NuVasive, Inc.
Q3 2017 Earnings Call Transcript
Published:
- Operator:
- Greetings, and welcome to the NuVasive, Inc. Third Quarter 2017 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Carol Cox, Executive Vice President, External Affairs. Thank you. You may begin.
- Carol Cox:
- Thank you, Damien, and welcome everyone to NuVasive's third quarter 2017 earnings call. The company's earnings release, which we issued earlier this afternoon, is now posted on our website as Investor presentation, both of which have been filed on Form 8-K with the Securities and Exchange Commission. We've also posted supplemental financial information on the Investor Relations website to accompany our discussion today. On the call, we will be covering information that is included in the Investor presentation, and I encourage you to access these materials so that you may follow along. Before we begin, I would like to remind you that the discussions during today's call will include forward-looking statements, which are based on current expectations and involve risks and uncertainties, assumptions and other factors which, if they do not materialize or prove to be correct, could cause NuVasive's results to differ materially from those expressed or implied by such forward-looking statements. Additional risks and uncertainties may affect future results as described in our news releases and periodic filings with the Securities and Exchange Commission. NuVasive assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. This call will also include a discussion of several financial measures that are not calculated in accordance with Generally Accepted Accounting Principles, or GAAP. We generally refer to these as non-GAAP financial measures. These measures include our cost of goods sold, gross margin, sales, marketing and administrative expenses, research and development expenses, operating margin, non-GAAP earnings per share, free cash flow and EBITDA. Reconciliations to the most directly comparable GAAP financial measures may be found in today's news release and in the supplementary financial information, both of which are accessible from the Investor Relations section of NuVasive's website. Joining me on today's call are Greg Lucier, our Chairman and Chief Executive Officer; and Raj Asarpota, our Chief Financial Officer. With that, I would like to turn the call over to Greg.
- Greg Lucier:
- Thank you, Carol and good afternoon, everyone. On today's call, we will be covering our results for the third quarter providing an update to our 2017 guidance and providing some initial thoughts on 2018. I want to welcome Raj to his first earnings call at NuVasive as our Chief Financial Officer. He brings over 25 years of experience and a proven track record of driving operation improvements and supporting market expansion at medical device and life sciences companies. I am pleased to have his skills and guidance on our leadership. Now earlier this afternoon, we reported third quarter results including revenue of $247.4 million, representing year-over-year growth of approximately on an organic basis. We also reported non-GAAP operating profit margin of 17.6%, a 150 basis points increase over prior year and non-GAAP earnings per share of $0.52 representing year-over-year growth of approximately 30%. Revenue growth in the quarter was primarily driven by our international sales, which grew approximately 46% on a constant currency basis. This was the fourth consecutive quarter in which we achieved sales growth in excess of 20% in our international market. This consistent double-digit growth demonstrates a continued strong demand of our spine technology outside the United States from the building of our operations and sales capabilities resulting in strong demand in all of our international markets including key market such as Italy, Germany and Japan. Further as we scale these international sales, our profitability grows due to fixed cost leverage and in turn that profitability accelerates the reduction in our effective corporate tax rate. In the U.S., revenue declined to 3.5% due to some uncontrollable dynamics in the quarter including the negative impact from Hurricanes Harvey and Irma and one less selling day versus the prior year. US sales reflects greater penetration in the deformity market with our ReLine posterior fixation portfolio and our - portfolio along with new product introductions including base interfixated ALIF system, TLX expandable cage, ReLine small stature and the early rollout of our XLIF module all driving growth in our spinal hardware business. This growth was more than offset by continued softness in our Biologics business a new leader has been named over that franchise who is going to dig in and put all options on the table. Our longer-term goal remains lowering the need for Biologics to advance material engineering of the implant, but in the meanwhile we're going to do a better job extending this revenue erosion. Putting that all together, excluding the impact of Hurricanes Harvey and Irma on U.S. results and Hurricane Maria on the international results which we estimate to be approximately $5 million in total and one less selling day. Revenue growth for the company would have been approximately 6%. Now I often get asked questions about the US market and the trend we're seeing. Like others across the industry, we saw softer volumes expected during the quarter. Procedure volumes grew approximately 1% year-over-year, lower than anticipated. In fact, we had expected incremental sequential uptick in volumes in the second half of the year as patients met -- and their plan and move forward with spine procedures. While we did not see volumes step up in September, the acceleration was not as steep as we expected. The hurricane which came late in the quarter has been impact on volume as I mentioned, we do not believe this alone could be the primary driver of the differential. We talk regularly to our surgeon customers, all systems and ensure its - as part of our work to access the market. While these conversations that are now - provided various data points, we do not have a definitive view on what is causing the underlying softness in the US spine market. But here is what I can tell you so far. Based on the first nine months of the year, the US spine market is stable but largely flat overall. To our services business, we participate in nearly 90,000 spine procedures a year giving us a unique insight in procedural volumes across the US and what we are seeing is that volumes were down about 2% on the quarter including the impact of the hurricane. We believe some of this softness is likely due to the timing of when patients are getting procedures done. Additionally, we know hospital admissions and surgical volumes continue to be down and the reasons for this include commentary around the impact of high deductible plans and changes in insurers pay or mix. Pricing has been relatively aligned with our expectation, down roughly 2%. We have markets where pricing is better particularly new products and products and markets where it is worse. But overall in line with our expectations. This is largely a patient volume issue. We continue to monitor the data and stay close to our customers. But without a clear line of state to the timing of the rebound of the US market, we are taking a more conservative stand for the remainder of 2017 and reducing our full year revenue expectations to $1.030 billion from $1.065 billion to reflect these dynamics. Let me provide some color on these numbers. When we reiterated guidance on the July call, we believe there was a pathway to our full year revenue guidance of $1.065 billion, that pathway soon and uptick in volumes in the back half of the year, based on a combination of historical trends, customer conversations and the impact of high deductible plants. However, the uptick has not materialized as I discussed our July guidance also did not anticipate the recent hurricane and their continued impact in Q4 as it relates to particularly our business in Puerto Rico. We believe the fourth quarter numbers we have provided today are achievable and we are optimistic about 2018 given the many opportunities ahead of us as you will hear. Underscoring our confidence and the growth ahead for NuVasive, today we announced our Board of Directors approved a share repurchase program authorizing the purchase of up to 100 million of the company's common stock over three-year period. The board strongly believes in our strategic roadmap, our ability to execute against our strategic initiatives and to deliver a long-term organic growth and improved operating profitability while staying committed to disciplined capital deployment and driving value for our shareholders. While it's too early for us to provide specific metrics for expectations of 2018, I do want to provide a base framework for how we are thinking about the next year. Based on where we expect to finish in 2017, folding in new product launches, continued execution on our operating initiatives. We feel good about the revenue growth in the mid-single digit range at least a 100 basis points of operating margin expansion and EBITDA of approximately $300 million in 2018. We will provide specific guidance for 2018 when we report fourth quarter results. Let me turn now to underpinning the buyback and our confidence in NuVasive and our value creation capabilities. NuVasive is the absolute industry leader in spine, with state of the art technology and deep surgeon hospital relationships. I'm proud of the excellent and talented leadership team we have built, not only at the senior level, but deeper into the organization. Today we have senior leaders like Matt Link, Steve Rozow and Skip Kiil who bring decades of spine and orthopedic experience to their role of leading strategy and technology, operations and global commercial respectively. Matt is a long - NuVasive executive with more than 15 years of industry experience including extensive knowledge of the US spine market as well as a surgeon in hospital dynamics. Steve spent over 20 years with Zimmer in various manufacturing and operational leadership roles and Skip has led complex in global commercial enterprises internationally and in the US. He spent over 12 years at Stryker where he was responsible for commercial operations or six strategic businesses, including their Neuro Spine/ENT group. At the desk level management, we are strong bunch of leaders who have spent their careers in driving the development of our new technologies for products procedures and system. In years past, we have leaders who understand the spine market and have strong legacy relationships in the industry. When you partner this us with the deep operational excellence and board med-tech experience the rapid leadership team brings and they are we have the right team in place to grow this company responsibly and continue to take market share. But I'll tell you something else, these leaders are dedicated to teamwork and supporting our we culture. A great company is about the teamwork, not one two or three people. It's about shared consciousness across many many individuals and having every person in power to deliver exceptional results. Our future at NuVasive is share leadership to drive sustainable growth and value creation. As you know we have a strong history delivering disruptive spine technology and this weekend, we will hold surgical innovation workshops, in-booth demonstrations and scientific sessions focused on lateral procedure solution and advanced material science among other technologies and procedures. For 15 years we've been the global leader in lateral spine surgery with the XLIF procedure and over the last year we've doubled down our investments in this flagship surgical approach. At this year's AMS we will showcase the expansion of our lateral procedural solution portfolio to enable single-position surgery from or lateral from T6S1 through the launch of our XLIF Crestline and lateral ALIF. XLIF Crestline is an additive procedure solution to XLIF providing increased access to the sometimes-challenging anatomy of L4, L5 and lateral ALIF will provide additional access to L5 to S1 with a lower efficiency to enable lateral single-position surgery. We're also introducing our proprietary advanced material science of AMS technology portfolio of premium spine interbodies at MAS. We will be highlighting both our Porous TI and Modulus titanium interbodies. Through AMS we will enhance the structure and service of our surgical materials to deliver interbody implant with superior audio integration and biomechanics. And final research which hopefully demonstrates the need for much less biologic material in surgery. In early September, we when we acquired Vertera Spine, a privately held medical device company developing and commercializing highly innovative interbody implants or spinal fusion using porous PEEK technology. As a result of this acquisition, NuVasive is now the only medical device company to offer porous interbody technology across both PEEK and titanium material thereby addressing the spectrum of surgeons these in preferences for interbody implant. The technology developed by Vertera provides a unique three-dimensional porous PEEK architecture to help a little bit encourage in growth based on preclinical studies while maintaining biomechanical and imaging properties of PEEK in general. Technology will be adapted to resisting the evasive product line with porous PEEK and we believe porous PEEK will become the new goal standard in PEEK technology. Additionally, we will highlight our Modulus titanium which integrates endplate porosity with an optimized body lattice structure, providing a fully force architecture an ideal environment for bone growth while enhancing visualization of traditional titanium interbody implant. We recently launched our first Modulus titanium interbody for XLIF and have plans to expand to additional procedures. Before I turn the call over to Raj, I would like to give an update on the commercial launch of our industry disrupting radiation reducing LessRay software technology system. It was launched late in third quarter following robust alpha and beta testing and more than dozen hospitals have performed spine surgeries. Interest in LessRay is extremely high demonstrating a critical need for solution like LessRay to address a major safety issue related to radiation facing surgeons and hospital administrators. Our team is busy conducting trials in many places when we're at very sages of the capital purchasing process. A few weeks into the launch a couple of dynamics have become clear. Early customer interest is buy to the 24-month lease option and have hospital capital budget cycles allocated annually and can take up to six to nine months on average to complete and are somewhat unpredictable given budget cycles that are up hospital because. As a result, the exact timing of each transaction is too early to predict. Based on these dynamics, we are treating our expected revenue associated with LessRay in the fourth quarter to approximately $1 million down slightly from the $2 million to $3 million we have previously guided. We are pleased with our customer interest and pipeline and believe that as they work through the capital sales process over the next few quarter, this demand will translate in the revenue levels we anticipated. In closing, we continue to be encouraged by current portfolio, our robust technology pipeline and the opportunity we have working as a team to continue to bring different solutions to market. While the slowing US market presents a challenge, it does not -- our objective and result to grow market share as we invest in growing our global franchise. We expect international revenues growth greater than 20% from the foreseeable future and that we will benefit from the leverage the scale provides. From a profitability standpoint, we have multiple opportunities continue to execute on the targets we've laid out and fully expect to drive double-digit growth for both non-GAAP EPS and EBITDA. NuVasive prospects remain strong. Now, I'd like to turn the call over to my colleague Raj.
- Rajesh Asarpota:
- Thanks, Greg, and good afternoon, everyone. I'm pleased to be participating in my first earnings call at NuVasive today and look forward to meeting many of our investors and analysts there this week at NASS. Before we get started with the financials, let me remind you that many of the financial measures covered in today's call are on a non-GAAP basis unless noted otherwise. Please refer to today's earnings news release, as well as the supplemental financial information on nuvasive.com for further information regarding our non-GAAP reconciliations. Given that we have passed the one year anniversary for the Biotronic acquisition, all results are organic and will be discussed on a reported basis. For the third quarter of 2017, we reported revenue of $247.4 million, which reflects growth of approximately 3% on both, reported and constant currency basis. Revenue growth in the quarter was primarily driven by strong international growth of approximately 46% on a constant currency basis with above market growth across all geographies. In the U.S., revenue was down 3.5% driven by growth in our core hardware business which is offset by continued declines in our biologics business, lower than expected procedural log-in [ph] in our NuVasive clinical services business, and increased reserves against the remaining billing and collections backlog we first discussed in Q2. Both, the international and U.S. businesses were impacted by headwinds resulting from Hurricanes Harvey, Irma and Maria, estimated to be approximately $5 million and by one less selling day in the quarter compared to Q3 of 2016 which was approximately $3 million. Adjusting for these items, worldwide growth would have been approximately 6%. Our U.S. spinal hardware revenue grew at/or above the U.S. market at above 2% per year -- year-over-year to $135.2 million. The increase was driven by new products introductions in the U.S. including [indiscernible] and the only rollout of XF Modular [ph]. Adjusting for the impact of the hurricanes and offsetting the impact of one less selling day, year-over-year the U.S. spinal hardware business would have grown approximately 5% over the prior year period. Revenue from U.S. surgical support came in at $63.7 million for the quarter, down 12.7%, primarily related to continued stopness in our biologics business. We continue to face challenges in this area as new competitive product offerings enter the market and we experience some procedural issues that are affecting revenue volumes. This is an area where we must make inroads and we're tracking it through multiple approaches including the hiring of a new biologics leader and executing on different partnerships to further penetrate the spine market and adjacent areas. We will continue to explore additional avenues as appropriate. NuVasive clinical services and iOS revenues are down year-over-year driven by the decline in procedural volume. During Q3 the conversion of NVM5 increased 63% year-over-year. As you may recall, we had some billing and collection challenges over the course of the first half of the year. Over the first quarter we made significant improvements and by the end of the quarter the entire backlog of billings was processed and submitted for reimbursement. Given the timing of the improvements some of which we implemented late in the quarter, most of the billings were submitted but collections lagged due to the reimbursement cycle and as a result our revenue was impacted by $2 million for the quarter. We don't expect this process to impact revenue in future periods and while we may have even some reversals in the fourth quarter, we're not building that into 2017 revenue expectation. The delayed billing has also increased our day sales outstanding or DSOs to 68 for the quarter compared to approximately 66 days in Q2 of '17. While overall accounts receivable has decreased by approximately $3 million over the prior quarter, DSOs were approximately two days higher given the sales levels. The primary driver remains the NCS accounts receivables which are approximately $2.5 million despite the sequential decrease in sales driving the change. The driver as I just discussed is due to reduction of the backlog, getting billings out but not having the opportunity to collect cash prior to quarter end. Excluding the impact of NCS, the overall organizational DSO would have been approximately flat despite the impact of slower cash collections in hurricane impacted areas such as Florida, Houston and Puerto Rico, and strong international sales that generally come with longer DSOs. The expected significant reduction in DSOs into the fourth quarter as cash collections in the NCF increased significantly as a result of clearing the backlog. In the third quarter, international revenue grew approximately 46% on a constant currency basis to $48.5 million. This is the fourth consecutive quarter where international business has posted above 20% growth and we feel confident this type of growth will continue to value to the future. The EMEA region has continued to perform well delivering approximately 41% growth on a constant currency basis. All key western EU markets say more than 26% -- 20% growth driven by spreads in the UK, Italy, Germany and Benelux. Our Asia Pacific business also had a solid quarter reporting very strong growth of approximately 47% on a constant currency basis. Specifically in Japan, XLIF continues to see good momentum, as well as our posterior fixation business. Latin America grew approximately 57% on a constant-currency basis, driven by very strong performances in Brazil. These results are particularly strong as we absorbed approximately $1 million impact in Puerto Rico due to Hurricane Maria. We anticipate the Puerto Rico business will continue to be impacted in the fourth quarter of '17 as the government struggles to get electricity back up and running and as a result they are removing $3 million from our forecast. We are uncertain at this time what [indiscernible] postponed in Q3 will return in Q4 or what percent of electric procedures will return altogether. Now, let's turn to the rest of the P&L. Non-GAAP gross margins for the third quarter was 73.5%, down 280 basis points from the prior year. The primary drivers include 90 basis points due to a higher mix of revenue in lower margin businesses. Pricing pressure continues to be consistent from past quarters remaining the low single-digits at approximately negative 2%. Gross margin was also impacted by the timing of operational efficiencies of approximately 60 basis points. As we continue to build out our West Carrollton facility, we faced a 70 basis points headwind due to a slower than expected ramp up in our in-source manufacturing. As we work through that transition, we anticipate these headwinds will turn to tailwinds by the first quarter of 2018. Our efforts towards self-manufacturing continues as the team in West Carrollton further ramped up production in the third quarter. All interior and exterior construction on the facility has been completed and all the equipment is on-site at this point. The new production facility machine hundreds of thousands of pieces in Q3 with nearly a 70% increase over Q2. Also during the third quarter, the transition from the Fairborn facility began with employee shareholders and equipment's starting to move over to the West Carrollton facility with a focus on completing all this activity by the end of the year. While there has been some short-term pressure on our gross margins as we get the West Carrollton facility up and running, these challenges are quite normal when starting up a new factory. In October, we hit our internal targets related to absorption for the first time and now expect to be on-track for the remainder of the year. As a reminder, we believe the benefits of controlling our cost structure including our supply chain will pay dividend over the next several years contributing an approximate 400 basis points to gross margins. Inventory levels in the quarter were up from the prior quarter, from $237 million in the second quarter to $249 million in the third quarter. The increase in inventory was attributable to increased raw materials and work in process at our West Carrollton facility as well as inventory builds associated with new product launches. The Company has traditionally had a cycle in which inventory builds throughout the year in anticipation of product launches while ramping down towards the end of the year. In the fourth quarter, we expect inventory levels to decrease dramatically as we have launched nearly half a dozen new products throughout the second half of the year. Non-GAAP SM&A expenses as a percent of revenue decreased 420 basis points from the prior year to 50.8% in the quarter or $125.8 million. This meaningful progress was primarily driven by greater asset efficiencies related to freight, workforce productivity and related equity based of work that was cancelled in connection with recent departures. With the growth in our international business, we were also able to take advantage of our expanding scale and accelerate some of this leverage. Non-GAAP research and development or R&D expenses totaled $12.7 million in Q3 of 2017 compared to $12.5 million in Q3 of 2016. R&D expense was 5.1% of revenue for Q3 of 2017 versus 5.2% in the same period last year. Sequentially we continue to ramp up our R&D spend as a percent of revenue to increase over the long-term with a goal of investing approximately 7% of revenue on these efforts. Our path has not changed; we continue to make investments in key areas, including the NSO technology and efforts around imaging, navigation and surgical automation, as well as our portion to advance material sciences our inter-bodies [ph]. Third quarter non-GAAP operating profit margin was 17.6%, this represents 150 basis points of favorability to prior year as a result of performance compensation and international scale partially offset by the decrease in overall gross margin for the company. Approximately 100 basis points of operating margin improvement is related to the reversal of share-based compensation expense associated with the departure of our former Vice Chairman. Third quarter adjusted EBITDA margin which excludes the impact of non-cash stock-based compensation was 24.9%, a decrease of 100 basis points compared to 25.9% in the same period last year. Moving further down the P&L, interest and other expense net on a non-GAAP basis was $5.3 million in Q3, down from $5.8 million in the same period last year. Now turning to tax; our non-GAAP tax expense in the quarter was $11.9 million resulting in a non-GAAP effective tax rate of 31.1%, an improvement with expectations primarily due to higher international revenue and continued tax planning efficiencies. We're now expecting a full year tax rate to be 34%, an improvement from previous guidance of 35%. As I have reviewed the plan for tax planning initiatives designed to lower our tax rate, I'm comfortable with the work that team is doing to drive further improvements. As previously discussed, we're committed to bringing our corporate tax rate down into the mid to high 20s of our time and we continue to make nice progress at that direction. If the U.S. government puts into place further tax reform as has been discussed recently, NuVasive would be a significant beneficiary of these changes. Third quarter 2017 non-GAAP net income was $26.7 million, and non-GAAP earnings per share was $0.52 compared to non-GAAP net income of $21.1 million and non-GAAP earnings per share of $0.40 in the same period last year. Turning to our GAAP results; GAAP net earnings for the third quarter of 2017 were $33.6 million or $0.64 per share compared to $3.9 million or $0.07 per share in the same period last year. Please refer to our earnings press release or the supplemental financial information filed posted on nuvasive.com for further information related to our GAAP versus non-GAAP adjustments for our third quarter of 2017 performance. With the third quarter of 2017 now behind us and several dynamics playing out in the third quarter, and continuing into the fourth quarter, we are taking a conservative stand to the remainder of the year as we update our full year 2017 guidance. As we go forward, I want to ensure we are setting realistic goals for the company and that we will confident we can achieve these goals. Based on the results for the third quarter and our revised outlook for the fourth quarter, we're now guiding to full year in revenue of $1.30 billion versus prior guidance of $1.65 billion. This new outlook includes the following assumptions for the fourth quarter; our international business continues to grow over 20%, minimum spine surgeries occurring in Puerto Rico for the full quarter, anticipated lower procedural volumes in the U.S. mute the strength of our hardware business as we take sharing deformity [ph] and benefit from new product launches in our degenerative portfolio and continued softness in our biologics business. Based on lower revenue expectations for the full year, we are also updating our non-GAAP operating margin guidance to 16.6% and our non-GAAP EPS expectations to $1.91. While we are disappointed to have to reduce these expectations, we continue to make solid strides in our profitability efforts and in fact, are not lowering these estimates to the same extent we are reducing the top line. Going forward, we continue to be committed to delivering at least 100 basis points of improvement in non-GAAP operating margin each year. Please refer to our supplemental information filed on our website for greater details of the updated revenue guidance. Finally, I'd like to share a few thoughts with you about my first 50 days at NuVasive. What I've seen so far is a company that has a ton of runway ahead of it and that's why I was excited to join NuVasive in the first place. I continue to spend time gobbling [ph] into the financials of the company and learning the business side. In earnings [ph] that I'm specifically excited about is operating margin improvement opportunities and I want to reaffirm the company's commitment to profitability including its goal to ultimately achieve a non-GAAP operating margin of 25%. There are lot of levers to make that happen and I've already seen the finance team working collaboratively with the department functions and sales force to execute on those levers. In addition, I'm working through some of the headwinds we saw in the last quarter to ensure that for the things that are in our control, we've turned them around to tighter execution. NuVasive [ph] focused on closing the year strong and meeting our revised commitments to the year. With that I'd like to open up the lines for Q&A.
- Operator:
- [Operator Instructions] Our first question is from Josh Jennings from Cowen and Company. Please proceed with your question.
- Carol Cox:
- Hi Josh, you're maybe on mute.
- Operator:
- Josh Jennings, please proceed with your question.
- Josh Jennings:
- I'm sorry, can you hear me?
- Carol Cox:
- Yes, we can hear you.
- Josh Jennings:
- Can you hear me now?
- Carol Cox:
- Yes.
- Josh Jennings:
- Okay. I apologize. Thanks for taking the questions. I just wanted to start off -- thanks for all the details on the quarter and the guidance revision. But just to be clear that the assumption in terms of the U.S. spine market in the fourth quarter is that it remains constant at Q3 levels? And do you have any update in terms of the trends you're seeing thus far though it's early days in October?
- Greg Lucier:
- Your assumption is correct and I'd say early October has been god. But we're not going to give any other guidance other than what we've already given you.
- Josh Jennings:
- Understood. Thank you. Just one follow-up. Just wanted to touch base on sales force and then productivity. Was NuVasive still -- in the quarter and then you've talked about sales people coming off knocking piece. Can you give us any details to help us attempt to quantify the impact of the productivity ramp of those reps as we move into 18? Thanks a lot for taking the questions.
- Carol Cox:
- Hi Josh, it's Carol. Thanks a lot for the questions. I'd say we had a group of sales reps coming off knocking piece, I would say they are coming off various times and we've seen some really good highlights in some specific geographic areas where they performed very well. We've seen a couple other areas where we probably need to ramp up a little bit better in those areas but I'd say overall its relatively in line with what we expected of course it's mashed up with a little slightly slower US market, but relatively well.
- Operator:
- Our next question is from Matthew O'Brien from Piper Jaffray. Please proceed with your question.
- Matthew O'Brien:
- Good afternoon. Thanks for taking the questions. I am going to sneak in a couple here. So just as far as the guidance for 2017 goes, the lowering I think was largely expected the amount in Q4 is a little bit eye popping. And it's not that that's overly surprising, but what I'm trying to illuminate here I think for most people on the call is whether or not that guidance is really conservative similar to what you've been talking about Greg versus something really coming off the rails at the company i.e. you're losing customers or the biologics business is really starting to fold into itself or something along those lines. So, any kind of color you can provide around the reduction that you made, I think you know when you net out everything it's about $20 million bucks in Q4 to the guidance. Any kind of color you can provide there I think will be helpful?
- Greg Lucier:
- Matt, thanks for the question. SO qualitatively you have assessed it right. We have brought the guidance down to a number that we feel is very conservative, very achievable and allow investors to come in essentially, they like too and make some money. It is not reflective of any external dynamics any competitive repositioning of the company accordingly. Raj maybe you want to say few other words?
- Rajesh Asarpota:
- Yes, I think like Greg said. If I look at the $20 million-ish of Q4 called down more than 50% or only half of it is really coming from hurricanes and biologics, right. So, we said the impact from the hurricane to be about $4 million and we continue to see a little bit of the softness on the biologics side. The rest of it really is procedural volume decline in the US that's going to be partially offset by some goodness on the international side. So that's kind of how we see it right now and like Greg said, we are calling it conservatively and that's the -- essentially.
- Matthew O'Brien:
- Okay. And then just a quick follow-up on LessRay, I think I may get some attention as well. But you're thinking two to three in Q4 if people are shifting over to an operating lease type arrangement but you're still sticking with about $1 million bucks given that AFP is at $150,000, $200,000 something in that range. That would imply actually that the number of systems you're going to place would be a lot higher than you would have thought had it just been an outright sale. So is the demand even stronger than you thought here in Q4 but the nuances are as the lease versus the outright purchase is definitely anticipated. So, we shouldn't over read a lack of interest in the system.
- Greg Lucier:
- No, actually I think you also articulated that one right. There in a ton of interest in that system. It's going to be more released, so revenue recognition will be different. But we feel very strongly about the potential of the systems and heading into a full year 2018 we're going to be able to capture the revenue we had anticipated early on we're just giving you the 60-90 days outlook here which is awfully kind of fresh.
- Carol Cox:
- Yes. I'll add to that. I think it's really important to think about, I think that first piece of capital we're watching over finally the interest is higher, higher than we thought it was going to be but we've got timeframe that we're running into some of these, the capital lease reviews are about a year out some of the folks are having interest but they got to get into the - get that approved. So, I think you'll see that really play out as we are in 2018.
- Rajesh Asarpota:
- Yes, those budget cycles take six to nine months on average to predict. So, it's a little bit unpredictable.
- Operator:
- Our next question is from Richard Newitter from Leerink Partners. Please proceed with your question.
- Richard Newitter:
- Hi, thanks for taking the questions. I was hoping to start off Greg maybe on biologics and within the context of some of the items that both you and Raj indicated were under your control and not under control. Is biologics one of those items that you feel like is under your control and do you feel like you've had a floor now for the year-over-year declines in biologics or do you feel like it's a bit of a wildcard and it could continue to get worse and what's embedded in that 2018 mid-single digit kind of initial outlook with respect to how biologics performs relative to the back half of this year?
- Greg Lucier:
- Let me take your question and put it more into historical context. So, a few years back NuVasive launched a very popular biological product based on stem cell technology and it had a very fast growth rate. Whether or not you need biologics to drive fusion is a larger question now that we're starting to have inside the company. So, I would just say from here forth technologically our goal is to greatly limit the amount of biologics required by better advanced material science on the implants. Now let me just come back to biologics. I think you've seen the worst of it at this point in 2017, I think we can do a much better job of stemming the erosion of making it more bundled into the procedure than we have in the past and that's basically the focal point of our efforts. So, we tried to have investors understand is that the implant business in the US obviously relative to patient volumes is doing good. We're having to focus now on the biologics and getting it included and that's where the new leaders are going to spend a lot of their time.
- Richard Newitter:
- Okay, got it. And then my second question just on the margin. Are you guys committed to 100 -- your long-term outlook of at least a 100 basis points of margin expansion per year. For 2018 is that inclusive of the restatement on the - and how should we be thinking about that comment with respect to that?
- Rajesh Asarpota:
- No. Right now - our assumptions do not include any - we expect that the tax will be repealed. So that's in our assumptions right now.
- Richard Newitter:
- Okay. And then maybe just one follow-up on the gross margin. Raj you said you're committed still to the 400 basis points once the US West Carrollton facility is fully up and running and inventories migrated there. Should we be thinking about any dynamics into the first half of 18 versus second half with respect to gross margin just it feels like the gross margin benefit is pushed out one or two quarters. So should we be thinking about that or does it start really hitting right off the bat in the first quarter of 18?
- Rajesh Asarpota:
- Yes. So right off the bat we expect the headwind that you are seeing right now returning to tailwinds. As the factory is up and running and start to increase our absorption, I think it'll be fully optimized and that's what we are breaking into our plants right now.
- Richard Newitter:
- Okay. Thank you.
- Operator:
- Our next question is from Matt Miksic from UBS. Please proceed with your question.
- Matt Miksic:
- Hi, good evening thanks for taking our question. Can you hear me okay?
- Rajesh Asarpota:
- We can.
- Matt Miksic:
- So, you may have been bouncing back and forth and Greg I apologize if you got some flavor of this type of question but I'd love to understand first if we just its maybe a question for Raj also just sort of picked through the 2% growth US would have been 5% was what I -- I think I heard you say -- items and I think 1.5% it sounds like it would have been from the selling day. But what made up that other 1.5%?
- Rajesh Asarpota:
- Yes. So, if you look at the US final growth right. So, we have on a reported basis said 2% and what we said is the impact from the hurricanes would add a couple of points to that and then you have the selling day in there as well. So that's what migrates you from 2% to 5%.
- Matt Miksic:
- Got it. And thanks for that clarification. And then just sort of the broader question I want to ask is perception heading into this quarter was obviously some discounting and expectations of a shortfall and softness in the spine market, I don't think that is much of a surprise and some expectation that you would trim. I guess if we're talking about taking I guess in the neighborhood of or does it work out to be $15 million to $20 million or so out of Q4? Given the environment in spine the lack of visibility in this market what gives you the confidence because that is what investors are looking for is some confidence that this Q4 number is doable.
- Rajesh Asarpota:
- Thank you for that question. If I try to convey, we went back through all of the numbers. All of the assumptions have done from the bottoms up view across all the different geographies of the world and have now created guidance that we have labeled very conservative so that an investor can have confidence that those are the numbers that will be achieved if not exceeded.
- Matt Miksic:
- Okay. Alright and you feel like you're controlling for what has been kind of a variable in terms of the market growth just coming in, I guess assuming that it remains 100 basis points or flattish type of growth in the US market?
- Greg Lucier:
- That's what the guidance is based on, no big recovery and a business as usual and those are the numbers that we're guiding to now.
- Matt Miksic:
- Okay. And now seasonal step up I think that some people are also thinking we might get, sort of deductible year-end push is not something you're baking into these numbers?
- Greg Lucier:
- We're anticipating the normal seasonality not the super seasonality we were originally expecting due to the push up of XLIF procedures into the fourth quarter we're just not counting on that now and that's what the new guidance reflects.
- Matt Miksic:
- Great. And if I could just -- one more clarification Greg on your discussion of the results and relative to the market it sounds like the softness in the market is kind of slowness that we've seen in the first nine months of the year. You would describe that as kind of across the board and not a not a competitive, some new competitive dynamic that is emerging into the US degenerative MIS space?
- Greg Lucier:
- We certainly do not see that. If you look at results that have been reported so far based on what we know in our competitive intelligence of others are doing, we think we're continuing to hold in there if not gain. And I think we'll just let the next two, three weeks play out and I'm pretty confident that you'll see it's doing quite well competitively.
- Matt Miksic:
- Great. I'll leave it there. Thank you.
- Operator:
- Our next question is from Matt Taylor with Barclays. Please proceed with your question.
- Matt Taylor:
- Hi, thanks for taking the question. Can you hear me okay?
- Greg Lucier:
- We can.
- Matt Taylor:
- Great. So just wanted to follow-up on the US market discussion. We characterized the issue of being really a patient volume one. Do you have any further thoughts on that? Earlier in the year you pointed to some friction talked about how the investable plan, what is your yield intelligence telling you that may be happening up there and mark?
- Greg Lucier:
- Thanks for that question. Let me give a little more qualitative commentary. When we went in 2017, I think we were like most companies we expected the market to be as it was in 2016. We anticipated a pretty robust growth for us in the US market and I think we were caught in a little surprise like the entire industry has now been by to softness we were seeing. And like good competitors we were or are we did a lot of self-examination wondering if that was ourselves wondering if we were missing something. But as the year has unfolded it's become clear, this market in the U.S. has become softer. And I suspected the combination of a lot of things, high deductible plan, spine is an area of health care where the doctor continued to make virtually all the decisions and wanting to push back a little bit more than they have in the past. The variety of circumstances have caused the market. So essentially go flat. Now for us, we're finally it's the island we live on and we're going to make this thing work, and we're making it work internationally so we know we have the right formula. We think we have the right formula in the U.S. too, we're just going to tighten it up a bit more. And that's what our guide the 2018 arm anticipate is that we can grow this franchise mid-single digit, increase profitability and make a pretty darn good business. No matter what they kind of US market look like and we're counting on it to be basically as it is today.
- Matt Taylor:
- And just a follow-up, you had a separate press release today about $100 million buyback authorization. Could you talk about how you are thinking about executing that? Is that going to be opportunistic, you want to consistently buy back shares, what's the philosophy there?
- Greg Lucier:
- So, we are believers in the Company, we're believers in the strategy, we want it to signal that we're buyers of the stock. We have not signaled yet what the exact strategy will be to implement that, but I can say for sure, we will definitely be opportunistic if the stock becomes too undervalued. And we wanted to have that in place to be able to take immediate action accordingly.
- Operator:
- Our next question is from Kaila Krum with William Blair. Please proceed with your question.
- Kaila Krum:
- Great. Thanks guys. Greg, you've done several pretty unique technology and services deals over the last 18 months. It looks like you did invest quite a bit in Vertera just looking at the cash outlay in the quarter. So, guys can you talk a little bit about how you plan to prioritize organic growth and internal product development relative to continued inorganic tuck-ins into 2018?
- Greg Lucier:
- Our number one preference to grow is organically. We believe you have to be all about innovation in this market, and we want to obsolete ourselves and everyone else accordingly. The only reason we do acquisition is because we have a humble view that sometimes not all the bright ideas or the best idea sit in our four walls. And so, with that humility, we look around the world, and we very, very selectively and disciplined way, we'll buy things. Vertera Spine is just one example. Look, the porous PEEK technology is amazing in its ability to drive bony growth. That coupled with our titanium development, which we think is by far the industry-leading technology creates an incredible set of choices for surgeons that we think hopefully support the premium strategy that NuVasive has in the marketplace. So, again it's all about organic growth. It is all about internal intonation and quite frankly we only do M&A if we can see ideas that we think we can bring to market faster than doing them inside the four walls of our place.
- Kaila Krum:
- Okay. That's helpful. And then I guess, as far as internal product development, I mean what would be the process if you wanted to evolve the LessRay platform, to include not only neuromonitoring and Bendini but potentially also a robotic arm longer-term?
- Greg Lucier:
- Well, good question, great question. We're not going to get into pipeline conversations, but as Carol rightly pointed out, this is our first capital item will start itself and as we guided investors in three to five years, this company will become a systems company as much as it an implant company today. We believe spine has to become much more procedurelized, integrated with implant and systems all working together and that's what NuVasive is going to do over the next couple of years.
- Kaila Krum:
- Great. That's helpful. Thank you.
- Operator:
- Our next question is from Andrew Hanover with JP Morgan.
- Andrew Hanover:
- Thanks for taking our question. I wanted to start by just talking about utilization trends as I know a bunch of these questions have been around, but looking through the lens of the services business Greg, for the third quarter and how the third quarter panned out? I mean looking at it in the second quarter and then giving guidance for the third quarter, how did that look versus where it played out? And you know how are you seeing that now for the fourth quarter, and can you remind us what your line-of-sight is with the services business?
- Greg Lucier:
- So, in the second quarter earnings call, our thesis was that we would see super seasonality start to kick in, in the final months of the third quarter and then big time in the fourth quarter. What we've tried to convey to investors now is we're not seeing that super seasonality like we thought at that second quarter earnings call. We have a very good view into the industry because as you rightly point out the services business. We do more spine cases than probably any other company in the world, certainly in the United States. And our viewpoint is typically couple of weeks ahead as spine surgeries are scheduled. So, I wouldn't say that our outlook is incredibly long-term, but at least it provides the moving snapshot a couple of weeks ahead of time. And based on that, we're saying now is that, the industry in 2017 is definitely down. There will be seasonality in the fourth quarter, so count on that. It's just not being pushed into the fourth quarter like we originally thought when we sat down and talked to you at the end of the second quarter.
- Andrew Hanover:
- Got it. And then just to tease out some of your commentary around the market. I mean, do you feel as though this is your - we're near the bottom, we're plateauing at the bottom, or the bottom is still - there is a little bit more room to go, I mean how would you categorize that, because it does sound as though you are - more at the bottom than we are on the way to the bottom?
- Greg Lucier:
- Look. We don't think this is a market that is going down further. It is not tanking. It's modulating. It was a kind of low-single digit growth market before. It's gone a little flattish now in 2017. I don't want anyone jumping out of the windows. You know we can get through this and the business is going to do just fine. So, you know steady hands, steady arms, steady mind and we'll get through this and we're going to continue to take share. We know very conservatively as we look forward, we've grown mid-single digits. That's just kind of an initial outlook and we'll give more confirmed guidance as we move into January of next year.
- Andrew Hanover:
- And then my last one is just on the business as a whole, I mean there are nuances here where there are positives. I mean 2% to 5% without the - excluding the hurricane and the selling day. So, can you just give us some more clarity in terms of how do you feel like the business did in terms of penetrating the deformity market and taking advantage of that and you know improving the comp structure issue that we had in the second quarter in terms of sales rep productivity and the positives that you are seeing despite some of the weakness in utilization? Thanks for that taking the questions.
- Greg Lucier:
- Thank you for the questions. So, there is a lot to click off that went well. As you say the deformity penetration continues. Historically this is a degenerative surgery business. We've moved it toward deformity and we're starting to make inroads and that's good. We have largely cleaned up all of the billing issues that we had in our clinical services business as Raj pointed out, there is a couple of million bucks that will finish out here in Q4. But all those systems and that was a big systems integration that's all done and that is a platform for growth for us now going forward. You will see us continue to do M&A in that category. If you do the adjustment as Raj did the walk, we continue to gain share in our implant business in the United States, actually quite robustly. Our issue as we try to focus investors' kind of minds and thoughts here is, we've got work on the biologics business. It is a medium-term issue. The business for us is not kind of long-term strategic, because we think actually the science of moving towards the implants. So, we're going to fix that, we're going to put our energies into that and if we can continue to do kind of better things there, you are going to see some pretty darn nice results in the U.S. business.
- Operator:
- Our next question is from Kyle Rose with Canaccord. Please proceed with your questions.
- Kyle Rose:
- Great. Thank you very much for taking the question. So, I - just one quick question on the biologic follow-up there, I think you've been - when you talked on the last call, you talked about the Q2 being down somewhere 7% to 8% and that was in addition to Q1 being down around 6%. Just wondered how we should think about how that trended into Q3. Did we see another step-down relative to what we saw in the first half of the year? And then, second question is just, how do you think about the cadence in the set-up for 2018 relative to how we've seen 2017 play out year-to-date? Do you expect it to be continued slower start to the year with increased seasonality as we move through the year or do you think that some of the hurricanes that have impacted the Q3 and Q4 may actually serve as a bit of tailwind and catch-up procedures as we pick-up the first half of 2018?
- Greg Lucier:
- Let me jump on the last part of your question first and then Raj can get into that other part. You know look I think what we're seeing right now is a 2018 who have the traditional seasonality like the businesses have until we see some external factors change, I don't want to be calling some super seasonality in the fourth quarter of 2018. So, when you model you should model so the normal seasonality's that we've been seeing in 2016 and 2017. So that's how you should think about going forward. So back to your question on biologics right, so in Q2 we saw about 7% decline year-over-year and in this quarter, that erosion rate doubled to about 15%. So, what we're thinking in Q4 is assuming that that erosion rate will be approximately 40% to 50% percent as we kind of manage to any further erosion and then kind of helping turnaround the biologics business as we move into 2018. Based on the focus the initiatives and as the new leader kind of get their arms around the business.
- Kyle Rose:
- Great, thank you very much. And then one additional question on LessRay, I mean I know it's still early but you did give some early comments as far as demand and some of the purchasing timelines. Just what you could give us as far as when LessRay is being evaluated what it's being evaluated against is it just getting on the capital budget process or are people evaluating LessRay versus some of the more expensive robotic technologies and how that value proposition conversations going with the account?
- Rajesh Asarpota:
- Good question. So LessRay is a completely different price point than any of these robotic solutions being sold, so it's got a lot of advantages from just an economic standpoint. What we do on these trials is we put it into the surgery they perform three or four days of surgeries with it they get accustomed to the workflow and we are seeing just rave reviews on the workflow for those people giving it a try. As we've said though there are capital budget cycles here in these hospitals. And so, we've got to navigate through those. In the meanwhile, there's an opportunity to do -- to get the systems out there and get them used. And so that's why we just in the fourth quarter have modulated the amount of revenue. The enthusiasm for the product remains extremely high and I think the investors should be encouraged by what they'll see in terms of results in 2018.
- Operator:
- This concludes today's question-and-answer session. I would now like to turn the conference over to Mr. Lucier for closing comments.
- Greg Lucier:
- Thanks for participating everybody and we look forward to speaking with you in the next quarter. All the best.
Other NuVasive, Inc. earnings call transcripts:
- Q2 (2023) NUVA earnings call transcript
- Q1 (2023) NUVA earnings call transcript
- Q4 (2022) NUVA earnings call transcript
- Q3 (2022) NUVA earnings call transcript
- Q2 (2022) NUVA earnings call transcript
- Q1 (2022) NUVA earnings call transcript
- Q4 (2021) NUVA earnings call transcript
- Q3 (2021) NUVA earnings call transcript
- Q2 (2021) NUVA earnings call transcript
- Q1 (2021) NUVA earnings call transcript