Globus Medical (GMED) David C. Paul on Q2 2016 Results - Earnings Call Transcript

| About: Globus Medical (GMED)

Globus Medical, Inc. (NYSE:GMED)

Q2 2016 Earnings Call

July 26, 2016 5:30 pm ET

Executives

Brian Kearns - Vice President of Business Development

David C. Paul - Chairman & Chief Executive Officer

Daniel T. Scavilla - Chief Financial Officer & Senior Vice President

David M. Demski - Group President-Emerging Technologies

Analysts

Craig William Bijou - Wells Fargo Securities LLC

J. P. McKim - Piper Jaffray & Co. (Broker)

Jonathan Demchick - Morgan Stanley & Co. LLC

Jason H. Wittes - Brean Capital LLC

Steven Lichtman - Oppenheimer & Co., Inc. (Broker)

Kyle Rose - Canaccord Genuity, Inc.

Robert Adam Hopkins - Bank of America Merrill Lynch

Richard S. Newitter - Leerink Partners LLC

Kaila P. Krum - William Blair & Co. LLC

David L. Turkaly - JMP Securities LLC

Matt Miksic - UBS Securities LLC

Young Li - Barclays Capital, Inc.

Operator

Good afternoon. My name is Shannon and I will be your conference operator today. At this time, I would like welcome everyone to the Globus Medical Second Quarter 2016 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

It is now my pleasure to turn today's call over to Mr. Brian Kearns. Mr. Kearns, you may begin your conference.

Brian Kearns - Vice President of Business Development

Thank you, Shannon, and good afternoon, everyone, thank you for being with us today. Joining today's call from Globus Medical will be David Paul, Chairman and CEO; Dan Scavilla, Senior Vice President and CFO; Anthony Williams, President; and Dave Demski, Group President of Emerging Technologies. This review is being made available via webcast accessible through the Investor Relations section of the Globus Medical website at www.globusmedical.com.

Before we begin, let me remind you that some of the statements made during this review are or may be considered forward-looking statements. Our Form 10-K for the 2015 fiscal year and our subsequent filings with the Securities and Exchange Commission identify certain factors that could cause our actual results to differ materially from those projected in any forward-looking statements made today.

Our SEC filings, including the 10-K, are available on our website. We do not undertake to update any forward-looking statements as a result of new information or future events or developments.

Our discussion today will also include certain financial measures that are not calculated in accordance with Generally Accepted Accounting Principles or GAAP. We believe these non-GAAP financial measures provide additional information pertinent to our business performance. These non-GAAP financial measures should not be considered replacements for and should be read together with the most directly comparable GAAP financial measures. Reconciliations to the most directly comparable GAAP measures are available in the schedules accompanying the press release and on the Investor Relations section of the Globus Medical website.

With that, I'll now turn the call over to David Paul, our Chairman and CEO.

David C. Paul - Chairman & Chief Executive Officer

Thank you, Brian, and welcome to everyone on the call. Our worldwide sales for the second quarter of 2016 were $137.5 million, an increase of 2.9% over the second quarter of 2015 or 3.1% on a constant currency basis. Non-GAAP earnings per share were $0.29 in the second quarter of 2016, an increase of 10.6% compared to the second quarter of last year. Adjusted EBITDA margin for the second quarter of 2016 was 36.5% compared to 35% in the second quarter of 2015. Overall, we had extremely strong profitability in the quarter, while top line growth was below our guidance objectives as we continue to reestablish our sales force expansion momentum.

Today, we announced the acquisition of the international business of Alphatec. Strategically, this acquisition gives us immediate access to the Japanese market, improved presence and penetration in other quick geographies, and significant scale to our international operations. We expect the impact to be marginally accretive in 2017 as we work through our transition and integration plans and expect to provide up to $0.08 per share in incremental EPS in 2018 and beyond.

As we look towards the rest of 2016 and beyond, we are confident on continuing to take market share and growing both our top line and bottom line above market rates within our core business. We're particularly proud of our margins as they continue to be best-in-class within our industry, with this marking the eighth consecutive year of mid-30%s EBITDA margin. We continue to execute against our long-term strategy for success as we drive towards $1 billion in sales.

First, driving innovation across the spectrum and spine to address unsolved clinical problems and working to improve clinical and economic outcomes. Second, driving sales force expansion in the U.S. and international markets to grow our distribution channels worldwide, to compete more effectively with our larger competitors. Third, continue to build out businesses within emerging technologies including robotics and orthopedic trauma. Fourth, to put our balance sheet to work by pursuing strategic M&A to augment our internal efforts and fuel incremental growth.

On today's call, I would like to update you on several areas. The Alphatec International acquisition, our ongoing efforts to rekindle sales expansion efforts both in the U.S. and abroad, the integration impact of the Branch acquisition, and our progress on emerging technologies.

We have spoken of our efforts to enter Japan and further strengthen and grow our international business in many of our recent calls. Today's announcement regarding the transaction will enable us to roughly double our international sales while giving us an immediate presence in Japan, the world's second-largest spine market. We expect this acquisition to add approximately $10 million in revenue for 2016 and approximately $40 million in revenue to 2017.

We are paying $80 million in cash and extending a $30 million, five-year senior secured loan to Alphatec as consideration for the acquisition. We also anticipate further investments in sets and replenishment inventory as we transition the customer base to Globus products. Not only does this give us immediate access to the Japanese market, we will also have a strong organizational infrastructure that will enable us to accelerate the introduction of Globus technology and quickly become a significant player in this important strategic market.

The acquisition will also strengthen our position in key markets such as Germany, UK, Spain, Brazil and Italy. The deal is expected to be neutral to EPS in 2016 and accretive by $0.03 to $0.05 per share in 2017, and to provide up to $0.08 per share in 2018 excluding integration costs. This acquisition demonstrates our commitment to use our balance sheet to address key strategic needs in a responsible and profitable manner. While we are committing $100 million-plus, we still have ample firepower to pursue other opportunities as they arise.

As I noted in our last call, we have not been satisfied with the pace and productivity of our sales force expansion efforts and are working diligently to significantly improve both. Over the past few years, the cadence of our sales force expansion has been typified by several strong quarters of expansion, interspersed with sporadic weaker ones that result in quarterly variations that fall short of expectations. We're working on making this process more repeatable and predictable to smooth our expansion rates over time. The U.S. market still remains significantly under-penetrated and we see tremendous upside as we hone our expansion program.

In the U.S., we're putting a lot of focus into our recruiting efforts while also taking an active management role in territory development. Specifically, we are working to improve our sales management team in the U.S. with primary focus on individual sales reps developing into successful territories. I expect us to regain our sales expansion momentum during the second half of 2016 and account for meaningful increases in our sales growth rates going into 2017.

Internationally, even with the acquisition, we will have only about 3% market share. So we have ample opportunity to grow at rates higher than the U.S. market over the near-term to long-term. The acquisition will provide meaningful scale and presence in certain markets, which will give us a stronger base from which to expand going forward.

Now, some updates on the initiatives that I've been speaking about for the past few quarters. Branch Medical, we're well on track to grow our in-house manufacturing capacity to reach 50% of all our needs by 2018. We had a gross margin benefit of $900,000 in 2015, $800,000 in the first quarter, and $1.1 million in the second quarter. And we are on track to reach $15 million in 2018.

The benefits from this acquisition go beyond the very powerful financial one I have just mentioned. Our engineers are able to interact much earlier on in the process to more efficiently develop manufacturing methods and to reach a make-buy decision earlier on in the project lifecycle. Further, trade secrets related to manufacturing expertise for our key technologies can now be preserved and will help add another layer of protection.

Emerging technologies, we continue to make steady progress on our robotics platform, and our goal remains to launch the first product in late 2016. We plan to submit to the FDA in the third quarter, as we're in the final stages of completing verification and validation activities. The excitement we've been hearing from physicians on our robotics platform and how it integrates well into spine, brain, and trauma procedures make us bullish on future applications and synergies.

Recent announcements and acquisitions by some of our competitors also validate our view of the potential for this technology to improve patient outcomes. Our platform is the only one designed with optimized workflow for the operating room surgeon and staff, and fully integrates with our implant technologies.

On the trauma side, we have further expanded our product development team and have made rapid progress in several key projects. We are still on track to launch several new systems in early 2017 and will begin building out the commercial organization by the end of this year. These emerging technology opportunities will enable us to further strengthen our business and will create a larger footprint for us within customer hospitals and institutions, while contributing to increasing sales growth rates, to reach $1 billion in sales over the next few years.

In summary, as we invest and build towards our long-term goal of creating a diversified musculoskeletal growth company, we remain highly focused on the opportunity to grow our spine business worldwide. We're excited about our prospects as we continue to execute on our growth strategy of rapid new product introductions and worldwide sales force expansion, while maintaining our focus on profitability and cash flow.

Over the next few months, we're looking forward to closing on the Alphatec International deal and integrating that into our business, and beginning the launch of our robotics and trauma platforms.

I will now turn the call over to Dan.

Daniel T. Scavilla - Chief Financial Officer & Senior Vice President

Thanks, David, and good evening, everyone. As David mentioned, Q2 sales were $137.5 million, up 2.9% as reported or 3.1% in constant currency versus Q2 2015. We're pleased with the continued financial strength of our business, where net income margin improved 80 basis points to 18.8%, adjusted EBITDA margin improved 150 basis points to 36.5%, and non-GAAP diluted EPS was $0.29 per share, up 10.6% versus Q2 2015, growing at 3.7 times the rate of sales. This is consistent with our long-term strategy of growing the bottom line faster than the top line.

U.S. sales for Q2 were $124.7 million, a 2.7% increase versus Q2 2015, balancing continued market penetration and new product launches with reestablishing our sales force recruitment and expansion momentum. International sales were $12.8 million, a 5.7% increase as reported or 8.1% in constant currency, driven by strength in key markets like Austria, Brazil, Germany and the UK.

Disruptive technology sales increased to $68.1 million, or 10%, due to continued strength in our expandable technology, CREO MIS, and biologics. Innovative fusion sales for Q2 were $69.4 million or a 3% decline, driven by U.S. sales force recruitment timing and onboarding.

Turning to the rest of the P&L, Q2 gross profit was 76.1% versus 75.6% in Q2 2015. Improvements are from the Med Device Tax suspension, continued Branch Medical benefits, and cost improvement programs and logistics. This is partially offset by inventory provisions, the continued shift in product mix driven by biologics, and single-digit price pressure. The Branch Medical acquisition benefit will continue as planned in 2016, and climb to $15 million per year once we achieve 50% in-house production.

Research and development expenses for the second quarter were $11.3 million, or 8.2% of sales, as compared to $9.1 million or 6.8% in Q2 2015. The increase includes an acquisition milestone expense in robotics, coupled with continued investments in robotics, trauma, product development and research capabilities. Investments in emerging technology impacted Q2 EPS by $0.03.

SG&A expenses for the second quarter were $52.4 million or 38.1%, as compared to $54.5 million or 40.8% in Q2 2015. The decrease in expense is driven by a one-time gain from the settlement of certain business acquisition liabilities and lower-than-planned employee-related expenses. Provision for litigation expense in Q2 was $3.1 million, resulting in a $0.02 impact on EPS.

The income tax rate for Q2 was 32.7%, a 310 basis point reduction compared to 35.8% in Q2 2015. The change in the effective tax rate is primarily due to the reorganization of our domestic legal structure to better align our business operations and the research and experimentation credit, which is now included earlier in the year due to the change in tax regulations. The full-year tax rate is projected to be approximately 34%, reflecting the ongoing benefit of the new U.S. structure.

Second quarter net income was $25.8 million, an increase of 7.3% versus Q2 2015, and growing approximately 2.5 times the rate of sales. Q2 GAAP diluted earnings per share were $0.27, and non-GAAP diluted earnings per share were $0.29 compared to $0.25 in Q2 2015. The difference in GAAP versus non-GAAP EPS in Q2 was primarily due to the provision for litigation expense. The Med Device Tax benefit added approximately $0.01 to EPS in Q2, while investments in emerging technology impacted EPS by $0.03.

Adjusted EBITDA for the second quarter was 36.5% compared to 35% in Q2 2015 driven by the Med Device Tax suspension and Branch Medical benefits partially offset by inventory provisions. We ended the quarter with $390.1 million of cash, cash equivalents and marketable securities. The recently-announced deal with Alphatec International will use approximately one-third of the cash balance.

Net cash provided by operating activities in Q2 was $23 million and free cash flow was $13 million. Q2 cash flow was typically lower than other quarters of the year driven by two planned tax payments. In Q2, we made $31.4 million of tax payments in the quarter. The company remains debt-free.

The company today issued new guidance for full year 2016 sales of approximately $575 million including $10 million from the Alphatec International acquisition. The GAAP diluted earnings per share of approximately $1.17 and guidance of non-GAAP diluted EPS, which excludes the impact of non-recurring items and the expected transaction costs associated with the Alphatec International business acquisition remains unchanged at $1.20 per share. The 2017 full-year sales projection $640 million including $40 million from the acquisition. We will provide 2017 guidance during the fourth quarter call.

We'll now open up the call for questions.

Question-and-Answer Session

Operator

Your first question comes from the line of Craig Bijou. Your line is open. Please go ahead.

Craig William Bijou - Wells Fargo Securities LLC

Hi, guys. Thanks for taking the questions. I want to start with Q2 and the performance there. And just trying to understand a little more about the sales force recruitment and onboarding issues, and then I guess I think you mentioned some of these on your Q1 call. So I guess, was there new issues in Q2? I mean was it something new that happened – I guess just little more color on what happened during the quarter?

David C. Paul - Chairman & Chief Executive Officer

Sure. Thank you, Craig. This is David. As I mentioned in the Q1 call, we had already seen some recruiting pick back up, nothing new happened in Q2. But we haven't yet been able to onboard as quickly as we expected during the Q1 call. And so as we look ahead at the next two quarters, we felt like that the onboarding process has been going slower than we expected. And that's really the main reason. Our overall recruiting though is much better than last year, but still it's not – the onboarding process is not been going as good as we'd liked.

Craig William Bijou - Wells Fargo Securities LLC

Okay. Thanks. And just if I can ask about 2017 guidance, one, I just want to make sure that I'm clear, is the $40 million that you're calling out from the Alphatec International business, is that completely incremental?

And I guess what I'm trying to do; I'm just trying to get to a organic growth. And if you back out that $40 million, you're at 4% growth in 2017, which is not really an acceleration over 2016 despite some of the comps. So I appreciate your comment on the onboarding in the back half of the year and expectations there? But is there anything else I mean I guess I would have thought that 2017 you would have seen a little bit more acceleration?

Daniel T. Scavilla - Chief Financial Officer & Senior Vice President

Hey, Craig, it's Dan, so a couple things. Yes, the $40 million we're looking at is incremental on to the organic growth. As you do your math, I'm going to ask you to also back out the $10 million that is also included in fourth quarter of this year. And you'll see that we're looking at about 6% organic growth when you make that adjustment.

Craig William Bijou - Wells Fargo Securities LLC

Okay. Great. And if I could just squeeze one more in, just on the $1.20 – on maintaining guidance EPS guidance for the year. I guess I'm a little surprised that you have that leverage ability there that despite the revenue growth slowdown that you can still drive that leverage. And I mean is there anything specific or are you cutting back any costs or anything from that perspective to hit that $1.20? Thanks.

Daniel T. Scavilla - Chief Financial Officer & Senior Vice President

You know, Craig, a little bit of both. I mean, certainly, as you know, we had a benefit of our tax rate that I talked about in Q1 and I held back on that. So that's going to be one part of it that you would see come through. We're not looking to do any cuts or change in our investment plans. We're committed to pull forward with everything we've talked about. We're continuing to build up our PD as well as our get our emerging techs out there. Certainly, the Branch Medical is a benefit that's helping out as well. So really when you look at these items, the $1.20 while not easy, we can do with what we've planned to do and still maintain our investments as we see fit.

Craig William Bijou - Wells Fargo Securities LLC

Okay. Thanks for taking the questions.

Operator

Your next question comes from the line of Matt O'Brien. Your line is open. Please go ahead.

J. P. McKim - Piper Jaffray & Co. (Broker)

Hi. Good afternoon. This is J.P. in for Matt. I just had two quick questions. One is back on the sales force hiring. Is it getting harder to recruit these reps from the competitors more than it used to be or is it more just onboarding internally? And then what gives you confidence that that will kind of normalize in the back half?

David C. Paul - Chairman & Chief Executive Officer

Thank you, J.P. This is David. As I mentioned in my prepared remarks if you go back and look a few years in our history, we've always had these quarters. And we haven't really been able to consistently hire at the same rates that we'd like to. We've mentioned in the past that we primarily hire two groups of folks. One competitive group of sales people from other companies, and the second group are developmental hires.

And while we've always had a lot of success for the competitive hiring, we've struggled with really with the development hiring and getting them onboard and successful. We have a timeline of about three years as to when we'd like to see a developmental hire get successful.

So competitive hiring hasn't become harder. In fact, this year, we've had some quite a few competitive hires. But the process I feel has not had the same amount of focus that we'd like. Ever since the first quarter, we've put a lot of management focus into this recruitment and hiring and onboarding of these reps. So we feel very comfortable about the rest of 2016 and 2017. That will get this fixed and growing again.

J. P. McKim - Piper Jaffray & Co. (Broker)

Okay. And then one quick one for Dan, and I appreciate the math you did around the 6% for 2017, and you don't want to get into too much detail. But does that $640 include anything from trauma and robot or is that still probably too small to even think about there?

Daniel T. Scavilla - Chief Financial Officer & Senior Vice President

You know there is a little bit out there right now with that, J.P. but we're not really going to go into detail with that for the main reason of we haven't yet filed or gained approval. So there's a small placeholder, and as we get further along that path, we will flush that out further towards the actual time for guidance.

J. P. McKim - Piper Jaffray & Co. (Broker)

Okay. And then just one last one, if I could. It looks like they did around $70 million in 2015 and now they are guiding $40 million next year, is that just normal disruption and conservatism?

Daniel T. Scavilla - Chief Financial Officer & Senior Vice President

Yeah. We think so. I mean, it's a conservative number to be sure. We realize that we're in markets together. We need to evaluate that and understand the best approach that way.

As you know most times you're doing an integration, there's a couple of bumps that we're trying to figure in. So, really what that is just basically the synergies as we go from today into a steady state and making sure we've got a number that we think we can lean into and achieve or possibly surpass.

J. P. McKim - Piper Jaffray & Co. (Broker)

Great.

David C. Paul - Chairman & Chief Executive Officer

J.P. I'll just add that while they did $70 million last year, in Q1 of this year, they were about $15 million.

J. P. McKim - Piper Jaffray & Co. (Broker)

Okay.

Daniel T. Scavilla - Chief Financial Officer & Senior Vice President

Thanks for the questions.

Operator

Your next question comes from the line of Jonathan Demchick. Your line is open. Please go ahead.

Jonathan Demchick - Morgan Stanley & Co. LLC

Hello. Thank you for taking the questions. So also wanted to I guess ask one question kind of on the sales force recruitment side and then another on Alphatec. But starting on the onboarding issues, is any part of this also dealing with attrition in any of the sales force or is this truly just getting people on and not as effective as they have been in the past?

And as we look into guidance, I mean, it seems like organically the balance of the year kind of hold steady with what you did this quarter. So, is any recover – is the base case that you're kind of working with that the sales force recruitment and onboarding issues just continued through the balance of the year, and if they approve, the growth rate should be higher? What's really being assumed in your current guidance?

David C. Paul - Chairman & Chief Executive Officer

Well, it's a two-part question. I'll just take the one on the sales force recruitment and then let Dan handle the guidance piece. Net expansion of sales force always includes recruitment and getting these territories successful without losing too many through the back door and attrition. And you always have some attrition in the way our sales comps are, there's attrition in a natural progression of folks who don't – who are not successful who tend to leave.

So quarter-to-quarter, we have fluctuations in attrition. We haven't had any big blip in Q2. We've had some more than we expected attrition at some parts of last year and even into Q1. But overall these things tend to even out over the whole year. So it's really us getting our focus back into recruitment and onboarding. Getting our sales management team focused in on this. We've done it successfully in the past. So we know that we're going to be able to turn this around.

So I'll turn the next piece over to Dan.

Daniel T. Scavilla - Chief Financial Officer & Senior Vice President

Hey, Jon. So back on your second part of the question is – the way that I would look at this is you do have a natural lift in Q4 tends to be a natural hockey stick in the U.S. driven by many things we've always discussed. So, the way I'm looking at this without getting into quarterly guidance for you is I think Q3 is fairly similar to what Q1, Q2 have been. And then we see a natural lift up not only through recruiting but just natural hockey stick in Q4 that we get us out through that number.

Jonathan Demchick - Morgan Stanley & Co. LLC

Thank you. Very helpful. And then just quickly one on Alphatec. For some capital deployment you guys have always mentioned that you're willing to reset the margin line a little bit for strong enough deal. When you think about how Alphatec is going to contribute, is this one of those deals that's going to impact the margin profile of the business significantly or is this do you think that you can onboard these $40 million of incremental revenue at reasonably consistent margins what you're currently working with?

Daniel T. Scavilla - Chief Financial Officer & Senior Vice President

Couple of things, Jonathan. As we go into next year, right, because that'll be really the first full year, it's going to be a transition year with the fair amount of investments transition different things that we're going to do with that $40 million. I think we're going to see a margin lower than what we normally do as a business during that period.

But again keep in mind too, and I don't know if we said this, is a good part of that acquisition is Japan-related, so the second largest economy in the world, a fairly strong and profitable place to be. And I think as we get into a steady state more in that 2018, we see some lifts of margin that will get is more in line with what were used to seeing as a company.

Jonathan Demchick - Morgan Stanley & Co. LLC

Thank you. Very helpful.

Operator

Your next question comes from the line of Jason Wittes. Your line is open. Please go ahead.

Jason H. Wittes - Brean Capital LLC

Hi. Thanks for taking the questions. Just on the Alphatec transaction. It sounds like you will be phasing out their products, but that will take time. Can you give us an indication of timing, and especially in Japan, what the timing may be to get your products online and theirs off-line?

David C. Paul - Chairman & Chief Executive Officer

Jason, thank you for the question. So, most other countries in Europe and the rest of the world, it should be fairly easy for us to transition, because we can transition over to our products. So, we're looking at a timeframe of one year to two years to finish all those transitions. But in Japan, it's still not clear what the regulatory process will be to get our products through. So we're going to try to get them out as quickly as possible. But having the infrastructure that Alphatec has in Japan is going to give us a benefit to getting our products quickly approved in Japan.

Jason H. Wittes - Brean Capital LLC

So if I think about it, this gets you the infrastructure but not necessarily a shortcut into Japan for your products?

David C. Paul - Chairman & Chief Executive Officer

It gets us the infrastructure. It shaves some time, but it's really hard to predict exactly how much time we're going to save by this.

Jason H. Wittes - Brean Capital LLC

And then secondly, in terms of dissynergies, you did give some rough numbers for next year. Can you give us kind of a – sort of a idea of what the dissynergy number you're anticipating in – is built into that number?

David C. Paul - Chairman & Chief Executive Officer

Well, as I mentioned before, the $15.6 million or so that they announced in Q1 is less than the $70 million they had annualized. And then when you look at all the geographies, there is some overlap between us and their distribution. So, we expect some natural dissynergies to occur.

Daniel T. Scavilla - Chief Financial Officer & Senior Vice President

Yeah. Jason, I would tell you again, if you straight line their announced Q1 and assume that you were somewhere between $55 million to $60 million this year, you walk in. So we would say we're anticipating somewhere between $15 million to $20 million of dissynergies. Again, we're striving to beat that, but that's our estimate right now, before we really walk in and start that activity.

Jason H. Wittes - Brean Capital LLC

Okay. And then, you did mention robot and trauma was pretty minimal in that rough estimate. It sounds to me from your commentary that you get a little more confident once approvals start rolling in, in terms putting more, I guess, meat behind them on the bone, in terms of those what the impact potentially could be in 2017. Is that the right way to think about it, or should we...?

Daniel T. Scavilla - Chief Financial Officer & Senior Vice President

Yeah, it is. And I'll be honest with you, I don't think that's anything other than just kind of my background of what we've done for 30 years with J&J is, we'll go in and start forecasting a product when it's approved, and not really put too much in there before that's done, so just to be conservative on that side.

Jason H. Wittes - Brean Capital LLC

Okay, great. I'll jump back in queue. Thank you very much.

Daniel T. Scavilla - Chief Financial Officer & Senior Vice President

Thank you.

Operator

Your next question comes from the line of Steven Lichtman. Your line is open. Please go ahead.

Steven Lichtman - Oppenheimer & Co., Inc. (Broker)

Great. Thanks. Hi, guys. So just a follow-up, David, on the onboarding process changes that you're looking to make. Can you provide a little bit more detail about, what are the types of changes that you guys are making? And maybe a little bit more specifics about what your focus is?

David C. Paul - Chairman & Chief Executive Officer

See, our focus is really at a territory level. So we've got our sales management team focused in on the territory level and how to onboard these reps that we recruit successfully so they go on to becoming straight commission reps and not fall out of the process. One of the struggles we've been having, more than on the recruiting side, has been getting these guys to straight commission and becoming successful territories. So we're really hyper-focused now on that onboarding process.

And a part of that is also recruiting, because you want to make sure you hire the right person so they will be successful. Over the last four months, five months as a management team, we've been hyper focused, including all our sales management, within the company. We've met together a couple times and focused in on getting these territories not only recruited, but also onboarded. It's hard to give you more specifics than that, because the rest of the stuff is really tactical. But that's really – I would say it's been a lack of focus, that we've now put the focus back on recruitment and onboarding.

Steven Lichtman - Oppenheimer & Co., Inc. (Broker)

Okay. Great. And then just secondly on Alphatec, just want to put a finer point on it. So the $40 million incremental for next year, is that anticipated to be a mixture of legacy Alphatec product and Globus product, or how should we be thinking about what that $40 million would represent?

Daniel T. Scavilla - Chief Financial Officer & Senior Vice President

I think you're right. I don't have an exact ratio to give you. But I would certainly go in and say it's certainly a mix and, heavier on the Alphatec right now, until we can understand the cadence at which we can make that impact.

Steven Lichtman - Oppenheimer & Co., Inc. (Broker)

And then over time, the anticipation is to phase the Alphatec product out and be distributing the Globus product only, is that right?

Daniel T. Scavilla - Chief Financial Officer & Senior Vice President

That's the intent.

Steven Lichtman - Oppenheimer & Co., Inc. (Broker)

Okay. Great. Thanks, guys.

David C. Paul - Chairman & Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Kyle Rose. Your line is open. Please go ahead.

Kyle Rose - Canaccord Genuity, Inc.

Great. Thank you very much for taking the question. So, a lot's been asked, but I wanted to go – circle back on the sales force side of it. You made a comment about the slower ramp on the direct hires that you're developing over the course of three years to get up to speed. But wondered if we could also talk about the competitive reps. It sounded like the competitive rep hires are still pretty strong.

So just wondered if you can walk us through what the cadence of that looked like in the back half of 2015? Because I believe normally, they have to sit out 12 months depending on non-competes and things of that sort. So what kind of gives us a confidence that we're going have some more reps coming on at a productive pace in the back half of the year? And then also, how we think about the cadence of the top line growth on an organic perspective in the U.S., to start 2017?

David C. Paul - Chairman & Chief Executive Officer

Well, thank you, Kyle. I think, just looking at the pipeline that we have, that's what gives us a lot of confidence about the second half of the year in hiring these competitive reps. As you know, with the non-competes and then with the level of relationships that these reps have with the surgeon, it's hard to predict how much business transitions over in their absence.

And so it's really an art form to predict how much of business will come on. But what gives us a lot of confidence in our business is the pipeline of reps that we have right now that we are recruiting, both competitive reps, and all the training and the development that we have ongoing for the reps already onboard.

On the organic growth side, I think our projection estimates about roughly about 6% growth worldwide. And I would say a little maybe the same in U.S. and international aside from Alphatec.

Daniel T. Scavilla - Chief Financial Officer & Senior Vice President

And it's Kyle, I want to check, were you asking about 2016 for the guidance move?

Kyle Rose - Canaccord Genuity, Inc.

No, just trying to understand the momentum exiting 2016 and into 2017 when we think about some of the reps and how that builds to an organic growth rate of 6%. Just, is that more weighted to the back half of the year as the focus has really come in the Q1 2016, Q2 2016 so we'll start to see that in the back half of 2017 or should we except some sort of a bounce back as we start the year given easy comps and hiring in the back half of 2016?

Daniel T. Scavilla - Chief Financial Officer & Senior Vice President

Got you. So, listen, I would lean into think that we're going to be stronger as we exit 2016, have some slightly better first half, but I would follow the natural trend where you see those accelerations occur and again look at a stronger Q4, not that it's all bank there (37:09). But I would just say at least our planning that way is based on the recruitment and the natural lift of the market that we would follow a normal growth trend as we have the past couple of years.

Kyle Rose - Canaccord Genuity, Inc.

And then just lastly on – I know you don't give longer term guidance from a 2017 perspective – but when you think about the puts and takes of the model with the launches on the emerging technologies and the investments that will continue there as you build out those commercialization teams, but then also focus on the integration from an Alphatec perspective. When you think about the adjusted EBITDA range that you historically give of 33% to 37% – 33% to 38%, I mean do you see any risk in the bottom end there when we think about 2017 and all those moving pieces in the model?

Daniel T. Scavilla - Chief Financial Officer & Senior Vice President

No. I think normally what we have been saying kind of from our November Analyst Day and going forward is 2017 really is that critical year where you're starting to launch emerging tech and have some modest revenue what you've placed into that, not only all the engineering and R&D folks, but the commercial folks as well. So you are going to have a bottom line that's strong but certainly not growing at or above the rate of sales related to just that fact alone. And I think the reason we threw out that range of 33% to 37% as we feel comfortable that we can reach into that range and do this. We don't anticipate going below that based on everything we know currently.

Kyle Rose - Canaccord Genuity, Inc.

Great. Thank you very much.

Operator

Your next question comes from the line of Bob Hopkins. Your line is open. Please go ahead.

Robert Adam Hopkins - Bank of America Merrill Lynch

Okay. Thank you. Can you hear me, okay?

David C. Paul - Chairman & Chief Executive Officer

We can hear you Bob.

Robert Adam Hopkins - Bank of America Merrill Lynch

Oh, great. Good afternoon. So thanks for taking the question. From time-to-time in your corporate history, obviously, you guys have had bumps in the sales force process and then you've recovered nicely. I guess this quarter though the 3% growth rate is lower than I've ever seen.

And I'm just curious you're characterizing this as just sort of something that happens from time-to-time, but the growth rates just I'm struggling with that a little bit because it is just much lower than we've seen in the past out of Globus. And so I'm just trying to make sure that there is kind of nothing else going on from either a sales force perspective or competitive perspective or just maybe as you guys are thinking about getting into other markets. So I'm just trying to understand the growth rate this particular quarter being so low.

David C. Paul - Chairman & Chief Executive Officer

See, I think two things are at play, right. One, we talked about having these bumps once in a while, but the other thing I think is, I wouldn't say lack of focus, but I'd just say that we are hyper-focused now on this issue, and especially with what Q1 and Q2 now, we want to make sure that we are able to get a more uniform cadence of recruitment and onboarding. And we don't see anything else structural to our business that changes how bullish we feel about our prospects. And also just looking at the pipeline that we have, Bob, gives us a lot of confidence that we're going to come out of it just like we have in the past.

Daniel T. Scavilla - Chief Financial Officer & Senior Vice President

Yeah. And Bob, this is Dan. It's not anything new or different in Q2. Again, it's also throughout the entire U.S. I mean quite a bit of our U.S. is performing well above market and doing very strongly. We did have a few of our larger areas leave late in Q4 and some in Q1 that we mentioned during the last call. And so, you would've had some revenues associated with them in Q1 that you don't necessarily have now. So same issue, it's kind of bleeding out into the bottom right now is what we see. And then what we're doing is recruiting and trying to close those and grow from there. But I think this was anticipated when we were saying in Q1 that we saw this occurring. Our rate of recruitment didn't necessary match the rate of attrition, and I think this is the result that we anticipated.

Robert Adam Hopkins - Bank of America Merrill Lynch

All right. Thank you for that. And then I just also want to ask about Alphatec because, obviously, spine mergers, between two spine companies can be tricky. And you guys are forecasting some pretty significant revenue deceleration here from that business. And so, I guess, my question is, can you talk a little bit about the structure of Alphatec? Is it 100% a distributor model outside of the United States? Can you just talk about the different distribution networks that you have outside of the United States and maybe talk to some of the challenges of integrating those? Because obviously those have been the things historically that have caused these integrations to be choppy.

David C. Paul - Chairman & Chief Executive Officer

Thank you, Bob. The biggest half – more than half of what we expect to do with the Alphatec acquisition is in Japan. And most times when you have a lot of dissynergies is when you have overlapping distribution. So seeing in Japan this will be all incremental. We don't see any disruption there or minimal disruption. Alphatec is direct in about five or six markets internationally, and all the rest is all distributor markets. There are a few markets where we have overlap and that's why we are prudently saying that it's a possibility that there could be dissynergies there. We're going to try to and work as hard as we can to maintain both sides, but it's going to be a challenge as we bring them together.

Robert Adam Hopkins - Bank of America Merrill Lynch

And then just one last one on the 3% growth this quarter and some of the comments about the breakdown in the US. So is this really limited to one or two geographies? Maybe just give us a little bit better sense as to the breakdown of growth and how concentrated the issues were versus just kind of a broader slowdown?

Daniel T. Scavilla - Chief Financial Officer & Senior Vice President

You know, it's really more, not just a few, but I would say, I'll call it a handful of areas that we saw occur probably late into last year and into Q1 of this year. And so, the majority of this, again, is performing well above market. These were some big players who left and with that transferred some business. And that's really the impact that we're working through right now.

Robert Adam Hopkins - Bank of America Merrill Lynch

And then on the lower guidance for 2016, if kind of this was expected in terms of this transition, why the guidance coming down a little bit?

Daniel T. Scavilla - Chief Financial Officer & Senior Vice President

Well, I think it's really more about the – you're talking about the 2016 base?

Robert Adam Hopkins - Bank of America Merrill Lynch

Yeah. Yeah.

David C. Paul - Chairman & Chief Executive Officer

Let's see. In Q1, when we spoke about it, we were still pretty optimistic about the onboarding of the newer reps that we've had onboard. That hasn't transpired the way we expected in Q2 and that's really why we decided to take down guidance.

Robert Adam Hopkins - Bank of America Merrill Lynch

Got it. Thank you very much for taking the questions.

David C. Paul - Chairman & Chief Executive Officer

Thank you, Bob.

Operator

Your next question comes from the line of Richard Newitter. Your line is open. Please go ahead.

Richard S. Newitter - Leerink Partners LLC

Hi. Thanks for taking the question. Most of mine have been asked. I just wanted to ask, following up to one of the margin questions related to the acquisition that you're doing with Alphatec here. You said that you expect the margin to be dilutive a little bit during the transition period in 2017, so expect a little bit below what you've been delivering. Well, you've definitely been delivering on an adjusted EBITDA margin basis nicely above that 33% to, call it, 37% range and even in this quarter 36.5%. I guess, when you say that it's going to kind of bring that down a little bit from your normal course of business, is that more like a – still like a mid-30% range, but lower or are you really thinking that this could be at the low-end of your 33% to 37% range in 2017?

Daniel T. Scavilla - Chief Financial Officer & Senior Vice President

So, Rich, all-in, right, when you talk about the core of the emerging tech and the integration of Titan coming in, we would kind of think that we're still towards that lower end in the 33% to 34% range all included with that is the way we're looking at it now.

Richard S. Newitter - Leerink Partners LLC

Okay. And then just as we look at the kind of the growth cadence, just following up to Bob's questions, you've seen a few quarters' deceleration now granted on tougher comps. It's still one of the lowest levels since we'd been following you as a public company. And now you're guiding kind of to organic growth in 2017 of 6%. So I guess my question is you laid out your plan at your Analyst Day last year, you talked about, I think, a 12% CAGR. It seems like the curve is getting much, much deeper towards the out-years, if you're going to kind of come in at or around a more of a mid-single digit rate in 2017. Should we be thinking about it's more kind of a plateau – not plateau but a little bit flatter in 2017, maybe even 2018 and in a much, much bigger spike in kind of exiting 2018 into 2020? Is that the way to think about it now?

Daniel T. Scavilla - Chief Financial Officer & Senior Vice President

I appreciate the question. I would tell you a couple of things. We're not backing away yet from our approach to become that $1 billion company. We think we're there. The acquisition, while not built into that long-range plan. As we've always said, it's one of those levers we could choose to use. So one of the first things to think about is when we have this acquisition in, we'll now have 15% of our sales internationally, and that was one of the key goals in that plan and this is one of those key realizations to get us there. So that's there as well.

Emerging tech, again, we always knew it would be lighter in 2017, and being conservative preapproval, but then expecting a fairly sizable contribution 2018 through 2020, which would get you up there. We do see the U.S. returning to health as we address these issues throughout this year and coming back up. So, yeah, I guess what I'm thinking is, you would come out with 2017 at that 6% guidance seeing incremental ramp-up in 2018 and 2019, I don't think we're just going to deliver it in 2020. But I think we've got solid 2018, 2019 numbers as we come out of what we're doing in 2017 with this.

Richard S. Newitter - Leerink Partners LLC

Okay. Thanks.

Operator

Your next question comes from the line of Kaila Krum. Your line is open. Please go ahead.

Kaila P. Krum - William Blair & Co. LLC

Hi, guys. Thank you for taking my questions. So, first, big picture question just on the competitive dynamic. I'm curious kind of what you're seeing as it relates to trends around hospitals consolidating vendors. I mean with now Zimmer-Biomet moving up a spot as far as market share with LDR. I mean, can you just give us a little bit more comfort that nothing has changed around your ability to compete for a share of those contracts and that those revenues can return once the sales force stabilizes.

David C. Paul - Chairman & Chief Executive Officer

Absolutely, Kaila. Thank you for your question. Yes. We don't see any evidence of our ability to compete in hospitals in any way decreased or compromised. So, we feel very comfortable. We win our fair share of contracts. While we always have capitated contracts that sometimes last year we have walked away from, not because of not being able to compete, but because we've just not been price takers at a certain level. So, we haven't seen any evidence that any of these consolidations have affected our ability to compete in hospitals.

Kaila P. Krum - William Blair & Co. LLC

Okay. Great. And then, just to follow up on robotics. I know you mentioned you guys would like to have your robot on display at NASS year. So is that still the case? And then you said that you were submitting for FDA approval in Q3, but still anticipating a launch at year-end. I mean, can you just give us confidence around that timeframe, and that you're positioned competitively there?

David M. Demski - Group President-Emerging Technologies

Hey, Kaila. This is Dave Demski. Yes, we are anticipating filing with the FDA in Q3. The development of the robot is complete. We are in the final stages of testing before we submit. Assuming those test goes well, we will submit filing this quarter. And then we will – we don't anticipate having U.S. approval for NASS, but we will be able to display it with the CE Mark and appropriately label. So at this point, we're really – very confident that we'll get it through the FDA by the end of this year.

Kaila P. Krum - William Blair & Co. LLC

Okay. Great. Thank you.

Operator

Your next question comes from the line of Dave Turkaly. Your line is open. Please go ahead.

David L. Turkaly - JMP Securities LLC

Thanks. I'm sorry, I've been bouncing around a little bit here. But I just wanted to clarify something. I thought I heard that the quarter, that there are a handful of areas in the U.S., late last year and early this year, where some sizable reps had left the company. Is that a fair, I guess, a recap of the biggest driver of the performance in the quarter?

Daniel T. Scavilla - Chief Financial Officer & Senior Vice President

Dave, we wouldn't disclose kind of where we're sized or anything like that. But, again, what I would tell you is, the majority of our – these are really far out exceeding market growth, and these items that we talked about earlier in the first quarter are just kind of coming into full fruition right now. And that's what we're kind of seeing the impact with that. Again, I would say it's more of a handful of areas and not systemic throughout all of the U.S. market.

David L. Turkaly - JMP Securities LLC

I guess one quick follow-up. Would it be fair to say then, looking forward, that you'd expect this to be sort of the trough in 2Q and to improve, I guess sequentially, this year and into next year, domestically?

Daniel T. Scavilla - Chief Financial Officer & Senior Vice President

I would think so. I'm not sure that we see a large rebound fully in Q3, so much as more of a return in Q4, given some of the activities that are out there. But yeah, I wouldn't expect it to be far off from where we currently are.

David L. Turkaly - JMP Securities LLC

Great. Thanks a lot.

Operator

Your next question comes from the line of Matt Miksic. Your line is open. Please go ahead.

Matt Miksic - UBS Securities LLC

Hey, guys, can you hear me okay?

David C. Paul - Chairman & Chief Executive Officer

Yes.

Daniel T. Scavilla - Chief Financial Officer & Senior Vice President

We can hear you, Matt.

Matt Miksic - UBS Securities LLC

So, most of the low hanging fruit has been picked, I think, in terms of the questions here. But I wanted to maybe just try to understand something that you've answered a number of times around this hiring process. So, first, you haven't given the size, and if your core business has grown above market and yet you're preempting (51:51) $137 million, $138 million or $125 million in the U.S. then that tells me that the delta is about somewhere between $5 million and $10 million a quarter, maybe on the high end of that range. Is that a reasonable way to think about the type of business that is shifted out (52:12) of your field force here in the last couple of quarters?

Daniel T. Scavilla - Chief Financial Officer & Senior Vice President

Yeah. I think there is probably a little bit on the higher end. But yeah, I think you've got the gist of this with where it's going, as we've got a couple of losses, probably more in about that $5 million range.

Matt Miksic - UBS Securities LLC

Okay. And then, when we spoke at our conference and in the last call, I know that the mantra was, we're focused on this now, we weren't focused in it before, or had been caught off guard maybe by more large folks leaving than we expected, which I think we all get. But the idea that we are really focused on it now suggests that maybe you hadn't been focused on it last quarter, and I think you were – and I know it's difficult for a lot of folks to understand how this works. And there is a lot of questions around, are you losing reps to larger players, are you losing prospective reps to other players?

And maybe if you could give us a sense of what happened? I mean, did you have folks who you were tracking, who just – you just couldn't get them over the hump for the rate that you wanted to bring them in or – and you sort of bit the bullet, or has it – have you lost other folks in the interim? Maybe some sense of what the flow of the funnel, if you will, of this processes look like for you, that left you kind of coming up shorter than you would like to be here at the end of the second quarter.

David C. Paul - Chairman & Chief Executive Officer

Thank you, Matt. I wish it were an easy A, B, C to answer your question. But there are a lot of moving parts in this with competitive reps, developmental reps, non-competes, the level of business that they can bring over. So it's hard to quantify everything. But what I said in Q1 was, our focus on it had started back then, at the end of last year actually. And Q2 already has, when we look at the first half of this year, our recruitment and onboarding has been better than it has been ending the year last year. So, yeah, we're focused on it. We remain focused on it. The only way to show that we are focused on it is having the numbers change, and we are looking forward to doing that in the second half of this year.

Matt Miksic - UBS Securities LLC

Okay. So it'll be a ramp up in the second half because we're starting – we're really talking about folks who would be coming in during the third quarter and contributing in – perhaps in the third quarter and fourth quarter, depending on non-competes et cetera?

David C. Paul - Chairman & Chief Executive Officer

Yes. But we also have some folks onboard in the end of first half already that we're hoping to get them to start contributing.

Matt Miksic - UBS Securities LLC

Okay. And these are non-compete issues that are holding that up or these are folks that are just kind of getting up to speed?

David C. Paul - Chairman & Chief Executive Officer

Both.

Matt Miksic - UBS Securities LLC

Okay. All right. Well, I do understand it's not an easy thing and certainly not an easy thing to do profitably. So, I think we get that.

So, the last thing I'd like to ask is the pipeline of product, I know you never talk about things before they launch. So, I wouldn't expect it to, but I did see one product that kind of struck me as particularly interesting coming out of IMS was this belated (55:46) COALITION standalone cage. And I'm just wondering if that or if anything else that you like to highlight as other territories are seeing success with that are helping to drive this above-market growth outside of the regions where you're backfilling your salespeople?

David C. Paul - Chairman & Chief Executive Officer

As I mentioned in the last quarter we've had a strong first half of product introductions especially in the first quarter. We've launched COALITION MIS, which is the anchor technology where you can – a surgeon could use screws or anchors, and that has had a lot of success early on in the rollout. We have also launched a product called MAGNIFY-S; it's a standalone expandable anterior lumber interbody fusion device. We're seeing significant traction with that. We also have a full slate of products for Q3 and Q4. I think this is going to be one of our best years of product introductions and sheer quantity. So, this will also add to our sales story next year.

Matt Miksic - UBS Securities LLC

Okay. Thank you, David.

David C. Paul - Chairman & Chief Executive Officer

Thank you, Matt.

Operator

Your next question comes from the line of Matt Taylor. Your line is open. Please go ahead.

Young Li - Barclays Capital, Inc.

Hi. This is actually Young Li for Matt. Thanks for taking the questions. I guess just a question, so, on your balance sheet. It remains very strong even with – even after Alphatec. You have a lot of things in the air with recruitment, Alphatec deal robotics and trauma taking up most of your attention. But just wondering will you now stand on the sidelines a little bit on the M&A front?

Daniel T. Scavilla - Chief Financial Officer & Senior Vice President

No. We won't. We've got a great balance sheet. We're going to use that where it make sense. We're going to balance the timings and size of acquisitions that we look at with our capability of successfully bringing Alphatec in as well as putting trauma and robotics out. So we won't do anything that will take us off that track at this point. But we'll still look for the right opportunities and go forward and use the balance sheet as best we can for strategic growth.

Young Li - Barclays Capital, Inc.

All right, great. And we've been getting some pretty positive feedback about 3D printer products. Is this an area of interest for you as well? If so, maybe can talk about the timing or maybe the type of products?

David C. Paul - Chairman & Chief Executive Officer

It is an area of interest for us. We've investigated it. We have launched a whole series of titanium plasma spray coated interbody cages. Some of the animal work we have done has shown very positive results. So we think this is eight great technology to have within the interbody fusion space. We've also investigated and continue to investigate 3D printer technology. It's a longer term project that we're not ready to discuss yet, Young Li.

Young Li - Barclays Capital, Inc.

Great. Thank you.

David C. Paul - Chairman & Chief Executive Officer

Thank you.

Operator

As there are no further questions at this time, I would return our call to the presenters.

Brian Kearns - Vice President of Business Development

Thanks for much for joining us. Feel free to call if you have any questions, we'll be around all day tomorrow.

Operator

This concludes today's conference call. You may now disconnect.

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