Globus Medical, Inc. (GMED) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Globus Medical Inc. Analyst Call. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to turn the conference over to your speaker for today, Brian Kearns, Senior Vice President, Investor Relations. You may begin.

Thank you, Twanda, and thank you, everyone, for being with us today. Joining today's call from Globus Medical will be David Paul, Executive Chairman of the Board of Directors; Dave Demski, outgoing President and CEO; Dan Scavilla, incoming President and CEO; and Keith Pfeil, Senior Vice President and Chief Financial Officer. This discussion 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 2021 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 savings as a result of new information or future events or developments. With that, I'll now turn the call over to David Paul, Executive Chairman of the Board of Directors.

Thank you, Brian, and good evening, everyone. The purpose of today's call is to update you all on 2 very significant events. First, I wanted to announce that our CEO, Dave Demski, has announced his resignation after nearly 20 years with the company, with the last 4.5 years as CEO Second, I'm happy to announce that Dan Scavilla has been promoted to President and CEO effective immediately. Dave has been a great partner to me and a true truly integral part of Globus from our humble beginnings in 2003 to a global publicly-traded company with revenue approaching $1 billion. I want to personally thank him for his countless contributions over the years, and we wish him well as he pursues other opportunities. Dave will stay on with the company to assist with the transition through June 30, 2022. Globus is fortunate to have a strong executive leadership team, and I'm pleased to announce that Dan has agreed to become our next CEO to lead Globus in executing on our strategy of becoming the preeminent musculoskeletal technology company in the world. Dan began his career with Globus in 2015 as Chief Financial Officer, and in 2019 was named Executive Vice President, Chief Commercial Officer and President of Trauma. Dan came to Globus after 28 years of prior experience with Johnson & Johnson, holding various positions of leadership in finance, including CFO of Vision Care, a multibillion dollar a year company. Over the past 7 years, Dan has become an integral part of Globus' executive team, providing steady and committed leadership that will now extend to the entire organization to drive our strategic goals. I will now turn the call over to Dave and Dan for their comments, and we'll have a few words to say in closing at the end.

Thank you, David, and good afternoon, everyone. It has been a privilege to be part of the executive leadership of Globus since its inception, working with talented and dedicated team members for almost 2 decades to improve the lives of patients. I want to thank the Board of Directors and David Paul specifically for the opportunity to be a part of this tremendous story of innovation and growth from the beginning. There are many things about Globus that I will miss but foremost among them will be the people. There is no more passionate, committed and professional group of people in our industry than Team Globus, and I am privileged to call many of you friends. Thank you for all your support and commitment over the years. I leave with the confidence that Globus is in good hands and well positioned for the future, financial strength, unmatched technology, outstanding leadership and a great team. I'll now pass the call over to Dan.

Thanks, Dave, and good afternoon, everyone. First, I want to thank the Board of Directors and David for their support of me over the last 7 years and for the opportunity to lead Globus into the future. I especially thank Dave for his leadership, partnership and friendship throughout my various roles here. I consider him one of the strongest leaders I've worked for in my career. Dave leaves the company in great shape with strong momentum. So in assuming the role, my initial approach will be to observe, learn and ask questions to determine what adjustments may facilitate the path we're on to become the preeminent musculoskeletal company. My message to our surgeons, employees and investors is not to expect sudden or radical shifts in our strategy, structure or market approach. Together with the leadership team, I'll assess how we're doing and make sure we invest where needed to fuel our continued growth while adhering to the lean and hands-on culture that has brought us this far. In the coming days, I'll focus on reaching out to our surgeons, engaging with our employees and connecting with the investment community to ensure the transition is smooth, and the company focus remains clear. I'll now turn the call over to Keith to talk about the quarterly sales.

Thank you, Dan, and good evening, everyone. Given the news of today, we wanted to provide everyone with a brief update on our first quarter sales. We will be reporting our complete first quarter results on Tuesday, May 10, 2022. Our Q1 2022 revenue is expected to be $230.5 million, up 1.4% over Q1 of 2021. Looking back on the first quarter, we were pleased to deliver year-over-year growth against a strong comp, coupled with the lingering COVID impacts and softer capital purchasing in Q1. Procedural volumes in the early part of the quarter were down. And while things began to improve in February, we really didn't see consistent momentum building until March. That momentum resulted in a record for U.S. Spine revenue in March and has continued into April. On the capital side, we experienced a slowdown in Q1. However, that momentum picked up as we exited March, and as we sit here in April, our pipeline appears robust as we progress into the second quarter. Looking back at history, I do want to highlight that Q1 is typically our lowest quarter for capital revenue. Our message today is simple. Coming out of our COVID impacted Q1, we remain extremely positive looking ahead into 2022. Our early Q2 trends point to the strong momentum from March continuing within our implant business and our robotic pipeline remains strong as we work to sell new Excelsius robotic systems. On the E3E (sic) [E3D] front, our first systems are slated to ship next week, and we will begin to fulfill the double-digit orders on hand for this system during the quarter. We hope to update everyone on our first E3D cases during our May 10 earnings call. Lastly, but most importantly, we are reaffirming our fiscal 2022 guidance of $1.025 billion in net sales and non-GAAP diluted earnings per share of $2.10. We remain extremely confident in our ability to achieve our fiscal 2022 guidance. The team is focused and committed to delivering on these results. David, I'll turn the call back to you for your closing comments.

Thank you, Keith. I'm looking forward to working with Dan in his new role as he leads Globus forward. I have never been more excited about our future prospects as we are reimagining the operating room and musculoskeletal surgery to drive better patient outcomes. Our Excelsius ecosystem will play a large role in this transformation with our suite of imaging, navigation and robotic systems leading the way. As we move further into the year and the effects of COVID subside, we expect to see accelerating revenue growth building on the progress in U.S. sales force expansion from Q1 and launching several innovative new products. As I've stated earlier, I've never been more excited about the future prospects of our company. We remain committed to bringing new and exciting technologies to market with our R&D engine to achieve our goal of improving the lives of patients with musculoskeletal disorders. Thank you. We will now open the call for questions.

[Operator Instructions] Our first question comes from the line of Matthew O'Brien with Piper Sandler.

Dan, congrats on the role, and Dave, best of luck to you. Dan, I apologize, this is a blunt question. I think investors need to hear an answer to this, though. But we've seen some other spine companies bring in new CEOs that didn't really kind of grow up in the spine industry and they've struggled to go through that transition. I know you've been there for 7 years. But what gives investors confidence that as you step into these big shoes, we don't run into some of the challenges, maybe some sales force management turnover, some sales force turnover that's affected other companies that have had people step into the role that just didn't have -- didn't really grow up in the industry?

Matt, thanks for the question and for being blunt with that. This is what I think. Globus has a strong team of leaders. I've been lucky to be part of that, as you said, for 7 years. And so as we transition with this, everybody that's been around the table remains around the table, we execute what we do. We go forward. There's no doubt that there'll be a better focus as I assume the role, and I'll make sure that I work deeply with these people, as I said, reach out and contact them, quickly get into the surgeons, work through with the team. And just remind everybody that the path we were on remains the path, right? And our job is to put meaningful products out there that we can benefit our patients and our surgeons.

Got it. And then as a follow-up question, the revenue number in Q1 came up a little bit light of the Street's modeling. You're reiterating, which is great to hear. I just want to just confirm that you're not seeing anything on the competitive side that we need to call out here. I don't know if it's an expandable -- you've got some more competition there, robots as Medtronic is getting more aggressive or sales force from -- challenges in bringing folks in from a sales force perspective that may have caused some the modest shortfall here in Q1.

Thanks for the question. This is Keith. I would say no, we haven't seen any change from a competitive perspective. I mean, the market remains competitive. But as I said in my comments, really, January was tough. We talked about that on our Q4 earnings call. We got into February, things did start to improve, but we really didn't start to see that momentum, that consistent momentum until we got into March and then March really ended up being a good month for us. As we look ahead, we remain confident in delivering on our numbers.

Our next question comes from the line of Matt Miksic with Credit Suisse.

And congrats, Dan as well on taking on this role. I guess the obvious question I'd ask Dave, if I could, is just why now? What's the catalyst, what's the impetus for leaving the company here?

Thanks, Matt. I would probably answer you with why not now. I've been looking for a new challenge for a while. And I think we're out of COVID. The company -- our technology is great, and we have some great stuff coming. The team is strong. We're financially strong. So I think there's really no better time for me to step out and try something new with my life and now. So there's really nothing wrong with the company or with me that's driving it. It's just -- is the time.

Okay. Well, here's to new opportunities. So good luck. We hope we hear more about it. But maybe a follow-up, if I could, for David and maybe your perspective on the rest of the team. I get Matt's question about other CEOs taking over other spine companies, and that certainly has been the history. David, if you could maybe -- you've stepped back from the stage a little bit. From an investor's perspective, we don't see you as often as we used to. What's your involvement -- what kinds of things are you involved with at the company? What do you -- do you think your role will change at all here as Dan enters this kind of new role? And maybe what are some of the other key team members that are sort of surrounding the executive level to help make sure that we do see this kind of transition to the new team and sort of upward trajectory continuing?

Thank you, Matt. First, like I mentioned in my prepared remarks, we are very fortunate that we have a really deep executive leadership team at Globus. We have very deliberately built our team over the years. And so we are fortunate that when something like this occurs, we have Dan who can step in and lead right away. And Dan has touched almost every area of our business already in the last 7 years. And the Board of Directors, and we have been very deliberate in making sure we're exposing our next generation of leadership to the secret sauce, if you will, of how Globus works. So I have no questions on how our future is going to be. It's as strong and stronger than it's ever been with the kind of products that we are bringing up. And the other thing I would mention is I've always been involved and responsible for product strategy at Globus throughout all these 19 years. And that will not change. I will be responsible for product strategy, but Dan is going to lead the company. And the baton has been turned over to him. I have full confidence in him. The Board of Directors has full confidence in him, and the entire Globus team is rallying behind him to make sure that we do extremely well. The leadership that we have in the room at the C-suite level is immense. And as we are looking and getting into all these other areas, and we've been deliberately building this bench to be stronger. And so we have no concerns whatsoever.

Our next question comes from the line of Steve Lichtman with Oppenheimer.

Dan, congratulations and Dave, best of luck. I guess 2 questions. First, Dan, as you make this transition, wondering who will be taking on the roles and focus areas that you had, and I'm thinking in particular around trauma.

Steve, thanks for the question. We haven't really announced that yet. I have some plans that I've been working through with the team. Some discussions really to be had really as we get into next week. I do have internal candidates that I think are going to be very viable. In fact, to be honest with you, I'm very excited if it works out this way because they're very strong and talented and experienced. But I think what we'll do is we're going to evolve through that, give them a chance to come in and speak with me and set that up before we send it out. But there are people identified for the roles to backfill everything that I'm about to shift from.

Got it. Okay. Great. And then, Keith, just on the quarter, you mentioned the soft capital environment, but you also reminded us that 1Q is typically the lowest. So was there anything surprising to you guys on that front? And what's your overall sort of message on the state of the capital equipment market?

So I don't think there's a change in the state of the capital equipment market. I mean really, when you get down to it, as we looked in Q1, the pipeline wasn't as robust as we thought it would be coming in. And really, again, that starts to get better as we got to the back end of the quarter. And it's -- coming into Q2, I sit here and I feel really good about the pipeline and where it stands for us to move forward in Q2. But given the softness in Q1, I don't really have any view of a change in the state of the capital market right now.

Our next question comes from the line of Craig Bijou with Bank of America.

Dan, congrats. And Dave, good luck. I want to follow up on Steve's question a little bit and maybe push you guys a little bit more. I think on the Q4 call, which was mid-February, you guys were pretty enthusiastic about the pipeline, the capital pipeline. So maybe again, following up on Steve's question, just want to understand, did something change? Did the orders not come in? I know orders typically come in at the end of the quarter. But just wanted a little bit more color maybe on what's laid out in that second half of the first quarter.

Yes, sure, Craig. Happy to expand a little bit on it. As we work robotic deals, the fact remains that robot deals take some time to complete. And as you look, as you go through a quarter, you're constantly going back and looking at the deals you're working on and looking at the pipeline because some deals will pop in and happen quickly while others will kind of slowly move their way forward. In Q1, the deals that we worked, we continued to work. But as we look back on the pipeline of things that may pop up, there wasn't, I would say, as much robustness in the early part of the quarter. As we got to the back part of the quarter, we started to see some of that come back alive. And as again, as I sit here in April, the pipeline coming into Q2 feels very strong, and we're looking to capitalize on that as we get into the second quarter.

Okay. And you guys reiterated full year guidance, which is great. Are the components different after seeing kind of what we saw in Q1? So I think Enabling Technologies, I think The Street has you at a $100 million or so. But are the components to get to that full year guidance changed?

Yes. I would say that from our perspective, the components haven't changed. I mean I can sit here today and tell you that we feel as positive about the business today as we did when we spoke in Q4. I would really fall back on some of the comments that I had earlier, but we came into April here, I think, well positioned as we move ahead, and that's why we felt it was important to reconfirm guidance. But to sum it up, I feel just as good today about the business and its parts and pieces today as I did on the fourth quarter call.

Our next question comes from the line of Jason Wittes with Loop Capital.

Dan, congratulations. David, job well done and best of luck in your new endeavor as well. First off, Dan, you mentioned no change in vision. However, my read at least is the company is kind of undergoing a slow shift away from just a pure spine play to trauma and hips and knees and basically full-service orthopedic implant player. I mean, I assume that's still kind of the longer-term agenda for the company as we look forward? Or how would you, how do you see that?

Jason, you're spot on. I guess what I'm saying is we're not going to shift off of that. We've gone from spine into becoming musculoskeletal. We've declared that we're going to go from implant into procedural-based type things and capitalize on an INR portfolio. What I'm signaling is we're not coming off of that plan. It's been set up. There's momentum under Dave's leadership and driving it with the portfolio developed with David and team. It's there. So we're in execution mode, and we'll certainly look as we grow and understand if there's tweaks here or there, but there wouldn't be anything coming out or planned to come out that would take us off that execution course right now.

Okay. Fair enough. Thanks for the clarification. And then secondly, related to this quarter and Enabling Technologies, you did somewhat delay the imaging navigation launch. Is that a factor? And also as we look at the year, is that going to be somewhat of a major contributor in your guidance? Or is that still going to be a minor player versus straight up robotic sales?

So thanks for the question. I would say that when you think about the quarter, I would say that's not a major factor in the quarter. As we think about it the soft launches that we're planning to do here -- is moving according to plan. As I step back and look at the larger year, it's factored into our guidance. And I wouldn't say that, that's changed from what we thought when we came out with guidance earlier in the year.

Our next question comes from the line of Vik Chopra with Wells Fargo.

Dan, congratulations. And Dave, best of luck. A couple of questions for me. So I guess, Dan, you were in charge of Trauma. And I'm just kind of wondering what your key strategy around ramping trauma sales in 2022 is? And if that's changed? And I had a follow-up.

Thanks, Vik. It hasn't really changed. I mean, if you come back to what we've been saying, it's about building the basic bag and getting out there, which we have been doing and accelerating. It's pivoting into innovation within that, which is something we started to do. And at the same time of increasing those offerings, it's about expanding the sales force and creating penetration through that combination. And so that's working for us. We always want to accelerate that and go further. But there's no plan to change how we're implementing that right now.

Got it. Super helpful. So you reiterated guidance for 2022, and I'm just curious how you think about a return to normal seasonality this year after a couple of months of providing your guidance in Q4.

Thanks for the question. In terms of returning to seasonality, I mean, Q1 was clearly impacted because of COVID. I think that some of the procedures, anecdotally, that would have happened in Q1 have pushed late in the quarter and into Q2, but we don't really spend a ton of time looking at the larger market. We're really focused on kind of what we see. I think that we'll be working through that in Q2. And assuming no major reemergence of COVID, I would think that things would return to normal as we get to the back half of the quarter and into Q3.

[Operator Instructions] Our next question comes from the line of Ryan Zimmerman with BTIG.

Sorry to see another Michigan Wolverine leave the helm, but best of luck. And Dan, looking forward to working with you in the CEO role. First off, just Dave, for you, and I want to put to bed, can you just comment on -- I assume that it's nothing that you're doing is competitive to spine or to Globus in any capacity in your next endeavor?

No, Ryan, I'd go blue before I get into the comments. But no, I actually have restricted covenants and don't intend to compete with Globus in spine or orthopedics. I don't have any immediate plans. So I'm just trying to make the transition go smoothly, and then we'll figure out what the next steps are.

Okay. And then, Keith, for you, with the capital sales being where they were, I want to ask a little bit about supply chain components and particularly the microchip dynamics that have been kind of hampering some of the other CapEx companies in the first half of this year. How much has that played into your ability to meet demand either in the first quarter -- and how much did that play into or will it play into your ability to meet demand for both Excelsius3D and the standard robotic system in the first half of the year? Can you meet the existing capacity? And what impact will it have potentially on pricing or margins?

So that's a great question. I'm not going to get into a ton of detail today because I really want to focus on revenue. But what I will tell you is that supply chain did not have any impact on our Q1 capital sales. Supply chain remains a challenge like we said last quarter, and I think it's going to continue to be a challenge. But the way I would answer that is also we've reaffirmed guidance today. We still feel really good about our year.

Our next question comes from the line of Richard Newitter with Truist.

It's Sam on for Rich. First question, I'll just ask on you -- Dan, how do you think about M&A playing into the Globus strategy? Do you think there's any -- should we expect any changes on capital deployment in that sense?

Sam, thanks for the question. I would tell you that we have been an acquisitive company. We've put some decent amount of our cash flow over the past several years into that, mostly on small areas, and we'll continue to do that. I don't see why that would change for us. And we've stated before, we're always looking for something that may be transformative. Now with this change in place, it's not something we would rush into. We want to make sure we've got everything tight before we do that, but we'll continue to look. And as you know from our balance sheet, we have the capability of doing that. So I would say we're not coming off any strategies. We're not delaying any strategies. We'll continue to do smaller tuck-ins, and we'll look for the right opportunity to possibly do something larger if it works well for our shareholders.

Great. And then just a quick one on imaging systems. Did I hear right that the double-digit orders for the -- was that specifically for the second quarter? And then how should we think about that relative to the run rate for the back half?

I would say that we have double-digit orders in-house. I wouldn't say that's specific to the second quarter. I really don't want to get into the parts and pieces of looking out to the back half of the year. I would just focus on, today, we've reconfirmed our guidance for the year.

Thank you. I'm showing no further questions in the queue. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.