NuVasive Inc

F:NK8

Earnings Call Transcript 2022-Q1

[Operator]

Good day, ladies and gentlemen, and welcome to the NuVasive First Quarter 2022 Earnings Conference Call.

I would now like to introduce your host for today’s call, Ms. Juliet Cunningham, Vice President of Investor Relations at NuVasive. Please go ahead, Ms. Cunningham.

[Juliet Cunningham, VP, IR]

Thank you. Good afternoon, everyone. Joining me today are Chris Barry, Chief Executive Officer; and Matt Harbaugh, Chief Financial Officer. Chris will provide an overview of NuVasive’s first quarter 2022 business results and trends, as well as innovation highlights and updates on our strategy. Matt will review our detailed financial results and updated 2022 financial guidance. And then, we’ll host the question-and-answer session.

The earnings release, which we issued earlier this afternoon, is posted on the IR section of our website and has been filed on Form 8-K with the SEC. We have also posted supplemental financial information on our IR website. As a reminder, this call is being recorded and an archive will be available on our IR website later today.

Before we get started, I’d like to remind you that our comments during this 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 materialize or prove to be correct, could cause actual results to differ materially from those expressed or implied by such forward-looking statements.

The factors that could cause actual results to differ materially are described in NuVasive’s news release and periodic filings with the SEC. Except as required by law, we assume no obligation to update any forward-looking statements or information, which speak as of their respective date.

In addition, this call will include certain non-GAAP financial measures. Reconciliation of these measures to the most directly comparable GAAP financial measures are included in today’s earnings release and in the supplemental information, both of which are accessible from the IR section of NuVasive’s website.

And now, I’d like to introduce Chris Barry.

[Chris Barry, CEO]

Thank you, Juliet, and good afternoon, everyone. Earlier today, we reported our first quarter 2022 financial results. On today’s call, I’ll provide an overview of our first quarter 2022 performance, a review of key innovation highlights and updates on our strategy, which continues to unlock multiple vectors of growth. NuVasive delivered strong first quarter 2022 net sales of $290.8 million, an increase of 7.2% on a reported basis or 9.1% on a constant currency basis, compared to the prior year period.

Despite COVID-19 impacts during the first half of the quarter, we saw procedural volumes return across February with continued growth in March. This was evident in our U.S. and international commercial performance. Overall, I'm very pleased with the health of our business, and I remain confident in our near and long term strategy to execute on new opportunities for growth.

In particular, U.S. spinal hardware delivered high single-digit year-over-year growth, led by continued growth in cervical, including the C360 system and the Simplified Cervical Disc, further adoption of new product introductions in our interior portfolio and growth in thoracolumbar fixation.

The U.S. surgical support business rebounded well in the first quarter, with Pulse platform unit sales performing as expected and biologics benefiting from the increase in procedural volumes. This was partially offset by a decline in our NuVasive Clinical Services business driven by headwinds due to payer mix.

We continue to see strong performance in our international business as we delivered low double-digit growth over the prior year period on a reported basis and high-teens growth on a constant currency basis. Europe continues to execute well, despite impacts related to COVID-19 in Southern Europe. Latin America delivered solid performance throughout the region. And in Japan, we continue to see growth due to our differentiated technology offerings.

Another key growth driver is enabling technology led by the Pulse platform. We are executing against our plan as expected and recently surpassed the 500 commercial case milestone for Pulse. With additional Pulse units up and running in the United States in the first quarter, and our first international commercial cases in the United Kingdom, the Pulse value proposition is resonating with hospital executives and surgeon partners around the globe.

As a reminder, the Pulse software ecosystem integrates multiple hardware technologies into a single platform. This unique ecosystem provides surgeons a seamless workflow when utilizing multiple technologies in the operating room and can be used in 100% of spine surgery cases. Most importantly, it's extensible software architecture allows for integration for current and future technologies. We're pleased with our collaboration with Siemens Healthineers to enable seamless integration between the Pulse platform and the Cios Spin mobile C-arm, which provides hospitals and surgeon partners a leading intraoperative 2D and 3D imaging solution.

We continue to invest in robotics R&D and execute on our Pulse robotics road map. We've completed numerous labs with surgeon partners and have additional labs scheduled throughout the year. While early surgeon feedback has been very positive, we have not yet submitted for regulatory approval and thus, we will not complete first in human this year. Pulse robotics will be a key application for the Pulse platform, and we will provide information on upcoming milestones at a later date.

Our team is making progress on building out the broader Pulse ecosystem, integrating new applications, new tools and new capabilities is what we believe will resonate most with our surgeon partners. To that end, we've made strategic investments to advance our data and analytics and preoperative surgical planning strategies will support the development of new applications for the Pulse platform.

Turning to cervical, another key strategic growth driver for the company. Our C360 portfolio delivered greater than 20% growth in the first quarter. This was led by the Simplified Cervical Disc, which continues to receive tremendous surgeon feedback as the most clinically effective technology in the cervical total disc replacement procedure segment.

To further support the disc's growing body of clinical evidence to simplify this 2-level U.S. FDA IDE study data was recently published in the Journal of Neurosurgery Spine. The peer review publication reiterates that the simplified disc has a significantly greater success rate at the 24-month follow-up compared to ACDF when used for two-level CTDR. The disc continues to demonstrate superiority in comparison to alternative techniques, and I look forward to seeing more patients benefit from this differentiated technology.

To advance our portfolio and position in the $2.6 billion cervical sub-segment, we remain on schedule to launch Reline cervical, our next-generation posterior cervical fixation system in the third quarter of 2022. Reline Cervical provides compatibility with the Pulse platform and integrates with our Reline Fixation system, one of the most comprehensive fixation systems on the market today.

We continue to receive positive surgeon feedback on Reline cervical and clinical evaluations and are excited to incorporate this new technology and further expand the industry's most innovative cervical portfolio.

In less invasive surgery, we continue to invest in differentiated technology to extend our leading position in the $900 million anterior sub-segment and to take share in the $1.6 billion posterior spine sub-segment.

Our comprehensive procedurally integrated solutions address the anterior and posterior column from a lateral or prone position, providing surgeons the flexibility to treat any patient pathology with NuVasive procedure.

We continue to see growth in ALIF due to strong surgeon adoption of Modulus ALIF. Commercially launched in 2021, Modulus ALIF, is our latest 3D printed porous titanium implant designed for both supine ALIF and XLIF procedures. Research and development continues on our next-generation expandable interbody for anterior and posterior surgery.

We remain on track to begin clinical evaluations in 2022 on MOD XXLIF for lateral spine surgery and MOD XPL for posterior lumbar procedures. In addition, we remain on schedule to launch the NuVasive tube system in the second half of 2022.

The NuVasive tube system, a new tubular retractor system designed to support less invasive posterior decompression and fusion procedures will be a key addition to our comprehensive portfolio of instruments for prone procedures.

International will remain a key growth driver in 2022 and beyond. Anchored by our differentiated technology and global infrastructure, we anticipate continued growth around the globe.

We expect that our international business will also benefit from the return of our precise system from NuVasive Specialized Orthopedics in key markets outside the U.S. This is supported by our recent announcement that Precise has now surpassed 100 peer-reviewed publications. The milestone is significant as it further supports the clinical benefits and efficacy of the novel technology.

I'm pleased with our surgeon education efforts at our West Coast experience center in San Diego and our recently opened East Coast experience center outside of New York City. In 2021, we had a record year, training more surgeons than any other year at NuVasive.

As the industry leader in surgeon education and training, surgeon demand for our clinical professional development program remains high in 2022, with training courses at both centers focused on Pulse, Simplify, X360 and XLIF and MAS TLIF.

In closing, I'm excited for what's ahead for NuVasive. I'm encouraged by the momentum in our business and our progress to extend our leadership position in less invasive surgery, take share in subsegments where we historically had underrepresented market share, deliver on our differentiated innovation and enabling technology and drive continued growth in our international business.

We are evolving from a company focused on a single subsegment of spine to a company that is helping transform the future of spine care. We're committed to delivering sustained growth, unlocking value and making progress against our vision to change a patient's life every minute.

I will now turn the call over to Matt to discuss the company's financial results in greater detail.

[Matt Harbaugh, CFO]

Thanks, Chris, and good afternoon, everyone. Today, I will cover our first quarter 2022 financial results and drivers. I will also walk you through the updated 2022 financial guidance. Our detailed financial results have been provided in today's press release. During my remarks, I will be discussing both GAAP and non-GAAP measures and refer you to our press release for GAAP to non-GAAP reconciliations.

Total first quarter net sales were $290.8 million, an increase of 7.2% as reported and 9.1% on a constant currency basis compared to the prior year period. The first quarter was a story of two halves. The first half of the quarter was significantly impacted by COVID-19 and related health care staffing shortages.

However, procedure volumes improved over the second half of the quarter as government restrictions eased and hospital systems increased elective surgeries in most of our key markets.

Despite these headwinds, we saw a continued positive momentum from our new product introductions, including the Pulse platform and our cervical portfolio, led by the Simplify Cervical Disc, which I'll cover in more detail shortly.

Strong international sales of $71.5 million in the first quarter of 2022 grew 10.5% as reported and 18.6% on a constant currency basis compared to the prior year period. These results were driven by Europe, Latin America and Japan, all posting double-digit growth.

Now I'd like to share some key highlights from our U.S. product lines. U.S. Spinal Hardware net sales were $155.6 million, representing a 7.2% increase over the prior year period. Within U.S. spinal hardware, our thoracolumbar and cervical portfolios, both grew year-over-year with cervical posting greater than 20% growth in the first quarter. This performance was led by our C360 system, including increasing surgeon adoption of the Simplify Cervical Disc.

U.S. surgical support net sales were $63.6 million in the first quarter, an increase of 3.8% compared to the prior year period. This growth was driven by net sales from the Pulse platform in our Biologics business, but was somewhat muted by the results of NuVasive Clinical Services, which declined year-over-year due to unfavorable payer mix.

Turning now to operating highlights. Non-GAAP gross profit in the first quarter was $212.2 million compared to $199.6 million in the prior year period. The year-over-year increase was primarily driven by higher procedure volume. As a percent of net sales, non-GAAP gross margin was 73%, a decrease of 60 basis points compared to 73.6% in the prior year period. The year-over-year decline was primarily driven by product mix and normal levels of low single-digit pricing impacts, partially offset by a decrease in inventory charges in the quarter.

First quarter 2022 non-GAAP operating expenses were $178.2 million, an increase of 8.5% compared to $164.3 million in the prior year period. The year-over-year increase was primarily driven by variable expenses on higher net sales particularly sales commissions, freight expenses and our continued investment in R&D to further our core spine and enabling technologies portfolios. We are also experiencing some inflationary impacts, which we will continue to monitor and navigate.

First quarter 2022 non-GAAP operating margin was 11.7%, a decrease of 130 basis points from 13% in the prior year period. The year-over-year decline was primarily driven by lower gross margin and continued investments in commercial. Non-GAAP other income and expense was $2.6 million of income for the quarter compared to $10.6 million of expense in the prior year period.

The year-over-year change was attributable to unrealized foreign currency gains in the first quarter of 2022 versus unrealized foreign currency losses in the prior year period. Additionally, interest expense decreased compared to the prior year period as a result of the settlement of the 2021 senior convertible notes in March of last year.

Non-GAAP tax expense in the first quarter of 2022 was $8.4 million compared to $5.6 million in the prior year period. The Q1 2022 effective tax rate was 23%, which was consistent with the prior year period.

On a GAAP basis, we reported first quarter net income of $19.2 million or diluted earnings per share of $0.35 compared to a net loss of $7.5 million or diluted loss per share of $0.15 in the prior year period. GAAP diluted EPS includes the dilutive impact of applying the if converted method to the company's convertible notes.

On a non-GAAP basis, we reported first quarter net income of $28.2 million or diluted earnings per share of $0.54 compared to net income of $19 million or diluted earnings per share of $0.37 in the prior year period. This was largely driven by higher net sales and unrealized foreign currency gains, which contributed $0.10 to diluted earnings per share in Q1 2022.

Moving to cash flow. Our free cash flow for the first quarter of 2022 was negative by $27.6 million versus positive $6.6 million in the prior year period. As you know, our first quarter is historically the lowest free cash flow quarter of the year and typically negative. In addition to typical seasonality, we had impact from our cash collection timing resulting from ramping sales in the second half of Q1 as COVID-19 lessened and procedure volume increased.

As of March 31, 2022, we had cash and cash equivalents of $205.3 million. The cash used since December 31, 2021, was primarily related to CapEx investments in Q1 and acquisition-related contingent consideration milestone payments. Our $550 million revolving credit facility remains undrawn.

Turning to our full year 2022 financial guidance. Given our strong results in Q1 and the overall health of our business as we exited the quarter, we are updating our 2022 guidance as follows: we are raising the low-end of the guidance range for net sales.

We previously provided a guidance range for net sales of 5% to 8% growth as reported or 6% to 9% on a constant currency basis. We now anticipate net sales growth of 6% to 8% as reported and 7.5% to 9.5% on a constant currency basis. This includes an updated estimate of negative currency impact of approximately 150 basis points for 2022.

We are not changing our guidance range for non-GAAP operating margin, which remains at 13% to 14.5%. And we have raised our guidance range for non-GAAP diluted earnings per share based on our revised expectations for net sales.

We previously provided a guidance range for non-GAAP diluted earnings per share of $2.05 to $2.35. We now expect non-GAAP diluted earnings per share in a range of $2.15 to $2.45. While we remain cognizant of the macro issues that could affect us all, we are monitoring these issues closely and have factored these considerations into our 2022 guidance range.

We are confident in the trajectory of our business, especially with the positive momentum from our new product introductions and multiple vectors of growth. Our focus continues to be on executing on our plans and delivering on our commitments for the benefit of all our stakeholders.

And now, operator, please open the call for questions.

[Operator]

Thank you, Sir. At this time, we will be conducting a question-and-answer session. [Operator Instructions]

The first question we have is from Josh Jennings from Cowen. Please go ahead.

[Josh Jennings, Cowen]

Hi. Good afternoon. Thanks for taking my questions and congratulations on a strong start to the year despite the difficult environment. I wanted to ask about the strong revenue performance in the first quarter and just wondering if you could share any benefit from case mix.

I mean, one of the thoughts on recovery is spine market, but also for NuVasive specifically, is that potentially more of the complex cases were postponed late last year and even in early January, and it's more complex coming back, multilevel cases coming back to increase revenue per case. So was it -- did you receive a benefit, do you think, in 1Q? And should that continue? Or was it just purely total volume recovery broad-based across all different case types? Thanks for taking the question and congrats again.

[Chris Barry, CEO]

Thank you, Josh, and I appreciate the question. We didn't really see the mix change. What I really attribute our growth from was really this idea of multiple vectors of growth. I've been talking a lot about our company moving from that one-dimensional company. And I'm really proud of how we've evolved. We've made a lot of investments over the last couple of years.

And if you think about where we are now, we've extended our leadership in minimally invasive or anterior, the $900 million sub-segment. We now balanced out our leadership in XLIF and now a leader in ALIF. We continue to take share in some segments that we've traditionally had low share, cervical, $2.6 billion sub-segment. We've delivered now a couple of quarters in a row, 20-plus percent growth.

We still have some advancements to make in posterior, $1.6 billion, that's ahead of us with the tube system I talked about in the prepared remarks, and we've got work to do on expandables. The differentiated technology with Pulse, we've surpassed our 500 case milestone. So that's up and running.

And as I've talked a lot about, the global business now represents 25% of overall revenue, and that continues to grow double digit, and that's been consistent for us. So those things combined is what I attribute our growth to. I didn't see the mix in the pent-up demand for complex, but we may see it going forward, but we'll see. But I appreciate the question.

[Operator]

Thank you. The next question we have is from Matt Miksic from Credit Suisse. Please go ahead.

[Matt Miksic, Credit Suisse]

Great. Thanks and congrats on a really strong start to the year. A follow-up on, Matt, some of your comments on margins, just to make sure we understand this is, I think you mentioned that there was some maybe unfavorable margin mix, product mix in the quarter. But holding your full year margin guidance, I guess, you're expecting that to correct throughout the year. Could you maybe talk a little bit about the margin dynamics in the quarter and then your expectations for the year? And I have one quick follow-up.

[Matt Harbaugh, CFO]

Yes. Thanks for the question. I was very pleased with how the quarter came together for us. As you can tell, we came in line with expectations on the bottom line from an operating income as a percent of net sales perspective. EPS was higher, a lot of that driven by currency, foreign currency adjustments. So all in all, a good quarter. Really pleased to see the topline.

And I would just highlight, in addition to the vectors of growth that Chris just highlighted. We're also very pleased with our international business. They posted strong results as well. So hard to find a rough patch in these results. Good start to the year. I will say that we didn't change our guidance from an operating income perspective.

And that's just because it's early on in the year, and there are lot of macro events, interest rate changes here in the states today or an Ukraine supply chain challenges and so we just wanted to give ourselves a little more room. Obviously, if we continue to form -- to deliver, excuse me, these strong results as we get into future quarters, our goal would be to be on the higher end of the range we provided.

[Matt Miksic, Credit Suisse]

Thanks. And then the follow-up, and I almost hate to ask this question because there are so many things that are going so well right is, around Chris and your comment of pushing out the first-in-human time line a little bit for the robot. Can you talk about maybe what has led you to that and maybe expectations for when we can expect that to get back on track? I don't know if that's the right way to think about it, but some expectations of visibility as to when that will happen.

[Chris Barry, CEO]

Yes. I obviously expected the question. But listen, the whole announcement here really is just adjusting the time line. We're making great progress. We continue to have robust investment in the R&D perspective. Surgeon feedback has been very good. We continue to do labs on a routine basis. We want to do this project right.

And as we did the assessment, as I pointed to in late Q2, early April, we just have more work to do with a complex system involving hardware, software systems integration not only within the robot arm itself, but within the Pulse ecosystem.

And for those reasons, we're not ready to submit regulatory approval, which is a gating item for us to get into first clinical. I'm not going to give a guideline or a time line today. But I will tell you, as we move closer, I will provide that time line. We just need to assess the elements of the system and make the appropriate progress on the time line.

[Matt Miksic, Credit Suisse]

Fair enough. Thank you.

[Chris Barry, CEO]

Thanks, Matt.

[Operator]

Thank you. The next question we have is from Mathew Blackman from Stifel. Please go ahead.

[Mathew Blackman, Stifel]

Good afternoon, everyone. Thanks for taking my question. I was actually hoping to talk a little bit about international, particularly, the strength that you're seeing in Japan, I know you guys have spent a ton of time revamping the Japanese business, the international business as a whole. And it's proven to be a really important and durable growth driver.

But can you give us a little bit more color on what is driving growth there. Just trying to get a sense of why you're confident that you can sustain this outsized growth relative to the markets there, but also even relative to the U.S. market. Any help there?

[Chris Barry, CEO]

Yes. It's been an investment area for us. And I think a lot of -- the competitive dynamics are slightly different. If you get out of the U.S., the U.S. is more dense for the competitors, if you will, a lot of smaller competitors here that we don’t necessarily see at a global level. So number one, the dynamics are slightly different.

As far as Japan specifically, we've made a good investment. We have the right team, introduce products specifically for the Japanese market and made a real commitment to that market. We've got dedicated infrastructure, supply chain. Our logistics have been further developed there.

So those things, I think, have led us into continuing to evolve and create a very good leadership position in that market. So that is a model. The Japanese model is exactly what I'd like to see us do in other large markets and some of the things that we've talked about. We're doing those things in some of the key European markets, in Asia-Pac, in Latin America. Japan happens to be the furthest along outside the U.S. in development and that’s driving our growth.

[Mathew Blackman, Stifel]

And if I could slip in -- sneak in one more question on Simplify. I appreciate it's really early days here still. But any sense of whether the success you are seeing is taking share today from other competitors? Or are you seeing some market expansion? And again, I appreciate it's early, small size. But are you starting to see and not just hearing you talk about the C360 portfolio as a whole, are you starting to see pull-through for the broader portfolio because of Simplify? Is that working as a good way to get into new accounts? Appreciate it. Thanks.

[Chris Barry, CEO]

Yes. A few questions in there that I'll take a shot here. Number one, we obviously, I believe, are taking share in the short-term. I think we've got a very clinically differentiated technology in the CTDR market. So I would say, the answer is yes, we're taking share. But I also feel the early stages of market acceleration in the CTDR market, and we believe that's happening, and we're starting to see it.

It's early coming out of COVID. We need to see durability of some of the data that we're looking at. But for sure, we think we're leading in an expanding market over time. Now how fast and how large that gets, we'll have to see. And I think the last question was -- I forget.

[Mathew Blackman, Stifel]

Pull-through. Just pull-through of the rest of portfolio.

[Chris Barry, CEO]

So -- it's opening doors. I'd say the C360 portfolio is benefiting from the lead-in product, which is our Simplified Artificial Disc. So the answer is, yes. We're seeing a benefit across cervical portfolio. We're meeting new customers and new surgeons that we didn't necessarily engage with in the past that's introduced in the broader portfolio. So we're excited about the technology, and I think we're just getting started.

[Operator]

Thank you. The next question we have is from Vik Chopra from Wells Fargo.

[Vik Chopra, Wells Fargo]

Hi. Good afternoon. Thanks for taking the questions and congrats on a great start to 2022. So two questions for me. First, maybe on Simplify. Can you talk potentially about the performance in the quarter from a revenue perspective? I know you blew out -- I'm sorry, I know you exceeded your guidance for 2021 and how we should think about the potential impact to sales from Simplify in 2022?

And my second question is on your new product launches. How much do they contribute to growth this quarter? And is that expectation of half the growth coming from new products still stand with the updated guidance? Thanks so much.

[Matt Harbaugh, CFO]

You bet. Thanks. This is Matt. With regard to Simplify, the reason we talk about our cervical portfolio is that you kind of missed the robustness of C360 if you're only talking about Simplify. And as Chris said in the prepared remarks, we've had greater than 20% growth in cervical for the last two quarters. Also international for cervical is doing well, too. So all-in-all, we're taking share in cervical, and we're really pleased with the results.

With regard to your question around new products. I don't really think about it on a quarterly basis, I think about it on a full year basis. And I'll just remind you of my comments on the last call, which is about half of the growth in our guidance and that this remains even though we changed it today, about half the growth is coming from new products and then the other half is coming from taking share and growing the business on a natural basis. So that's how you should think about it on a full year perspective.

[Vik Chopra, Wells Fargo]

Thank you.

[Matt Harbaugh, CFO]

Thanks.

[Operator]

Next question we have is from David [Technical Difficulty]

[Unidentified Analyst]

Hi, guys. This is Joseph on for David. I guess, first question. How much of your debt right now is floating rate? And how should we be thinking about the impact of that on EPS as the interest rates increase?

[Matt Harbaugh, CFO]

Yes. Thanks. We do have two convertible notes. Both are 450 million tranches. You can see all the data in the 10-Q that we filed today. It's reasonable. It's manageable. We have not drawn on our revolver, which I went out of my way to talk on the prepared remarks. If we were to draw on that, it's -- depending on our leverage, it's LIBOR plus 2% or LIBOR plus 2.25%. So we're tracking the market very carefully, but we're comfortable that we're in pretty good shape from a balance sheet perspective.

[Unidentified Analyst]

Okay, that's helpful. And then if I can just squeeze in one more. Is there anything notable to structure wise in the supply chain that we should be aware of, I guess, especially with titanium procurement? Thanks.

[Chris Barry, CEO]

We're keeping a close eye. I think Matt's comments were -- kind of sums it up in his prepared remarks around some of the guidance questions we had on margins to keeping a close eye on supply chains. We haven't experienced anything material yet.

Clearly, we're feeling inflation in areas like freight, some of the internal travel budgets, things like that. We're feeling a little bit of pressure. But overall, nothing material at this particular time. But it's still early in the year, so we're going to keep an eye on it. But I don't know if you have anything else on to add.

[Matt Harbaugh, CFO]

Yes, I would just frame it a little bit further, Chris. From a financial perspective, if you look at our cost of goods sold, roughly three-fourth of the spend there is labor and overhead. And so if you're thinking about commodity costs, yes, there's something we're keeping our eyes on. But the lion's share is labor and overhead for that particular line item, which I think is good for us considering what's going on in the world right now.

[Unidentified Analyst]

Yes. Absolutely. Thank you guys very much.

[Chris Barry, CEO]

Thanks for the question.

[Operator]

Thank you. The next question we have is from Shagun Singh from RBC Capital Markets.

[Shagun Singh, RBC Capital Markets]

Great. Thank you so much for taking the question and congratulations on a strong print here. Matt, I was wondering if you could provide some color on Q2 or the cadence through the year. I think consensus was previously looking for about 4% year-over-year growth in Q2 and EPS down 5%. So just any puts and takes would be helpful?

And just a question on the long-term. You're guiding to about 7.5% to 9. 5% growth in 2022 following about 8.5% underlying growth last year. I think Simplify and Pulse are -- Pulse is mostly additive as well. So what does this imply for 2023 and your LRP goal of 5% to 7%? You expect to be at the top end or above it? Thank you.

[Matt Harbaugh, CFO]

Yes, it's a little too early to be talking on 2023 just yet, but here's how I would frame 2022. As we're looking at consensus for Q2 from a net sales perspective, it didn't -- prior to this call, it was around 307. I think that's a good number to use for the second quarter, considering what we've seen so far. We've got a couple of months here to deliver against.

And we've said all along that the plan for this year is back half weighted. I'll just remind you that NSO should have a strong third quarter, and weak quarter last year. And then we're going to see the ramping, to your question, around Simplify and Pulse as we get into future quarters. So that also led us as we were thinking about guidance. We wanted to raise guidance to reflect the strong performance we released today, but kind of play it down the field a little bit further here in the second quarter.

[Shagun Singh, RBC Capital Markets]

Thank you. Are you guys willing to share the contribution from Simplify and Pulse in Q1 and what you might be assuming in your full year guidance? Thanks for taking the question.

[Matt Harbaugh, CFO]

Yes, I'll go back to my question earlier, which is cervical grew greater than 20% over the last couple of quarters. We're really happy that's Simplify, that's C360, that's the cervical portfolio in total. We're going to talk about it that way as opposed to specific to Simplify because you kind of missed the story of what we're doing strategically by only focusing on Simplify.

And then on Pulse, you can see it there with the growth in U.S. support and the lion's share of the units we placed were U.S. The only challenge there, which we talked about in the prepared remarks was NCS actually was down year-over-year. So that's put a little bit of pressure, but we are pleased with the results, a lot of that driven by Pulse.

[Shagun Singh, RBC Capital Markets]

Thank you.

[Operator]

Thank you. The next question we have is from Joanne Wuensch from Citi.

[Unidentified Analyst]

Good afternoon. This is Anthony on for Joanne. Thanks for taking our questions. Can you just provide some commentary on the hospital capital spending environment, just what you're seeing on appetite? And also maybe touch on how you're seeing any material impact from staffing at the moment? Thanks.

[Chris Barry, CEO]

Thanks, Anthony. I appreciate the question. We're obviously keeping an eye on capital budgets, and we've obviously heard from others that have reported for us that there's been some challenge. We haven't experienced it yet. I think we had a fairly robust pipeline.

The pipeline is pretty well vetted, and I think the team has done a good job executing against the milestones to get those systems transacted. But we're keeping an eye on it because we are hearing things.

As far as staffing goes, I do not believe that hospitals are fully up and staffed yet. I think they're making improvements. I think we're benefiting from the fact that spine procedures are generally profitable procedures. We're also benefiting, as we've talked a lot about, taking advantage of areas that we haven't played in the past. So it's upside for us.

Even if the market is a little sluggish, we're still feeling positive momentum from our key launches. So, definitely keeping an eye on capital spend and capital budgets with our customers. But we feel like we've got a strong, pretty well vetted pipeline ahead of us. But we'll continue to monitor as we go forward.

[Unidentified Analyst]

Great. Thanks.

[Chris Barry, CEO]

Thank you.

[Operator]

Thank you. The next question we have is from Craig Bijou from Bank of America.

[Craig Bijou, Bank of America]

Good afternoon, guys. Thanks for taking the questions, and sorry if I missed any comments on this earlier. But Chris, I wanted to see what you guys are seeing in April in terms of procedure volumes and if you see those pick up from March?

[Chris Barry, CEO]

Yes. Thanks, Craig. We're just now getting into May. But April was what I would consider to be sort of natural seasonality starting to come back into the business. You have spring breaks. So, it was good volume, in line with what I would look at like 2018 and 2019 coming out of Q1 into Q2. So, it's very reflective of pre-COVID, which would say you have spring break, you had surgeons traveling, you had kids traveling.

You had all these other inputs that create the natural seasonality that we see. We'll see how May plays out. I feel pretty confident that we're on track, but we need to see how May and June turn out. But I would say April was a good reflective quarter that would indicate that seasonality is sort of flowing back into the business the way it did prior to the COVID disruption.

[Matt Harbaugh, CFO]

Yes. This being said, we do expect a growth Q1 to Q2, as I mentioned earlier. Q2 consensus is a good number to use for the second quarter. So, it is true that May and June are going to define the quarter but that's a good number to use.

[Craig Bijou, Bank of America]

And maybe just following up on that. Just bigger picture, Chris. Obviously, I hear your comments on the seasonality, but are we back to a normal procedure volume level pre-COVID or however else you want to define it? And I know that you guys haven't really talked about a backlog or seeing a backlog. So make sure that that's still accurate that you're not seeing a huge backlog in procedures.

[Chris Barry, CEO]

No, I don't believe we're seeing a huge backlog. I think we're getting back to pre-COVID. I think we're back to pre-COVID levels today. Are we actually experiencing a backlog that's bolstering the number? It's probably a little early to tell. The good news for us is we're not dependent on the pent-up demand because we've got multiple ways that we're growing the business in areas that we didn't have pre-COVID. So we're in a decent spot.

It's a little early for me to determine with any level of confidence how can I assess what happened in Q1 in relation to pent-up demand versus natural volume. But I think the system is showing it can deliver pre-COVID volume, which is a great sign for us. In the past, we didn't see that.

We're seeing that durability start to flow in, even with the ebbs and flows of infection rates ticking up, I feel like we're back to a durable position. So with that, we'll continue to monitor and try to assess the underlying volume and any pent-up demand that may be on top of it.

[Craig Bijou, Bank of America]

Great. Thanks, guys.

[Chris Barry, CEO]

Thank you. Next question?

[Operator]

Thank you. The next question we have is from Jason Wittes from Loop Capital. Please go ahead.

[Jason Wittes, Loop Capital]

Hi. Thanks for taking the question. Congrats on a strong start to the year. Just on U.S. surgical support, maybe if you could just help kind of look at the pieces in terms of directionally where they're going. Biologics sounds like it was growing, which relative to last year, I think, is a positive because I think there were some negative pressure last year. It sounds like a lot of the growth was Pulse.

And then the third part would be on the monitoring side. How should we be thinking about that business going forward? I guess all three businesses, but I'm just curious to know about sort of what are the drivers of that U.S. surgical support business and how we should we be looking at it in 2022? Thank you.

[Chris Barry, CEO]

I'll take a shot, and Matt may want to complement what I say here. But yes, we've got a little bit of a mixed bag with surgical support. We have biologics. We feel like it's sort of rebounding into normalized growth, which is going to be in line with market growth. Obviously, we see Pulse as a growth engine and a growth driver for us over the next several quarters, next few years going forward.

And then in the NCS business had a bit of a volatile quarter. As Matt mentioned, some payer mix related issues. It's more of a grow with the market. It's a volume-based business. So that -- those three elements really make up the surgical support business. So we're clearly looking to continue to build out the and accelerate our Pulse system, and we'll continue to monitor the biologics business and the NCS business going forward.

[Jason Wittes, Loop Capital]

And just a quick follow-up, if I could. On Pulse, can we assume we're in full launch now? Or is that still sort of, are we still kind of gradually building up to a full launch for the Pulse system as it stands right now?

[Chris Barry, CEO]

I would say we're kind of on that starting line. We've got the 500 case milestone, we talked about. So we've got very good, I think insights to utilization and how to install these the right way. We've had to kind of cover the ground there as we always do in these launches, specifically for us being somewhat new to selling capital, we wanted to do this the right way. But the pipeline is growing.

First commercial cases I mentioned earlier, in Europe, that starts to signify that we're expanding outside the U.S. and accelerating the overall launch. But safe to say in the U.S., we're in full launch globally. We're working through the steps and we'll continue accelerate as we move forward.

[Jason Wittes, Loop Capital]

Great. Thanks. I will jump back in queue.

[Chris Barry, CEO]

Thanks Jason.

[Operator]

Thank you. The next question we have is from Richard Newitter from Truist Securities. Please go ahead.

[Richard Newitter, Truist Securities]

Hi. Thanks for taking the questions and congrats on a great start to the year. I was hoping to start off, Chris, on international. When you came in a couple of years ago, I remember you made some tough decisions about where to put strategic focus, regional, organizational decisions, some product decisions.

I'm just curious, relative to what initiatives and steps that you've taken since then, where do you think you are relative to seeing a payoff from those moves? And where do you think your growth trajectory is relative to where that payoff could get you?

[Chris Barry, CEO]

Yes. Thanks, Rich for the question. I came in almost four years ago now, and the nearest opportunity that I saw was international growth, really accelerating our position there. And I think the team has done a good job. And that's been a pretty durable growth engine for us over the last couple of years and through this quarter as well. And there's still room to run there. We're still early days, in my opinion, in a lot of key markets.

From there, we doubled down, and as we talked about multiple vectors of growth, we invested in cervical. We started investing in some of the posterior procedures. We doubled down in ALIF to round out our position in interior. We continue to invest in enabling tech.

So all of those things, I think, have kind of led us to this point. I would say, over the last few quarters, we're just now starting to feel those investments start to show up for us. So, I think, it's early days of what we've invested in over the last three years.

But by doing that, I think this all allows us to sort of pivot the company to -- from sort of that one dimensional to a procedural-focused or broad innovator in the space, leading across a multitude of different procedures, which leads us right into integrating those procedures with Pulse and expanding the Pulse platform, leveraging the Pulse ecosystem to really think about integrating both organic and inorganic opportunities, both pills, technologies, capabilities to really start to then say, how do we create the most comprehensive surgical procedure. How do we create the most comprehensive lateral procedure? What can we extend now with some of the new technologies are brought in?

So I think we're in a unique position to have pretty durable growth from the investments we've made over the last three years, and we have a real chance to start looking forward. We're excited to talk more about that in the coming quarters and hopefully in our Investor Day later.

But, looking forward as opposed to looking down, which I say a lot within the four walls of our company, I think we've made the right investments over the last couple of years. We've got to make the right investments going forward to really make sure that we're innovating in the market longer term.

[Matt Harbaugh, CFO]

The other thing I'd add from a financial perspective is the other thing that I've seen in the international business over the last two years, despite COVID impact, we've said for years, double-digit growth, low to mid-double-digit growth is what we're going to see in our international business. We saw that continue in the first quarter. We saw that throughout the pandemic.

Yes, we had some markets that were off. But, the performance there in total in aggregate has been relatively consistent if you actually do the math on a full year basis, which we've been very pleased to see, especially since it's nearly a quarter of our total net sales at this point.

[Richard Newitter, Truist Securities]

Thanks for that. On Simplify, I know it's early, but any metrics you can share just to give us a sense to what might be some trialing here versus what is sticky in terms of ongoing use, repeat ordering? I guess, how are you looking at that and evaluating that aspect?

[Chris Barry, CEO]

Yes. I mean there's -- I mentioned this in some of my remarks, but there was a recent study, head-to-head study between CTR or Simplify and ACDF and post-op data was significantly better for the CTR procedure. So we're excited about this technology. And I think we're just now scratching the service of where to go.

And I'm excited about the space. I don’t -- I look at most of our sales, if not all of our sales as organic and repeatable. We're taking on customers. They're extending same-store sales type of metrics we're looking at.

But our demand is high. Our training centers are in high demand for training on this device. So it's pretty organic. There's not a lot of -- there's a lot of fuzziness in the number. We feel like we're ahead of schedule on what we need to deliver, and we're going to continue to accelerate.

[Richard Newitter, Truist Securities]

Excellent. And if I could just squeeze one more in on the robot. I appreciate that these things are fluid. You want to get it right. But Chris, in the past, when I've asked you this question, you said that when you do come to market with your first-generation robotic capability on Pulse that you will likely be coming to market with something that's on a more advanced level, not just kind of pedicle screw placing robot, but it will be likely competitive with where next-generation current robotic systems will be at that point in time.

I guess, should we be thinking that the feature set that maybe is causing some delays and things here on the timing is going to be expanded and more advanced? And does that comment still hold? Thanks.

[Chris Barry, CEO]

I mean the thing that I would think about is I think about the Pulse ecosystem in its totality, right? That we think about robotics as an application within a broader ecosystem. So what I'm excited about is we talked about proceduralization in the past. We talked about our focus on instrumentation on implantables, on surrounding technologies, on fixation systems.

Now we're incorporating navigation, 2D, 3D imaging, incorporating this into a singular ecosystem and now adding robotic capability. I think those things in an integrated systemic procedural approach, I think, creates the right opportunity for us to truly advance spine surgery.

So, I don't think about robot to robot competition. I think about procedure to procedure competition. And when I say that, yes, I think we'll have some advancements in the space and robotic will be a force multiplier for us within what we're doing in the broader enabling tech space.

[Richard Newitter, Truist Securities]

Thank you.

[Chris Barry, CEO]

Okay. Next question?

[Operator]

Thank you. The last question we have is from Allen Gong from JPMorgan.

[Allen Gong, JPMorgan]

Hi, guys. I've got one quick question and another follow-up. Sorry if it's been asked before, I've been jumping around. But the first one is, I know [Technical Difficulty]

[Chris Barry, CEO]

Did we lose?

[Allen Gong, JPMorgan]

Hi. Sorry. Can you hear me?

[Chris Barry, CEO]

We lost you for a minute. Could you start from the top there?

[Allen Gong, JPMorgan]

Sorry about that. Yes, I just wanted to say, unfortunately, I have been jumping around. So sorry if I ask a question that's been asked before. But your international business is obviously a key driver for you, one that's continued to grow very well. And I know you don’t exposure to China. But when we think about growing to case volumes and some shutdown dynamics internationally, is that affecting your business at all as we had in the second quarter?

[Chris Barry, CEO]

Yes. Good question. I mean the simple answer is we're still dealing with sort of a broad impact of COVID-related or staffing related or anything associated with the last couple of years in certain markets. I mean, if you look at Q1, Australia was challenging for us. It was still somewhat on the shutdown mode as was U.S. in part of January and into February. So we've yet to have a non-impacted COVID-quarter period.

Since late 2019, we have not had one quarter that didn't have some level of impact, which is both been challenging, but also gives me more optimism than pessimism that the best is yet to come for what we can do and the best that we’ve made.

So we're clearly still dealing with coming out of the last couple of years, and we still have pocketed areas of challenge that we have to deal with. But we're more diverse, which gives us a little more insulation against some of the choppiness that we may feel in any given market.

[Allen Gong, JPMorgan]

Got it. And then, I feel like from what we've seen so far in earnings, a lot of it is top line looks a little bit better because Omicron has been less of a headwind than expected, but we've also seen incremental pressures down the P&L more mixed bits on EPS. I think it's really nice to see you guys raising both the bottom and the top of your EPS range so first quarter.

But when it comes to ongoing challenges for your environment, what are you seeing on your own business? Like has it gotten incrementally worse? Has it gotten incrementally better? And is it just the first quarter really kind of carrying the date for that EPS raise? Thank you so much.

[Chris Barry, CEO]

Yes, you bet. So I would say that freight has been a challenge for us throughout the past year. We saw it in the second quarter of last year. That continued. We also did see fuel surcharges that we're rolling in. As I mentioned earlier, from an operating income perspective, we're taking a cautious viewpoint right now because it's hard to predict where a lot of things are going to go.

I mentioned earlier, but I'll repeat it. In our cost of goods sold, our labor and overhead is about three-quarters of the spend there. And so we have some exposure to commodities. Obviously, we want to get continuity of supply for chips for Pulse.

But all-in-all, we seem to be able to navigate through that successfully with our supply chain team and hope for that to continue. But with all the macroeconomic events out there right now, I think it's wise to kind of play it down the field a little bit more. Thanks for question.

[Operator]

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would now like to turn the conference call back to Chris Barry for closing remarks.

[Chris Barry, CEO]

Thank you. And thank you all for your questions and participation today. I'll close with just -- I want to reiterate that I'm very proud of our progress to deliver on our strategic plan of really developing and executing on these multiple vectors of growth.

As I've said before, we remain committed to delivering sustained growth, unlocking value and making progress against our vision to change a patient's life every minute. We look forward to speaking with you all next quarter. Thank you, and have a great day.

[Operator]

Thank you. Ladies and gentlemen, that then concludes today’s conference. Thank you for joining us. You may now disconnect your lines.