Globus Medical Inc (GMED) 2016 Q2 法說會逐字稿

Good afternoon. My name is Shannon and I will be your conference operator today. At this time, I would like to welcome everyone to the Globus Medical second quarter 2016 earnings release conference call.

(Operator Instructions)

It is now my pleasure to turn today's call over to Mr. Brian Kearns. Mr. Kearns, you may begin your conference.

Thank you, Shannon, and good afternoon, everyone. Thank you for being with us today. Joining today's call from Globus Medical will be David Paul, Chairman and CEO; Dan Scavilla, Senior Vice President and CFO; Anthony Williams, President; and Dave Demski, Group President of Emerging Technologies.

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 FY15 and our subsequent filings with the Securities and Exchange Commission identify 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 includes certain financial measures that are not calculated in accordance with generally Accepted Accounting Principles, or GAAP.

We believe this non-GAAP financial measures provide additional information pertinent 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. With that, I will now turn the call over to David Paul, our Chairman and CEO.

Thank you, Brian, and welcome to everyone on the call. Our worldwide sales for the second quarter of 2016 were $137.5 million, an increase of 2.9% over the second quarter of 2015 or 3.1% on a constant currency basis.

Non-GAAP earnings per share were $0.29 in the second quarter of 2016, an increase of 10.6% compared to the second quarter of last year. Adjusted EBITDA margin for the second quarter of 2016 was 36.5% compared to 35% in the second quarter of 2015. Overall, we had extremely strong profitability in the quarter while top line growth was below our guidance objectives as we continue to re-establish our sales force expansion momentum.

Today, we announced the acquisition of the international business of Alphatec. Strategically, this acquisition gives us immediate access to the Japanese market, improved presence and penetration in other key geographies, and significant scale to our international operations. We expect the impact to be marginally accretive in 2017, as we work through our transition and integration plans and expect to provide up to $0.08 per share, an incremental EPS in 2018 and beyond.

As we look towards the rest of 2016 and beyond, we are confident on continuing to take market share and growing both our top and bottom lines above market rates within our core business. We are particularly proud of our margins as they continue to be best-in-class within our industry, with this marking the eighth consecutive year of mid-30%s EBITDA margin.

We continue to execute against our long-term strategy for success, as we drive towards $1 billion in sales. First, driving innovation across the spectrum in spine to address unsolved clinical problems and working to improve clinical and economic outcomes.

Second, driving sales force expansion in the US and international markets to grow our distribution channels worldwide, to compete more effectively with our larger competitors. Third continue to build out businesses with an emerging technologies, including robotics and orthopedic trauma. Fourth, to put our balance sheet to work by pursuing strategic M&A to augment our internal efforts and fuel incremental growth.

On today's call, I would like to update you on several areas. The Alphatec International acquisition; our ongoing efforts to rekindle sales expansion efforts both in the US and abroad; the integration impact of the Branch acquisition; and our progress on emerging technologies.

We have spoken about our efforts to enter Japan and further strengthen and grow our international business in many of our recent calls. Today's announcement regarding the transaction will enable us to roughly double our international sales while giving us an immediate presence in Japan, the world's second-largest spine market.

We expect this acquisition to add approximately $10 million in revenue for 2016 and approximately $40 million in revenue to 2017. We are paying $80 million in cash and extending a $30 million, five-year senior secured loan to Alphatec, as consideration for the acquisition.

We also anticipate further investments in sets and replenished our inventory, as we transitioned the customer base to Globus products. Not only does this give us immediate access to the Japanese market, we will also have a strong organizational infrastructure that will enable us to accelerate the introduction of Globus technology and quickly become a significant player in this important strategic market.

The acquisition will also strengthen our position in key markets such as Germany, UK, Spain, Brazil and Italy. The deal is expected to be neutral to EPS in 2016 and accretive by $0.03 to $0.05 per share in 2017, and to provide up to $0.08 per share in 2018, excluding integration cost.

This acquisition illustrates our commitment to use our balance sheet to address key strategic needs in a responsible and profitable manner. While we are committing $100 million plus, we still have ample buying power to pursue other opportunities as they arise.

As I noted in our last call, we have not been satisfied with the pace and productivity of our sales force expansion efforts and are working diligently to significantly improve both. Over the past few years, the cadence of our sales force expansion has been typified by several strong quarters of expansion and dispersed with sporadic weaker ones that resulted in quarterly variations that fall short of expectations. We are working on making this process more repeatable and predictable to smooth our expansion rates over time.

The US market still remains significantly underpenetrated and we see tremendous upside as we hone our expansion program. In the US, we're putting a lot of focus into our recruiting efforts while also taking an active management role in territory development. Specifically, we are working to improve our sales management team in the US, with primary focus on individual sales reps developing into successful territories.

I expect us to regain our sales expansion momentum during the second half of 2016 and account for meaningful increases in our sales growth rates going into 2017. Internationally, even with the acquisition, we will have only about 3% market share so we have ample opportunity to grow at rates higher than the US market over the near to long-term. The acquisition will provide meaningful scale and presence in certain markets which will give us a stronger base from which to expand going forward.

Now some updates on the initiatives that I've been speaking about for the past few quarters; Branch Medical. We are well on track to grow our in-house manufacturing capacity to reach 50% of all our needs by 2018.

We had a gross margin benefit of $900,000 in 2015; $800,000 in the first quarter; and $1.1 million in the second quarter; and we are on track to reach $15 million in 2018. The benefits from this acquisition go beyond the very powerful financial one I have just mentioned.

Our engineers are able to interact much earlier on in the process to more efficiently develop manufacturing methods and to reach a make by decision earlier on in the project lifecycle. Further, trade secrets related to manufacturing expertise for our key technologies can now be preserved and will help add another layer of protection.

Emerging technologies. We continue to make steady progress on our robotics platform and our goal remains to launch the first product in late 2016. We plan to submit to the FDA in the third quarter as we are in the final stages of completing verification and validation activities. The excitement we've been hearing from physicians on our robotics platform and how it integrates well into spine, brain and trauma procedures make us bullish on future applications and synergies.

Recent announcements and acquisitions by some of our competitors also validate our view of the potential for this technology to improve patient outcomes. Our platform is the only one designed with optimized workflow for the operating room surgeon and staff, and fully integrates with our implant technologies.

On the trauma side, we have further expanded our product development team and have made rapid progress in several key projects. We are still on track to launch several new systems in early 2017 and will begin building out the commercial organization by the end of this year.

These emerging technology opportunities will enable us to further strengthen our business and will create a larger footprint for us within customer hospitals and institutions while contributing to increasing sales growth rates to reach $1 billion in sales over the next few years. In summary, as we invest and build towards our long-term goal of creating a diversified musculoskeletal growth Company, we remain highly focused on the opportunity to grow our spine business worldwide.

We're excited about our prospects as we continue to execute on our growth strategy of rapid new product introductions and worldwide sales force expansion while maintaining our focus on profitability and cash flow. Over the next few months, we're looking forward to closing on the Alphatec international deal and integrating that into our business, and the beginning the launch of our robotics and trauma platforms. I will now turn the call over to Dan.

Thanks, David, and good evening, everyone. As David mentioned, Q2 sales were $137.5 million, up 2.9% as reported, or 3.1% in constant currency versus Q2 2015. We were pleased with the continued financial strength of our business where net income margin improved 80 basis points to 18.8%. Adjusted EBITDA margin improved 150 basis points to 36.5% ; and non-GAAP diluted EPS was $0.29 per share, up 10.6% versus Q2 2015, growing at 3.7 times the rate of sales.

This is consistent with our long-term strategy of growing the bottom line faster than the top. US sales for Q2 were $124.7 million, a 2.7% increase versus Q2 2015, balancing continued market penetration and new product launches with re-establishing our sales force recruitment and expansion momentum.

International sales were $12.8 million, a 5.7% increase, as reported, or 8.1% in constant currency, driven by strength in key markets like Austria, Brazil, Germany and the UK.

Disruptive technology sales increased to $68.1 million, or 10%, due to continued strength in our expandable technology, CREO MIS and Biologics. Innovative fusion sales for Q2 were $69.4 million, or a 3% decline driven by US sales force recruitment timing and onboarding.

Turning to the rest of the P&L. Q2 gross profit was 76.1% versus 75.6% in Q2 2015. Improvements are from the med device tax suspension, continued Branch Medical benefits, and cost improvement programs and logistics. This is partially offset by inventory provisions, the continued shift in product mix, driven by Biologics and single-digit price pressure.

The Branch Medical acquisition benefit will continue as planned in 2016 and then climb to $15 million per year once we achieve 50% in-house production. Research and development expenses for the second quarter were $11.3 million or 8.2% of sales as compared to $9.1 million, or 6.8% in Q2 2015.

The increase includes an acquisition milestone expense in robotics, coupled with continued investments and robotics, trauma, product development and research capabilities. Investments in emerging technology impacted Q2 EPS by $0.03.

SG&A expenses for the second quarter were $52.4 million, or 38.1% as compared to $54.5 million or 40.8% in Q2 2015. The decrease in expense was driven by a one-time gain from the settlement of certain business acquisition liabilities and lower-than-planned employee-related expenses. Provision for litigation expense in Q2 was $3.1 million, resulting in a $0.02 impact on EPS.

The income tax rate for Q2 was 32.7%, a 310 basis point reduction compared to 35.8% in Q2 2015. The change in the effective tax rate is primarily due to the reorganization of our domestic legal structure to better align our business operations and the research and experimentation credit which is now included earlier in the year due to the change in tax regulations. The full-year tax rate is projected to be approximately 34%, reflecting the ongoing benefit of the new US structure.

Second quarter net income was $25.8 million, an increase of 7.3% versus Q2 2015, and growing approximately 2.5 times the rate of sales. Q2 GAAP diluted earnings per share were $0.27. Non-GAAP diluted earnings per share were $0.29 compared to $0.25 in Q2 2015.

The difference in GAAP versus non-GAAP EPS in Q2 was primarily due to the provision for litigation expense. The med device tax benefit added approximately $0.01 to EPS in Q2 while investments in emerging technology impacted EPS by $0.03. Adjusted EBITDA for the second quarter was 36.5% compared to 35% in Q2 2015, driven by the med device tax suspension and Branch Medical benefits partially offset by inventory provisions.

We ended the quarter with $390.1 million of cash, cash equivalents and marketable securities. The recently announced deal with Alphatec International, we'll use approximately one-third of the cash balance. Net cash provided by operating activities in Q2 was $23 million and free cash flow was $13 million.

Q2 cash flow was typically lower than other quarters of the year, driven by two planned tax payments. In Q2, we made $31.4 million of tax payments in the quarter. The Company remains debt-free. The Company today issued new guidance for full-year 2016 sales of approximately $575 million, including $10 million from the Alphatec International acquisition.

The GAAP diluted earnings per share of approximately $1.17 and guidance of non-GAAP diluted EPS, which excludes the impact of nonrecurring items and expected transaction costs associated with the Alphatec International business acquisition remains unchanged at $1.20 per share.

The 2017 full-year sales projection is $640 million, including $40 million from the acquisition. We will provide 2017 guidance during the fourth quarter call. We'll now open the call for questions.

(Operator Instructions)

Craig Bijou.

Hi, guys. Thanks for taking the questions. I just wanted to start with Q2 and the performance there. Just try to understand a little more about the sales force recruitment and onboarding issues and then I think you mentioned some of these on your Q1 call. So was there new issues in Q2? Was it something new that happened? I guess, just a little more color on what happened during the quarter?

Sure. Thank you, Craig. This is David. As I mentioned in the Q1 call, we had already seen some recruiting pick back up. Nothing new happened in Q2. But we haven't yet been able to onboard as quickly as we expected during the Q1 call.

So as we look ahead at the next two quarters, we felt like that the onboarding process has been going slower than we expected. That's really the main reason. Our overall recruiting though is much better than last year but still it's not -- the onboarding process has not been going as good as we'd like.

Okay. Thanks. Just if I can ask about 2017 guidance. If, one, I just want to make sure that I'm clear. Is the $40 million that you're calling out from the Alphatec international business, is that completely incremental? And I guess what I'm trying to do, I'm just trying to get to a organic growth.

If you back out that $40 million, you're at 4% growth in 2017, which is not really an acceleration over 2016 despite some of the comps. I appreciate your comments on the onboarding in the back half of the year and the expectations there, but is there anything else? I mean, I guess I would have thought that 2017, you would seen a little bit more acceleration.

Hey Craig. It's Dan. So a couple things. Yes, the $40 million we're looking at is incremental on to the organic growth as you do your math, I'm going to ask you also back out the $10 million that' also included in fourth quarter of this year. You'll see that we're looking at about 6% organic growth you make that adjustment.

Okay. Great. If I could just squeeze one more in. Just on $1.20 -- on maintaining guidance, EPS guidance for the year. I just -- I guess I'm a little surprised that you have that -- the leverage ability there despite the revenue growth slowdown that you can still drive that leverage. And I mean, is there anything specific? Are you cutting back any costs or anything from that perspective to hit that $1.20? Thanks.

Craig, a little bit of both. I mean, certainly, as you know, we had a benefit of our tax rate that I talked about in Q1 and I held back on that. So that's going to be one part of it that you would see come through.

We're not looking to do any cuts or change in our investment plan. We're committed to pull forward with everything we've talked about, with continuing to build up RPD as well as our get our emerging techs out there. Certainly, the Branch Medical is a benefit that's helping out as well so really, when you look at these items, the $1.20, while not easy, we can do with what we plan to do and still maintain our investments as we see fit.

Okay. Thanks for taking the questions.

Matt O'Brien.

Good afternoon this is JP in for Matt. I just had two quick questions. One is, back on the sales force hiring. Is it getting harder to recruit these reps from the competitors more than they used to be? Or is it more just onboarding internally? And then what gives you confidence that, that will normalize in the back half?

Thank you, JP. This is David. As I mentioned in my prepared remarks, if you go back and look at a few years in our history, we've always had these quarters. We haven't really been able to consistently hire at the same rates that we'd like to.

We've mentioned in the past that we primarily hire two groups of folks; one competitive group of salespeople from other companies and the second group are developmental hires. While we always had a lot of success for the competitive hiring, we have struggled with, really, with the development hiring and getting them onboard and successful.

We have a timeline of about three years as to when we'd like to see a developmental hire get successful. So competitive hiring hasn't become harder, in fact, this year, we've had some quite a few competitive hires.

But the process I feel has not had the same amount of focus that we'd like. Ever since the first quarter, we put a lot of management focus into this recruitment and hiring and onboarding of these reps so we feel very comfortable about the rest of 2016 and 2017. That will get this fixed and growing again.

Okay. And then one quick one for Dan. I appreciate the math you did around the 6% for 2017 and you don't want to get into too much detail but does that $640 million include anything from trauma and robot or is that still probably too small to even think about there?

There's a little bit out there right now with that, JP. But we're not really going to into detail with that, for the main reason of we haven't yet filed or gained approval. So there's a small placeholder and as we get further along that path, we'll flush that out further towards the actual time for guidance.

Okay. And then just one last one, if I could. It looks like they did around $70 million in 2015 and now you're guiding to $40 million next year. Is that just norm disruption and conservatism?

Yes. We think so. It's a conservative number to be sure. We realize that we're in markets together, we need to evaluate that and understand the best approach that way. As you know, most times you do an integration, there's a couple of bumps that we're trying to figure in. Really, what that is, is just basically the dissynergies as we go from today into a steady state and making sure we've got a number that we think we can lean into and achieve or possibly surpass.

JP, I'll just add that while they did $70 million last year, in Q1 of this year, they were about at -- about $15 million.

Okay. Thanks for the questions.

Jonathan Demchick.

Hello. Thank you for taking the questions. Also, wanted to, I guess ask one question on the sales force recruitment side, and then another on Alphatec. But starting on the onboarding issues, is any part of this also dealing with attrition in any of the sales force or is this truly just getting people on and not effective as they have been in the past?

And as we look into guidance, it seems like, organically the balance of the year holds steady with what you did this quarter. Is any recover -- is the base case that you're working with, that the sales force recruitment and onboarding issues just continued through the balance of the year? And if they improve, the growth rate should be higher? Or what's really being assumed in your current guidance?

Well, that's a two-part question. I'll just take the one on the sales force recruitment and then let Dan handle the guidance piece. Net expansion of sales force always includes recruitment and getting these territories successful without losing to many through the back door in attrition.

You always have some attrition and the way our sales comps are, there's attrition and a natural progression of folks who don't -- who are not successful who tend to leave. So quarter to quarter, we have fluctuations in attrition. We haven't had any big blip in Q2.

We've had some, more than we expected attrition, at some parts of last year and even into Q1. But overall, these things tend to even out over the whole year. So it's really us getting our focus back into recruitment and onboarding; getting our sales management team focused in on this. We have done it successfully in the past so we know that we are going to be able to turn this around so I'll turn the next piece over to Dan.

Hi, Jon. So back on your second part of the question, is the way that I would look at this is you do have a natural lift in Q4. It tends to be a natural hockey stick in the US, driven by many things we've always discussed.

So the way I'm looking at this without getting into quarterly guidance for you is I think Q3 is fairly similar to what Q1, Q2 have been. And then We see a natural lift up, not only through recruiting, but just natural hockey stick in Q4 that would get us out through that number.

Thank you. Very helpful. And then just quickly, one on Alphatec. For some capital deployment, you guys have always mentioned that you're willing to reset the margin line a little bit for strong enough deal. When you think about how Alphatec is going to contribute, is this one of those deals that's going to impact the margin profile of the business significantly or is this -- do you think that you can onboard these $40 million in incremental revenue at reasonably consistent margins what you're currently working with?

So a couple of things, Jonathan. So you go into next year, right, because that will be really the first full year. It's going to be a transition year with a fair amount of investments transition different things that we're going to do at that $40 million. I think we're going to see a margin lower than what we normally do as a business during that period.

But again, keep in mind, too, and I don't know if we said this, is a good part of that acquisition is Japan related so the second largest economy in the world, a fairly strong and profitable place to be. I think as we get into a steady-state more in that 2018, we see some lifts of margin that would get us more in line with what we're used to seeing as a Company.

Thank you. Very helpful.

Jason Wittes.

Hi. Thanks for taking the questions. Just on the Alphatec transaction. It sounds like you'll be phasing out their products, but that will take time. Can you give us an indication of timing and especially in Japan, what the timing may be to get your products online and theirs off-line?

Jason, thank you for the question. So most other countries in Europe and the rest of the world, it should be fairly easy for us to transition. Because we can transition over to our products so we're looking at a time frame of one to two years to finish all those transitions.

But in Japan, it's still not clear what the regulatory process will be to get our products through. So we're going to try to get them out as quickly as possible but having the infrastructure that Alphatec has in Japan is going to give us a benefit to getting our products quickly approved in Japan.

So if I think about it, this gets you the infrastructure but not necessarily a shortcut into Japan for your products?

It gets us the infrastructure; it shaves some time but it's really hard to predict exactly how much time we're going to save by this.

And then secondly, in terms of dissynergies, you did give some rough numbers for next year. Can you give us a idea of what the dissynergy number you're anticipating is built into that number?

Well, as I mentioned before, the $15.6 million or so that they announced in Q1 is less than the $70 million they had annualized. And then when you look at all the geographies, there is some overlap between us and their distribution. We expect some natural dissynergies to occur.

Jason, I would tell you again. If you straightline their announced Q1 and assume that you were somewhere between $55 million to $60 million this year, you walk in. So we would say we're anticipating somewhere between $15 million to $20 million of dissynergies. Again, we're striving to beat that but that's our estimate right now before we really walk in and start that activity.

Okay. And then you did mention robot and trauma was pretty minimal in that rough estimate. It sounds to me from your commentary that you get a little more confident once approvals start rolling in terms of putting more of, I guess, meat behind the -- on the bone in terms of those what the impact potentially could be in 2017. Is that the right way to think about it or should we --

It is and I'll be honest with you. I don't think that's anything other than just kind of my background of what we've done for 30 years with J&J, is we'll go in and start forecasting a product when it's approved and not really put too much in there before that's done, so just to be conservative on that side.

Okay. Great. I'll jump back in queue. Thank you very much.

Steven Lichtman.

Great. Thanks. Hi, guys. So just to -- a follow-up, David, on the onboarding process changes that you're looking to make. Can you provide a little more detail about what are the types of changes that you guys are making? Maybe a little bit more specifics about what your focus is?

Our focus is really at a territory level so we've got our sales management team focused in on the territory level and how to onboard these reps that we record successfully so they go on to becoming straight commission reps and not fall out of the process. One of the struggles we've been having more than on the recruiting side has been getting these guys to straight commission and becoming successful territories.

So we're really hyperfocused on that onboarding process. A part of that is also recruiting because you want to make sure you hire the right person so they will be successful. Over the last four or five months as a management team, we've been hyperfocused, including all our sales management within the Company.

We met together a couple times and focused in on getting these territories not only recruited but also onboarded. It's hard to give you more specifics than that because the rest of stuff is really tactical. But that's really, I would say it's been a lack of focus that we've now put the focus back on recruitment and onboarding.

Okay. Great. And then just secondly, on Alphatec, just want put a finer point on it. So the $40 million incremental for next year, is that -- anticipate to be a mixture of legacy Alphatec product and Globus product or how should we be thinking about what that $40 million would represent?

I think you're right. I don't have an exact ratio to give you. But I would certainly go in and say, certainly, a mix and heavier on the Alphatec right now. Until we can understand the cadence of which we can make that impact.

And then over time the anticipation is to be -- just to phase the Alphatec product out and be distributing the Globus product only; is it right?

That is the intent. Okay. Great. Thanks, guys. Thank you.

Kyle Rose.

Great. Thank you very much for taking the question. So the last one asked but I wanted to go and circle back on the sales force side of it. You made a comment about the slower ramp on the direct hires that you're developing over the course of three years to get up to speed but I wondered if we could also talk about the competitive reps. It sounded like the competitive reps hires are still pretty strong.

So just wondered if you could walk us through what the cadence of that looks like in the back of 2015? Because I believe it's -- normally, they have to sit out 12 months depending on non-competes and things of that sort so what kind of gives us a confidence that we're going have some more reps coming on and coming on at a any productive pace in the back half of the year? And then also, how we think about the cadence of the top line growth on an organic perspective in the US so it just start 2017?

Well, thank you, Kyle. I think Just looking at the pipeline that we have, that's what gives us a lot of confidence about the second half of the year and hiring these competitive reps.

As you know with the non-competes and then with the level of relationships that these reps have with a surgeon, it's hard to predict how much business transitions over in their absence and so it's really an heart -- it's an art form to predict how much business will come on. But what gives us a lot of confidence in our business is the pipeline of reps that we have right now that we are recruiting for competitive reps and all the training and development that we have ongoing for the reps already on board.

On the organic growth side, I think our projection estimates about roughly about 6% growth worldwide. I would say a little, maybe the same as US and international, aside from Alphatec.

And Kyle, I wanted to check. Were you asking about 2016 for the guidance move?

No, just trying to understand the momentum, exiting 2016 and into 2017 when we think about some of the reps and how that builds to an organic of 3% to 6%. Is that more weighted to the back half of the year, as we -- the focus is really common to Q1, Q2 2016 so we'll start to see that in the back half of 2017? Or should we except some a bounce back as we start the year of giving easy comes and the hiring in the back half of 2016?

Got you. So I would lean in and think that we're going to be stronger as we exit 2016 and it has some slightly better first half but I would follow the natural trend where you see those accelerations occur and again, look at a stronger Q4, not that it's all bank there. But I would just say the least our planning that way is based on the recruitment and the natural lift of the market that we would follow a normal growth trend as we have the past couple of years.

And then just lastly on -- I know you don't give longer-term guidance from a 2017 perspective but when you think about the puts and takes of the model with the launches on the emerging technologies and the investments that will continue there, as you build out those commercialization teams but then also your focus on the integration from an Alphatec perspective. When you think about the adjusted EBITDA range that you historically give of 33% to 37%, 33% to 38%, do you see any risk in the bottom end there when we think about 2017 and all the moving pieces in the model?

No. You know what? I think normally, what we have been saying from our November Analyst Day and going forward is 2017 really is that critical year where you're starting to launch emerging tech and have some modest revenue what you've placed into that, not only are all of the engineering and R&D folks, but the commercial folks as well.

So you are going to have a bottom line that's strong but certainly not growing at or above the rate of sales related to just that fact alone. I think the reason we threw out that range of 33% to 37% is we feel comfortable that we can reach into that range and do this; we don't anticipate going below that based on everything we know currently.

Great. Thank you very much.

Bob Hopkins

Okay. Thank you. Can you hear me okay?

We can hear you, Bob.

Great. Good afternoon. Thanks for taking the questions. From time to time in your corporate history, obviously, you guys have had bumps in the sales force process and then you've recovered nicely. I guess this quarter though, the 3% growth rate is lower than I've ever seen. I'm just curious, your characterizing this as just something that happens from time to time.

But the growth rates, just -- I'm struggling with that a little bit because it's just much lower than we've seen in the past out of Globus. And so I'm just trying to make sure that there's nothing else going on from either a sales force perspective or competitive perspective or just maybe as you guys are thinking about getting in other markets. I'm just trying to understand the growth rate this particular quarter being so low.

See I think two things are at play. Like one, we talked about having these bumps once in awhile but the other thing, I think is, I will say lack of focus but I did say that we are hyperfocused now on this issue and especially with what Q1 and Q2 now, we want to make sure that we're able to get a more uniform cadence of recruitment and onboarding.

We don't see anything else structural to our business that changes how bullish we feel about our prospects. Also just looking at the pipeline that we have, Bob, gives us a lot of confidence that we're going to come out of it just like we have in the past.

Bob, this is Dan. It's not anything new or different in Q2. Again, it's also not throughout the entire US. Quite a bit of our US is performing well above market and doing very strongly.

We did have a few of our larger areas leave late in Q4 and some in Q1 that we mentioned during the last call. So you would have had some revenues associated with them in Q1 that you don't necessarily have now. So, same issue is just bleeding out into the bottom right now, is what we see.

What we're doing is recruiting and trying to close those and grow from there. But I think this was anticipated when we were saying in Q1 that we saw this occurring. Our rate of recruitment didn't necessarily match the rate of attrition and I think this is the result that we anticipated.

All right. Thank you for that. And then I just also wanted to ask about Alphatec because obviously spine mergers between two spine companies can be tricky. You guys are forecasting some pretty significant revenue deceleration here from that business. And so I guess my question is, can you talk a little bit about the structure of Alphatec?

Is it 100% distributor model outside the United States? Can you talk about the different distribution networks that you have outside the United States? Maybe talk to some of the challenges of integrating those because obviously, those have been the things historically that have caused these integrations to be choppy.

Thank you, Bob. The biggest half -- more than half of what we expect to do with the Alphatec acquisition is in Japan. Most times, when you have a lot of dissynergies is when you have overlapping distribution. So seeing in Japan, this will be all incremental, We don't see any disruption there or minimal disruption.

Alphatec is direct in about five or six markets internationally and all the rest is all distributor markets. There are a few markets where we have overlap and that's why we are prudently saying that it's a possibility that there could be dissynergies there. We're going to try to and work as hard as we can to maintain both sides but it's going to be a challenge as we bring them together.

And then just one last one on the 3% growth this quarter. And some of the comments about the breakdown in the US. So is it -- so is this really limited to one or two geographies? Maybe just give us a little better sense as to the breakdown of growth and how concentrated the issues were versus just a broader slowdown?

It's really more on that -- not just a few but I would say I'll call it a handful of areas that we saw it occur probably late into last year and into Q1 of this year. And so the majority of this again, is performing well above market. These were some big players who left and with that, transferred some business and that's really impact that we're working through right now.

And then on the lower guidance for 2016, if this was expected in terms of this transition, why the guidance coming down a little bit?

Well, I think it's really more about the 20 -- you're talking about the 2016 base?

Yes, yes.

Well, in Q1, when we spoke about it, we were still pretty optimistic about the onboarding and of the newer reps that we've had on board. That hasn't transpired the way we expected in Q2 and that's really why we decided to take down guidance.

Got it. Thank you very much for taking the questions.

Richard Newitter.

Hi. Thanks for taking the question. Most of mine have been asked. I just wanted to ask, a following up to one of the margin questions related to the acquisition that you're doing with Alphatec here. You said that you expect the margin to be dilutive a little bit during the transition period in 2017 so expect a little bit below what you've been delivering.

You've definitely been delivering on an adjusted EBITDA margin basis, nicely above that 33% to, call it, 37% range, and even in this quarter 36.5%. I guess when you say that it's going to bring that down a little bit from your normal course of business. Is that more like a -- still like a mid-30% range but lower? Are you really thinking that this could be at the low end of your 33% to 37% range in 2017?

Rich, all-in, right, when you talk about the core, the emerging tech and the integration of Titan coming in, we would think that we're still towards that lower end in the 33% to 34% range, all included with that. It is the way we're looking at it now.

Okay. And then just as we look at the growth cadence, just following up to Bob's questions. You've seen a few quarters deceleration now granted on tougher comps, it's still one of the lowest levels since we've been following this as a public company and now you're guiding to organic growth in 2017 of 6%.

I guess, my question is you laid at your plan at your Analyst Day last year. You talked about, I think a 12% CAGR; it seems like the curve is getting much, much deeper towards the outyears, if you're going to come in at a -- around a more of a mid-single-digit rate in 2017.

Should we be thinking about it's more a plateau -- or not plateau but a little bit flatter in 2017, maybe even 2018 and then a much, much bigger spike in exiting 2018 into 2020? Is that the way to think about it now?

I appreciate the question. I would tell you a couple of things. We're not backing away yet from our approach to become that $1 billion Company; we think we're there. The acquisition, while not built into that long-range plan, as we've always said is one of those levers we could choose to use.

So one of the first things to think about is when we have this acquisition in, we'll now have 15% of our sales internationally. That was one of the key goals in that plan and this is one of those key realizations to get us there. So that's there is well.

Emerging tech, again, we always knew would be lighter in 2017. I'm being conservative pre-approval but then expecting a fairly sizable contribution 2018 through 2020 which will get you up there.

We do see the US returning to health as we address these issues throughout this year and coming back up. So yes, I guess what I'm thinking is you would come out with 2017 at that 6% guidance, seeing incremental ramp-up in 2018 and 2019. I don't think we're all just s going to deliver in 2020 but I think we've got solid 2018, 2019 numbers as we come out of what we're doing in 2017 with this.

Okay. Thanks.

Kaila Krum.

Hi, guys. Thank you for taking my questions. So first, a big picture question just on the competitive dynamic. I'm curious what you're seeing as it relates to trends around hospitals consolidating vendors. I mean with now Zimmer Biomet moving up as far as market share with LDR, can you just give us a little bit more comfort that nothing has changed around your ability to compete for a share of those contracts and that those revenues can return once the sales force stabilizes?

Absolutely Kaila. Thank you for your question. Yes. We don't see any evidence of our ability to compete in hospitals in any way decreased or compromised. So we feel very comfortable; we won our fair share of contracts.

While we always have capitated contracts that sometimes last year, we have walked away from and not because of not being able to compete but because we've just not been price takers at a certain level. So we haven't seen any evidence that any of these consolidations have affected our ability to compete in hospitals.

Okay. Great. And then just to follow up on robotics. I know you mentioned you guys would like to have your robot on display at MAST this year so is that still the case? And then you said that you are submitting for updated approval in Q3 but still anticipating launch at year-end. I mean, can you just give us confidence around that time frame and then your position competitively there.

Hi, Kaila, this is Dave Demski. Yes. We are anticipating filing with the FDA in Q3; the development of the robot is complete. We're in the final stages of testing before we submit.

Assuming those tests go well, we will submit filing this quarter. We will -- we don't anticipate having US approval for MAST but we will be able to display it with a CE Mark and appropriately labeled. At this point, we're really, very confident that we'll get it through the FDA by the end this year.

Okay, great. Thank you.

David Turkaly.

Thanks. I'm sorry I've been bouncing around a little bit here. But I thought I'd clarify something that I heard, the quarter, there were a handful of areas in the US late last year and early this year where some sizable reps had left the Company. Is that a fair, I guess, a recap of the biggest driver of the performance in the quarter?

David, we wouldn't disclose where or size or anything like that. Again, what I would tell you is the majority of our -- is a really [far out exceeding] market growth and these items that we talked about earlier in the first quarter are just coming into full fruition right now. That's what we're seeing the impact with that; again, I would say it's more of a handful of areas, not systemic throughout all of the US market.

I guess one follow-up. Would it be fair to say then looking forward, that you'd expect this to be the trough in 2Q and to improve, I guess, sequentially this year and into next year domestically?

I would think so. I'm not sure that we see a large rebound fully in Q3 so much as more of a return in Q4 given some of the activities that are out there. But yes, I wouldn't expect it to be far off from where we currently are.

Great. Thanks a lot.

Matt Miksic.

Hi guys, can you hear me okay?

Yes. We can hear you, Matt.

So, most of the low hanging fruit has been picked, I think, in terms of the questions here. But I wanted to maybe just try to understand something that you've been answered a number of times around this hiring process.

First, I know you haven't give the size and if your core business has grown above market and yet your printing $137 million, $138 million, or $125 million in the US. Then that tells me that the Delta is about somewhere between $5 million and $10 million a quarter, maybe on the high end of that range. Is that a reasonable way to think about the type of business that is shifted out of your field force here in the last couple of quarters?

Yes. I think that's probably on the higher end but I think you've got the gist of this with where it's going, we've got a couple of losses on probably more in that $5 million range.

Okay. And then when we spoke in our conference and on the last call, I know that the mantra was we're focused on this now. We weren't focused on it in Q4 and -- or had been caught off guard maybe by more large folks leaving than we expected, which I think we all get. But the idea that we're really focused on it now suggests that maybe you hadn't been focused on it last quarter and I think you were.

I know it's difficult for a lot of folks to understand how this works. There's a lot of questions around losing reps to larger players, losing prospective reps to other players. Maybe if you could give us a sense of what happened? Did you have folks who you are tracking who just -- you just couldn't get them over the hump for the rate that you wanted to bring them in?

Or and you bit the bullet? Or has it -- have you lost other folks in the interim? Maybe some sense of what the flow or the funnel, if you will, of this processes look like for you, that left you coming up shorter than you would like to be here at the end of the second quarter.

Thank you, Matt. I wish it were an easy ABC to answer your question but there a lot of moving parts in this with competitive reps. Developmental reps, non-competes, the level of business that they can bring over. So it's hard to quantify everything.

What I said in Q1 was our focus on it had started back then at the end of last year, actually. Q2 already has when we look at the first half of this year, our recruitment and onboarding has been better than it has been ending the year last year. So yes, we are focus on it. We remain focused on it. The only way to show that we are focused on it is having the numbers change and we are looking forward to doing that in the second half of this year.

Okay. So it will be ramp-up in the second half because we're starting, we're talking about folks who would be coming in during the third quarter and contributing and perhaps in the third and fourth quarter depending on non-competes, et cetera.

Yes. But we also have some folks on board in the first half already that we're hoping to get them to start contributing.

Okay. These are non-compete issues that are holding that up or these are folks that are just kind of getting up to speed?

Both.

Okay. All right. Well, I do understand it's not an easy thing and certainly not an easy thing to do profitably. So I think we get that.

The last thing I'd like to ask is the pipeline of product. I know you never talk about things before they launch. So I wouldn't expect you to but I did see one product that struck me as particularly interesting coming out of IMAST was this belated COALITION standalone cage. And I'm just wondering if that or if anything else that you'd like to highlight as other territories are seeing success with that are helping to drive this above-market growth outside of the regions where you're backfilling your salespeople?

As I mentioned in the last quarter, we've had a strong first half of product introduction, especially in the first quarter. We've launched COALITION MIS which is the anchor technology where you can -- a surgeon could use clues or anchors and that has had a lot of success early on in the rollout.

We've also launched a product called MAGNIFY-S; it's a standalone, expandable anterior lumbar interbody fusion device. We're seeing significant traction with that. We also have a full slate of products for Q3 and Q4.

I think this is going to be one of our best years of product introductions in sheer quantity. So this will also add to our sales story next year.

Okay. Thank you, David.

Thank you, Matt.

(Operator Instructions)

Matt Taylor.

Hello. This is actually Young Li in for Matt. Thanks for taking the questions. Just a question, so on your balance sheet, it remains very strong even with -- even after Alphatec. You have a lot of things in the air with recruitment, Alphatec deal, robotics and trauma taking up most of your attention. But just wondering, will you now stay on the sidelines a little bit on the M&A front?

No. We won't. We've got a great balance sheet. We're going to use that where it makes sense. We're going to balance the timing and size of acquisitions that we look at with our capability of successfully bringing Alphatec in as well as putting trauma and robotics out. So we won't do anything that would take us off that track at this point. But we'll still look for the right opportunities and go forward and use the balance sheet as best we can for strategic growth.

All right. Great. We've been getting some pretty positive feedback about 3-D printed products. Is this an area of interest for you as well? If so, maybe can you talk about timing or maybe the type of products?

It is an area of interest for us. We have investigated it. We have launched a whole series of titanium plasma spray coated interbody cages.

Some of the animal work we have done has shown very positive results. So we think this is a great technology to have within the interbody fusion space. We have also investigated and continue to investigate 3-D printed technology. It's a longer-term project that we're not ready to discuss yet, Young Li.

Great. Thank you.

Thank you.

As there are no further questions at this time, I would return our call to the presenters.

Thanks very much for joining us. Feel free to call if you have any questions. We'll be around all day tomorrow.

This concludes today's conference call. You may now disconnect.