Globus Medical Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 7, 2024

There are 12 speakers on the call.

Operator

Thank you for standing by. Welcome to the Globus Medical First Quarter 2024 Earnings Call. At this time, all lines are will be on mute and a question and answer session will be held after the prepared remarks. Please be advised that today's conference is being recorded. I will now turn the call over to Brian Kearns, Senior Vice President of Business Development and Investor Relations.

Operator

Mr. Kearns, please go ahead.

Speaker 1

Thank you, Crystal, and thank you, everyone, for being with us today. Joining today's call from Globus Medical will be Dan Scavilla, President and Chief Executive Officer and Keith Fyle, Chief Operating Officer and Chief Financial Officer. This review is being made available via webcast accessible through the Investor Relations section of the Globus Medical website atwww.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 ks for the 2023 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.

Speaker 1

Our SEC filings, including the 10 ks 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 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.

Speaker 1

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'll now turn the call over to Dan Scavilla, our President and CEO.

Speaker 2

Thanks, Brian, and good afternoon, everyone. Globus delivered a tremendous Q1 as we push into 2024 with sales of $607,000,000 growing 119% or $330,000,000 Non GAAP EPS was $0.72 increasing 36% versus prior year, even with the 32% increase in outstanding shares driven by the merger. Adjusted EBITDA was 28% and free cash flow is $24,000,000 for the quarter. Q1 is the Q1 where we integrated the Globus and NuVasive field organizations into 1 formidable team, rolling out new reporting structures globally, combining product portfolios to create best in class offerings to our surgeons, reorganizing support organizations, implementing common systems and beginning to unlock synergies to drive future growth. Through all of this change, Globus launched 5 new products in Q1 and has set the stage for a record number of launches in the coming months.

Speaker 2

These results are a testament to our incredible team working tirelessly around the clock to drive integration, overcome challenges and create scalable solutions so that we can reach steady state quickly and shape the markets in which we compete. We will increase our focus on earnings per share and free cash flow over adjusted EBITDA in this and future earnings calls. While we remain committed to achieving a strong mid-30s adjusted EBITDA as we've been able to consistently accomplish for over 20 years, we feel that delivering sustained profitable growth combined with strong and consistent free cash flow is the real measure of potential and shareholder value, especially for companies that have been in operation for several years. Moving into the performance of our business areas. U.

Speaker 2

S. Spine grew 100% in Q1 with notable gains across our product portfolio in expandables, biologics, MRI screws, 3 d printed implants and cervical offerings. This above market growth is driven by the strength of our combined product offering, competitive rep recruiting from prior quarters and increased implant usage through robotic pull through. Competitive rep recruiting has significantly increased in Q1 2024. Now more than any point in our history, the most successful and tenured competitive professional reps are seeking to join our team.

Speaker 2

Competitive reps with over 10 years of tenure, once a rarity to recruit, are seeing the power and future we can offer them as a destination of choice for innovation and growth. 2024 has the potential to be a record recruiting year and is off to a great start. On the product development front, we continue to execute and introduce new products from our prolific R and D pipeline launching 5 products this quarter. The combined GMED Nuva product development team is beginning to hit its stride with meaningful collaboration in developing and launching new products and we expect product launches to continue at an accelerated pace going forward due to improved internal development processes. I want to share these recent meaningful launches with you.

Speaker 2

The first products are DuraPro and Vazara power tool systems for hard and soft tissue preparation that represent our initial entries into the power tools market. Beyond entering a new market, these two systems greatly complement our enabling best in class robotic navigation, innovative musculoskeletal implant solutions, comprehensive biomaterial offerings and interoperative imaging tools as we seek to proceduralize spine orthopedic and cranial surgery. The DURA PRO Oscillating Drill System is a game changer for our surgeons allowing them to perform safe bone and disc removal around neurovascular anatomy through an open or MIS approach with optional robotic navigation using ExcelsiusGPS. The system uses oscillating drill technology that cuts bone easily while being harmless to soft tissue structures. The disc removal tips enable fast and easy disc and cartilage removal while providing a tactile sensation upon reaching subchondral bone.

Speaker 2

The first cases have gone extremely well and surgeons who have seen our technology are eager to start using it. We look forward to a full rollout in the coming weeks. For SARA, high speed drills are used for controlled drilling, burning and removal of hard tissues at speeds up to 80,000 RPMs. The foot controlled power drills offer robotic navigation using ExcelsiusGPS and various interchangeable burst styles designed for clinical applications in spine and orthopedics including joint arthroplasty and trauma. Feedback on this system has been excellent and we are ramping up distribution over the coming months.

Speaker 2

In spine, the Reliance 3 d system for complex spinal deformity was launched in Q1 and perfectly augments the Reliance platform as our reducer technology that allows for 3-dimensional control of the spine. It is designed for usability as well as efficiency to reduce the cognitive load even of the most complex cases. The extremely low profile and versatile reducer is ideal for complex cases with significant axial rotation and cob angle correction, where access to the screws is limited by anatomical constraints. Adira Aflix plate system introduced in February provides a rigid coupling to a variety of interbody spacers to enhance construct stability and promote repeatable placement. The system allows for easy in situ attachment of interbody spacers significantly reducing the risk of spacer migration and creating a standalone construct when used with 2 bone screws.

Speaker 2

It offers compatibility with a range of static and expandable interbody spacers, bone screws and bone anchors facilitating a versatile surgical approach. Additionally, the ability to insert the plate spacer as a single construct streamlines the procedure by reducing the number of instrument passes. On the trauma side, we launched the Anthem distal radius system with additional plating options and more streamlined plate fitting, improving our existing offering of older plates and rounding out the risk portfolio. It is receiving great clinical feedback and has had a strong start since introduction. We expect it to be the flagship plate of our wrist fracture fixation portfolio.

Speaker 2

In Enabling Technology, sales were $32,000,000 up 27% versus prior year driven by higher robotic and imaging system sales. This was our highest Q1 since launch and we have not yet seen the positive tailwind effects of NuVasive accounts which we believe will be in later this year. Robotic procedures continue to accelerate growing 15% versus prior year and exceeding 71,000 robotic procedures performed since launch. Our international spinal implant business delivered record sales in Q1 growing 193% on a constant currency basis compared to prior year. In 20222023, we increased our investment in our international business for people, products and sets and we have achieved consistent above market growth through these regions as a result.

Speaker 2

We have yet to fully harness the power of the combined Globus and NuVasive product offerings internationally and feel this will be a significant tailwind moving forward. The combined trauma and NSO business delivered 308% growth for Q1 driven by the continued strong performance and market penetration of our base trauma business combined with the fast uptake of the NuVasive Specialty Orthopedic Growth Nail. The combination of these two businesses is one of the strengths of our merger, offering a broad range of product and market changing innovation. Moving into the integration status in January, we implemented the realigned U. S.

Speaker 2

And international sales team structure to support surgeons worldwide. We're investing in our field sales teams with product cross training and enabling tech hands on experience so they can increase their growth opportunities and offerings to their surgeons. In addition, we rolled out our common operating system in the U. S. This quarter, allowing us to work as 1 company and 1 team.

Speaker 2

Like any system implementation, there are areas working well, areas that require debugging and areas to enhance our future productivity. I want to thank the field team and the in house support groups for their dedication and speed in implementing the structure and systems quickly pushing towards steady state as we continue to improve this platform. I especially want to call out our Memphis team who not only implemented a new operating system and new processes, but quickly pushed their post implementation daily shipments to record levels. Cross selling our existing portfolio is beginning to take root as newly formed teams cross train and share products to offer surgeons more options for treating their patients. In 2023, we made significant investments in key product sets and enabling tech long lead time components in preparation for higher demand and are ready to support increases in these areas.

Speaker 2

In product development, we carry forward the rich history of rapid development to remain an industry thought leader as we work with our surgeon partners who address unmet clinical needs from pioneering the XLIF procedure that is now the gold standard of lateral surgery, leading the market in expandable spacer technology and developing the best spinal robot in the most advanced intraoperative CT imaging, we're working to create surgical proceduralization of all key spine surgeries to create the standard of care across the spine industry. Our intellectual property portfolio has been number 1 in the spinal industry for the last decade and we are committed to further expanding this lead especially in enabling tech arenas as we continue to be at the forefront of imaging, navigation and robotics. To accomplish this, we remain committed to continuing existing projects and we'll have a strong ongoing PD presence on the West Coast focused on spine and enabling tech solutions. I believe our long term prospects as a leading innovator have never been stronger with the combination of our R and D people, our GMED and Nuva IP portfolio and the revamped development process. We're enhancing our surgeon engagement programs to increase our impact with surgeons and further strengthen how we interact with them in all aspects of our business.

Speaker 2

Our professional affairs team has been expanded and we've added scientific affairs, marketing and communications team all with talented individuals. In addition, we're increasing our research and clinical investments and expanding the coordination of education programs and enhancing our presence in teaching institutions. Operations remains the strength of the merger. We've begun expanding in house capabilities of the West Carrollton production facility as part of our ongoing synergies. The Memphis distribution center is now on our common system and increasing its role in the overall business.

Speaker 2

We will continue to invest in high-tech manufacturing equipment for our implant, instrumentation and enabling tech production capabilities. We're also working to consolidate volumes and orders with 3rd party vendors to accelerate delivery times and drive cost savings. All of these activities are progressing as planned. As you can see from the Q1 results, synergies have been identified and actions have begun to realize benefits, focusing on out of pocket spending and prioritized investments to match future growth plans. In house organizational structures are being implemented and should reach steady state by mid year 2024.

Speaker 2

While some employees have been impacted by the merger and reorganization, the merger payback is not driven by deep employee or spending cuts. We remain focused on building an organization to support long term sustained profitable growth. I believe the potential for Globus has never been greater. It's up to us to harness our resources and shape the future of our markets. We have at our fingertips everything we need to realize this.

Speaker 2

I want to thank the worldwide Globus team for your dedication and support delivering an incredible Q1 and furthering the pathway to becoming the preeminent musculoskeletal technology company in the world. I will now turn the call over to Keith. Thanks, Dan, and good afternoon, everyone. Our Q1 results point to a strong start in fiscal 2024 with sales and earnings growth both exceeding expectations. Our team was and remains focused on executing against key integration objectives namely sales retention and alignment, process standardization and synergy capture.

Speaker 2

I will focus my comments this afternoon on 1, Q1 2024 results 2, provide updates on integration and synergy goals and 3, comment on insights as to our performance for the remainder of 2024. Now turning our attention to Q1 results. Our first quarter revenue was $606,700,000 growing 119.3% on an as reported basis and 119.8 percent on a constant currency basis over the prior year quarter. The Q1 GAAP net loss was $7,100,000 resulting in a GAAP loss of $0.05 per share. Our first quarter results were impacted by merger related costs, restructuring charges as well as in process research and development expense.

Speaker 2

Our Q1, 2024 non GAAP net income was $98,100,000 which drove $0.72 of non GAAP diluted earnings per share. The non GAAP EPS of $0.72 includes a onetime $0.06 favorable non cash adjustment, which I will comment on further when I provide my update on Q1 gross profit. Our first quarter non GAAP net income grew 82.4%, while non GAAP EPS grew by 36.4%. Excluding the one time impact worth approximately $9,500,000 non GAAP EPS grew by 25% compared to the prior year quarter. The primary drivers of growth are core sales volume increases coupled with lower than planned sales dis synergies, the inclusion of NuVasive results and the realization of cost synergies partially offset by a higher share count.

Speaker 2

To illustrate, our Q1 2024 share count was 135,400,000 shares compared to 102,200,000 shares in the prior year quarter. Our first quarter adjusted EBITDA was 27.5% and free cash flow totaled $23,800,000 Musculoskeletal sales in the Q1 of 2024 were $574,700,000 or 128.4 percent higher versus the prior year quarter, driven primarily by the contributions from the NuVasive merger. On a pro form a basis, assuming NuVasive was in our prior period results, musculoskeletal sales grew 3.3% versus the prior year quarter of the prior year. Pro form a growth was driven primarily from our U. S.

Speaker 2

And international spine businesses as well as trauma products. Our first quarter enabling technology sales totaled $32,000,000 growing 27.5% versus the prior year quarter, driven primarily by increased sales of Excelsius GPS and our E3D system. The Q1 saw a return to more historical norms with the vast majority of transactions being outright purchases. The pipeline was strong coming into the quarter and remains so as we closed Q1 and entered Q2. A focus of Q1 was driving further development of legacy NuVasive customers into the EGPS pipeline.

Speaker 2

We believe this cross selling activity will set us up for future success as we push further into 2024 and beyond. 1st quarter U. S. Sales totaled $482,900,000 growing 106.3 percent as reported. On a pro form a basis, U.

Speaker 2

S. Sales grew 2.8% led by growth in U. S. Spine, trauma and enabling technologies. International sales were $123,700,000 in the Q1 of 2024, growing 190.7% as reported.

Speaker 2

Looking at international revenue on a pro form a basis, sales grew 8.1% led by spinal implant growth in key focus countries including Spain, Italy, Belgium, Ireland, Germany, Saudi Arabia and Poland. GAAP gross profit in the Q1 was 60.2% compared to 74.4% in the prior year quarter. Consistent with the prior year, the decrease in gross profit is largely associated with the NuVasive merger, namely step up amortization. Excluding the impacts of step up amortization, adjusted gross profit was 69%. Included in adjusted gross profit is a one time favorable non cash adjustment to depreciation expense worth approximately $9,500,000 impacting non GAAP EPS by $0.06 and adjusted gross profit by 1.5%.

Speaker 2

This relates to a purchase accounting measurement period adjustment of the useful lives of assets acquired through the NuVasive merger. Excluding this one time impact, adjusted gross profit would have been 67.5%. The decline in adjusted gross profit versus the prior year quarter is driven by the inclusion of NuVasive in our consolidated results, partially offset by cost synergy actions, which I will discuss later in my prepared remarks. Consistent with my comments during our Q4 earnings call, we still expect full year adjusted gross profit rate to be in the mid to upper 60s for the full year 2024. Research and development expenses for the quarter were $57,300,000 or 9.4 percent of sales, which includes a $12,600,000 charge related to the acquisition of in process research and development.

Speaker 2

Excluding the IPR and D charge, research and development expenses for the quarter would have been $44,700,000 or 7.4 percent of sales compared to $21,100,000 or 7.6 percent of sales in the prior year quarter. The increase in spending is again driven by the inclusion of NuVasive in our results, partially offset by cost synergy actions taken during the quarter. The acquisition of IP R and D during the quarter is a testament to our commitment in seeking out new technology and innovation, which aligns with our mission and go to market. We applaud our internal teams in driving this forward, while the business remains focused on achieving its merger integration objectives. For the full year, we still expect R and D expense to be in the range of 7.5% to 8% consistent with prior comments.

Speaker 2

SG and A expenses in the Q1 of 2024 were $248,700,000 or 41 percent of sales compared to $122,400,000 or 44.2 percent of sales with the increase being driven by the impacts of the NuVasive merger, partially offset by cost actions taken. Our continued expectation for 2024 is that SG and A expenses will improve 1 to 2 percentage points over full year 2023 SG and A expense. GAAP restructuring costs incurred during the Q1 of 2024 totaled $19,100,000 and non GAAP restructuring charges totaled $6,000,000 in the quarter compared to 0 in the prior year quarter. The costs incurred relate primarily to workforce reductions as well as facility and lease termination costs. Net interest expense during the Q1 was $1,900,000

Speaker 3

compared to

Speaker 2

interest income of $6,500,000 in the prior year quarter. The decreased net interest income is a result of a lower cash driven by the pay down of the former NuVasive line of credit at merger close as well as interest expense from the senior convertible note. FX loss during the quarter totaled $15,400,000 compared to the prior year quarter. Dollars 11,200,000 of this FX loss relates to a non cash acquisition related impact associated with a former NuVasive deal prior to the merger. The GAAP tax rate for Q1 2024 was 16.8% versus 22.3% in the prior year quarter.

Speaker 2

The reduced tax rate for the quarter was driven by a combination of lower GAAP pretax profits as well as discrete items, predominantly the IP R and D acquisition during the quarter. As we look further into the year, we expect our non GAAP tax rate to be approximately 23% for the full year 2024. Moving over to cash and liquidity. Our cash, cash equivalents and marketable securities were $485,700,000 at March 31, 2024. We did not have any short term borrowings against our line of credit and our only long term debt consists of the 0.375 percent senior convertible notes due in 2025.

Speaker 2

Our intent remains for these notes to be part of our capital structure until they are due to be settled in March 2025. Q1 net cash provided by operating activities was $52,400,000 and free cash flow was $23,800,000 We expect a temporary impact to operating cash flow as a result of higher accounts receivable balances driven by our systems integration and the resulting U. S. Go live. We note this as a temporary delay, which will impact the 1st and second quarters and be reflected as a higher working capital investment in accounts receivable.

Speaker 2

We have no concerns regarding collectability and view this as a temporary systems go live impact. Capital expenditures during this quarter were $28,600,000 or 4.7 percent of revenue. Our full year expectation remains that CapEx will be in the range of 5% to 6% of sales. During the Q1, we spent $83,300,000 to repurchase approximately 1,600,000 shares of our Class A common stock. Since the merger with NuVasive closed on September 1, we have spent approximately $308,900,000 to repurchase 5,900,000 shares of stock.

Speaker 2

To put this into context, this share repurchase equates to approximately 15% of the dilution created as a result of the stock for stock merger. This demonstrates our continued belief in this deal and our conviction to drive a successful outcome in bringing these 2 great companies together, further separating ourselves from the competition. We have $191,700,000 remaining on our authorized share repurchase program. Turning our attention to integration and synergies, significant progress was made during the quarter on driving cost synergies. We again reaffirm our commitment to achieving $170,000,000 in cost synergies and have fully acted upon actions which will result in our achievement of realizing 40% of that total figure or $68,000,000 during 2024.

Speaker 2

Operationally approximately $12,000,000 will favorably impact gross margins in fiscal 2024 and are predominantly the result of supply chain efficiencies, namely contract renegotiations and facility consolidations. The remaining $56,000,000 are expected within OpEx and will be primarily achieved through actions around headcount reductions as well as discretionary spending through the rollout and implementation of revised spending policies, systems consolidation and a reduction in third party consulting expenses when compared to pro form a legacy spending of the combined organizations. As we think about next steps, we are now turning our attention to driving manufacturing and material cost reductions. This will be achieved through an examination of processes, manufacturing in sourcing, material cost renegotiations and cross training of our manufacturing facilities to expand production of both legacy Globus and legacy NuVasive products at all locations. This will drive enhanced efficiencies while also creating a stronger supply chain to prevent potential future manufacturing disruptions due to this cross training.

Speaker 2

We expect actions to be taken in 2024 2025, which will drive P and L savings later in 20252026. Lastly, I'd like to make some brief comments on our performance for the remainder of the year. As a result of our strong Q1 and continued growing confidence, we are updating our previously provided guidance. We now expect 2024 net sales to be in the range of $2,460,000,000 to $2,485,000,000 and our fully diluted non GAAP EPS to be in the range of $2.75 to $2.85 per share. Our revised net sales guidance implies 2.7 percent to 3.7% growth over pro form a 2023 revenues totaling $2,396,000,000 As commented on last quarter, our revenue guidance includes the impact of a potential $150,000,000 revenue dissynergy as a result of the merger.

Speaker 2

Though our confidence level increases the further we move into 2024, we remain appropriately conservative over the prior year non GAAP EPS of 2.32 over the prior year non GAAP EPS of $2.32 Our revised guidance includes an estimate of approximately 137,000,000 shares for the full year. My closing comments will be brief. We are thrilled with our strong first quarter performance and are extremely confident in delivering against our commitments for the year. Dan and I both touched on our Q1 achievements and our commentary should leave you with our steadfast commitment to driving execution, not only on the merger integration, but also on driving new product launches, expanding our sales force and achieving further penetration of Excelsius products, while continually driving expansion further into the musculoskeletal market to achieve our mission. All of this will be done in a financially responsible manner consistent with the Globus history of driving strong profits and free cash flow while maintaining a strong balance sheet.

Speaker 2

Thank you to the entire Globus team for their tireless efforts in driving this tremendous Q1 progress as we continue to achieve our mission of becoming the preeminent musculoskeletal company. Operator, we will now open the call for questions.

Operator

Thank you. We are now going to shift to our question and answer session. Thank you for holding. I do would like to mention that we ask participants to please limit their questions to one question and one follow-up. Our first question comes from the line of Matt Blackman of Stifel.

Operator

Your line is now open.

Speaker 4

Good afternoon, everybody. Thanks so much for taking my question. Can you hear me okay?

Speaker 1

Yes. Yes.

Speaker 4

Great. Keith, I heard you say qualitatively that you saw, I think, lower dis synergies in the Q1, and then you sort of talked to the original dis synergy number. I'm just curious, you didn't lower that number, that $150,000,000 number, but should we take the fact that you bumped guidance by about $10,000,000 as a reflection of maybe dis synergies in that magnitude being lower than you expected? Just any way to help us think through the dis synergy number and then the follow-up. Yes.

Speaker 2

No, it's a great question. And I would say we called out the 150 because we wanted to level set. That's what we commented on last quarter. But coming out of this Q1, we're really pleased with the performance. And to your point, we did tick up full year revenue guidance.

Speaker 2

So it really goes back to what I said earlier. The further we get into the year, the more confident we're feeling, but we are still applying some appropriate Globus conservatism. And Matt, what I would build on to that is we're raising it because of the performance throughout the business. While we called that 150 out that was primarily U. S.

Speaker 2

Spine and a little bit of international, but the raise reflects the strength throughout all of our business here.

Speaker 5

And the other important thing that

Speaker 2

I would raise is that as you think about the last time we got together to talk and give you an update on Q4, we haven't seen any material, I'd say, rep reductions or anything like that that would cause us to believe that the situation was going the other way. We remain positive and confident as we finish Q1.

Speaker 4

That's really helpful. I appreciate all that color. And I guess the follow-up, you did mention maybe getting after the NuVasive Excelsius cross selling opportunities in the second half of the year. I guess, so the first part is, is that still contingent or not on getting approvals for the implants on the robot? And then I guess the other question is, how do we think about that opportunity set?

Speaker 4

I mean, we've done some work.

Speaker 6

It

Speaker 4

seems like a really big number of potential NuVasive accounts that don't have a robot. But it all seems like a very distinctly unique opportunity set from perhaps some of your competitors that may be coming later year or into next? Just any way you could think you could frame the opportunity for us on the cross selling side of selling the robot into Nuva accounts? Thank you.

Speaker 2

Hey, Matt, it's Dan. So listen, one of the premise that we talked about when we did the whole merger was the fact that we would rapidly grow our sales force and our customer base, in fact significantly accelerating what we've done through our usual competitive recruiting. So this was a leap forward with the intent for us to not only build the best bag of existing products, but to actually open up these new accounts for us as Globus for enabling technology. We've made moves already to bring realign with guided instruments and those appropriate implants onto the robot. We're working through that and should have that ready for the second half of the year.

Speaker 2

We're making sure that as I mentioned in my comments, our reps are trained with hands on and know and are very familiar with this technology to further help accelerate that in, in the second half of the year.

Speaker 4

All right. Thank you very much.

Operator

Thank you for your question. Please stand by for our next question. Thank you. Our next question comes from the line of Shagun Singh of RBC. Your line is now open.

Speaker 7

Hi, everyone. This is Kendall on for Shagun. Thanks for taking my question and congrats on a nice quarter. I have one quick question on upcoming spine robots coming to the market. I know there's potentially 2 new competitive spine robots coming to the market from larger market players and one of them has been a major share donor over the last several years.

Speaker 7

How do you expect the new systems to compete in the market and especially against your spine robot? And what do you think of implant share dynamics as these companies have a better ability to defend their position in the market? Thank you so much.

Speaker 2

Kendall, I see it's a tough one to answer through. I would tell you that we're focused more on the fact that we do have the best enabling technology and we have a pathway to do this through the merger that we've set up. We're going to stay focused on that and drive into a relatively new market that has very low penetration in total. But we feel like we're best poised to continue with the cadence we have and actually increase the velocity. We've always recognized the competition would someday come and may someday come.

Speaker 2

That's not a deterrent for us to stay or change anything. We're going to remain on course with our heavy investments. Our focus and belief in our sales team and the ability to get in and get the best technology in the surgeon's hands. And the only thing I would add to that is I think we're extremely well positioned to compete here because we still feel we have a best in class robot. But more importantly, the thing to think about here is that we're still investing in our product line from an implant perspective.

Speaker 2

So as we think about coming to market, we're coming to market with the robot. We're continuing to invest in implants and R and D. That really gets back to some of the core reasons why we wanted to bring these companies together, because we still believe that we're working to drive innovation and moving the business forward with our product portfolio innovation. I'm just going to add one thing to that too. As you heard me announce the DuraPro and the VASERA type power tools that is a significant game changer when coupled up with our existing enabling technology that's going to further just create differentiation throughout what we're going to offer.

Speaker 7

Thanks so much for the color. And then I just have one quick follow-up. What were you seeing from the capital spending environment in Q1? And what have you seen in the early part of Q2, especially I have a couple of questions also about have you seen more on front sales or you see more leases on that side?

Speaker 2

So thanks for the question. So the capital environment remains robust. Our pipeline coming out of Q4 into Q1 was strong and we felt the same way coming out of Q1 into Q2. I commented on the fact that really and during the quarter not only did we close the deals that we did, we're really starting to bring together that pipeline of the formerly invasive customer. And I also commented on during the quarter, we saw more of a return to normalcy where the vast majority of our sales in the Q1 were outright purchases.

Speaker 7

Great. Thank you so much for the color.

Operator

Thank you for your question. Please stand by for our next question. Our next question comes from the line of Matt Taylor of Jefferies. Your line is now open.

Speaker 3

Hi, thank you for taking the question. I just wanted to ask about the guidance raise on the top line and if why you didn't raise by as much as the strong beat that you had in Q1. Is that conservatism? Or is there anything else that you're considering there?

Speaker 2

Yes. Thanks for the question. This is Keith. Yes, I would say that it's conservatism. I mean, we came out of the quarter extremely thrilled with where we landed.

Speaker 2

But as we look into the year, it's still early. We're still we just closed the Q1. But like I said earlier, there's nothing right now that leads me to believe that my enthusiasm shouldn't change as I look ahead. Yes. And Matt, I would tell you, if you look at us historically, we do not usually raise on the first quarter no matter what our results are, but we're sending a signal as to our belief here by putting this out.

Speaker 3

And just a follow-up, you mentioned this could be a record year for hiring, which may surprise some people. Maybe just talk about how that's evolving and when we would start to see that matriculate?

Speaker 2

I don't know if it would be any different than the norm with that is we have a lot of interest coming at proactively. And again, you've got a great team who goes out as well and seeks out those type of things. And so, I would tell you, the portfolio of active recruits is stronger than I remember seeing in recent history. The folks that we've onboarded in the Q1 would be a record. I'm not going to reveal that amount.

Speaker 2

And like anything, you make sure that they get onboarded properly. You adhere to all contractual obligations. And what you usually see from these is a lift in the current year and then a stronger one in the 2nd year and you kind of level out in the 3rd year. I would think we would follow that course. The signaling of this is the fact that we're saying that it's a precursor to what we believe can be a strong year in the second half and into next year.

Speaker 3

Great. Thanks so much and congrats.

Speaker 2

Thank you. Thanks.

Operator

Thank you for your question. Please stand by for our next question. Our next question comes from the line of Brian Zimmerman of BTIG. Your line is now open.

Speaker 8

Hey, guys. Congrats. Nice to see. It's proven some doubters. I want to start with gross margins actually, Keith.

Speaker 8

It looks like you guys are sequentially really improving gross margins. I know there was a one time benefit in there. But just talk to me about kind of behind the scenes, you talked a little bit about consolidating vendors, enhancing manufacturing. How long does this kind of take you to work through? When do we really see those benefits?

Speaker 8

And to your guidance language, Keith, I think last quarter you said about 65% to 70% for guidance for gross margin. And now you kind of set around high 60s, if I'm not mistaken. So just want to understand kind of your thinking specifically around the gross margin cadence for this year and as we move into 2025?

Speaker 2

Thanks, Ryan. It was a great question. So my messaging on mid to high 60s gross margins for the quarter is for the year is consistent with what I communicated last quarter. But as you think about kind of where we're at, the things that we look to knock off quickly was getting the U. S.

Speaker 2

System done, driving standardization from a warehousing perspective and going out and renegotiating contracts for things that impact supply chain around freight, things of that nature. The in sourcing and contract renegotiation to expand manufacturing takes a little bit longer. So one of the things that you have to drive is you have to drive 1st bringing or buying additional machinery and equipment. We've taken actions to do that. Those machines have to get delivered, get put online.

Speaker 2

That puts you into the second half of the year. You're going to start producing as you get into Q3 and Q4 and as well as Q1 and Q2 next year. So that basically is going to show first in terms of where you're in sourcing, you're going to see inventory step up, but you're not going to see that roll through the P and L until it pushes through the P and L. That's why I had the comments of you're not going to see that until you get into 20252026. But the actions that you're taking are actions that we've been very aggressive with to date.

Speaker 2

I also commented in some of my earlier statements about just really focusing on spending. As we think about getting everyone commonized around one approach, one of the things that I would expect to see is more of what I call legacy Globus approach to spending and really kind of sweating a lot of the costs that are out there. Those are all things that are going to help us really improve the gross margin, but the big savings to us doesn't occur until really into getting into next year.

Speaker 8

Very helpful. And then Dan one for you. I was at A and S, I got to see Excelsius Hub, some of the power tools. It was nice to see. This feels a little bit like an extension on the margin away from spine, maybe into some more of the core neurosurgery.

Speaker 8

You guys have kind of had outward pushes in the past in imaging and trauma. And just curious, kind of understand your view of where you want to go with the business and not to downplay the combined spine business, but it does feel almost if you're pushing outward away from Core Spine and would appreciate your thoughts on kind of the longer term vision.

Speaker 2

Thanks, Ryan. Look, one of the things we've always said and we'll continue to say is, while we look to become a musculoskeletal technology company, meaning that we'll go out into all those areas, we recognize that we will always be predominantly spine and we're never going to lose focus of being spine with what we do. These things can all enhance spine, but they also have other applications. So even the power tools you refer to, the fact that they're applicable to orthopedics, trauma, cranial, those things help a lot. And even the hub itself, again, that can help in different areas, but again, also as applications at ASCs or in other things within spine.

Speaker 2

And I think at the end of the day, if you keep in mind that the even the capital that we're doing is all about driving the core spine and creating those and sterilizing procedural solutions that we do. So I would tell you we're not trying to move away from this or signal anything with spine other than we're all in. And we have opportunity to take great technology beyond those borders and that's what we're doing.

Speaker 8

Thanks guys. Congrats on the quarter.

Speaker 1

Thank you.

Operator

Thank you for your question. Please standby for our next question. Our next question comes from the line of Steve Lichtman of Oppenheimer and Company. Your line is now open.

Speaker 6

Thank you. Good evening, guys. I guess, just first question, as we look at the U. S. Spine business, as you look at that low single digit pro form a number, how much in the synergies would you sort of peg came through in the Q1 itself?

Speaker 2

Steve, I'll take that. We actually probably won't disclose that. I mean, there's always different areas where things are going good or not with the area overall. But I would tell you it's kind of tough to tease through what that would be to give you a whole number with it. I mean so I don't really have something I could honestly give you and say I know for certainty here's what it is.

Speaker 2

At the end of the day, we're just looking for growth everywhere and we've put a lot on the U. S. Team in particular. And so there's a level of distraction when you've created a new team with new products, with new folks, with new procedures, with a new system. And I think that's really what we're looking to do with this.

Speaker 2

But I really don't have a number that I could say with certainty here's what's driven from the synergy impact.

Speaker 6

Got it. And then just a follow-up on your comment about shifting the dialogue from adjusted EBITDA and more toward EPS and free cash flow. On the latter, can you level set us on what your expectations are for free cash flow this year and then over the medium term, whether talking about on a free cash flow conversion basis or on an absolute dollar basis? Appreciating Keith your comments about AR in the first half.

Speaker 2

Yes. So I think the way to look at this thanks for the question first off. If I look at fiscal 2023, I want to say we generated give or take $180,000,000 of free cash. The way I think about that over the longer term is we also identified $170,000,000 of synergies. So you kind of put those two numbers together that's where you kind of see yourself going over the long term.

Speaker 2

Near term, the focus is on really driving cash savings that are going to contribute to EPS. So I would again look at last year and think about some of the things that I commented on related to the synergies that we realized this year.

Speaker 6

Got it. Thanks, guys.

Operator

Thank you for your questions. Please stand by for our next question. Our question comes from the line of Vik Chopra of Wells Fargo. Your line is now open.

Speaker 9

Hey, this is Simran on for Vik. Thank you guys for taking the questions and congrats on a great quarter. Maybe just starting off on the robotics side, I don't think I heard a latest update on the Recon Robotics or recon robots. So what are the latest timelines there?

Speaker 2

That's a great question. Thanks for asking. We actually filed the RECOMM robot. It's with the FDA. And so we're at a stage now where we're waiting approval.

Speaker 2

What we're doing while we're waiting approvals, we're building inventory, getting ready to roll it out. So we're always waiting for the FDA. I don't have an exact date I could give you. My thought would be the second half of the year probably towards the later part of the third quarter is really what we're looking for. But that remains again beyond the power tools one of the most exciting things I think will get out the door this year.

Speaker 9

Okay, great. Very helpful color. And maybe just how should we think about growth in your Enabling Technologies business in 2024? And how are you thinking about seasonality across that business?

Speaker 2

I think that the growth I mean, the growth is going to be consistent with bringing the NuVasive business into the fold. I mean the seasonality or the pipeline doesn't really change. We still expect Q2 and Q4 to be the key drivers. But from a growth perspective, you would expect to convert some of the legacy Nuva customers into that EGPS portfolio or Excelsius portfolio and drive the business going forward. I mean, when you think about the robot, you have E3D and then you have new products coming.

Speaker 2

So the cadence for that business in terms of long term growth should be very positive. And you'd expect it to grow at a higher rate than the overall business.

Operator

Great. Thank you. Thank you for your question. Our next question comes from the line of Craig Bijou of Bank of America Securities. Your line is now open.

Speaker 10

Good afternoon, guys. Thanks for taking the questions. So I wanted to start with your comments on the integration going better than expected. And maybe Keith or Dan, just trying to understand when you guys may feel more comfortable either taking down that $150,000,000 number or that you're not going to see or essentially that you've kind of moved past some of the potential disruption areas with the integration of the sales force?

Speaker 2

Craig, my first thought was December 31. But what I would tell you is, again, as we get through and get the cadence going, I think you'll see us get more comfortable, really happy with where we are for the Q1. I would think we're going to feel the same way for the Q2. But again, you just don't know. So we're trying to be responsible to the shareholders and make sure that we get through these phases.

Speaker 2

But personally, I would think that deep into the 3rd quarter is when I personally will feel better. And I would agree with Dan. As we get through the year, we remain positive with where we're at so far here entering the 2nd quarter. I would feel probably most comfortable as we get through the Q3.

Speaker 10

Got it. That's helpful guys. And as a follow-up on the Enabling Tech, obviously the revenue is pretty good revenue, very good, one of the highest quarters you guys have ever had and you typically don't see that in Q1. And I know you've talked a little bit about it, but what are some of the drivers? Are you seeing just more adoption by surgeons using robotic technology and that's kind of driving the capital acquisitions by hospitals.

Speaker 10

I mean anything that you're seeing kind of on the ground that may be pushing robotics a little bit more, a little bit deeper within spine?

Speaker 5

I would

Speaker 2

say the answer to that is yes. I mean, as we think about the last couple of quarters, one of the things we consistently saw was even when we were just still standalone Globus, the pipeline was strong and the pipelines remain strong. There's a lot of interest. The capital sales force is very active in their accounts, not only on Excelsius, but also E3D. And as we look forward, you're bringing in those NuVasive customers.

Speaker 2

The deals haven't closed yet, but the pipeline for the legacy Nuva customer is now adding to the legacy Globus pipeline. So as we look ahead, we see a lot of positivity in having that business grow the next couple of quarters. And Craig, I would just add that I think the market has moved through its curve, its adoption curve. And you've gone past the early adopters at this point. These technologies are proven.

Speaker 2

And so there is more willingness for surgeons to actually use this as well as hospitals to bring it in as something that they feel is a benefit to the patients. So I think that we're moving along that maturity curve for people willing to use it.

Speaker 10

Great. Thanks for taking the questions, guys.

Speaker 1

Thank you.

Operator

Thank you for your question. Please stand by for our next question. Our next question comes from the line of Caitlin Cronin of Canaccord Genuity. Your line is now open. Hi, thanks for taking the questions and congrats on a great quarter.

Operator

Thank you. Yes, awesome. Just to start off, have you begun to think about discontinuing any redundant product lines? And in that vein and kind of towards the enabling texting as well, what about Pulse? Any updated color and updated plans

Speaker 6

for this product as well?

Speaker 2

Caitlin, thanks for the question. So we'll take it into 2 pieces. No, we've stated openly that we are not going to proactively drive SKU or product rationalization. We're going to offer everything out to customers. And I think over time customers will migrate a certain direction that we will follow.

Speaker 2

I don't feel like I'm in a position to prescribe to surgeons what products they can use. I think we have to stay focused on what they need for their own good. So that piece will continue on the path we are, which is no planned rationalizations. Enabling tech over time always has different purposes and we can look at. So again, we don't have anything we would state today that we feel like we're going to obsolete or replace or pull out at this given time.

Speaker 2

I think Pulse has a great step forward. There's a lot of applications globally that we're looking for it now. We're fine tuning some plans. We've made it clear that we're going to integrate it into our enabling technology offerings and use some of those capabilities going forward. And as we build further strategies, we have a feeling that there's a good place for this long term.

Speaker 2

I don't think it will be a major growth driver of us, but I think there are things in it that can help us further penetrate the market.

Operator

Awesome. Thank you. And then just a quick one. Any updates on the timing for the augmented reality headset?

Speaker 2

I would say still back half of the year. That's one where we need to get that filed and approved through. We feel good about it. We're ready to do it, but it's in queue right now just to get through our processes.

Operator

Got it. Thank you. Our next question comes from the line of Matthew O'Brien of Piper Sandler. Your line is now open.

Speaker 3

Hey, this is Phil on

Speaker 5

for Matt. Thanks for taking our questions and congrats on the great quarter. Just for starters on the EBITDA and EBITDA margin, one quick clarification point, does the $1665 number include the one time adjustment of $9,500,000 And I guess as bigger picture, you said in the past that on year 3 post the closing, you'd be back in the kind of mid-30s as far as EBITDA margin goes. Still a lot of leverage that you're expecting over the next, I guess, 3 years to get it to just even 33%. So just talk about the confidence in getting back to that mid-30s EBITDA margin?

Speaker 2

Thank you. I want to make sure I understood the first part of your question. You said the $9,500,000 was that included or excluded?

Speaker 5

Yes, in the EBITDA.

Speaker 2

Yes. That was depreciation expense, so that would not be part of EBITDA. So that would not be in the results for EBITDA or adjusted EBITDA. As we think about longer term getting back to mid-30s, we believe that we can absolutely get back to mid-30s. You're going to see cost leverage occur with the business as you drive the synergies forward and you're going to still expect to drive sales growth.

Speaker 2

I mean our intent here, this year is as Dan stated earlier a little bit of a transition from the standpoint of bringing the sales forces together and driving disruption. But as you look ahead, the goal is to get back to the high single digits growth as a combined organization that will help drive additional cost leverage on top of the cost savings to get you back into that mid-30s range.

Speaker 3

Yes.

Speaker 2

And Phil, I'll just add into, I feel pretty good with this. What we're saying through our script and through our answers, we're investing everywhere that we need to invest to bring these to reality. We have the capabilities of doing this whether it's machines for in house manufacturing or renegotiations of some of our services or even third party activities for some of our instrumentation. Everything is in play that would take us on the path. And I think both Keith and I feel really confident that we have multiple pathways or levers to get us up into the ranges where we want to be.

Speaker 5

That's helpful. And I guess just my last question. As it pertains to stock purchases in the quarter, curious to get your take if that was more opportunistic given where the stock price is at or more ongoing? And then how that impacts your ability to do any tuck in

Speaker 7

M and A, which you've called out

Speaker 5

as a priority in the past?

Speaker 2

Yes, I'm going to answer that one too. So the answer is a little bit of both. But we're absolutely taking advantage of what we feel is an undervalued stock and we're going to take that back and remove some of the dilution we created and even add more earnings per share power as we go forward in the future. I think that's one of the strongest things that we're doing here is using a strong cash flow to take advantage of something that we think has been overdone so that we can actually benefit from it over the long term. And as it relates to tuck in acquisitions, as I look at where we're at right now, the business is generating strong cash.

Speaker 2

We're sitting on still a large cash balance. The business is generating profits. And as we look ahead, we're really not limited by our balance sheet to go do tuck ins. We have ample cash on hand plus we have an untapped line of credit should we want to do anything. So I don't see that limiting us as we look at tuck ins moving ahead.

Speaker 1

Thanks so much. Thank you.

Operator

Thank you for your question. Please standby for our next question. Our next question comes from the line of Richard Newitter of Truist Securities. Your line is now open.

Speaker 11

Hi, good evening. This is, Rodney Misra in for Rich. Thanks for taking the questions. So I guess I had questions on the robot, both the current and potential future robot that's coming to market. Could you maybe on kind of Excelsius, could you help paint a picture maybe around utilization in terms of what you're seeing with accounts that

Speaker 2

have now had this for

Speaker 11

a few years versus new accounts and where things can go for new placements? And then around the Future Robot, I believe I heard you say that you're kind of contemplating inventory build right now ahead of approval. How should we think about the impact to gross margin once sales begin post approval? Thank you.

Speaker 2

So Rob, I'll answer that. So let's start with the latter part of that is the ortho robot coming out. Again, I think what that will be is in a different marketplace that will allow us to have more volume ramp up of our place that will allow us to have more volume ramp up of our implants of knees and hips. And so I think that there'll be a benefit there to the overall business that we look at that way coming forward. I don't see it as any type of significant degradation on where we're going pressure wise along those lines.

Speaker 2

If you get back to your first part of the utilization for the Excelsius spine robot, obviously, it's different in different accounts with different needs. But what we've seen is a growing strength and growing usage. There are sites that have multiple robots at this point and not just 1 or 2 sites, but several where they build this in and really integrate it and get enough usage that they need more than 1 or 2 or even 3 in some cases. So we are really seeing a lot of activity of high usage and sites that are buying multiple robots at this point.

Operator

Okay. Thank you. This does conclude today's conference, the Globus Medical earnings call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Globus Medical Q1 2024
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