Globus Medical Inc (GMED) 2015 Q1 法說會逐字稿

Welcome to Globus Medical's first-quarter earnings call.

(Operator Instructions)

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

Thank you for being with us today. Joining today's call from Globus Medical will be David Paul, Chairman and CEO; and Dave Demski, President and COO. I will now read our required legal disclaimers.

During this call, items may be discussed that are not based entirely on historical fact. 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 Form 10-Q for the first 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, net and other non-operating expenses, provision for income taxes, depreciation and amortization, stock-based compensation, changes in the fair value of contingent consideration in connection with business acquisitions and other acquisition-related costs, provisions for litigation, and with respect to the computation of free cash flow, adjustment for the impact of restricted cash and 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'll now turn the call over to Dave Demski, our President and Chief Operating Officer.

Thank you, Ed, and welcome to everyone on the call. We're very pleased with our record quarter sales $131.6 million, an increase of 15.2% over the first quarter of 2014, or 16.4% on a constant currency basis. Our business has steadily gained momentum since the second quarter of last year, in which, as you may recall, we had turned over a distributor in Louisiana and we saw a drop in pricing.

Since then, we have been able to regain over half of that business, seen some stabilization in our pricing, and have posted robust quarterly year-over-year growth. Not only that, we have seen steady sequential growth as well. This solid momentum makes us very excited about our prospects for the remainder of this year and beyond.

In the first quarter, US sales grew by 18%, international sales increased by 3.9% over the first quarter of 2014 on a constant currency basis, and declined by 7.1% on an as-reported basis, due to an unfavorable foreign currency impact of $1.3 million. Innovative fusion sales increased this quarter to $70.4 million, or by 5.4% from the prior year's quarter, while disruptive technology sales increased this quarter to $61.2 million, or by 29.1% from the prior year's quarter.

Fully diluted earnings per share were $0.26 in the first quarter of 2015, compared to $0.22 in the first quarter of last year, an increase of 18.2%. Adjusted EBITDA for the first quarter of 2015 was 35.2%, compared to 36.8% in the first quarter of 2014. This decline was primarily the result of a decrease in gross margins, offset by continued operating leverage gains associated with our diligent expense control surrounding SG&A expenses.

For the first quarter, gross margins were 75.6%, compared to 77.8% in the first quarter of 2014. The decline is attributable to a shift in mix associated with biologic sales, which typically have lower gross margins than other implants, an increase in royalty expenses, and the impact of foreign currency exchange rate fluctuations on OUS margins.

Research and development expenses for the first quarter were $8.7 million, or 6.6% of sales, as compared to $7.4 million, or 6.5% of sales for the same period of 2014. The increase in R&D spending was primarily due to expenses related to our robotics division, along with additional investments made in our research department.

SG&A expenses showed significant improvement in the first quarter of 2015, coming in at 39.7% of sales, compared to 40.9% in the first quarter of 2014. We continue to achieve operating leverage in our business by controlling expenses as our sales volume grows. We produced free cash flow of $27.4 million, and ended the quarter with $285 million in cash, cash equivalents, and marketable securities.

The overall spine market continues to be encouraging. The three Ps: pricing, procedures, and pods remain relatively stable in our view. Pricing pressure, which remain in the mid-single digits in the first quarter, was almost entirely offset by favorable product mix, primarily driven by new technologies.

Procedural growth remains healthy, but off the torrid pace we saw in fourth quarter. There were no significant developments regarding pods in the first quarter, but we are encouraged by the recent trends and certain pods disbanding, and fewer instances of surgeons joining new pods.

As we previously announced, Dan Scavilla has joined Globus as Senior Vice President and Chief Financial Officer. Dan joins Globus after a 28-year career with J&J, in which he performed a wide variety of financial management positions of increasing responsibility. (Technical difficulties) Vice President, Finance and Business Operations at J&J's multi-million dollar vision care division.

Dan's career at J&J included positions encompassing a wide variety of responsibilities, including finance, operations and IT, both in the US and abroad. Dan's experience adds significant depth to our team, and we look forward to his contributions to our future success.

Based on our strong first-quarter results, we are increasing full-year guidance for both sales and EPS to $514 million and $1.02 per share, respectively. In closing, we are very pleased with the strong start to 2015. I will now turn the call over to David Paul, Chairman and CEO, for our closing remarks.

Thank you, Dave, and good evening, everyone. The first quarter of 2015 was another strong period for Globus Medical. We grew our sales by 15.2% as reported, or 16.4% on a constant currency basis, reaching $131.6 million, while maintaining our strong profitability profile, with adjusted EBITDA of 35.2% and free cash flow of $27.4 million.

We launched four new products in the quarter and continue to have a full product development pipeline. On the sales-force front, we continued to work on refining our process of recruitment and on-boarding of new salespeople. We believe that Globus remains the destination of choice for the best sales talent in the industry and are working to capitalize on this demand.

Our overall stellar performance this quarter was a result of consistent and sustained execution of our strategy of combining robust product innovation and continued sales force expansion with disciplined expense control. I am proud of the performance of our team this quarter and continue to be confident in our ability to produce profitable growth in the remainder of 2015 and beyond. We continue to execute on our strategy of robust product innovation by launching several new products this year.

I will now comment on two specific new product introductions and provide an update on our initiative in regenerative biologics. We began rolling out the RISE-L system in the quarter, marking another unique offering in the lateral lumbar interbody fusion space. RISE-L is an expandable spacer designed for optimal disc height restoration, with minimized trauma associated with impaction.

The 7-millimeter continuous expansion reduces trialing steps and provides an optimized in-plate fit. The device has a large continuous graft chamber that can be filled inside to help maximize graft contact with vertebral end plates, and increase the area available for fusion. We have been pleased with the feedback we have received on its performance from our early users and expect it to further improve our best-in-class lateral offering.

Second, CREO MIS, a minimally invasive screw and rod fixation system was launched in April. CREO MIS is designed to help minimize muscle disruption through a minimally invasive approach, while providing the same strength, rigidity and reduction capability of a traditional pedicle screw system.

Over the past few quarters, we have been highlighting the continued growth of our CREO platform, and CREO MIS is another key module that will be a driver of sales growth. CREO is an advanced and comprehensive pedicle screw system available for treating a variety of complex deformity, regenerative and trauma pathologies through open and minimally invasive approaches.

Turning to regenerative biologics, since the closing of our acquisition of TTOT in the fourth quarter of last year, we have worked diligently to increase production capacity by making significant investments in helping TTOT procure and set up high-precision manufacturing equipment and processes. Several new products from these efforts will launch in the US throughout the remainder of 2015. We are also making significant strides with our synthetic portfolio and seek to grow our overall biologics market share more in line with our hardware business.

Finally, I want to add my personal welcome to Dan Scavilla to our team as Senior Vice President and Chief Financial Officer. I am looking forward to working with Dan, who brings a great deal of experience from his 28-year career at Johnson & Johnson. He's an accomplished executive with a strong track record of streamlining operations, delivering increased profitability, and driving sales growth.

With Dan's long tenure and successful record of improving and leading large healthcare businesses, both domestically and internationally, he will be a valuable addition to our executive management team and will help support our growth as Globus becomes a larger player in the muscular skeletal market.

In summary, we continue to execute on our long-term growth strategy of rapid new product introductions, and US and international sales force expansion, while maintaining a continued focus on profitability and cash flow. We remain excited about our prospects in 2015, as we continue to execute on our disciplined strategy of profitable growth. We are now happy to take any questions.

David Roman, Goldman Sachs.

Thank you for taking the question, good afternoon, everybody. I was hoping we could start with the business, given the strength in the quarter, and perhaps you could offer a little bit more detail on what were some of the dynamics influencing the better-than-expected performance that you delivered in Q1? And then help us map what you saw in the first quarter to how you're looking at the balance of the year?

Thanks, David. I don't think anything in particular stood out in the first quarter, it's just what we've been saying all along since we've been public, if you go back to -- it starts with product innovation and continue to roll-out new products, building our US sales force, expanding our international footprint, and then acquisitions. So the one thing that's maybe a little bit different than the past was we have TTOT that we bought last year, and we're happy with that integration to date, and excited about what it's going to do for us in the future.

In terms of your second half of your question about what we look for, for the rest of the year, I mean we're very encouraged by what we've seen so far, and there's nothing that we see out there that's negative, other than the currency situation that people have talked about, a lot of different businesses.

Okay, and I guess, would you agree with an assessment that the volume environment, or the end-market, is perhaps a little bit better than it's been in the past couple years?

Yes, I think it's modestly better.

Okay, and then lastly, I was hoping you'd just touch on two things that were in the proxy that you filed late last week, and one of which relates to the change of the auditor, which I know it was disclosed fee dispute, but I was hoping you could just give us any more detail given that the auditor fees were actually down in 2014?

And then if you could just comment on the difference in the final purchase price of the Branch Medical acquisition, the $68 million versus the $57 million -- $52 million or $57 million -- just help us bridge the difference between what was originally announced and where things closed?

Sure. In terms of KPMG, they never gave us an official reason. They just said they declined to stand for reelection. That happened in the midst of fee discussions about 2015, so I'm assuming that's what prompted it.

There were no accounting issues, there were no disagreements about anything in terms of controls or anything we were doing here, so I'm just attributing it to that. We're well into the search for a replacement. We've taken bids from the other big four players, as well as a couple of the other large international firms that are not part of the big four.

We expect to be able to announce a replacement within the next 2 to 3 weeks as they clear their -- make sure they don't have any conflicts in terms of work they'd perform for us. And then, in terms of the branch question, I believe the major difference there was we purchased -- since we were such a large customer of branches, we owed them money, so we bought their receivables and we also acquired cash from them.

That's helpful, thanks so much.

Matthew O'Brien, Piper Jaffray.

Thanks for taking the question. Dave, can you just give us a general sense for what the impact of TTOT was in the quarter?

Yes, we're not going to break that out as is our normal practice, Matt, to go down into any more granularity than we give in the Qs and the Ks. So we're just -- I think we said last year that we increased our guidance by $12 million for the year. We're happy with the way things are going to date.

And the other aspect of TTOT that I just want to call your attention to is that one of the fundamental reasons we acquired them was to produce products for Globus. We have not seen any of that yet in our numbers, although we will be launching two products with them probably in the second quarter, if not the second quarter it'll be in the third quarter. So they're starting to produce Globus-branded tissue-based products that you'll start to see in our sales as well.

Got it. But they still sold product during the quarter that you recognized?

Yes they did. And then, back to the guidance we give last year, the $12 million, was primarily attributable to their continued sales to other parties.

Got it. Okay, but it's still kind of low single digits in terms of revenue contribution for you guys in the quarter?

At this point, we're just saying that we're happy with the contribution. We don't want to get into any more granularity.

Okay. And then as a follow-up on the domestic performance, extremely strong this quarter, not the easiest comp in the world from last year. Can you just give us a sense of some of the factors at play there, was it CREO? Newer products? Additional new accounts? What were some of the factors that really drove a lot of that growth, if you can split it between the different buckets?

Yes, from more of a qualitative standpoint, I think going back to the CREO launch, we're still really in the early days there, in terms, that's a system launch, and then David alluded to in his comments tonight, we're just now launching the MIS component of that. CREO's been really strong for us, as well as ALTERA, it's the latest generation of our expandable technology, that launch has gone extremely well. And then, looking forward, the RISE-L product, as we -- our lateral business hasn't been what we wanted to be in the last year, but we're really excited about what RISE-L is going to do for that component of the business.

Got it. Thank you.

William Plovanic, Canaccord Genuity.

Thanks, good evening, can you hear me okay?

Yes, Bill, how are you?

I'm wonderful, thank you. Couple of questions. Disruptive technology has really been accelerating, which is interesting, because I think when you hired all the reps back in 2013, some of the commentary was that we would expect to see the innovative fusion first, as they sold the basic products, and then see the disruptive technology ramp up.

Did these kind of reps bypass that whole innovative fusion and go right to the disruptive technology? Is that what's driving this is? Or is this kind of new product that are really driving the growth, because 29% year over year is a big number.

Yes, I would say it's more than new products. We've highlighted in the recent past all of the biologics go into that bucket for us. So KINEX is a product we've discussed in the past, it's our in-house synthetic product that's been doing really well. TTOT sales are in there, ALTERA is a MIS expandable interbody spacer. All of those products are in that bucket and doing quite well.

And I wouldn't underestimate the contribution coming from some of the sales reps we've hired over the last 12 months also in that bucket. And products launched even prior to that, like RISE and four to five have continued to keep growing. So it's clearly been a mix of new product introductions and all the new salespeople we've been able to bring over.

Excellent. Thanks. And then you had that distributor change in the second quarter of last year. It seems like the revenues bounced back pretty quickly as we got through the end of the year, and even with this quarter.

Would you say that you're at 100% with that distributor that you replaced? At 90%? Where are you in terms of revenues lost and then gained back?

Just comparing the first quarter this year with last year, we're about two-thirds.

Okay. Excellent. And then my last question is just a guidance one. I mean, $131.6 million and $0.26 is $526 million and $1.04.

If I go back for the last three years, in no quarter, if I took the first quarter and annualized it, would it be less than full-year guidance? Is there something you're worried about?

No. We're not worried about anything. I think we just want to maintain appropriate level of conservatism. We just got one quarter out of the way, and competitive market, so we just want to be appropriately conservative.

That's all I had. Thank you.

Rich Newitter, Leerink Swann.

Hi, thanks for taking questions. David, I think you said that mix this quarter basically neutralized mid-single-digit price decline, so I was just curious, what was mix maybe last quarter or in the prior quarters?

This has been very consistent for us, Rich. Our ASPs have been relatively flat, and we've seen for the last year this mid-single-digit pressure on pricing, so we've been able to offset almost all of through mix.

Okay. And is there anything -- I mean, it sounds like you have a pretty nice new product cadence this year, especially moving into the 2Q in the back half. Do you think we could see mix actually start to turn that net positive? If that's the right way to think about it?

I don't know if I want to go that far. I think it's been our strategy all along to continue to innovate those products, bring more value so they come at a higher price, and as people adopt them, we're seeing that mix effect.

Okay. Now just two more. You know you're approaching the quarter where you anniversary the distributor disruption, you said you're two-thirds through or firing capacity this quarter. So should we assume that you're 100% back by next quarter?

No, I would not assume that. Every day is its own battle. So we're continuing to work hard down there and picking up business, but we're not in the business of predicting when we will get it all back.

Okay. And just gross margin, can you give us any color on where you think you should be for the year? Or how much of a year-over-year decline, versus 2014, given the OUS and biologics pressures that you were talking about?

We don't really to get down into that level in terms of our guidance. We're strictly focusing on the top-line growth in EPS.

Okay. Okay. Thanks. Very nice quarter, guys. Thanks.

Ben Andrew, William Blair.

Great, thanks for taking the question. If you look at the second quarter, and kind of the guidance, is there a reason to believe that Q2 would be down sequentially? Is there any kind of one-time things in Q1, as people are trying to ask at, that would suggest that

No, there's nothing significant in one that is out of the ordinary, Ben.

Okay. And then, there's the biologics business with TTOT, and are you still getting ready to launch those projects in the private-labeled versions, or private-branded versions? Is that something that can actually, over time, feedback and drive the implant business as well?

Possibly, yes.

More likely than not, it will help us get our fair share of the case with the added biologics in the case, along with the hardware. But it's also possible that some of those products can help us get the hardware business.

Sure. And then, maybe as a percentage, or however you would express that, how big of an impact is having that full portfolio of biologics on your per-case revenues? Is it a 10% opportunity, a 30% opportunity, versus where you are today?

It about between a 15% -- 10% to 15% opportunity of a case, and that's how we've always looked at it. That we need to have our fair share of the biologics business. Biologics has to make about 15% of our total sales.

Okay. That's helpful, thank you. And then any update on the robotics platform, and when we may get another look, or at least a first look at what you're doing, or an update? Thank you.

As I mentioned in the last quarter, we've been extremely pleased with the progress we have made with the robotics project. We will be able to give more updates in the second half of this year, and we are hoping to give you all more color on the progress and a peek at where the product is. But we've been extremely happy with the status of the development, and we're still on track for launching this product next year.

Great. Thank you.

Craig Bijou, Wells Fargo.

Hi, guys. Thanks for taking the questions, and congratulations on a very good quarter. That being said, I do want to touch on the international growth and the step-down there. And I guess what happened there and what can we expect for the rest of the year? Should I expect that it accelerates again?

Yes. Good question. I think you can see that coming, if you looked at our last several quarters, our growth there was decelerating. The international balance, one number that we report is a combination of a lot of different factors, a lot of different countries. We've had some struggles in a couple of the countries that are some of our major producers.

I think we've addressed the issues that we have there now. I'm sure that we've got one situation on the right track. The other one I'm fairly sure of, I'm just kind of waiting for confirmation there, so I do expect to see sequential growth as we build that back up through the rest of the year. It's going to be a bit before you'll see the year-over-year growth catch up to it, given the hole that we're in at this point.

Okay, thanks. That's helpful. If I could just ask on M&A. I know you've done a couple small deals, and you obviously have a lot of cash on the balance sheet.

Just how do you think about M&A going forward? Is it -- are you going to be more focused on technologies? Potentially some vertical integration acquisitions, similar to branch, or maybe even international acquisitions to get access to a market there?

Thank you for the question. We've always said that M&A is part of our growth strategy, and we've been extremely discriminating on the types of things that we've been looking at. While we look at a lot of companies throughout the year, we really look for companies and businesses that will add value to our product portfolio and our strategy.

We did that with Branch, which we felt matched with our strategy, we felt that with TTOT as it set a hole in our biologics platform. We continue to be extremely active in the space looking at other opportunities like TTOT to further fortify our biologics portfolio.

But we're also looking at ancillary areas to build our Company in the musculoskelatal space, so we want to be discriminating, yet active, in the M&A space so we can add more value to our Company. That being said, we'll always look at every acquisition with a lens of, will it add to our sales growth, our EBITDA margins and cash flow? So that's really the lens through which we would evaluate a new acquisition.

Great, thanks for taking the questions, guys.

Jason Wittes, Brean Capital.

Hi, thanks for taking my question. Wanted to ask about biologics, the 10% to 15% number, in terms of per-case biologic usage, my understanding is that at least half that, actually a little bit more, is from either a stem cell product or a growth factor product. Which I think when you bought TTOT you said would still be a couple years off. Is that still kind of your thinking in terms of what the market breakout is, and sort of what timing may be for you to get a stem cell product out there?

Thank you for your question, Jason. Yes, I think that will be fair to say because we think that the TTOT acquisition gave us about roughly $800 million market space in which to add new products into. But we still would be missing two components that make up the biologics basin, one is the BMP product line and then the second is the stem cell space. We actively have a program in our Company working on a product, but I think we are still one to two years away from fully realizing our 15% of the case share.

Okay. That's very helpful. Also, I know you don't get too granular on the expense side, but my understanding was this year R&D would go up as a result of A, the biologics program, but also the robotics program. Is that still the right assumption when modeling for this year?

The robotics program is the major driver there. And it is up if you look at the dollars. We've been able to grow sales kind of at the same rate, so we are seeing the same percentage, but the back half of the year will probably have a little more in terms of the robotics program as we get closer to the market.

Okay, and then in terms of the cascade of new products, I know that you guys are always introducing new products, very innovative, but you mentioned three. Should we assume that those are the three main drivers in 2015, or is the cascade going to continue for the rest of the year? And related to that, if I look at those three products, it seems like they have pretty long wind and should continue to contribute pretty nicely for the rest of the year, as well. If you can give us a sense on that, thanks.

We have a full product portfolio of products to be launched in 2015. I only highlight the products that are more significant than others, but we have several other products that are of equal significance as the ones we launched that we will get out in 2015. So, I'm extremely bullish about our product portfolio in 2015.

Okay. Thank you very much.

Steven Lichtman, Oppenheimer & Co.

Thanks, hi, guys. Just a couple of follow-ups. Just a question on where we are with the POD trend. Do you get a sense that there is some of that POD business coming back to the market? Or do you see it more of a stable situation right now that isn't getting worse?

There's a little bit coming back, Steve, and that's anecdotal. I know of a few surgeons who have re-engaged us after being in a POD. So it's -- I would say at this point, it's a trickle, though, it's not a big trend coming back.

Got it. And then just one quick one on the P&L. Your tax rate, higher this year than last, I assume a lot of that has to do with geographic mix. Any opportunities you see -- tangible opportunities you see to drive that down over the next several years?

Yes. I think as our international business grows we should have significant opportunities to bring that down.

Okay. Great, thanks, guys.

This concludes tonight's call. You may now disconnect. Thank you.