Globus Medical, Inc. (NYSE:GMED) Q3 2021 Results Conference Call November 4, 2021 4:30 PM ET

Company Participants

Brian Kearns - SVP, Business Development and IR
Dave Demski - President and CEO
Dan Scavilla - EVP and Chief Commercial Officer
Keith Pfeil - SVP and CFO

Conference Call Participants

Matt Miksic - Credit Suisse
Matt Taylor - UBS
David Saxon - Needham & Company
Sam Brodovsky - Truist
Korinne Wolfmeyer - Piper Sandler
Steven Lichtman - Oppenheimer & Company

Operator

Welcome to the Globus Medical’s Third Quarter 2021 Earnings Call. [Operator Instructions]

I will now turn the call over to Brian Kearns, Senior Vice President of Business Development and Investor Relations. Mr. Kearns, please go ahead.

Brian Kearns

Thank you, Amanda, and thank you, everyone, for being with us today.

Joining today’s call from Globus Medical will be Dave Demski, President and CEO; Dan Scavilla, Executive Vice President, Chief Commercial Officer; and Keith Pfeil, Senior Vice President and Chief Financial Officer.

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 2020 fiscal year 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 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 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 Dave Demski, our President and CEO.

Dave Demski

Thank you, Brian, and good afternoon, everyone. Globus had an outstanding quarter in Q3. Not only do we continue to take market share and perform well above our peers, we also accomplished several important strategic objectives. Historically, our growth has been fueled by 3 factors: new product introductions, robotic sales and competitive recruiting. All 3 of these leading indicators were very strong in Q3.

Revenue for the quarter was $230 million, up 6% over 3Q ‘20. Non-GAAP EPS was $0.50 per share, a 3% increase and adjusted EBITDA was a strong 34%. These results reflect an estimated $12 million to $13 million in correlated revenue headwinds in the U.S. during the quarter. Factoring that in would have resulted in revenue growth of 12% and upward revisions to both non-GAAP EPS and adjusted EBITDA.

Our enabling technology momentum continues to build, resulting in revenue of $20 million in Q3, an increase of 124%. The third quarter is typically challenging for capital sales, but our team performed extremely well, narrowly missing an all-time record as they delivered a fourth straight quarter of robust growth. In fact, enabling technology revenue on a trailing 12-month basis reached $74 million, 57% higher than any full year in our history.

The clinical superiority of ExcelsiusGPS in the operating room continues to be the underlying factor driving this growing momentum. Adoption and utilization remained strong even in the COVID dampened third quarter and prospective surgeon customers routinely acknowledged that ExcelsiusGPS is the best fine robot on the market.

As we discussed last quarter, this virtuous cycle is driving an acceleration in our growth. The ExcelsiusGPS robot will soon be joined by the Excelsius 3D imaging system and the Excelsius Hub navigation platform, both of which gained FDA 510(k) clearance in Q3. This combination of robotics, imaging and freehand navigation will become the Excelsius ecosystem, providing a seamless, scalable and unmatched clinical experience for surgeons.

We are putting the finishing touches on the products and ramping production in anticipation of strong demand. We are also excited to report the launch of the cranial application in Q3. We have multiple sites utilizing the technology with great results and enthusiasm. The accuracy time savings and efficiency of Excelsius over traditional approaches has been outstanding, exceeding our initial expectations.

This latest advancement helps drive robotic sites to take full advantage of the capabilities and scalability of the ExcelsiusGPS platforms. U.S. Spine continues to take significant market share growing by 2% as reported, but 10% after factoring in the impact of COVID-related shutdowns. This is on top of a challenging comp from Q3 last year, where we reported 17% growth in our U.S. Spine business.

This results in a 2-year adjusted stack growth of 27%, well in excess of any of our peers. Pull-through from robotics, contributions from new product introductions, and competitive recruiting were all factors driving growth. The number of competitive reps we added to our team in Q3 was the highest in over a year. Competitive recruiting along with robotic sales have historically been leading indicators of future growth, and we’re excited by the implications of our strong Q3 performance.

On the international front, our spinal implant business declined by 3% in the quarter. The trend of strong growth in most markets offset by declines in Japan, continues as we work off the impact of our strategic moves in Japan last year. Trauma revenue was up 21% in 3Q ‘20 and 9% sequentially. We added several competitive reps in Q3 and have a strong pipeline of recruits.

The upcoming launch of our ANTHEM Mini Frag System is the first of several exciting new product launches planned in this space over the next year. Finally, it is my pleasure to announce the acquisition of Capstone Surgical Technologies. Founded by Dr. Peter Bono, a board-certified orthopedic surgeon in Southeastern Michigan, Capstone has developed a unique patented surgical drill that leverages oscillating technology to accomplish bone removal, disk removal and screw insertion in minimally invasive spine surgery.

Oscillation significantly improves the safety profile of high-speed powered instruments compared to traditional drill technology. Furthermore, this technology is an important element in our plan to incorporate safe, efficient tissue removal capability into our robotic platforms in the future. We are looking forward to a strong finish to what has been an outstanding year.

While COVID restrictions are still impacting certain markets, they began to abate late in Q3 and remained lower than their peak. Our robotics pipeline remains strong, and we’ve closed several deals already in Q4. We anticipate the launch of Excelsius 3D late in the quarter and our recruiting pipelines in spine, trauma and INR remain strong. I will now turn the call over to Keith.

Keith Pfeil

Thanks, Dave, and good afternoon, everyone. Globus has completed another impressive quarter and continued its focus on execution around our strategic objectives despite the COVID headwinds. Revenue, profitability and free cash flow were all robust for the quarter, reflective of our continued market share growth, all while driving continued investment across our business.

Third quarter revenue was $229.7 million, growing 6.3% as reported versus Q3 of 2020. Q3 net income was $47.2 million, growing 6.8% over the prior year third quarter. Non-GAAP net income was $52.7 million, growing 7.3% versus Q3 of 2020 and delivered $0.50 of fully diluted non-GAAP earnings per share, which includes a $0.02 headwind driven by a higher share count when compared to Q3 of 2020, primarily as a result of the prior year share repurchase.

Adjusted EBITDA was 34.1%, and we generated $59.5 million of free cash flow. Turning our attention to sales. Our third quarter U.S. revenue was $198.2 million, growing 8.8% versus the third quarter of 2020, led by INR and U.S. Spine, as Dave mentioned in his earlier comments. We are encouraged by the performance of our U.S. business despite the difficult market conditions encountered during the quarter.

Looking back over the past 2 years, our U.S. Spine business continues to show impressive gains, growing 20.9% over the trailing 4 quarters when compared to 2019. International revenue for the third quarter was $31.5 million, declining by 7.2% compared to Q3 of 2020, driven primarily by lower robotic sales. The performance of our international spine business varied by region, demonstrating strong year-over-year growth in countries, including the U.K., Spain and Belgium.

This growth was partially offset by lingering COVID impacts as well as our previously mentioned Japan transition, which is positioning us for longer-term sustained growth. Gross profit in the third quarter was 74.5% compared to 73.6% in Q3 of 2020. The increase in gross profit was mainly driven by lower inventory reserves.

Research and development expenses for the third quarter were $15.9 million or 6.9% of sales, higher by $1.4 million or approximately 10% as compared to the third quarter of 2020. As mentioned earlier in the year, we continue to see tremendous opportunities to accelerate our growth in INR, spine, trauma and total joints.

Given that, we remain focused on expanding our R&D investments going forward, seeking to further differentiate our product portfolio and drive continued growth. SG&A expenses for the third quarter were $96.4 million or 42% of sales compared to $89.2 million or 41.3% of sales in the third quarter of 2020. The increase in spending, both in dollars and as a percentage of sales is reflective of higher sales compensation costs but also increased spending in areas such as travel, meetings and trainings.

These areas of spending continue to return to pre-pandemic levels as we seek to further engage with our customers. The effective income tax rate for the quarter was 13.3% compared to 16.8% in the third quarter of 2020. The lower tax rate was the result of tax benefits associated with stock option exercises. We concluded Q3 with $985 million of cash, cash equivalents and marketable securities.

Net cash provided by operating activities was $77.3 million, and free cash flow was $59.5 million. Year-to-date free cash flow was $160.2 million, and on a rolling 4-quarter basis, the company has generated a record $226.3 million of free cash flow. The company reaffirms its 2021 guidance of $950 million in net sales and $2 in fully diluted non-GAAP earnings per share.

Despite the COVID headwinds encountered during the quarter, our third quarter results contribute to what has been an impressive year for Globus. We delivered sales and profitability growth. We closed Capstone Surgical and we gained approval for our E3D system all while continuing to position ourselves for the long term. Though we are still experiencing lingering COVID impacts, we remain focused on execution during the fourth quarter to close the year strong while setting us up for continued growth in 2022 and beyond.

We will continue to invest for the future in order to drive new and exciting products while expanding our customer outreach to drive continued share gains across all markets. I’d like to thank the Globus team for their continued drive in their pursuit for excellence.

We will now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Matt Miksic from Credit Suisse.

Matt Miksic

And congrats on really impressive quarter given the environment. Just one question, if I could, on the international trends you mentioned. You called out the shortfall to your estimates maybe or your expectations, even though it was better than our expectations on the international side around robot sales. Can you maybe flesh that out and talk about any other dynamics that you’re seeing internationally? And then I just have one follow-up.

Keith Pfeil

As it relates to robots, I wouldn’t call anything out specifically. Q3, as Dave said, is typically a slower quarter. We just happen to have a really strong U.S. quarter for robotics. There’s nothing that gives me pause for concern as it relates to robots internationally. As you think about musculoskeletal, I called out a couple of countries for musculoskeletal. Point I was trying to make there is that the growth internationally is lumpy country by country, but overall, we’re seeing growth with what we would expect in musculoskeletal internationally, separate of the Japan callout that we both commented on.

Matt Miksic

Great. That’s helpful. And then just maybe the follow-up. I’m sure you’re going to get a lot of questions on the current environment and staffing. But I wanted to ask, you mentioned a few things about Capstone.

If you could maybe flesh out how that fits into your enabling technologies portfolio or kind of understand what’s special about it a little bit, but maybe how -- what’s the go-to-market strategy? Or what does it do for you that you learned -- that you’re not getting now with your current portfolio?

Dave Demski

Well, we -- thanks, Matt. It’s -- we’re not in that market right now. Power tools is a nice adjacency for musculoskeletal as part of our overall strategy. So that gives us an opportunity to enter that segment with a highly differentiated product. And then combine that with the fact that one of the big unmet unsolved challenges with robotics is tissue removal. This gives us some really important technology that we can incorporate into our robotic platforms to solve that problem in the future. So we’re excited about the potential of this.

Operator

Our next question comes from Matt Taylor with UBS.

Matt Taylor

So as Matt predicted, I did not want to ask you about the current environment and kind of what you’re seeing in the quarter. If you could talk a little bit about the lingering challenges and how things are changing and the impact on staffing, would love any color you can provide.

Dave Demski

Yes, Matt, not too much different than what I’ve heard on other ortho calls. It was worse. It got bad, August, September, started getting a little bit better. Some markets are coming back, but we’re still seeing some overhang into Q4. So that’s a combination of just bed capacity as well as staffing considerations. We don’t really have insight into how that mix is, but it’s better than it was, but not gone.

Matt Taylor

Great. And could I just ask a follow-up on imaging and how we should think about the launch there. And I assume that will be an enabling tech. Could you give us any color on the ramp you expect?

Keith Pfeil

Imaging, we’re expecting a Q4 -- late Q4 launch from the classification that will be within enabling technologies.

Matt Taylor

Okay. Any color on the ramp, and how quickly that could go?

Keith Pfeil

We’re busy building imaging systems now, and everyone is excited about it. We’re looking to get it launched in Q4, late in the quarter and really followed up into 2022 with more and more sales. As it relates to Q4 of this year, I don’t expect it to be a material part of our number as we close out the year…

Dave Demski

Yes, Matt, I’ll just add to that. The early ramp is hard to predict. We’re finishing up the final stages of the launch in terms of the product and production, but the demand is really strong. The surgeon interest is huge. We’ve got orders for it already. So the first half of the year is probably hard to see exactly how that ramp will go. But once we get in the stride, it’s going to be a really important product for us.

Operator

Our next question comes from the line of David Saxon with Needham & Company.

David Saxon

My first one is just on guidance. I was just wondering what’s assumed in guidance, you noted the environment is getting better. So does guidance assume that continues or kind of stays the same. And then that $12 million to $13 million in COVID headwinds are those deferred procedures? And does guidance assume any bad returns in the fourth quarter?

Keith Pfeil

Thanks for the question. I mean, the guidance assumes really 3% to 4% growth here in the fourth quarter. As we look -- stepping back, as we look at the year, we think we’ve had a really impressive year. We came out this year with $880 million in guidance. We’ve increased it $70 million since then. When you look at our current guidance, in total and compare back to 2019, we’re growing at 10% compounded annually.

As I look to the fourth quarter, specific to some of the things that you called out, we talked last quarter about having slowdowns as a result with kids going back to school and things like that. And now we had COVID headwinds that occurred in the quarter. Some of those may come back. But as I look at our guidance, $950 million is a good number. We feel like it’s a good number, and that’s what we’re focused on as we close out the year. We feel good about all of the areas of our business in terms of them performing, but we also are calling out that we still do see some lingering COVID impacts.

David Saxon

Okay. And then my second question is just on enabling technologies. You have the imaging launch later this year, you called out hub and the cranial module is launching as well. You’re at a $70 million -- call it, $75 million trailing 12 months revenue. I mean is this something that could be $100 million in 2022?

Dave Demski

Certainly could be. We’re not in a position to give guidance nor do we break it down. But we expect this segment of our business to grow significantly faster than the rest of our business, given the -- just where we are in the adoption curve of the technology, where we are in terms of a market participant, both of those trends are really favorable. So we think this segment grows for us significantly over the long term.

Operator

Our next question is from the line of Sam Brodovsky from Truist.

Sam Brodovsky

Just first one, kind of a more macro question in terms of what you’re seeing in the rep hiring environment and clearly being successful in terms of adding people. But as we get further away from that initial impact of COVID, has there been any change you’ve seen in the competitive rep hiring environment? And just want to appreciate thoughts there and how spend can kind of follow through with that.

Dave Demski

Thanks, Sam. I would not say there’s been any change due to COVID in rep hiring. We’ve always been an attractive place for the accomplished sales reps to go because we have the technology that’s adding value in surgical procedures. So it’s always nice to have the best products if you’re in sales, and we value our salespeople and compensate them accordingly. And we’ve traditionally been a strong recruiter. I would not -- it’s always been competitive. So it’s kind of the same, if you will.

Sam Brodovsky

Great. That’s helpful. And then I’ll just ask one on Capstone here. I think probably the initial intended application is going to be spine, but would be curious to hear how you think about that potentially augmenting the portfolio beyond spine applications and whether it be trauma or even expanding into a larger joint.

Dave Demski

Yes, there’s definitely opportunity to expand that technology across the ortho segment. So it’s -- we’re going to start with spine. It was developed by spine surgeons. So it’s really dialed into what they do in those procedures. But the technology itself is applicable across all of those segments.

Operator

Next question is from the line of Matt O’Brien with Piper Sandler.

Korinne Wolfmeyer

This is Korinne on for Matt. So kind of turning the focus to the trauma portfolio. Is there any update or further color you can provide on your efforts to build out your trauma business? I believe you mentioned some product launches, new product launches coming up historical like in the past, you mentioned that, but what is the status on those? And is there anything specific we could be looking forward to on that front?

Dan Scavilla

Thanks for your question. Yes, as we’ve spoken about in the past, we continue to build out the basic bag, adding some innovation into it, just to become market appropriate to be able to compete with the established players. What Dave mentioned is we received our FDA approval for our mini fragmentation system, that is a significant add for us given what it is in the market, the growth of that actual product in the market itself I personally see that as the potential to be one of our largest brands in a very short time.

We’ll be rolling that out within the fourth quarter. And I think that will be a significant step forward. We have several other products in the portfolio all scheduled for submission to the FDA with a planned launch up to from what I’m seeing in the first half of the year.

With that, we’ll probably gain the ability to cover off maybe 20% of the market in addition to what we’re doing today. And we’ll be very close to getting to where we want to be to then start bringing in meaningful innovation to actually transform the procedures.

Korinne Wolfmeyer

That’s great. And then just on Excelsius 3D, I know you’ve talked about it a lot. But can you speak to what some of the early feedback has been among surgeons who have tried it so far. We were pretty impressed with what we saw at NAS, but just curious to hear what you’ve been hearing in the field around that.

Dave Demski

It’s really impressive and exciting. I think everyone who sees it wants one then it becomes how can I get this technology versus what’s -- the benefits to them are obvious just in terms of the size, the functionality, the maneuverability of it, the smart aspects of it compared to what’s out there. So we’re really excited about the opportunity here.

Operator

Our next question comes from the line of Steven Lichtman with Oppenheimer & Company.

Steven Lichtman

And my question was, I guess, you guys touched on it, I guess, a little bit earlier, but what are you guys assuming in terms of COVID headwinds on procedure volumes, in particular, on the impact, I guess, on hospital staff insurances.

Keith Pfeil

I mean, thanks for the question. Our view is we’re looking at our guidance overall in total at $950 million. I mean what we’ve done, we’re not really focused on breaking out the parts and pieces. We did call out the headwinds that we saw in the quarter. But as I stated earlier, as I think about where we are and the growth we’ve seen to finish at $950 million we think is a strong statement, number one. But number two, we’re still in this ongoing COVID environment.

Last year, we had super strong third and fourth quarters. So coming into this year, we knew we had a strong third quarter comp. We again, we have a strong fourth quarter comp all in the environment of still being in some sort of lingering COVID headwind. So sitting here today, the $950 million, again, feels like a good number for us in the aggregate when you look at all of our businesses.

Operator

And thank you for joining the Globus Medical’s Third Quarter 2021 Earnings Call. This concludes today’s call, and you may now disconnect.