result of new information or future events, or circumstances arising after the date on which it was made. The financial information discussed in connection with this call reflects estimates based on information available at this time, and could differ materially from the amounts ultimately reported in our 2014 Form 10-Q for the second quarter.

Our revenue, earnings, operating margin, cash flows and similar items are sometimes expressed on a non-GAAP basis, and have been adjusted to exclude certain items including among other things, interest income and expense and other nonoperating expenses, provision for income taxes, depreciation and amortization, stock-based compensation, changes in the fair value of acquisition-related contingent consideration in connection with business acquisitions, provisions for litigation, and with respect to the computation of free cash flow, purchases of property and equipment. The comparable GAAP financial information and a reconciliation of non-GAAP amounts to their comparable GAAP amounts can be found in the tables included in today's earnings release, which is available on the Globus Medical investor relations webpage at www.globusmedical.com. I will now turn the call over to Dave Demski, our President and Chief Operating Officer.

Thank you, Ed, and welcome to everyone on the call. Our worldwide sales for the second quarter were $113.6 million, an increase of 6.1% over the second quarter of 2013. In the US, sales growth was 3.6%. While we are still taking market share, domestic sales growth in the quarter was below our historical standards.

This was primarily the result of two factors. First, early in the quarter we made the decision not to renew our existing contract with a significant US distributor negatively impacting our sales. Second, we experienced an uptick in pricing pressure during the quarter, increasing from the low to mid single-digits to the mid single-digits.

We made the decision not to renew the distributor contact, based upon our belief that our long-term goals will be better met by going in a different direction. We understood the risk to our short-term results, but feel very confident that our decision was in the best interest of Globus, and that we will be able to recoup these losses and more in the future. We are currently in litigation with this entity, and cannot comment further on the specifics.

For those of you who have known us for some time, you will recall that we made a comparable decision in 2010 for similar reasons. The decision also negatively impacted our results in the short-term, but was the right long-term decision. Our Company has created significant value since our inception, by following principles that focus on the long-term health of the organization. While these decisions, and sometimes result in short-term pain, there is no doubt that by consistently following these principles, we have been able to achieve outstanding long-term growth and profitability.

We are very pleased with revenue from our international operations, up 34.1% over the second quarter of 2013. Through the first six months of 2014, our international growth stands at the 38.5% over the first half of 2013.

Our strong growth is primarily being achieved through greater penetration in existing markets, although we did expand into several smaller markets in the second quarter, reaching a total of 32 countries. We continue to see improve probability in our OUS operations, as a result of achieving operating leverage on our improved sales.

Adjusted EBITDA for the quarter was 35.4% of sales, 140 basis point improvement over the 34.0% EBITDA margin we achieved in Q2 2013. The 2014 results include the impact of the significant ramp up in R&D expenses associated with our purchase of Excelsius at the end of 2013.

It further demonstrates that our strategy of growth through innovation, coupled with diligent expense control produces outstanding financial performance. Diluted earnings per share were $0.22 for the second quarter. Free cash flow was $6.3 million for the quarter, and $29.4 million year-to-date. We ended the quarter with $313 million in cash, cash equivalents and marketable securities. We remain debt-free.

As I mentioned above, pricing pressure has increased to the mid single-digits during the quarter. Hospitals continue to aggressively manage implant costs through contract negotiations. We are able to mitigate this pressure to some extent by shifting the mix towards new and better technology, but the decline in prices negatively impacts our results.

There have been no significant developments concerning [PODs] since our last call. Procedural volumes continue to be at levels that are less than seen in the fourth quarter of 2013, but remain relatively healthy. We are not aware of any systemic changes on the part of carriers or patients.

Recruiting for the quarter and year-to-date is down from the 2013 hiring pace. However, our current pipeline of recruits is robust, and we continue to believe Globus is the destination of choice for the top sales talent in our industry. For the remainder of 2014, we are intensifying our focus on ramping sales from the large bolus of new hires that we made in the second and third quarters of 2013. Many of the competitive hires are rolling out non-competes, and we expect to see increased sales as a result.

The other area we will be paying particular attention to, as we look to offset the impact of pricing and the distributor loss, is new product introductions. We have had several key strategic introductions in the past 12 months, that we expect to see a significant gains from in future quarters.

In particular, the continued expansion of our biologics portfolio with the addition of KINEX and SIGNIFY, and most significantly the launch of our CREO pedicle screw platform that David Paul will discuss of his remarks. As we look forward to the remainder of 2014 and beyond, we are confident in our ability to continue to take market share, and grow well in excess of the market.

We will remain focused on driving innovation and expanding our sales footprint, both domestically and abroad. We will continue to strive to be good stewards of our resources, operating the business efficiently and profitably. I will now turn the call over to Rick Baron to provide detail on our financial measures.

Thank you, Dave. Today, I will review our financial performance for the second quarter of 2014, as compared to the second quarter of 2013 for key elements of the income statement, balance sheet, and statement of cash flows. Our worldwide sales for the second quarter of 2014 were $113.6 million, a 6.1% increase over the second quarter of 2013. Innovative fusion sales increased this quarter to $65.9 million or by 4.6% from the prior year's quarter, while disruptive technology sales increased this quarter to $47.7 million or by 8.4% from the prior year's quarter.

Sales in the United States for the second quarter of 2014 grew to $101.6 million or by 3.6%, while international sales grew to $11.9 million or by 34.1% from the prior year's quarter. Overall growth in sales was attributed to the expansion of both domestic and international territories, and the greater penetration in existing territories.

Gross profit for the second quarter of 2014 was $87 million or 76.6% of sales for the current year's quarter, as compared to $82.2 million or 76.9% of the sales from the prior year's second quarter. Research and development expenses this quarter were $7.7 million or 6.8% of sales, as compared to $7 million or 6.6% of sales from the same period of 2013. The net increase in the expense was due to the current year's expenditures for our robotics project, offset partially by a [decrease] year-to-year of certain R&D expenses.

As planned, we anticipate additional increases in expense for R&D in future quarters due to the expenditures relating to the robotics project. Selling, general, and administrative expenses were $46.4 million or 40.9% of sales, compared to $45.8 million or 42.8% sales for the prior year's second quarter. This represents a lower percent of sales due to the leverage in our operating model.

Our operating income, income tax rate, quarterly net income and GAAP fully diluted earnings per share reflect the effect of the Synthes litigation, and related expense of $19.5 million in the prior year for each of these variables. Operating income increased to $31.6 million or 27.8% of sales for the second quarter of 2014, as compared to $11.2 million or 10.5% of sales for the prior year's quarter.

Adjusted EBITDA for the second quarter of 2014 was 35.4% of sales or $40.2 million, as compared to 34% of sales or $36.3 million in the prior year's quarter. As Dave indicated earlier in the call, an adjusted -- our adjusted EBITDA further demonstrates that our strategy of growth through innovation, coupled with diligent expense control procedures continues our outstanding financial performance.

The income tax rate for the current quarter was 35.2%, as compared to 32.3% in the second quarter of last year. Quarterly net income was $20.6 million, as compared to $7.4 million in the second quarter of 2013.

And GAAP earnings per diluted share were $0.22 for the second quarter of 2014, and $0.08 for the prior year's quarter. Non-GAAP earnings per diluted share, which excludes the provision of litigation net of tax effects was $0.23 per share, as compared to $0.21 per share in 2013. The diluted share count as of the end of June was 95.5 million.

Cash, cash equivalents and marketable securities balance was $313 million as of June 30, 2014, compared to $275 million as of December 31, 2013. Operating cash flow for the six months at June 30, 2014 was $41.6 million. Free cash flow as defined as operating cash flow less capital expenditures was $29.4 million. We remain debt-free.

Guidance. As Dave indicated earlier, the decision not to renew the distributor, and the impact to pricing will affect our top line expectations. We now expect full year revenue to be in the range of $460 million to $465 million.

We are, however, reiterating our EPS guidance for the year, as we estimate our full year's adjusted earnings per share, diluted share in the range of $0.90 to $0.92. I will now turn the call over to David Paul, Chairman and CEO, for our closing remarks.

Thank you, Rick, and good evening, everyone. We have come a long way since our founding just over 11 years ago, having just completed our second year as a public company. Our strong performance since the IPO, has been a testament to our focus on improving patient outcomes by delivering innovative products, growing our sales force worldwide, and a disciplined approach to expense control.

As Dave explained earlier, this quarter had some unexpected challenges, that led to sales growth below our historical trends. However, we were able to generate very strong profitability, while continuing to take market share. Our EBITDA margin of 35.4% was particularly strong, despite increased pricing pressures validating our disciplined business model.

On the product development front, we have continued to execute and launch new products out of our R&D pipeline, launching five new products this quarter for a year-to-date total of 10. I will touch upon some of those here. First, we further expanded the CREO platform, by launching the CREO Threaded system and the CREO MCS corticle screw system. CREO Threaded is part of our growing new pedicule screw platform, and offers controlled gradual corrections for complex deformity users who prefer Threaded locking caps.

This product caters to the Threaded subsegment of pedicule screws, which is the largest segment of the spine market. The CREO MCS system facilitates a simple, minimally invasive mid line approach that minimizes soft tissue disruption, with a fixation equal to a traditional screw trajectory. The combination of CREO MCS and our line of expandable interbody spacers including CALIBER, RISE, and soon to be launched ALTERA expandable articulating device provides for a powerful tool for minimally invasive posterior procedures.

Earlier this month, we launched the direct look platform for lateral procedures, a lateral retractor instrumentation system and technique that allows surgeons to have a direct visualization of the source muscle and the neural structures. The system is designed to minimize injury to the lumbar plexus, reduce retraction time and pressure of soft tissue within the incision, and increase the safety profile of the lateral approach. This approach may help shorten the learning curve for lateral fusion surgeries, and potentially lessen or eliminate the need for neuro monitoring.

Also as mentioned during the last call, we added SIGNIFY bioactive to our family of bioactive glass-based bone graft substitutes. Bioglass has been shown to recruit and signal osteoblasts that promote bone formation.

SIGNIFY also provides an osteo-conductive matrix for new bone growth. Our intensified efforts in the biologics space are beginning to yield returns, and we are continuing to work in this arena to further strengthen our position.

I believe our long-term prospects as a leading innovator and share taker will continue for the foreseeable future. In summary, we are confident in our ability to execute on our long-term growth strategy, by bringing new products to the market, continuing to expand our sales territories both in the US and international markets, while maintaining a steadfast focus on profitability and cash flow. We will be happy to take questions now.

(Operator Instructions)

William Plovanic, Canaccord Genuity.

Great. Thanks. Good evening. Can you hear me okay?

Yes, Bill.

Thank you. So the question I have is -- it's multi-parted, but it really is all going to stem from the distributor change. And as you think about this, the first piece of this is, how much of the change in guidance is a function of the change in the distributor versus the pricing? And then I have a follow-up based on that.

We are really not prepared to talk about those details, Bill, in terms of the guidance, or the components of the guidance.

Okay. The follow-up to that is, when would you expect the -- obviously, if you take out a distributor or don't renew a contract, you are putting direct distribution into that channel. When would you expect the new distribution that is being put into place to start gaining traction? So when -- obviously, you are guiding something like 5% to 6% growth in the back half of the year. I would assume that, as that new distribution in that territory comes up and your other -- the reps you added last year, which are now rolling off of non-competes, that as we think about, at some point in the future, is it Q4, Q1, when do we start to see the growth rate reaccelerate again?

Well, just isolate your question to the loss of the distributor. We will start seeing some sales immediately. I mean, there are steps happening in the market right now. We are maintaining some of the business. We lost a significant amount of it. But to get back to the levels that it was, I mean, that will take at least a year to work through that cycle and probably more. Does that help you from that standpoint?

It does. And then, again, on those new reps, if there is any quantification for the reps you hired last year and their ramp. I mean, how should we think about when they really start contributing to the numbers?

It varies over time and by each territory. But as we track them, we are satisfied with the progress of the recruits we have made in the last 18 to 24 months. They typically have noncompetes, so you don't see as big of an impact in that first 12 months.

There is somewhat of a vacuum effect, if you will when we take them out of their territories, where their business becomes up for grabs many times, and we are able to capture that. But they are not able to be a part of that process. So when they come off their noncompetes in month 13, they are able to go back in there, and that is where we see a more accelerated ramp in that next one -- in that next year. It can take them a while to reestablish relationships, and things happen while they are gone. So it's hard to say with certainty, how that is going to occur, but we really see a ramp in the second year.

And Bill, consistent with the way that we have described it, the bolus of those reps occurred late in Q2, very late in Q2 of last year through the end of the year. And we have indicated that the timing of that increase happens within that second year, and by the end of the second year. So we have always put a time frame on it in the 18 month time frame. So hopefully that's helpful.

So if you start hiring on that late Q2 2013, through the end of 2013 that we should think that the contribution from them is really a mid 2015 event?

Right. You will start seeing some of the increase in revenue now, but you will ramp all the way up fully into the territory by that point in time.

Well, you start seeing it now.

Yes.

You will begin to see it on month 12, and then you get fully ramped up in that 18 month or so time frame.

Okay. And you are not, at this point, willing to quantify kind of how much of the loss of the distributor versus pricing? Because what we are trying to figure out is, what would the quarter have been if they weren't -- if you had kept that distributor, and kind of how is the rest of the business tracking? That is what I am trying to back into. And that's all I have. Thank you. (Inaudible)

Bob Hopkins, Bank of America.

Hello, can you hear me, okay?

Yes, Bob.

Great. Maybe just want to finish that thought. I mean, the first question I would have, would be what was the growth of your US business, ex that distributor here in Q2?

Essentially it was the 3.6%.

No. That was the growth rate of the whole US business this quarter. What I am curious about is, excluding that, the issues with that distributor, what was the growth rate of the rest of the US business?

Traditionally, we haven't segmented it in that way, but the loss is largely attributable to the two items that Dave had mentioned. Clearly, the pricing which is down to 2 point something percentage points, and then the loss of the distributor. Those are the two main items. With the loss of the lower sales price, remember also that Dave indicated in his remarks, that normally we will see some mitigation of that price decline through the introduction of new products.

So, one of the first questions that pops into my head here, as I listened to your disclosures, you commented that the distributor issue happened at the beginning of the quarter. And I guarantee you from all the e-mails I am getting, that investors view this as a material disclosure. So I am just curious why this wasn't disclosed earlier on in the quarter?

Well, I don't think it rises to the level of materiality. We have looked at that from a legal standpoint, and it doesn't rise to that level.

Okay. So, approximately in 2013, can you share with us what the revenues from this particular distributor were?

Bob, we are not prepared to discuss the details of what the specific loss was related to that.

Okay. So the basic comment here is that, the distributor issue and the pricing issue, ex that, you would have been at normal growth rates? Is there anything else going on in any of the other geographies? So basically outside of the distributor area in the pricing, everything was kind of normal with the quarter? Or were there other things that slipped this quarter that are things that you want to disclose here?

It would be the normal ups ebbs and flows of the business. What we've tried to do each quarter is identify the things that are plus and minus, and unfortunately, this is one of those quarters where there's a minus. There are plans in place to replace that territory, that distributor. They will come in over time. At this point, we are not willing to put an end date on it, as we would feel uncomfortable in not being able to achieve that. So we have modified the guidance to take into account the fact that this is something that will take some time to pull into it.

The good things that have happened this quarter, hopefully not to be lost, would be the growth internationally has continued. So that remains very helpful, and is a driver of growth, that was called out separately. And the strategy of continuing to introduce the new products, and the meaningful products, which again help attract, and will be most likely part of the attraction for the replacement strategy for that distributor. So those things are good things.

Last question for me is, is the reason why you aren't disclosing more, is because you are involved in litigation with this distributor? Because obviously, without the details, we are just left to speculate with what's going on with the business, and what's going on with the rest of the business. So is this really a legal issue here, as to why you are not disclosing more?

That is part of it, but I also think historically, we felt like we have limited our disclosure, in terms of particular customers, particular products, particular sales reps, because we feel it puts us at a competitive disadvantage. We want the business to be strong, and we understand you need to run your models and help value the stock, but we want to protect the business from fundamentally, to be able to compete.

Was pricing bad across the board, or was it just in certain geographies?

We're just talking US here. But it was -- it is throughout, most of the impact we are talking about involves the national chains, the larger customers, so they are not just regionally focused.

Okay. Thank you.

Matthew O'Brien, William Blair.

Good afternoon. Thanks for taking the question. Just to follow-up on the first two, Dave Demski, and to push a little bit. You talk about this increase from mid -- I am sorry -- low single-digit pricing to mid single-digit pricing. When I look at your overall business in totality, I am getting to something around $7 million to $8 million of the reduction in guidance from pricing, with around, $12 million, $13 million from the distributor. Are those numbers even in the right ballpark?

Well, I think we have given you enough pointers on the pricing to do some math like that. I am not going to confirm or deny it, but I will just repeat it. Mid-single digits -- that has increased to the mid-single digits, from the low to mid single-digits. So your thinking is directionally correct there.

Okay. And then, when I think back to 2010, and knowing you guys back to then, with the distributor turnover at that point, if memory serves, it took about a year to 15 months to get that territory kind of back up to where it had been, and then growing from there. Is that what we should anticipate here, or you think there has been some learning that has gone on since then, or some direct employees that you could potentially put into those -- into that geography to shorten that time frame?

Well, I think that geography was much larger than this geography, so that actually took us almost two years to get back to where we were.

Okay.

Your memory, Matt, your memory is accurate and that was the situation that Dave referred to, where the Company itself has decided to take the decision -- the easier decision would have been to maintain and not be able to grow as effectively in that area. And we've hopefully taken -- we've only taken a small step backwards to take two steps forward.

Got you. And then along those lines, Rick or anybody, are there any other bigger distributor contracts that are coming up for renewal over the next 12 months?

There is a constant flow of those, yes.

Okay. But generally, speaking your relationships right now with those distributors are fairly healthy?

They are very good.

Okay. And then finally for me, a fairly large reduction to the top line guidance, but supporting the bottom line outlook. Can you just help us understand where those savings are going to come from specifically, in terms of R&D projects, or some of the marketing activities that you were going to do, that you are not going to do? And then, how that could impact the business as we look into 2015?

This Company is all about making pretty constant and steady, and hopefully good decisions for the long run. That guidance it really doesn't impact any of the anticipated spend, that we would have been making. As you could see by the performance in this quarter, even with the decrease in sales, we still managed to hit the consensus within the adjusted EBITDA and the adjusted earnings per share line. So fundamentally, we have been able to do the right things, hopefully internally to maintain those metrics, which are important, I think, to you and to everybody. That's one. Two, the leverage in the model historically has been from those areas that have been underperforming. And as we have talked about earlier in the year, the adjusted EBITDA out of our international, and some of those other areas, have popped appropriately, which allows us to make this kind of reaffirmation of the EPS.

Maybe I will take another crack at that. I think we are doing a little better than we thought we would, when we gave the guidance initially. So, we expect those trends to continue through to the end of the year.

Got it. Thank you.

David Roman, Goldman Sachs.

Thank you, and good afternoon, everybody. I know we have been through the distributor discussion a few times now, but I was just hoping you could give a little bit broader perspective on, to what extent do you think we need to monitor things like this, and factor the potential for contact losses into our thinking of the stock on a go forward basis? And the reason I ask this is, it is the second time in four years there has been a major distributor disruption. And if this is something that we should need to model and think about more volatility in your top line on a go forward basis?

We don't have any other -- any plans to do that, David. But as we have distributors, they have -- we are committed to certain geographies. And if they are not able to grow up to the level we need them to, we have to look at restructuring their contracts. And there is always the potential of something like this in that event. But there is nothing on the radar screen that we can see that causes us to anticipate another one of these.

Another thing is to keep in mind, is it has been two in four years, but it has actually been two in 12 years. Since our inception, this is really the second one of any significance, that we've had to not renew.

Although, my pushback to that would be, that the time period we are talking about 2010 to 2014, has been one of very difficult growth for the market. So the likelihood of underperformance of a distributor, where everyone's fighting to take an incremental piece of a pie that is not growing, the likelihood of underperformance has got to go up, right?

I don't know that that's true. We would judge their performance based on as it relates to the market, and the dynamics in their markets. So we have not -- we weren't able to do it in this case. But we have been able to restructure contracts successfully with other folks facing a similar situation. I don't think the likelihood goes up because the market is more competitive. If those individuals are our best option in those geographies, we are going to stick with them.

Okay. That's helpful perspective. And then maybe you could go into a little bit more detail on the pricing side, that just seems like a relatively meaningful change for a metric that has been pretty stable. Understandably, that pricing has been negative but you been able to talk to that low to mid single-digit number, I think for several quarters now. Can you give us any maybe further context of why you think that took a step down this quarter, and why you don't think that is going to be the one-time aberration?

Well, it's just that it's a function of the hospitals coming out and renegotiating as their contracts come up, particularly the bigger chains, and they have become better buyers over the last several years. Last year was -- we saw a lessening of the pressure throughout the year, and it started to dip down, and it went down pretty precipitously in the second quarter. So that goes back to our guidance. We don't have a reason to think that it is going to improve immediately, so we've taken the guidance down to account for that this year. You can't turn the business on a dime in response to that. But taking it out a few more quarters, we're going to overcome it, by continuing to release new products, by continuing to hire, and frankly the products that we have introduced to date, and the reps that we have on our team right now, there is a lot of capacity there that we can exploit.

Okay. That makes sense. And I guess, my last question would be if you sort of add up, all the pieces of the market so far, pretty much everyone has reported except them, obviously Medtronic. But this does look like a tough quarter for the overall spine market. And I am just wondering, you made it in your prepared remarks, Dave, the comment that growth continued to trend below Q4 levels. Whether you think we are in a prolonged period of slower growth versus where we exited last year? Or this is just pronounced seasonality, and we should expect to ramp through 2014, just like we have seen on a seasonal basis the past couple years?

Well, that's a great question. We are -- I think from our experience, the seasonality last year was profound. It was unusual. So, we are still trying to understand whether was that the pending Obama care implementation, or was that a high deductible policies people that are shifting to; what caused that fourth-quarter spike? And hoping that this year, we will see the same kind of spike. But if, so if it is related to Obamacare, we probably won't see the same kind of spike this year. But we are not counting on it. We are hoping that's the case, but I think we've got to go through one more season here, to see really what is driving that.

Okay. I got it. Thank you.

Okay. Do you have another caller?

Richard Newitter, Leerink Partners.

Hello. Thanks for taking the questions. I was hoping, David, maybe you can tell us, just looking at the guidance which you are now implying about a mid single-digit growth rate for the year, what is the right normalized growth rate for the Company? I mean, I appreciate you are not willing to go much deeper into the granularity, and breaking down the pricing commentary from the distributor. But at least, can you give us a sense of where you see your business, in light of all the changes that have taken place this quarter, and what you know to be true for all the positive momentum drivers going forward, what do you see this business growing at? Is this, a where you were, kind of before this, as of the first quarter? Or do you see it getting back into the high, the low double-digit kind of a sustainable growth rate trend?

Yes. Rich, I thank you for the question. I view that what's happened this quarter as more or less an air pocket. It is a couple of events happened at the same time. I don't think that undermines our business model in any way, very bullish on our long-term prospects. It is not the kind of thing you can turn around in one or term quarters, but I think next year and beyond, we will be back into double-digit growth.

Okay. That is helpful. And the other question I just had was, it sounds like pricing took a step worse. But you still feel confident that with new product flow, and kind of like you said, your business model and what you have been doing in the past, that you can help to offset that somewhat. So my question really is, is what happened this quarter that you think you couldn't offset it as much? Or what is it about the new product flow, or the things that happened over the next several quarters, that you do think you can kind of potentially combat that pricing?

So, just before Dave or David respond, I want to make sure that the context of how we calculate this is -- I just want to remind you, this is a -- think of it as a same-store sales type of a calculation. So if we didn't sell the item, or we didn't sell it to that particular end point last year, that's not included in the calculation. So this is a same-store sale thing. What we do talk about is the overall innovation that we have throughout it, which has mitigated some of that over time. Dave?

Yes. In terms of your question, I -- we're not changing anything fundamentally in the business model. So I think it is a matter of just more focused execution, continuing to believe in what we're doing, with the products that we're developing, the technology that we're developing, and the team we have on the ground, as well as continuing to recruit. It's a change in the business, one of which we precipitated ourselves. The other is more exogenous, and so we need to compensate for it, and we have done that historically. We've been able to overcome these sorts of challenges in the past, and I don't see any reason we won't be able to now.

Thank you, and just if I can, just two very quick follow-ups. So would you have changed guidance if not for the distributor issue, and it was just the pricing?

To be honest, I don't think we should comment on that. I think that overall, we are still comfortable with the fundamental aspects of the business, which is really what we are trying to give out this evening. The issues at hand are the two issues that have been identified. And they are things that, either through refilling that one territory, that one area, we can do. Or the continued strategy that has happened over the past 11 years of introduction of new and meaningful products. So, we feel comfortable with the rest of the business and the execution.

And how long do the contracts you just signed last, on the pricing front? Clearly, there were some prices in contacts that you had to re-sign. Just curious to know long were they for?

Most of the hospitals want to you sign a one to three year agreement. None of them go beyond three years, but unfortunately they kind of hold a unilateral power to renegotiate when they want to. So there's not a lot of protection from our standpoint.

Thank you.

Matt Miksic, Piper Jaffray.

Hey, thanks for taking our questions. I wanted to -- listening to you talk about this distributor, I think Rick made a comment, and maybe David also commented, on the idea that there are potentially some opportunities or alternatives as to how you might fill this territory. I guess, hearing you talk about it a little bit, and understanding that you are not telling us an awful lot about where it is or how big it is. Is part of this issue potentially that -- I think Dave, you mentioned in some cases we want to determine whether a distributor is our best option in a given geography. Is part of the issue here, is that you had underperforming distributor, and that may be a matter of contention with you in this organization, but you had someone that you would prefer to do selling harder and at a higher rate, and there are the other options in that region, that you are balancing that against? Is that a fair way to look at what you're doing?

I think generally in the way to think about that is that we are committed contractually to a fairly significant geographical area. So we have certain situations, where you have a concentration of sales into a small number of surgeons or accounts, in a large geography that they are occupying it. And when we try to renegotiate it, we try to reduce that geography down to where they have the ability to have an impact, and open up the rest of it, so we can develop it and invest in it. And in this case, we weren't able to convince the person that that was a good thing for them, for their organization. And they -- we parted ways, whereas in the past we have had folks who were able to see that that was good for them and for Globus. We have -- and there is incentives built in their for them to do that. And so, where that would come up again, we would make the same kind of approach where it is applicable. We really want to get back geography that is underperforming, so we can invest in it.

Okay. And as you get further into this process of rebuilding that, or you get through these discussions with this entity that you are separating with. Is this something you will be able to give us some sense as to which way you are going to fill this, in terms of either hiring indirect reps in some cases, or contracting with another organization, or whatever it is as you work that out?

Probably not. I will just go back to my earlier comment, that from a competitive standpoint, we would rather not share that information publicly.

All right. Well, despite the disappointment in the way the revenues have gone, and we appreciate you holding the line on the bottom line. It may seem like an ironic question, but you talked a little bit about some of the new launches going better than you anticipated, or some of the trends that you've seen going better than expected. Head line here, doesn't look better than expected, but can you talk about maybe where you are seeing some encouraging traction, things that are working out better related to the CREO launch, or other products that would be helpful color for us?

Thank you, Matt. I think the CREO launch is really the biggest launch that we have undertaken in our history. And it is still an ongoing launch, because the platform has multiple products and systems to it. And this quarter, we launched two more products to it. So that's really where we've been seeing a lot of excitement, and we are very confident that this is going to be our biggest product by 2016. I alluded to this two quarters ago, and we still see tremendous upside and potential within the CREO launch.

I also mentioned in my prepared remarks about ALTERO. We just recently got FDA 510(k) clearance on an articulating expandable device. With all the talk about [sizable] balance of things so important in the lumbar spine, we think that ALTERO will be a great alternative to enhance our [sizable] balance, and that is another product that we are very excited about in the second half of this year and beyond.

And any color as to -- there seems to be this battle, maybe it is winding down, but maybe not, as to who is picking up some of the reps dropping out of these other organizations, either combining like Synthes and DePuy or Biomet or Zimmer? Any color as to how you are faring, in terms of just generally new hires and getting into the end of the year?

Well, I think last year was a record for us, and we are off that record, but we are still strong. There is still some fall -- the Synthes DePuy combination has declined somewhat from where it was. The pace is off, but there are still individuals leaving that organization regularly. Regarding the other ones, we really haven't been paying a lot of attention, nor have we been a factor in those.

Okay. All right. Well, thanks for the color.

Thank you, Matt.

Steven Lichtman, Oppenheimer and Company.

Thank you. Hello. Dave, just to give context again back to 2010, I think you mentioned it was in that second year after the distributor end, and that you came back to normalcy. And I think you saw some really strong growth, because obviously, the comparables were also easier from that prior year. Are you indicating also that you think the -- based upon the work you are going to be doing here, that the return to normalcy potentially could be faster in this case, just given the territory size?

It's possible. But we are not predicting that. So I don't want that expectation. It is a hard process. It is a long-term view that we're taking, and so we're working as we speak to make some changes there that will help us improve, but it is a work in process.

Okay. And then just looking back at the math that we were talking about earlier on the two components for the full year guidance, on prices versus the distributor. Just to make sure they are all on apples to apples -- the pricing discussion to low to mid, down to mid is just based upon the US sales base? Is that right?

That's correct.

Okay. And then just lastly, the balance sheet, obviously the clean balance sheet you got here and the continued cash flow, updated thoughts if you could, in terms of where you think overall, there are opportunities for you to both bolster the portfolio?

Well, we have always made it clear that biologics is a space that we have intensified efforts with in-house product developments, but we have also been looking at opportunities there. And that is one area that we could potentially see ourselves use some of that cash in our balance sheet.

Okay. Great. Thanks.

Thank you.

(Operator Instructions)

William Plovanic, Canaccord Genuity.

Great. Thanks. Can you hear me okay?

Hey, Bill.

Just follow-up questions on this. One, what do you consider is material, is it 10% or greater? And then just two, given that the stocks is probably going to get hit tomorrow, do you have any thoughts on stock buyback, or anything like that? Or is it still just purely M&A for cash usage? And that's all I had.

Okay. Material is a combination of things. The give and take between the top line miss and the bottom line hit, clearly impacted the decision-making process. So with essentially, if you had dropped sales by the amount that you dropped, I think that the expectation throughout the market, would have been that we would have missed on the bottom line too. So we either equaled or exceeded expectations, depending upon how you calculate it.

So top line miss, and those two things clearly, I'm sure in the way that your voice would indicate it, Bill, and perhaps Bob's, that there is a little bit of discussion in there. But it would have to be a combination of them, and I think that is the way I would have dealt with this type of an issue too. Also, I think the permanence of it. This is something that from time to time, we will have people that we will terminate, let go, distributors that we will hire, distributors that we will fire. But we do that in a way that we hope is good for the long-term benefit of the Company. And the long-term for us, in and when for our company, is for our investors and for you, not necessarily for those in the room. So those are the basis that we look at. So it is top and bottom line as a combination. And then, please, the second part of your question, Bill, if you could repeat it? I would appreciate it.

Sure. It was just given there is a high likelihood that the stock is coming off tomorrow, are there any thoughts on a stock buyback for uses of cash?

We still view that right now, that the cash is there. We have still the potential for appropriate acquisitions, and that may be the best use of the cash into the future.

Okay. Thanks.

Thank you, Bill.

Thank you.

We have no further questions in queue at this time. I would like to thank everyone for joining today's conference call. This does conclude the call, and you may now disconnect.