Globus Medical Inc (GMED) 2014 Q3 法說會逐字稿

Welcome to the Globus Medical's third quarter earnings call. At this time, all lines will be on mute, and a Q&A session will be held after the prepared remarks. I now turn the call over to Ed Joyce, Investor Relations Director. Please go ahead.

Thank you. Thanks for being with us today. Joining for 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 third quarter.

Our revenue, earnings, operating margins, 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 non-operating 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, provision for litigation, and with the 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 these 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, and welcome to everyone on the call.

Our worldwide sales for the third quarter were a record $117.8 million, up 9.9% over the third quarter of 2013. In the US, sales growth was 8.7% over the third quarter of last year, and 4.9% over the second quarter of 2014.

The sequential growth we achieved in Q3 is significant in that historically we have seen sluggish procedural growth from Q2 to Q3, as evidenced by our flat sequential growth from Q2 to Q3 in 2013 and a 1.6% decline in the same period in 2012.

The strength in 2014 is indicative of the continued solid execution of our business model, namely new product introductions and the expansion of our sales footprint.

Our international operations also had a strong quarter, up 23.2% over the third quarter of 2013. We are pleased with the progress being made in expanding our penetration within our existing international markets and, further, the steady improvements of their contribution to our bottom line.

We are happy to report record profits for the quarter. GAAP net income was $23 million, and fully diluted EPS was $0.24. Adjusted EBITDA for the quarter was 35.6% of sales, a 220 basis point improvement over the 33.4% EBITDA margin we achieved in Q3 2013.

The improvement we have achieved this year is due to our disciplined approach to spending. And we continue to see opportunities for operating leverage and margin improvement across all areas of the business.

Free cash flow was $32 million for the quarter and $62 million year-to-date. We ended the quarter with $346 million in cash, cash equivalents, and marketable securities, and we remain debt free.

Consistent with last quarter, we have seen pricing pressure in the mid single digits. As a point of clarification about what we mean by this statement, we compare the average price per SKU for all products sold in this quarter and the comparable quarter one year ago.

The weighted average result of this calculation was in the mid single digits during the last two quarters. The calculation does not address the impact of shifting our mix towards newer, improved technology, which tends to be at higher prices.

PODs were back in the news during the quarter, as the DOJ filed both civil and criminal actions against certain physicians and a manufacturer during the quarter. CBS News picked up on the piece and ran a story that was not favorable to physicians and hospitals involved with PODs.

While we saw no direct impact as a result of these events, we remain hopeful that continued scrutiny and publicity from the DOJ will convince those involved with PODs, particularly hospitals, that they should discontinue doing business under the POD model.

Recruiting year-to-date is within our historical norms, and we continue to attract highly successful reps to our team. In addition, we are happy with the on-boarding process for the large group of sales reps we hired in 2013.

As we announced last week, we acquired allograft tissue processing and manufacturer Transplant Technologies of Texas, or TTOT. This is our largest acquisition to date, with a purchase price of $35 million upfront and a total of $15 million in milestone payments over three years based on the achievement of revenue targets. It is important strategically, as they bring a long track record of profitably selling biologics.

The combination is expected to drive value in four distinct ways -- one, sales to existing TTOT customers; two, improved sourcing of products Globus currently sells; three, sales of current TTOT products by the Globus sales force; and four, the development of new products for sales through both the Globus and TTOT channels. David will elaborate further in the opportunity later in today's call.

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, while maintaining sound fiscal discipline and improving our profitability.

As I'm sure you read in the earnings release today, Rick Baron has decided to resign so that he can pursue other interests. He has offered to remain with the company to assist with the transition during the search for his replacement, which has already begun.

Before turning the call over the Rick, I'd like to take this opportunity to thank Rick for his service and contributions to Globus, and wish him well in his future endeavors. I will now turn the call over to Rick to provide detail on our financial measures.

Thank you, Dave. Today I will review our financial performance for the third quarter of 2014 as compared to the third quarter of 2013 for key elements of the income statement, balance sheet, and statement of cash flows.

Our worldwide sales for the third quarter of 2014 were $117.8 million, a 9.9% increase over the third quarter of 2013. Innovative fusion sales increased in the quarter to $67.7 million, or by 8.2% from the prior year's quarter, while disruptive technology sales increased this quarter to $50.1 million, or by 12.3% from the prior year's quarter.

Sales in the United States for the third quarter of 2014 grew to $106.6 million, or by 8.7%, while international sales grew to $11.2 million, or by 23.2%, from the prior year's quarter. Overall growth in sales was attributed to expansion of both domestic and international territories, and greater penetration in existing territories.

Gross profit for the third quarter of 2014 was $90 million, or 76.5% of sales for the current year's quarter, as compared to $81.9 million, or 76.4% of sales from the prior year's third quarter. The gross profit percentage is slightly favorable to prior year, which reflects favorable mix of product sales and our ongoing leverage in the O-US sales model.

Research and development expenses this quarter were $8.1 million, or 6.9% of sales, as compared to $6.6 million, or 6.1% of sales, for the same period of 2013. The net increase in the expense was predominantly due to expenditures associated with our robotics project.

Specifically, the expense areas which were increased were approximately $800,000 of employee compensation expenses, and approximately $800,000 of project and clinical trial costs.

Selling, general, administrative expenses were $47 million, or 39.9% of sales, compared to $45.7 million, or 42.6% of sales, for the prior year's third quarter. This represents a lower percent of sales due to the leverage in our operating model.

The increase in costs quarter-to-quarter was due mainly to compensation costs associated with the growth in sales and the expansion of sales force in both US and O-US markets.

GAAP operating income increased by $5.4 million to $34.9 million for the current year's quarter. This also represented an improvement of over 200 basis points, as the operating margins increased to 29.6% of sales for the third quarter of 2014 as compared to 27.5% of sales for the prior year's quarter. This reflects the overall control of expenses and the leverage on our operating model.

Adjusted EBITDA for the third quarter of 2014 improved by $6.2 million to $42 million, as compared to $35.8 million in the prior year's quarter. Our adjusted EBITDA grew to 35.6% of sales for the quarter, an improvement of over 200 basis points over last year's quarter results of 33.4% of sales. Again, this improvement demonstrates our successful strategy of growth through innovation, coupled with diligent expense control.

Our income tax rate for the current quarter was 33.7%, as compared to 31.6% in the third quarter of last year. Our guided tax rate is approximately 35%. The lower effective rate for the three months ended September 30th, 2014 was favorably impacted by the results of Internal Revenue Service audits in relation to certain FIN 48 reserves for 2011 and 2012 tax years.

Quarterly net income was $23.1 million, as compared to $20.3 million in the third quarter of 2013. GAAP earnings per diluted share were $0.24 for the third quarter of 2014 and $0.22 for the prior year's quarter. Diluted share count as of the end of September was 95.5 million.

Cash, cash equivalents, and marketable securities balance was $345.8 million as of September 30th, 2014, compared to $275.5 million as of December 31st, 2013. Operating cash flow for the nine months ended September 30th, 2014 was $77.2 million. Free cash flow, as defined by operating cash flow less capital expenditures, was $61.6 million, and we continue to remain debt free.

Guidance -- lastly, as we've announced previously, we expect the purchase of Transplant Technologies of Texas to contribute approximately $2 million in additional sales and to be neutral to fully diluted earnings per share for the fourth quarter of 2014.

Adding to the guidance we provided on the second quarter call, we now expect annual sales to be in the range of $462 million to $467 million.

Finally, it has been a pleasure to work with the entire team here at Globus. I have enjoyed participating in the growth of Globus as it matures as a public company over the past three years.

I would like to thank my staff, my colleagues here at Globus, Dave Demski, and the Board of Directors. I would also like to thank, in particular, David Paul for giving me this opportunity.

While I am looking forward to what lies ahead for me, I am committed to a smooth transition for Globus. I am also confident that I will be able to continue to follow Globus' success story with great interest and pride over the coming years.

I will now turn the call over to David Paul.

Thank you, Rick, and good evening, everyone. Before I begin, I would like to reiterate Dave's sentiment and thank Rick for his many contributions to Globus during his tenure, and wish him well as he embarks on the next stage of his career.

In terms of next steps for us, we have begun our search for Rick's replacement and have put a transition plan in place. As part of that plan, Rick will be stepping down next week as our Chief Financial Officer to allow him to focus on issues relating to the transition.

Dave Demski will assume the Chief Financial Officer duties on an interim basis until a new CFO is hired. Some of you may remember that Dave was our first Chief Financial Officer and served in that capacity for over five years until his promotion to President and Chief Operating Officer in 2008. I am confident that Dave can handle the additional duties, and that doing so will allow for a smooth transition to our next CFO.

Turning to the quarter, our strong performance in this quarter 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.

We took market share this quarter, and continued to generate very strong profitability. Our EBITDA margin of 35.6% was particularly strong despite increased pricing pressures, validating our disciplined business model.

We're also extremely happy with the recently announced acquisition of Transplant Technologies of Texas, or TTOT, as this will be transformative for our presence in the $800 million regenerative biologics marketplace.

On the product development front, we have continued to execute and launch new products out of our R&D pipeline, launching three products this quarter, bringing the year-to-date total to 13. I will touch upon two of those here.

First, we further expanded the rollout of the CREO platform and our presence in the complex deformity market by launching SILC, a low profile sublaminar fixation system that is easy to insert and provides the stability to perform standard reduction maneuvers for correction of spinal curvatures, without the need for pedicle purchase.

This new system adds to our growing portfolio of leading technological solutions, offering another option for deformity correction. The SILC system also works in weak or osteoporotic bone and in a variety of complex deformity curves, aiding in the reduction for vertebral segments in which pedicle fixation is not an option.

Second, we began the rollout of Altera, our new articulating expandable TLIF spacer that is designed to maximize the achievement of lordosis and sagittal balance from a posterior approach. The combination of CREO MCS, that facilitates a simple MIS midline approach that minimizes soft tissue disruption, and Altera provides for a powerful tool for minimally invasive posterior procedures.

I will now provide some details on the TTOT acquisition. TTOT is an allograft tissue processing and manufacturing company based in San Antonio, Texas, whose products have successfully been used in over 600,000 patients over the last 20 years. This acquisition will provide Globus with its own source and capabilities for allograft tissue, including bone, soft tissue, and other biologics.

Joe Mims, founder of TTOT, has created an excellent organization that has produced steady sales growth while running the business with a keen eye towards profitability, leading to the right cultural fit for our two organizations.

Through this opportunity, we expect to not only leverage TTOT's current portfolio across our sales force, but also utilize the combined capabilities and expertise to bring new products to our existing customers.

We are very pleased to welcome TTOT's founder, Joe Mims, and his entire team to Globus, and look forward to TTOT's contribution to our growth strategy. More specifically, we see three specific areas of growth with this opportunity; first, growing TTOT's sales of existing and new products through their current distribution channels.

TTOT has several exciting products in their portfolio, including SteriSorb Sponge, a 100% cancellous sponge that is compressible, SteriShield Amnion Patch, a physical barrier for protecting wounds, and SteriFlex Wrap, 100% cortical sheet that can be bent, contoured, or rolled for various applications.

Second, selling the entire TTOT portfolio of spine products through our sales force, thereby significantly expanding customer contacts throughout the US and other worldwide markets.

And lastly, having capabilities and capacity to develop and bring to market a portfolio of differentiated products, including precision machined spacers, next generation BBMs, and specialty spine products. We have already been actively working on several new products in various stages of development that will lead to multiple product introductions in 2015 and beyond.

In summary, we are confident in our ability to execute on our long term strategy by bringing new products to the market, continuing to expand our sales territories both in US and international markets, while maintaining a steadfast focus on profitability and cash flow.

We will be happy to take questions now.

(Operator instructions.) Matt Miksic, Piper Jaffray.

Hey, good evening. Thanks for taking our questions.

Thank you, Matt.

So, I guess one of the first questions on most folks' minds is going to be some sense, to the degree you're willing to share with us, of the progress that you've made in sort of rebuilding around the dispute that you had earlier in the year with one of your distributors with the termination of a contract. I don't want to focus too much on that, but I know that is an important question. Just qualitatively or quantitatively or whatever you're willing to share would be helpful.

We can give you some qualitative color, Matt. We've moved some of our experienced folks into that market, and we've made a couple of hires. One in particular was in the fourth quarter we're pretty excited about.

But, as we mentioned last quarter's call, it's going to be a long process down there. And we feel like we're taking the right steps, but it's very early days.

Okay. So, we shouldn't read into the strength in the quarter as to anything dramatically bouncing back or happening in that particular area?

No, not at all.

Okay. And then, I wanted to talk a little bit about -- you've spent some time before talking about CREO, this new product, SILC. And I'm hoping -- I suppose we're going to see more and learn more about it at NASS in a couple of weeks. But, if you could give us an idea of what that does for your -- it sounds like the deformity side of the business, and potentially the size of that market or how we should think about that moving the needle for the business over the next year or two.

Matt, this is David. So, SILC is a product that continues to build on our deformity platform. It's a band made out of PET. Many times when you have deformity corrections in long constructs, it's hard to line up all the screws in line with one another. And oftentimes you have a vertebral body that's de-rotated in the sagittal or coronal plane.

And having a band like this enables the surgeons to pull the vertebral body and make correction and bring it in alignment with the rest of the construct. It's an extremely flexible way, because it connects on the lamina through the sublaminar space and there is no need for pedicle fixation at that level.

Other times you can have a smaller thoracic pedicle where you cannot have screw fixation where, again, you can use this type of a device. Not too many competitors out there. In fact, I think there's only one other viable company; a second much smaller one, but really one viable alternative for this type of device in the deformity space. So, we're pretty excited about this product and what it can do for our deformity business.

I think I'm familiar with the product you're talking about. In terms of size, just to put this in perspective of your arsenal of products, does this get you into more deformity cases? Is that the value? Is it in itself a $5 million or $10 million product over time? I mean, how should we think about it?

I would think about it in terms of a single. To your earlier point, it clearly gets us into deformity cases that we don't have today. And it has already led to us being in cases that we wouldn't have been in without this product. So, it is a door opener type of product for us, as only one other company really has a comparable product.

So, we look at this still as a single and we also look at this as another piece to the CREO platform, as we continue to build and flesh out this platform to be the most comprehensive fixation system in the lumbar and thoracic spine.

Great. Well, that's very helpful. Thank you, David.

Thank you, Matt.

Bill Plovanic, Canaccord.

Great. This is actually Kyle on for Bill. Can you hear me all right?

We can hear you, Kyle.

Hey, Kyle.

Great. Thank you very much, and congrats on a great quarter. Just wanted to see if you could add a little more color on the top line. Really strong quarter, as you guys have talked about. Obviously, there's some new products helping there, but also in distribution coming online from some of the hires last year. Just wondered if you could kind of -- we could tease out some of the mix between where -- the cadence of those new hires coming online, and then also the contribution from some of the new products.

Kyle, this is Dave Demski. We really don't typically share that sort of information at that granular level.

As we look at the business, our growth is going to come from both of those areas. So, in any particular quarter, it might a little bit more of one or the other. But, over time, it's all about adding new products to the bag and getting our sales reps hired and developed.

Okay, great. And then, one other product -- or one other question. On the operating side, revenues are up almost $4 million or $5 million quarter-over-quarter, but SG&A stayed nominally flat. How should we think about SG&A as a percentage of sales moving forward at similar revenue levels?

We're looking at it at a similar percentage. If there's leverage, there's leverage in two lines. One I pointed out was a slight leverage in G&A. The other side of it is in the sales operation and the general operation O-US. That's part of the reason why it's been flat.

I think you almost look at us from a bottom line up, approximately 34%, 35% of just adjusted EBITDA. There'll be some pushes and calls -- some puts and calls between R&D and some SG&A spend. But, we'll pull that bottom line out with a fair amount of reliability.

Okay, great. And then, just one final question here. Obviously you made the acquisition recently. Biologics has been an area that you've noted was a place of focus for the company and a hole in the portfolio. And when you look at your product portfolio now, now that you've kind of filled the hole of biologics there, how do you view your product portfolio and where do you think you need to focus some of the future R&D on? And then, that's it.

Thank you, Kyle. As I mentioned in the call, this is an area that -- even in prior calls, we've been pointing this out as an area that we have been intensely focused on improving our position.

As I mentioned in the call, we are working really on a series of new products that we have been in development for over 18 months now that we want to get out, which we couldn't due to a lack of supply. That's going to be really helped by this acquisition.

And secondly, TTOT has an incredible portfolio of existing products that they have now that we don't have access to previously, and we couldn't be in those markets. I mentioned we look at the allograft space as roughly an $800 million market, of which we have been participating in less about $100 million to $200 million at current levels.

So, this enables -- this opens up the entire $800 million market as a market for us to be active in. So, we are really excited about this. We still have more work to do on the biologic space, and we are going to continue to keep our eyes open for other opportunities also.

Great. Thanks a lot.

Thank you.

Bob Hopkins, Bank of America.

Thanks. Can you hear me okay?

Hey, Bob.

Hey, good afternoon. So, two things, first just a question on the guidance -- implied guidance for fourth quarter. It looks like it's pretty flat relative to what you put up in Q3. And that's usually a seasonally strong quarter. Just wondering, given the strength in Q3, why you wouldn't see more of an uptick in Q4.

I guess it's more a function of our desire and our policy to just issue annual guidance. So, we're basically keeping our guidance unchanged but for the acquisition of TTOT.

But, is there any kind of negative headwinds that you'd point out for Q4 that you think we should be aware of?

No.

No headwinds. Also I think one thing Dave mentioned at the last call, last year's Q4 was particularly strong for us and for everyone else. We're not quite sure how this Q4 is going to be for everyone, so we want to be reasonably conservative in what we are looking at.

Okay. And then, for Rick, I was wondering -- sorry to hear the news, but I was wondering if you could give us some background as to what drove your decision. What are your plans? Just would love to get a little more color, because it seems like the gap between the decision and when you're leaving is pretty quick, and would just appreciate a little more background.

Actually, I'm not leaving as quickly as perhaps the way that you could interpret the decisions that we're making. What we felt was most important was continuity over the long term.

My transition -- end transition date, quite frankly, isn't defined yet. I'm going to be here for as long as the transition requires. I'll actually be out and in some of the investor conferences later in the month. So, it's simply a way to make sure that we have the right continuity.

You can trust that Dave is a really good CFO. I followed him, so it's a good way to be.

As far as my personal plans, I'm really sincerely off looking at those other interests that some CFOs could have and other opportunities as they come along. And I hope to see all of you over the next couple months as I transition here at Globus, and then at some point in time in the future separately.

And I totally appreciate if you don't want to go into the color, but I'm just curious as to what -- basically why are you leaving? I'm just curious.

Other interests and opportunities. We've done a lot here in three years. Ed points out to me that this has been something that I've been doing over the course of my career, although I don't really think of it that way.

This is the fourth or fifth company that I've been with as a public CFO. Most of those I took public. And with the results and how good we are right now, it seems like a really good time to transition off and make sure that it's as seamless as possible.

It's as simple as looking to do something else. Nothing more, nothing less.

Okay, appreciate it. Thank you.

Matthew O'Brien, William Blair.

Good evening. Thanks for taking the questions. Dave Demski, I was hoping we could start off with just any additional color you could provide around the pricing dynamics that you saw in the quarter. I know last -- during Q2, one of the big pressures was some contracting work that you did, and the rates that you were able to get were a bit lower than you had expected historically. And you had some contracts that were coming up here in Q3. Did you see those contracts kind of come in as expected? Were they worse than expected? And then, are you seeing any of your other customers coming back to you more aggressively following the Q2 disclosure?

Well, our sales are pretty diverse. This is a huge number of customers, so I think it may have been a little bit of an exaggeration to attribute last quarter to any particular contract or two.

I would say that the tenor of our negotiations reflects the numbers that we're seeing. So, they're a little more aggressive in the last six to nine months than perhaps a year to two ago. And that's reflected in the fact that our numbers have gone from sort of the low to mid single digits to the mid single digits, if that helps.

Okay, that is helpful.

And Matt, can I add one thing? On the last call, I think something was lost in perhaps the way that we articulated it; a couple things. One, the pricing environment is roughly the same now as it was when we went on the road as an IPO. It also was a quarter that was consistent.

And this quarter, as we've looked at other people who have reported, the pricing that we're experiencing seems to be more of the norm in the industry. So, it's not so much an anomaly of today and maybe even last quarter, as it may have been that we enjoyed a couple softer quarters prior to that and now it's just returned to where it was when we went public.

Fair enough. I was also hoping we could talk about the international margin opportunity. The results, again, were quite strong, but still off a fairly small base. Is it fair to assume that there's still some opportunity to take your international margins up? You don't have to quantify exactly by how much. I don't know if you want to use a baseball analogy and say maybe you're in the fourth inning of improving those operating margins, but just any kind of sense for how much more opportunity is available there.

I'm more of a basketball and football guy, so I'd say we're in the first half.

Okay. And then, one more.

And there's quite a bit of room.

Yes, and we're not even wheezing or anything. There's still a lot of room in the game.

Okay. One more real quick one, if I may, the biologics commentary from David Paul. Some of your competitors out there have quoted some numbers as far as where they think they can get their biologics franchise as a percentage of revenue eventually, in the 15%, 20% range longer term. And is that something that, given your distribution network, that we could potentially see from GMED as you roll out these new products over a three, four year period?

Aspirationally, that's where we'd like to be, Matt. I think it's 10% to 15% is how we see the biologic space. I think unless -- if you count BNP for one of our competitors, I think it's safe to say that that's about the mix of biologics in spine.

Okay. And I would imagine you're really low single digits as far as your total business goes at this point.

We're improving. We're definitely underperforming relative to the average. That's why we made this acquisition and why, as David alluded to, we have a number of projects in the pipeline.

Understood. Thank you.

Yes.

David Roman, Goldman Sachs.

Good afternoon. This is actually Matt McDonough on for David. I wanted to start with the P&L. As has been referenced, you've generated some pretty meaningful operating leverage this quarter. And I was just wondering, is this something we should be modeling moving forward? And I was also wondering to what extent will such leverage depend on top line growth?

Let me try to answer that, Matt. I think you need to look at the business in the components. So, in the US business, there's less room for operating leverage, although we are experiencing it quite a bit in the international business.

But, as we bring up to speed our robotics business later this year and into next year, you're going to see us spend a little more money there as those get off the ground.

So, if you look at it overall, I think we've said we want to be in the mid 30%s in terms of EBITDA percentage, and that's kind of where we try to moderate -- keep the business. As we're growing in one area, we'll invest in another and maybe bring the percentage down.

Got it. Thank you. And then, one more. Just taking a step back, I was wondering if you could just clearly go through the moving parts of what's changed versus last quarter. And I guess more specifically, did the market pick up fully offset the distribution loss from last quarter, or is it just that you're regaining share more quickly?

I'm not sure how to answer the question. We've not made any really meaningful improvements in terms of the distributor loss. We've put good people in place, but we haven't seen a lot of results from that. So, the uptick in the business this quarter over last quarter and over last year, again, goes back to continuing to launch innovative products and hire and develop good salespeople.

Okay, thank you.

Rich Newitter, Leerink Swann.

Hi. Good evening. This is [Robbie] in for Rich. My question is on the US environment. It seems to me, if you back out price given some of the commentary, volumes are improving. Just wanted to get your thoughts on that area, and then I had a follow up question on just your cash balances.

Yes, I think the third quarter seemed to be a good quarter, not exceptional by any means, but a good healthy market.

So, would you say that volumes have been sort of increasing throughout the year, and sort of maybe what your expectations are for fourth quarter?

Yes, to the increase, but it's a modest increase. And as David alluded to in his answer earlier on the fourth quarter, the fourth quarter is really hard to predict because last year was such an anomaly. We'd love to see that same spike again, but we are certainly not predicting at this point because it was so remarkable last year.

Okay, great. And then, sort of on the cash balance, you have about $345 million, a couple of tuck-in acquisitions with Transplant Technologies and Excelsius. What areas, I guess, are of interest in the portfolio right now?

We've continued from the time we've gone public. I mean, we've been interested in, as you alluded to, tuck-in companies, mostly either from a technology standpoint or from expanding our distribution footprint either here or abroad. Nothing major on (multiple speakers).

Great. And then -- thanks. And then, the one last one and I'll get back in queue. Rick, do you other interests include staying in industry or going to some other new opportunity outside of spine?

Along with fly fishing, they include perhaps going back into other industries, something in the healthcare area.

I also want to say one thing, and this may be more responsive to someone else that asked the same question. Sometimes when people transition out like this, and especially if you were concerned about a quick transition, one might worry about financial stuff and controls and things like that.

The one thing that I found very good here from the beginning was, A, the programs that we had established well before I got here, to which, quite frankly, I'd attribute some of that to Dave, and then the success of the program ever since. So, if anybody out there is worried about those types of things, this is hopefully a good -- it is a good shop that will hopefully continue that way into the future.

And now to be back to your question, it's interests and opportunities. And we'll see what the future holds.

Great. Best of luck. I'll look forward to speaking with you again.

Steven Lichtman, Oppenheimer.

Thank you. Hi, guys. Just on TTOT, Dave, you mentioned that the acquisition broadens your access within the market. I was just wondering if you could flesh that out a little bit more. What are the incremental areas that TTOT brings you now that give you access to that full $800 million market that you discussed?

Thank you, Steve. As I mentioned, one of the areas that it clearly broadens our access is the area of precision machine spacers that we have not really been playing that much in. And that really opens that space out.

We look at that space as a roughly $250 million space. And we only have a ACDF spacer in that space, and it's a much larger market than our present. So, that's one space.

We also look at the cell-based matrixes that are being sold and stem cell type products, and I think that's another space that opens out. Another ancillary space is the traditional allograft space, which is the bone, tendon/bone, and cancellous allografts and corticocancellous allografts that we are not in.

And finally, it also enables us to work on next generation BBMs. So, we still think BBM is a great graft material, and we're looking forward to expanding our presence in that space.

Got it. And just as a follow up, do they have a stem cell product already, or does this give you the ability to do some of the internal work on stem cells?

Thanks for the question, Steve. You know we don't comment on that, on specific products, until they are launched. So, they don't have a product that is on the market now.

Understood. And then, I guess just lastly, maybe asking about a product that's not on the market, is robotics just in general. If you could, talk a little bit about sort of the progress there and when we will get a little bit more detail on that front, perhaps next year then.

We have been making tremendous progress with the robotics project, but we're still on track for what we said when we made the acquisition. That's going to be a second half 2016 event, sometime in 2016.

It is a difficult project that is a multidisciplinary effort, but we have made a lot of progress. Quite frankly, we are ahead of where we thought we were going to be at this time.

Okay, got it. Thanks, guys.

There are no further questions at this time. This concludes today's conference call. You may now disconnect.