Globus Medical Inc (GMED) 2015 Q2 法說會逐字稿

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

Thank you for being with us today. Joining today's call from Globus Medical will be David Paul, Chairman, and CEO. Dave Demski, President and COO, and Dan Scavilla, Senior Vice President and CFO. This review is being made available via webcast, accessible through the Investor Relations section of the Globus Medical website at www.globusmedical.com.

Before we begin, let me remind you that some of the statements made during this review are, or may be considered forward-looking statements. Our Form 10-K for the 2014 fiscal year and our subsequent filings with the Securities and Exchange Commission identified certain factors that could cause our actual results to differ materially from those projected in any forward-looking statements made today.

Our SEC filings, including the 10-K, are available on our website. We do not undertake to update any forward-looking statements, as a result of new information, or future events or developments. Our discussion today will also include certain financial measures that are not calculated in accordance with generally accepted accounting principles, or GAAP. We believe these non-GAAP financial measures provide additional information partnered to our business performance. These non-GAAP financial measures should not be considered replacements for and should be read together with the most directly comparable GAAP financial measures.

Reconciliations to the most directly comparable GAAP measures are available in the schedules accompanying the press release and on the Investor Relations section of the Globus Medical website.

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. We had an outstanding second quarter. Sales were a record $133.6 million, earnings per share were $0.25, and adjusted EBITDA margins were 35%. We also introduced five new products during the quarter and sales force recruiting was very strong. We have made consistent steady progress on the development of our robotics platform and we are pleased with the integration efforts of TTOT and Branch Medical. In short, we are very pleased with our 2Q results and overall execution for the first half of 2015.

Sales for the second quarter increased 19.1% on a constant currency basis over the same quarter last year. This marks the fourth straight quarter of record sales and accelerating sales growth, reflecting tremendous strength in our business. US sales grew by 19.5% for the quarter and international sales increased by 15.4% on a constant currency basis. Sales growth in the US was driven by strong sales of several key products, including CREO, ALTERA, KINEX, SIGNIFY, and RISE-L.

We also had a very strong first half on the recruiting front, which positions us well for the future. While the international operating environment remains challenging, there was some encouraging signs during the second quarter. We achieved sequential growth from Q1 to Q2 and we have addressed management issues in two key markets.

Net income for the second quarter was $24.1 million, an increase of 16.5% from the second quarter of 2014, in line with our sales growth. Fully diluted earnings per share were $0.25 in the second quarter of 2015 compared to $0.22 in the second quarter of last year. Adjusted EBITDA for the second quarter of 2015 remains strong at 35.0% compared to 35.4% in the second quarter of 2014. Our second quarter performance highlights the fact that we have consistently maintained profitably metrics in line with much larger companies, while growing much faster than any of our large spine competitors.

As we move into the second half of 2015 and into 2016, we plan to make increasing investments in robotics, biologics, and in-house manufacturing. Over time, we expect these investments to result in operating leverage gains in the US and international businesses along with improved gross margins from the branch acquisition. We ended the quarter with $281.2 million in cash, cash equivalents, and marketable securities.

Free cash flow for the quarter was a negative $3.4 million. During the second quarter, we made significant capital expenditures associated with our recent acquisitions that Dan will cover in more depth in his remarks. US pricing pressure remained in the mid-single digits in the second quarter. Procedural growth remains healthy. There were no significant developments regarding pods during the second quarter.

Based on our strong first half results, we are increasing full year guidance for both sales and EPS to $524 million and $1.04 per share respectively.

In closing, we are very pleased with the strong start to 2015. We are executing well on our strategy to introduce a broad spectrum of innovative technology, grow our sales footprint in the US and abroad, and make focused tuck-in acquisitions. This has enabled us to produce year to date constant currency growth of 18%, while maintaining our industry leading profitability and cash flow metrics.

I will now turn the call over to Dan Scavilla, our Chief Financial Officer, for additional comments on our financial results.

Thanks, Dave and good evening everyone. As Dave mentioned, Q2 sales were strong, achieving $133.6 million or 17.6% growth on an as reported basis. On a constant currency basis, Q2 sales grew 19.1% versus prior year Q2. US sales increased 19.5% driven by market penetration and strong new product sales. International revenues increased 1.2%, as reported, or 15.4% on a constant currency basis, showing positive momentum gains versus Q1.

International had an additional headwind in Q2 with a government mandated price reduction in Belgium effective in April. This impacted is reflected in our results and had a negative impact of approximately 250 basis points on the international sales growth versus Q2 2014.

Innovative Fusion sales increased this quarter to $71.6 million, or 8.7%, driven by CREO, our newest clinical screw platform. Disruptive technology sales increased $62 million or 29.9% from Q2 2014 driven by continued strength in our expendable technology and biologics.

Turning to the rest of the P&L, Q2 gross profit was 75.6% compared to 76.6% in second quarter 2014. As we stated in our Q1 earnings release, the change is attributable to a shift in mix associated with biologics, which typically have a lower margin than other implants, an increase in royalty expenses, and an impact in foreign currency rates on our international sales.

Research and development expenses for the second quarter were $9.1 million, or 6.8% as compared to $7.7 million or 6.8% for the same period 2014. The planned increase in spending supports new initiatives such as robotics, expansion of our product development capabilities, and continued investment in research. SG&A expenses are in line with second quarter 2014 coming in at 40.8% compared to 40.9% of sales last year. Second quarter net income was $24.1 million, an increase of 16.5% over Q2 2014. Fully diluted earnings per share were $0.25 compared to $0.22 in the second quarter of last year. Adjusted EBITDA for the second quarter was 35% compared to 35.4% in Q2 2014.

We ended the quarter with $281.2 million of cash, cash equivalents, and marketable securities. Free cash flow for the second quarter was negative $3.4 million. Q2 cash flow is typically lower than other quarters of the year, driven by two planned tax payments. We made $31.9 million in tax payments in Q2. In addition, this quarter, we made $8.4 million of investments in PP&E for expanding branch manufacturing capabilities and the purchase of a building for our robotics business.

On the auditor front, in Q2 we selected and on-boarded our new independent auditor, Grant Thornton. I want to thank them for their tremendous effort and partnership in coming up to speed in Q2. The progress so far has been positive and we look forward to working with Grant Thornton moving forward. As I complete my first quarter as CFO and set my sights moving forward as part of the Globus leadership team, I'm setting a strategic focus to drive value added growth with leadership over the next few years.

Through driving international growth strategies to increased share capture and improve the overall size as a percent of our portfolio, implementing a tax strategy to improve our effective tax rate around the globe, and supporting the ongoing in-house manufacturing investments to drive efficiencies and scale. In addition, while we have delivered mid-30s EBITDA since 2009, we will continue to seek opportunities and efficiencies that will drive this profitability into the future.

I look forward to being part of a team and company with strong potential and long-term impact. I will now turn the call over to David Paul, Chairman and CEO.

Thank you, Dan and good evening everyone. The second quarter of 2015 was an outstanding period for Globus. We grew our sales by 17.6%, as reported on 19.1% on a constant currency basis, reaching $133.6 million, while maintaining our strong profitability profile with adjusted EBITDA of 35%. We launched five new products this quarter, bringing our total for the year so far to nine and continue to have a full product development pipeline for the second half of the year.

On the sales force front, we had a strong recruiting class and continue to work on our process of recruitment and on boarding of new sales people. We see strong evidence in our current crop of recruits and pipeline that Globus remains the destination of choice for the best sales talent in the industry.

Our continued strong performance this quarter was the result of consistent sustained execution of our strategy of combining robust product innovation and sales force expansion with disciplined expense control. I am proud of the performance of our team this quarter and I'm confident in our ability to produce profitable growth for the remainder of 2015 and beyond, even as we make significant investments in R&D initiatives, TTOT expansion, and in-house manufacturing.

We have continued to execute on our strategy of robust product innovation by launching several new products this year. Another increasingly important component is making bolt-on acquisitions of which TTOT is a prime example. When we acquired TTOT last fall, we said that we planned to market existing TTOT products through the Globus sales force, and that we would be co-developing several new products.

I would now like to comment on two specific new product introductions that are the result of the introduction. First, we began rolling out the [VIA] SHIELD system early in the quarter, marking the first product introduction from the TTOT acquisition. VIA SHIELD is a dual layer amnion patch, developed by TTOT, that can be used as an adhesion barrier to reduce scarring and inflammation in various procedures. We have been pleased with the feedback we have received on its performance and expect it to strengthen and build our regenerative biologics portfolio.

Second, COALITION AGX, a minimally invasive ACDF system consisting of low profile plates combined with either [PEEK] or allograft spaces. The system is cleared for standalone use and the plates are used with a spacer. Allograft spaces remain the preferred choice for a significant portion of spine surgeons for use in the cervical spine and this device now offers them the option of having a standalone, low profile device with an allograft spacer. The allograft spacer was designed at Globus and processed at our TTOT facility, and marks the second product introduction from the acquisition.

Early rollout began in the end of the quarter and initial feedback from early users has been extremely positive. Further product introductions from TTOT are being worked on and slated for the second half of 2015.

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. This marks the 12th quarter of Globus being a public company, characterized by high sales growth rates, and sustained industry leading profitability. We remain excited about our prospects in 2015, as we continue to execute on our disciplined strategy of profitable growth.

We're now happy to take any questions.

(Operator Instructions) And our first question is from the line of David Roman with Goldman Sachs.

Good afternoon, everybody. I want to start with just one question on the P&L and follow-up with a question on the business. And Dan, maybe you can help me out with this. As I'm looking at the incremental profitability that's reflected in your guidance raise, as well as what you're generating, the incremental dollar that you're dropping through the bottom line, is it a low -- you're seeing a lower profitability rate than what your absolute profitability is? And I would have thought that given the fixed cost nature of the business you would see greater additional leverage from every new dollar of sales.

So can you just walk me through any dynamics that may be influencing that?

Hey, David. I think the main driver of that is going to be what we've been stating along is this is an investment year. And as you look at what we're doing with our ramp ups in robotics and other areas, you're going to see a spending that's higher than we would have seen historically to go do that.

I would think of all of the things that are out there, that's the main driver of the difference you would see.

Okay. And then a follow-up on the business. Clearly, based on the numbers you're putting up in disruptive technologies, your new products are continuing to gain quite a bit of traction. Can you maybe give us some flavor as to -- and any specific products that are leading the charge, and any way to sort of quantify the sustainability of the positive impact they're having, whether it's RISE-L or anything else in that line item?

Yes, David, this is Dave Demski. I commented on them in my remarks. CREO and ALTERA are clearly leading the charge and then we have our synthetic biologics in KINEX and SIGNIFY. And then RISE-L is just recently launched, but we're very happy with the progress we're making there and the potential for our lateral business.

Okay, got it. Thank you.

Our next question is from the line of Bob Hopkins with Bank of America.

Great. Good afternoon. Can you hear me okay?

Hey, Bob.

Hey, thanks for taking the questions. So first off, on the revenue side, obviously a very strong first half for you guys. Terrific revenue growth. My question is really on the back half revenue growth guidance. It seems to suggest quite a slowdown from what you've seen in the first half. Is that conservatism or is there something unique going on with the back half that I'm not aware of?

Yes, Bob, consistent to what we've been saying and doing this year, we're just trying to be conservative. We're halfway through the year. There's nothing in front of us that we see that's going to cause us to have any concerns about the business.

Okay, perfect. That's what I anticipated. And then two other quick things. One on the margin and balance sheet and just maybe you could just talk a little bit about in light of some of the investments you're making and your industry high margins, what is your real sort of long-term guidance on the margin. If you'd just give us an update there. Is that to kind of keep the EBITDA margin that you're experiencing right now flat? Or will the investments kind of put a downward trend on that? Or can they go higher? Just kind of an update on the long-term margin outlook.

And then if you wouldn't mind commenting on inventory levels this quarter and where you expect to go -- that to go going forward.

Bob, it's Dan Scavilla. I would start with your first question, which is we will still lean into saying that mid-30s EBITDA is really the focus of what we want to do going forward and what I've said out on the road with folks is that mid-range is between 33 to 37. It will certainly flex during quarters depending on the right investments we want to do for the long-term. But even as we grow the business, we see the ability to leverage and gain, and stay within that mid-30s EBITDA range for the long-term.

And then on the inventories?

What was your question on that?

I just wondered if inventory levels this quarter were -- I think crept up a little bit and where you expect those to go going forward. Just what are some of the factors impacting inventory right now.

I think really it's primarily more of the new product launches. As we're going out there with these and putting the different types of items into the field, we're going to see the right investments. If you also look at our portfolio, our products don't tend to die and phase out. So we keep those going and they have a longer life. So what we're seeing through this, quite frankly, is just as we launch new products we're building the appropriate inventories.

Keep in mind, also, you're going to see the roll-in of some of the branch inventories that we've done and see a lift like that as we go through.

Great. Well, congrats on a really strong quarter. Thank you.

Our next question is from the line of Dave Turkaly from JMP Securities. Dave, your line is open. Sir, we'll move onto the next question from the line of William Plovanic from Canaccord Genuity.

Thanks, good evening. Can you hear me okay?

We can hear you, Bill.

Great. Thank you. So looking at this, I think people have asked the question but I'm going to go straight in. I think as we looked, as we saw with the up side in the revenue you'd see more to the bottom line. Just clear, as we think about this going forward, I mean if you continue to beat on the top line, will you continue to reinvest that beat? And if so, outside of robotics and I guess the money is going into manufacturing and robotics, and that's my first question. Do you just plan to keep reinvesting that beat?

Hey, Bill. It's Dan. I would think a couple of things there is you're right. We have those investments and we'll stay with them. But when you look at our guidance through the year, you should see when you do the math a slight lift in the second half of the year as well. So I wouldn't say every dollar of sales is going to drop down to those investments, but we are looking to do that for the next several quarters.

But I think, like I said, if you look at second half profitability, you'll see a lift in that based on what we're calculating.

Okay, and then on these investments, I mean the Excelsius, you're putting a lot into robotic surgery today. I don't think whether you look at total joints or even spine that that's been super successful. And I'm curious is what do you see in that, that wants to make you put so much investment into robotic surgery?

Thank you, Bill. I think the way we're looking at robotics is a little different than some of the nascent products that are out there right now. And we're looking at it very holistically on how to improve the total procedure from soup to nuts. And we think what we have as a product offering is a significant benefit to surgeons and patients than what is out there in the market now.

So we're pretty bullish about where we see the applications for the product platform. And even as we roll out the first product, we're already beginning to see other areas and other procedures that we can begin to implement this technology. And that's why we are investing pretty heavily in this space.

And then, I mean there isn't a lot out there on that and I'd just like to ask from -- as you look at it, is it cost saving? Will it be time saving? Because obviously, you're going to improve outcomes. But just the other two questions. Do you expect a robotics to be cost and/or time saving?

We absolutely expect some time saving from the procedure. And then cost saving because of the time saving. At the same time, if you're not going to -- if you're improving your accuracy of pedicle screw placement and interbody placement, you're going to bring down your re-operation rates and therefore help, again, with bringing down costs per patient. And sometimes the 30-day and 90-day re-operates are pretty high. And when you look at misplaced pedicle screws, many times patients come back for those. And we're hoping to really eliminate, if not minimize those type of re-operations.

Okay. And if I could ask one more margin story, which is I think I believe your US EBITDA runs somewhere near 40%, and correct me if I'm right or wrong. Where is your O-US today and how long do you think it'll take O-US to get up to US or whatever gap you think it's going to max out at? Thank you.

Bill, our O-US is profitable. We haven't shared specific numbers but we are in the black there. It's been a challenging year with the currency impacts. That drops right to the bottom line. So not making any predictions on when they might be equal. We are making progress there. There's a lot more leverage opportunities there given the fact that we're in a bunch of smaller entities. As we grow sales there, the percentages all improve dramatically.

But this year has been tough given the currency.

Thank you.

Our next question is from the line of Rich Newitter from Leerink.

Thanks for taking the questions and congrats on the topline, very strong performance. I was hoping, I think David Demski, you had mentioned, walked through some of the trends outside the US. You saw a little bit of a pick up this quarter versus previously. Can you just remind me? I might have missed some of them, where kind of you are on the leadership changes and kind of the turnaround there to get that growing again? Should we think of this as a multi-quarter reacceleration? Could we be re-accelerated back to levels you were at in 2014 by the end of the year? And then I have a follow-up.

It's hard to predict when we'll be back but I think we've got our management issues solved in the markets where we had them. Seeing some clear signs in one of our top five. The other has been more recent so we're still waiting to see those improvements. But as everyone, I guess, is saying, it's a tough environment and difficult to predict the growth. And then Dan had a comment today about what occurred in Belgium, which was kind of across the board about 30% price cut in most -- there's hardly any private pay there. So it's all government business.

So that was a hit to, again, one of our top five markets. It's fully absorbed in 2Q but it's going to take a while to get back to that -- to those 2014 levels. It could happen this year. It will definitely happen by next year.

Got it. Okay. That's helpful color. Thanks. And can you just remind us where you are with respect to the distributor loss or the sales that you've kind of been recouping over the past several quarters. How far along are you to kind of getting back up to full competitiveness in that region?

Yes, well I'm very proud of the efforts our team down there has made, as well as the support they've received here from product development, customer service. It's really been a team effort. But we are back and we're actually -- if you compare the sales in the second quarter of this year with the first quarter of 2014, which was the last full quarter of business from our old distributor down there, we're actually at about 116%. So we're all the way back and we're still growing.

Okay. Got it. So that should be a pretty meaningful tailwind for you as you approach the second half. Am I thinking about that correctly?

Yes, I think the business is very strong overall.

Okay. That's all from me. Thanks.

Our next question is from the line of Jason Wittes from Brean Capital.

Sort of a follow-up to that question. I appreciate your commentary about being very successful on recruiting on sales people this quarter. Is there any kind of quantitative numbers you could put around that in terms of where the sales force is now and how much you've added recently?

No, we really don't give those specific numbers, Jason. But we're in line for -- 2013 I think was our best year of recruiting and we're kind of mirroring that year right now, if that helps.

Okay, that's fair. And the non the robotics platform, I know that you've been sort of hinting at it but I guess our understanding was that sort of next year is sort of the major unveiling of that product, of the robotics platform. Is that the right way to think about it? And I guess the other assumption that most of us have is that given it?s a capital equipment type sale, it's probably going to be -- 2016 is going to be the launch year, but it would probably be the outer years beyond that when you'd really see the impact.

Are we thinking about that the right way?

Jason, this is David. I think you're thinking about it the right way. As we've said from the beginning when we made the acquisition that we're looking at a launch year of 2016. We're well on track to achieve that, but as you said, capital equipment sales tend to have a longer sales cycle. So we expect to see something meaningful on 2017 and beyond.

Okay, that's helpful. And just one final, I guess, robotic question. There's obviously been a lot of talk about alignment. My also understanding was that the robotics platform would sort of address alignment in a bigger way than you're doing at the moment. Is that also sort of what we should be thinking in terms of what's involved with the robotics launch?

I think the robotics platform will help in all of the above. It'll help in placement or the accuracy of the placement of the hardware, which absolutely helps with the alignment. When you place your hardware and your spacers in the correct orientation than you're going to have much better sagittal balance. So in that way, indirectly it helps with sagittal balance and alignment of the spine.

Great. That's helpful. Thanks. I'll jump back in queue.

Our next question is from the line of Craig Bijou with Wells Fargo.

Thanks for taking the question. Just wanted to -- Dan, I wanted to touch on something you mentioned in your prepared remarks about reducing tax. And I wasn't sure if you actually have a plan to do that. And if you do, if you could give us a little color on your thoughts there.

Sure, Craig. To be honest with you, what we're going to do is you look at our tax rate now and it's about 35% or north of 35%. And really, my thought is as we explore current structures that we have in place, and as we look at the opportunities both in domestic and international, we're going to work through a couple of plans, both domestic and international to enhance those.

To be honest with you, I'm really working right now with three different groups to sort through what these opportunities can be and should be, and I'll be in a better position really towards the end of Q3 to have probably more of a working plan.

Okay, thanks. And I guess I wanted to see, so with regard to the 2013 rep hires, I wanted to see, is there -- I think if I think about recent calls, I think there is still some room for those reps going up the productivity curve, if you will. And I think that'll continue throughout the rest of 2015. And so I wanted to see if that's a fair statement. And then if there is any benefit that you would potentially see in early 2016.

Craig, I think our strategy is to continually add reps and then to develop them, so increase their productivity. So I don't see that as a finite kind of opportunity. I think it's going to be continuous. I think we're continuing to recruit actively and I expect to do that for the foreseeable future as we grow the business. So there's certainly potential in the reps we have now to be more productive, but we're not going to stop when they get productive. We're going to continue to recruit and grow the (inaudible).

Okay, and if I could just squeeze one more in. With regard to TTOT and the TTOT products that you guys were selling, the $12 million that you had added to 2015 guidance. I just wanted to see if that's still a good number, if there's any reason to think that that is different.

We're happy with that number. We're beating it by a bit, but we're still in the integration process and we put the number out there knowing that there's a possibility that we could lose some business through dis-synergies, if you will. But we're happy with it so far.

Okay, thanks for taking the questions and congrats on a good quarter.

Do we have any other calls on the queue?

We have a question from the line of Ben Andrew.

Hi, guys. This is Kayla in for Ben. Thanks for taking our question. So just assuming that we're at an annual run rate of about $12 million with TTOT, when we back that sort of contribution out on a quarterly basis, we're coming up with about 15% in organic sales growth for the quarter.

So first off, am I right with that math? And second, how do you think about the organic business going forward just given that momentum? Do you anticipate that the core business would grow in that low to mid double-digit range sustainably for the next couple years?

I think your assumptions are very close. I would use those, as you said, from the organic side, and I would say you're in the range of what we're looking at for that. I want to make sure I'm understanding your question. Are you saying, do you see that organic growth going forward for several years? Is that what you were asking?

Yes, and I mean in the low to mid double-digit range.

That's our aspiration but our guidance, going back to our guidance, which is our official position is we're about 25 or about 24 for this year. But every day is a fight and we're trying to get as much as we can. And aspirationally, mid-teens is what we've always said about the Company.

Okay, great. And then just, I mean to follow-up on the recruiting question, can you just give us a sense, I guess, for where those reps are coming from? I mean would you say that you're benefiting at all from the ongoing consolidation in this space or management changes at competitors?

And then can we assume that the majority of these reps are coming over with non-competes and likely to contribute more to an acceleration in 2016?

I would say most of our growth is not from competitors. We hire both reps and we hire reps from competitive companies as well as reps from outside the industry and develop them. The higher numbers of reps come without industry experience. Those who do come from industry typically have at least a 12-month non-compete. Sometimes it's 24 -- 18 months. And then to your question about where they're coming from, it pretty much mirrors the market share of the other companies. It's not materially different from that.

So we get more reps from the larger companies on (inaudible) competitor.

Perfect. Thank you.

Our next question is from the line of Dave Turkaly from JMP Securities.

Can you hear me? Hello?

Hey, Dave.

Can you hear me?

We can hear you.

I'm sorry. I apologize for earlier. A lot of questions have been answered, but just quickly, I guess realizing that this annual Merck symposium is coming up here soon, I was wondering if there's anything you'd highlight there, whether it be biologics or other products that you think will be a focus? And then I guess if there's any color you'd give in terms of attendance, maybe even versus historically.

Thank you, Dave. We're not really focusing on any products, any specific product line, Dave. This is more of a research symposium. We have invested a lot in in-house research capabilities and a lot of basic science and applied research has been conducted over the last several years. We want to highlight some of that research, but it's also a forum for researchers outside of Globus to come and present, and share their research work.

So we have surgeons and researchers, and in some instances, regulators coming in to share in basic scientific research. So we're not really focused on any specific products. And the attendance is, as far as I can tell, so far it's going to be better than last year.

Great, and then just one other quick follow-up. I wanted to get your current thoughts sort of on the SI joint market and maybe how your SI lock product is performing, if you could share any of that with us? Thank you.

Our SI lock product is performing well. THIS YEAR, we've seen some material increase, even as reimbursements have become a little clearer. The harder issue with this whole space is really the algorithm for diagnosis and the diagnosis still seems to be a little murky.

So I think it's going to take a lot more time before things bet more clarity about how the specific pain is isolated to the SI joint for it to really take off.

Great. Thank you so much.

(Operator Instructions) Our next question is from the line of Steven Lichtman with Oppenheimer and Company.

Thank you. Hi, guys. Dave, you mentioned continued stability in pods, which is certainly good. Do you anticipate pods can actually turn into a tailwind at any point given the pushback up to the model we've seen, like from the OIG?

Yes, just anxiously awaiting for when that may occur. I think the government has been very clear that that model is not a legal model in any form. And we're starting to see some hospitals cut back -- forbid them and there are (inaudible) that we've actually had some customers come back because of that. But it really hasn't swept through the industry in any meaningful way. So we're kind of, I think, at an equilibrium now. We're not -- we're occasionally losing customers to them and we're getting a few back. But I think there's probably 15% of the market trapped in terms of pods that eventually should come back. Hopefully there will be more enforcement actions by the government that will convince people to abandon that model and come back to the more legitimate companies.

Got it. Thanks. And then just lastly on international, where are you seeing a positive -- you mentioned this, but where are you seeing the biggest opportunities? Where are the biggest growth opportunities for you guys? And any updated thoughts on potential Japan timing? Thanks.

Our growth opportunities, given the fairly small size of our penetration to date are really where the people and the procedures are. So Europe, Japan is another one. We are starting the process to enter that market. We won't be in the market for sure this year or next year, but 2017 is a possibility. We're just in early stages there and that's a very attractive market, but a very challenging one to enter.

Okay, great. Thanks, Dave. Thanks, guys.

And our next question is from the line of Matthew O'Brien with Piper Jaffray.

Afternoon. Thanks for taking the questions. Just was hoping to drill down a little bit on the market, Dave, that you saw here in Q2. Is there anything demonstrably different from a volume, pod, potentially pricing pressures easing in this quarter? And then have you seen anything competitively in terms of the behavior pattern of the folks where you're taking market share? Are they getting more aggressive anywhere in terms of using your balance sheet for anything? Or potentially offering pricing concessions?

Thanks. Nothing in particular is different. I'd say it's a pretty healthy market. I think procedures are good and have come back from where they were a couple of years ago. From our standpoint, pricing is still an issue. It's about mid-single digits in the US and has been that way for the last year. I know it's a little different than what some other folks have said, but that's what our calculations show.

And in terms of discounting our strategies and aggressiveness, not really, nothing of note.

Okay, and then just a follow-up for Dan on capital deployment. It's a question that gets asked frequently, but given that you've been there now for a few months, have you thought a little bit more about how to deploy the sizeable cash position of Globus and the free cash flow that you generate outside of just the traditional tuck-in acquisitions that are done? And specifically, are you and the management team there a little more inclined to potentially put an authorization or a share buyback in place?

Hey, Matt. It's a great question and you're right, we do get asked that a lot. Size is relative. I think we've got a healthy cash position and I think the balance sheet itself is in great position to look at possibly larger type acquisitions. There are none that we're currently actively seeking, but our thought would be right now to maintain our position of investment, make sure we've got the right capital equipment and expansion of branch, and look out in the market and understand what potentials are out there for us to do that.

As far as buybacks, certainly never say never. It's a consideration for us, but currently not on the table or being pursued with the Board at this time.

Great. Thank you.

And with that, ladies and gentlemen, this does conclude today's Globus Medical's second quarter earnings call. At this time, you may now disconnect.