Welcome to the Globus Medical Second Quarter 2022 Earnings Call. Please be advised that today's conference call is being recorded. I will now turn the call over to Brian Kearns, Senior Vice President of Business Development and Investor Relations. Mr. Kearns, please go ahead.

Thank you, Hope, and thank you, everyone, for being with us today. Joining today's call from Globus Medical will be Dan Scavilla, President and Chief Executive Officer; and Keith Pfeil, Senior Vice President and Chief Financial Officer. This review is being made available via webcast, accessible through the Investor Relations section of the Globus Medical website. Before we begin, let me remind you that some of the statements made during this review are or may be considered forward-looking statements. Our Form 10-K for the 2021 fiscal year and our subsequent filings with the Securities and Exchange Commission identify certain factors that could cause our actual results to differ materially from those projected in any forward-looking statements made today. Our SEC filings, including the 10-K, are available on our website. We do not undertake to update any forward-looking 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 on the schedules accompanying the press release and on the Investor Relations section of the Globus Medical website. With that, I'll now turn the call over to Dan Scavilla, our President and CEO.

Thanks, Brian, and good afternoon, everyone. It's good to connect with you again to review our solid results for the second quarter. Q2 was a record sales quarter for Globus, with revenues reaching $264 million or 5% growth, surpassing the difficult Q2 '21 comp where we had achieved 69% growth. In addition, Q2 had 14% sequential growth versus Q1 with stronger performance throughout the portfolio, setting a new monthly sales record in June, where we exceeded $100 million in monthly sales for the first time. Adjusted EBITDA was 35% and non-GAAP EPS was $0.56, including significant nonoperational headwinds for currency and tax rate that Keith will discuss further in his section. U.S. Spine had a record quarter with 2.5% growth against the challenging prior year comp of 64% growth. The primary drivers of U.S. gains were competitive rep conversions and robotic pull-through. Our recruiting pipeline is strong and should lead to a record rep recruiting year. I feel we are well positioned to deliver strong second half growth this year in our U.S. Spine business. Enabling Technology sales were $29 million, up 44% on a constant currency basis versus prior year, setting new quarterly records in both domestic and international sales. Robotic procedures and implant pull-through continued to accelerate, growing 30% versus prior year and surpassing approximately 35,000 robotic procedures performed since launch. Entering Q3, our pipeline is strong for both robots and imaging systems, but we recognized that the remainder of the year contains several macro risks, including inflation, labor shortages, supply chain disruptions and potential recession that may impact us and our customers' purchasing cycles. We'll continue to work with our customers to get the best technology in their hands as we all work through these environmental challenges. In May, we shipped our first Excelsius3D imaging systems and continued to sell units throughout the quarter. We successfully completed over 150 procedures in Q2. Surgeons have said this is a game changer. Excelsius3D is a 3-in-1 imaging platform, offering 3-image modalities in a single cart, with high maneuverability, a large field of view and seamless integration with our ExcelsiusGPS robotic navigation system. It is a key component to realizing the Globus ecosystem in the operating room, an ecosystem that is built and designed from the ground up to communicate together seamlessly. Market interest is high for the state-of-the-art technology and customer orders continue to grow. Excelsius3D is positioned to be a major growth driver for us as we continue to penetrate the market. On the international front, our spinal implant business grew 8% on a constant currency basis compared to the second quarter of prior year. We delivered double-digit growth in several markets, including Belgium, Brazil, India and Poland, where growth rates exceeded 40% for each market. International growth was partially offset by continued declines in Japan, a trend we identified last year and expect to continue through the third quarter. We remain positive on the progress and potential of our international business for long-term growth as we continue to reset the Japanese market. Our trauma business delivered its strongest quarter-to-date with 67% annual and 5% sequential growth, driven by sales force expansion, strong uptake of our ANTHEM Mini Fragment Plating System and the second quarter launch of ANTHEM Distal Femur Fracture System. We achieved double-digit growth in every product family. We're on track to launch meaningful products throughout the rest of 2022, and our recruiting pipeline is strong. Despite being faced with supply chain challenges, we've been able to offset vendor delivery delays and supply shortages without significant impact to sales. To remediate the extended vendor lead times, we've altered our ordering pattern to increase inventory levels. The electronic component market remains difficult, but has been offset so far by a nimble procurement team. In addition to these disruptions, freight surcharges continue to impact our cost of goods sold. We continue to seek to mitigate the impact of these challenges where possible. As we move into the rest of 2022, we remain focused on three core elements for long-term growth: innovative new product introductions, robot imaging placements and competitive rep recruiting. I'm pleased with the record sales in the quarter, the highest monthly sales record in June and the successful launches of the Excelsius3D imaging system and ANTHEM Distal Femur Fracture System. The second half of 2022 is all about focus on execution to deliver value to our customers and drive growth. I feel Globus Medical is well positioned to achieve our mission of becoming the preeminent musculoskeletal company in the world. I will now turn it over to Keith.

Thank you, Dan, and good afternoon, everyone. Globus completed a strong second quarter building momentum across the portfolio, especially with the initial launch and rollout of our E3D imaging system. We saw revenue growth and profitability improvements despite difficult prior year comps and macro headwinds. Revenue in the second quarter of 2022 was a record $263.6 million, growing 5% as reported versus Q2 of 2021 and 6.5% on a constant currency basis. Sales on a day-adjusted basis also grew by 5% as we had the same number of selling days in the U.S. and international. I call specific attention to our record sales in Q2 and the associated 5% growth when compared to the prior year quarter, given the tough comp in Q2 of 2021, where we grew 68.6% when compared to Q2 of 2020 and 29% when compared to Q2 of 2019. Second quarter net income was $54.6 million, growing 31.4% over the second quarter of the prior year. Non-GAAP net income was $57.3 million, delivering $0.56 of fully diluted non-GAAP earnings per share, which was flat to the prior year. However, I do note $0.09 of nonoperating headwinds in this figure, driven by a higher tax rate and unfavorable foreign currency impacts. Adjusting for these nonoperating items, our non-GAAP EPS would have grown 16% versus the prior year quarter. Adjusted EBITDA for the second quarter was 34.9%, and we generated $13.1 million of free cash flow. Drilling further into sales, our second quarter U.S. revenue was $225.3 million, growing 4.7% as reported when compared against the second quarter of the prior year. This growth is reflective of continued share taking within U.S. Spine, higher sales of our Enabling Technologies' robotic systems, new sales related to the rollout of our E3D imaging system and continued growth within our trauma business. International revenue for the second quarter was $38.4 million, growing 6.9% as reported and 17.3% on a constant currency basis when compared to the second quarter of the prior year and is reflective of the continued global expansion of our robotics portfolio. International implant sales were essentially flat to the prior year with growth noted in many countries, as Dan commented earlier. However, this growth was offset by lower Japan revenue. Musculoskeletal revenue grew 1.7% as reported and 3.1% on a constant currency basis in the second quarter of 2022 as compared to the prior year quarter. The as reported growth was driven by spine and trauma implant portfolios, partially offset by constant currency impacts and lower sales in Japan, as mentioned earlier. We have and continued to drive market share growth across our portfolio of products and remain confident in our ability to deliver a strong second half. Second quarter Enabling Technologies revenue grew by 41.7% as reported and 44.4% on a constant currency basis as compared to the prior year quarter. Consistent with our Q1 call comments, our robotics pipeline saw sequential improvement between the first and second quarters, resulting in higher sales of robotic units when compared to the prior year quarter. In addition, Enabling Technologies revenue was also favorably impacted by the initial shipment and sales of our E3D imaging system. The initial shipments have been received well by our customers. And as Dan noted, market interest remains extremely high in this new and exciting product. Moving further into the P&L, our second quarter gross profit was 74%, compared to 74.6% in the second quarter of the prior year. The decline in gross profit was driven by continued freight inflation and higher product costs. These headwinds were partially offset by lower inventory reserves, driven by one-time write-offs in the prior year quarter that did not repeat in the current year. Research and development expenses for the quarter were $17.4 million or 6.6% of sales, compared to $15.5 million or 6.2% of sales in the prior year quarter. The increase in spend is in line with expectations and consistent with earlier comments made regarding our continued investment in R&D across our portfolio as we drive planned spending increases on future growth drivers. SG&A expenses for the second quarter were $106.7 million or 40.5% of sales, compared to $107.3 million or 42.7% of sales in the second quarter of the prior year. The decreased spending is reflective of lower compensation and benefit costs, partially offset by higher travel and meeting expenses. In addition, SG&A is lower as a percentage of revenue due to the leverage impact of higher sales. The effective income tax rate for the quarter was 22.6%, versus 15.1% in the second quarter of 2022. The increased tax rate in Q2 is reflective of tax benefits realized in the prior year quarter related to stock option exercises, which did not repeat in the current year quarter. During the quarter, the company spent $144.5 million to repurchase its Class A common shares in connection with its previously authorized and announced share repurchase program. We currently have $150.8 million remaining on the share repurchase authorization. The company will fund its share repurchases with operating cash flows and excess cash. We ended the quarter with $881.7 million of cash, cash equivalents and marketable securities. Net cash provided by operating activities was $36.9 million and free cash flow was $13.1 million. The lower free cash flow is reflective of continued investments in working capital, namely inventory as well as increased CapEx investment predominantly in machinery and equipment. The company remains debt-free. We are reaffirming our previously provided full year 2022 guidance of $1.025 billion in net sales and $2.10 in fully diluted non-GAAP EPS, which includes estimated currency impacts. Looking back on the second quarter, I am pleased with our performance and note the resilience of our employees and partners as we manage through inflationary pressures, supply chain challenges and currency fluctuations. As we enter the back half of 2022, we are focused on driving continued share taking across our implant businesses, while we continue to expand on the sales of our technology to the marketplace, driving operational performance, managing execution and maintaining cost discipline are key focus items for our team as we continue throughout 2022, which will drive long-term shareholder value. We remain focused on improving musculoskeletal care through the delivery of products that serve and improve the lives of patients, and I remain thankful to our Globus team in their pursuit of excellence. We will now open the call for questions.

Our first question comes from Shagun Singh with RBC Capital Markets.

I was wondering if you could provide any color on procedure volumes into Q3. Have you seen any impact from COVID and/or staffing shortages? And then on Enabling Tech, how much was spinal robotics versus imaging in Q2? And then just my last question is on guidance. Can you just help us understand the magnitude of some of the macro pressures you're seeing? You called out FX as inflation supply, how much are you absorbing and what's built into your guidance?

Thanks, it's Dan. I'll start, and then I'll pass it off to Keith. So we won't comment, obviously, about Q3, where we're in strides. But I would tell you, honestly, to date, we've not seen anything impactful yet that we would comment on related to your question of procedural volumes being significantly off. Our eyes are on that. You never know when that can change, but that's kind of where we are right now, lightly. For Enabling Tech, the intent is not to really break out robot from imaging. But you would imagine that the vast majority of it being robotic at this point. We'll see how that moves over time as both of those volumes adjust. But that's really where we are. As far as guidance, I'll hand it to Keith.

Yes. One more point I want to add regarding Enabling Tech is that we observed an increase in sales of our robotic units in the second quarter compared to the previous year. This indicates that our robot business has grown. Looking at our full year guidance, we have taken into account roughly $0.09 due to currency fluctuations. However, we also need to consider the impact of our share repurchase and other planned items for the year. The effect of currency is being offset by the share repurchase, which is why we are confident in maintaining our guidance at $2.10.

Our next question comes from Vik Chopra with Wells Fargo.

Can you discuss some of the trends you're observing in the capital sector and your perspective on the capital environment as we approach the latter half of the year? Additionally, regarding the imaging system, are any chip shortages or supply chain issues affecting your capacity to fulfill orders?

Thanks, Vik. It's Dan again. I'll cover a few points. Trends and capital can be challenging to forecast, especially with ongoing uncertainty related to COVID. Last year was a very strong year for us, driven by market penetration and some pent-up demand following COVID. We weren't completely satisfied with our performance in the first quarter, but we've seen improvement in the second quarter. Looking ahead, assuming the pandemic doesn't cause major disruptions, we aim to exceed our performance from 2021. The situation has led to prolonged cycles for hospitals, as they are managing multiple priorities. However, we have managed to stay on target with our projections. There are daily challenges related to chip shortages that we navigate, but we've been actively addressing these issues for several months like everyone else. So far, we have obtained all materials necessary to manufacture the systems we have for sale, and that’s a testament to a very effective procurement team making it happen.

Our next question is from Richard Newitter with Truist.

I was hoping you could address your guidance, especially since there have been many changes since your initial outlook. Could you discuss the U.S. Spine, international spine, and Enabling Tech segments? How do you feel you are doing compared to your original expectations? Are you performing a bit better, a bit worse, or is everything unfolding as you anticipated?

Thanks for the question. This is Keith. Looking ahead, we don't provide a lot of specific details, but reflecting on last quarter, we experienced a softer first quarter in our Enabling Tech business. However, we have noted the improvement in our robotics pipeline as we moved into the second quarter. We feel positively about our robot business and remain cautiously optimistic for the rest of the year. While last year may have benefited from some residual COVID impact, leading to increased spending in hospitals, we're aware that hospitals might be more cautious this year. Nevertheless, we believe our robotic business has the potential for year-over-year growth. As for the Enabling Tech business, it is expected to perform around our initial forecasts. Focusing on the musculoskeletal segment, our U.S. Spine business continues to be a crucial growth driver. Although initial growth seems lower, we acknowledge the strong growth from last year. Looking towards the latter half of the year, we are optimistic and anticipate returning to high single-digit growth across our Spine portfolio.

Got it. I suppose the missing link is international because based on my calculations, if you're targeting a constant currency, international low double-digit range, that suggests the second half needs to see U.S. Spine growth in the double digits, around 10%. So, is it possible that international is performing stronger than expected and the second half will ramp up to high single digits instead of low double digits? Or are you comfortable with your initial assessment of around 10% for the second half and international?

I'd caution on splitting it out. As I think about the rest of the year, we remain extremely positive about where we are. We're landing 6 months in where we thought we would, and we're planning on finishing strong the rest of the way.

Okay. Last one, what about the EBITDA margin given the currency? Is the EBITDA margin still in the mid-30% range?

Yes, we're still turning to a mid-30s EBITDA margin.

Our next question will come from David Saxon with Needham & Co.

Yes. Sorry, I was just on mute. I'll start with Enabling Tech. Just now that you have multiple systems in the bag there, I was just curious, are you being success in kind of selling the kind of combined ecosystem? Or are you still kind of selling each system individually? And then in the back half of the first quarter, you obviously saw the order book weakened strengthened into the second quarter here. Can you just comment on how the order book is looking as we go into the third quarter?

Thanks, David. This is Dan. So it's a great question. And yes, we certainly have seen a combo opportunity with this even as we just began launching this in the second quarter. So we are seeing that, and it is the intent because you do hear us use the phrase, ecosystem, and that still needs to be built out further. But these are intended to be used seamlessly together. And the value there is using them together, that smooth activity. And so the intent will be to continue to do that and to push that and make inroads that way. Do you want to handle the second half?

Could you repeat the second part of your question?

Yes, just on the order book, how you're feeling about it?

Yes, regarding the order book. If you look at the year, historically, the first and third quarters tend to be slower. We are actively quoting and our order book is growing. However, I want to emphasize that the third quarter is usually slower than the second and fourth quarters. Nevertheless, the activity around robotics Enabling Tech remains strong.

Our next question is from Ryan Zimmerman with BTIG.

I want to start maybe a little higher level for you, Dan, as stepping into the CEO role. I appreciate Keith's comments around adjusted EBITDA margins being in the mid-30s and certainly expect you guys to continue to be there, but I guess I'm curious about your view around reinvestment for growth and whether you want to push a little bit on that lever, maybe at the expense of adjusted EBIT margin longer term as we look out in '23 and beyond. And as you make these inroads into join recon and bigger positions in trauma, etc., it would be helpful to get your perspective on that.

Thanks, Ryan. I appreciate the question. Again, we do enjoy being profitable and the mid-30s is one of those items that we tend to move by. We're not hampered by it. And as we have today and as you've seen through other quarters, we spend and invest for the long term. And if that means short-term downs, we're okay with that for the long-term growth. I think there would always be opportunities to invest on a longer ramp and go through that over time. But ultimately, everything that we work on to date, we feel that we can leverage up and grow to where we can remain within that mid-30s EBITDA. So at this stage, I don't see a reason to signal us coming off of that. And in particular, I don't feel like we're hindering or hampering any levels of investments that would set us off in a negative fashion for growth.

Just one thing I would add to that, when you look at our numbers, at the quarter, as an example, our R&D spending is up about 12% year-over-year. So we are investing. I think, as Dan said, you can't forget that we've been continually investing in our business. We grew the robotics portfolio that took a lot of R&D. And as those businesses continue to come online, we're looking to go reinvest in the next big thing.

I appreciate that, Keith. That's good color. And then, just as a follow-up, I mean you guys did repurchase some shares this quarter. You still have, I think you said $150 million, Keith, remaining. But you're sitting on a lot of cash, and you have signaled at least last year, I think, around your intent to be more aggressive, particularly on the M&A front. And so I'm curious kind of does the share repurchase signal that there's not items out there or assets out there that are attractive to you at this time? Because, again, you've been sitting on this cash for a while, and we really haven't seen you guys get incrementally more aggressive on the M&A front as we would have probably expected.

Yes, it's a great question. I mean we took the opportunity to buy back some shares during the quarter, but that doesn't really signal a change in our long-term strategy. We're going to continue to grow organically. We're going to continue to make complementary acquisitions. One thing I would call out is that coming into COVID, one would have thought that valuations would have become more favorable. They did, and they really went the other way. And we continue to look around and stay on the sidelines. But now where we're sitting with interest rates going up, the cost of borrowing is going to increase for some of these companies. IPO market has slowed down. I think it's going to create more opportunities for us. And for a company like us sitting with that amount of cash, I think, in any sort of a recessionary environment, it's going to create a better opportunity for us.

Yes. Ryan, I'll just add to that, too, right? I think you know us, we don't feel the pressure to act because of that cash. With the right move for the long-term strategic growth, we'll use it. And to date, we've not seen anything that we're willing to use it for, but it will happen over time. But just, again, we're not going to make a move for the sake of it. It's got to be the right move.

Our next question comes from Kyle Rose with Canaccord.

Great. So I just wanted to talk a little bit more about guidance as it pertains to the supply chain, where you stand now. It sounds like one of the biggest, I guess, headwinds would be electrical components. Obviously, you've got new products launching with the E3D. Maybe just help us understand what are you assuming in your top line guidance relative to the supply chain and constraints if that situation worsens and/or gets better through the end of the year?

Thank you for the question. From a revenue standpoint, we are very confident in our ability to meet our goals for the year. We recognize the supply chain challenges we face. As Dan mentioned earlier, our team has done an excellent job navigating these issues. Based on our current assessment and guidance, we feel assured that we can achieve our targets despite the supply chain difficulties.

Okay. And then one of the things that some of the larger ortho peers commented on earnings when they were talking about your capital sales was an increasing trend, at least in the total joint space moving towards earn-out rentals, placements of that sort. Just any commentary you're seeing there? And then I'll ask my last question as well, which is building a little bit on Ryan's question regarding M&A. I mean, historically, you've had a build versus buy bias, but you have made acquisitions when we think about Excelsius and TTOT from a biologic's perspective. Is it fair to think that any external inorganic purchases would come more on tangential type of assets or products rather than existing markets that you're in now?

Let me answer the second part of your question first. From a mergers and acquisitions perspective, we are actively exploring various opportunities. Our goal is to establish ourselves as a musculoskeletal company. We originally focused on the spine and are recognized as a spine company, but we are diversifying our portfolio. A couple of years ago, we made an acquisition in the joints space, and there are also complementary technologies within Enabling Tech that could enhance our Excelsius project. Therefore, our strategy is to acquire assets that align well with our business objectives. Could you provide more details on the first part of your question?

Kyle, are you still there? It looks like we might have lost him. I'm going to go ahead and move on to our next question. Our next question comes from Jason Wittes with Loop Capital.

Just a quick follow-up. I think you made it clear that you're still in the market and you're going to be disciplined in terms of what you potentially buy out there. But if I look at the share repurchase, I think it's the first one I've seen from you, at least in recent memory, I assume you were just being somewhat opportunistic, given where the share price is? And additionally, as a way to offset FX, is that the right way to think about it?

We have done this before, as you can see from last year. This is not our first time making such moves. We believe the stock is undervalued compared to our long-term perspective, and we saw it as a good opportunity to clear some shares and position ourselves for the future, as we anticipate it will be worth more over time.

Okay. And then on the Trauma business, I don't know if you can sort of size it where it is right now for us. And additionally, in terms of your product portfolio, I know you've talked about filling it out. Do you think you're kind of at critical mass at this point with Trauma?

Almost, right on the cusp of it, how's that? Really pleased with how we flipped out in the past year or 2 and have certainly put out some meaningful products will enter us into larger markets. Honestly, the mini frag and the distal femur are significant steps for us. The launches that we anticipate at the latter part of this year, second half of this year, I think will really get us to critical mass. And while there's still more families of products to develop, I would tell you, exiting 2022, I believe we have enough product family offerings to compete directly.

And then last question. I appreciate you putting a stake in the ground in terms of when you'd be launching the larger joint robotics piece. Can we assume that there's going to also be large joint implants accompanying that launch? Or how should we be thinking about how that's positioned?

No, that's exactly right, Jason. We need to build the basic bag in joints like we had done with Trauma, and we are in progress with those. Our anticipation is that those implants would be approved in time for the robot, close to it in timing, too, not very much in advance. But at that point, when the robot comes out, we will offer our implants to be used with that robot.

Our next question comes from Matt Misek with Barclays.

So I have one follow up on your Enabling Technology and robots and imaging as you go into the back half. I think the comment you made about Q1, it seems like some of that pipeline came through here in the second quarter. I would love to just make sure we are all understanding how to think about the sequence in Q3 and whether there was any Q1 pulled into Q2 or any thinking like that, that should inform our back half estimates in terms of cadence? And then I have one follow-up.

Matt, thanks. So I'll tell you, when we talked about Q1, we had felt like we had come into Q1 with a weaker pipeline as we had exited Q4. If you remember, that's really what we're feeling. The team had rebuilt that and had gotten good traction, as you can see for Q2. What I commented on is I feel like we're exiting Q2 with a stronger pipeline. And so always hard to predict and nor would we actually break out the quarters. But I would say as we enter Q3, the pipeline is stronger, certainly stronger than it was as we kind of were in the Q1. And our eye is on that. The demand is high, and I think that's very helpful with us. So can't quite say when it would occur. We don't know. But I would say as we exit the second quarter into the third, we have more potential than we had done when we delivered in Q1.

Okay. But then tempered by your comment earlier on seasonality, Q1 and Q3 is as being the weakest, that seasonality is still in place, right? Your pipeline enough to grow below past that? Or should we expect to see that same kind of, not a pause, but sort of flat sequential or something like that off maybe a little sequential and then up into Q4 is just the way these deals seem to flow?

No, your assumption is right because that isn't necessarily the impact of a pipeline, that's human nature of vacations and suddenly at the end of the year, they need to use capital. So I don't think there's anything that would shift type of seasonality. And I would plan for that, if I were you.

Great. And then just one question on color around the growth that you saw in Spine, I mean, which not everybody saw sort of a squeaky-clean growth into Q2. I think there was a fair amount of strength in volumes across your peers in musculoskeletal implants, but you seem to do maybe better than average, especially given your comp. And I just love to get any color you can give on sort of mix of procedures, geographic, regional cadences or differences across the U.S. or anything like that, that you noticed in Q2 versus previous quarters or during the recovery perhaps?

Yes, I would tell you that there is nothing significantly skewing it geographically or even that it was cervical versus lumbar or anything like that with it. It's really driven by the two main factors. We go out and we recruit reps throughout the year. And so you're seeing the fruits that you had done in 2021 coming online and acting and giving activity in 2022. That's one of the new lifts that are out there. As I mentioned in my script as well, the rollout placements and then that, as you know, greater than average pull-through related to robot is really part of that thing to come over. I can't express enough how pleased I am that we actually exceeded Q2 of last year into this year. It was such a hurdle and such a peak for us. I really think it's a testament of the team in the field to have gotten that done and achieved it.

Our next question comes from Steve Lichtman with OpCo.

It's Amir filling in for Steve. I have a question regarding the orthopedic robots market. Can you explain the transition in installations from sales to placements? Is that something you're noticing in the field? Additionally, what trends are you observing related to capital expenditures at hospitals?

Thanks, Amir. It's Dan. I would tell you that to date, we continue to sell, and we've always had different mechanisms for the customer in which to purchase. We haven't shifted off of that. And we haven't seen the pressure to shift off of that to date.

Okay. That makes sense. And just as a quick follow-up also on gross margins. Based on what you guys are seeing today in terms of the cost of materials, and I know you guys also called out chip, do you guys see an opportunity for gross margin expansion in 2023? And also as a quick follow-up to that, are you seeing any opportunities to take pricing action to help offset the headwinds?

It's a great question. This is Keith. As we look at gross margins, we've always said we're a mid-70s gross margin company, and we remain there. We are seeing some inflation this year with trade and some product costs. But as we look, we're a mid-70s business. I don't really want to get too far into 2023. As it relates to price, we're locked into a lot of contracts with a lot of our customers. If there are places for us to take advantage of the price, we will. But at the end of the day, we drive price through new product introductions. That helps offset the decline you see in older products.

Our next question comes from Drew Ranieri with Morgan Stanley.

Just on E3D for a moment. I know it's very early days, but could you talk about where you're selling these to? Is it existing customers of Globus? Are you seeing any competitive wins? And just maybe talk a little bit more about what that incremental pull-through might look like for an account with E3D? And sorry to piggyback off just the prior question in terms of pricing, but as you're rolling out E3D, I mean, is this another opportunity for you to take advantage of pricing looking ahead?

I'll take that, Drew. So a couple of things. Certainly, placing the initial units into Globus users is a benefit for us and for them and a chance to work together, and that's kind of where the first wave went. Certainly, getting into competitive areas as well, and that will accelerate over time going through both. So there was not a concerted strategy of just go to these spots. But again, the first few are in the Globus people's hands. And then I think from that, we began to branch out that way. The pull-through is an interesting question because I think the technology itself will be just to benefit to the hospitals and customers in many procedures, not just spine. And again, it is part of the ecosystem that we've designed and been talking about. So when you do combine it with our robots and soon-to-be our hub and other technologies, it's just going to be that seamless flow of data. It's going to hopefully be footprint beneficial to the customers and a way for them to save time and have better quality data and all work together. So I do believe that as we put these pieces out, it will generate the sale of pull-through of other capital equipment and obviously then lining up and using implants.

Got it. Regarding Japan, I believe it resets in the third quarter anniversaries. Could you discuss your expectations for the country moving forward? It would be helpful to set our expectations there.

Thanks. I'm very optimistic about Japan. I believe that the slowdown we’ve been experiencing may stabilize in the fourth quarter, followed by some reasonable growth in 2023. Given the strength of the economy, the market potential, and our planned offerings, I see it becoming a significant market for us over the next five years. While I can't predict specific annual outcomes, one of our strategic goals is to make Japan one of our top markets in that timeframe.

Our next question comes from Dave Turkaly with JMP Securities.

Great. I just had two really quick ones on Enabling, if I could. You mentioned the combo potential and as we think about our model, I would imagine it's got to be over half, but I don't know if there's any number? I know it's early that you would throw out there, but could the combo be 80% moving ahead in terms of use on E3D and the robot? And the follow-up would just be, as you compare those two together as a platform and you look at peers, can you maybe just refresh our memory on sort of where you think that sits, and maybe even versus some of the bigger folks like Medtronic?

Dave, it's too early for me to speculate on the combination and how to model it. I think it's best to leave that to you for now. As we gather more data and move beyond the initial quarter, we can certainly refine our approach. Currently, I don't have a solid answer to provide. It's part of the plan, but I'm unsure of the details at this stage. Regarding the benefits, I want to emphasize that both technologies have been developed by our engineers and software teams from the ground up. Our intention was for them to work together seamlessly from the beginning, rather than integrating alternative technologies. Because we started with a clean slate and designed them internally, we believe our technology is more advanced, providing better outcomes in terms of imaging capabilities and options. Additionally, integrating that data into your planning systems will offer significant advantages compared to where I perceive the competition currently stands.

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

Apologies if this has already been covered, but I would like to follow up on the sentiment regarding the second half outlook for U.S. core spine. The numbers have been a bit lower in the first half compared to prior years, and it seems you're anticipating a strong second half with a rebound and acceleration. Dan, could you provide more detail on what gives you confidence in that increase for the second half? Are there signs in the market or internal indicators that support this optimistic outlook?

Yes. Thanks, Craig. I would tell you, look at it holistically, it's been over the past couple of years, such a confusion with the pandemic. So if you look at what occurred last year, you had a strong Q1 and extreme spike of strength in Q2 and then somewhat of a leveling in the second half of the year. So even as you just look at the comps you're coming off of, we're exiting out of what was probably a 40-plus percent growth for us in the first half of 2021, and that wouldn't be repeated in the second half of 2021. So just by maintaining the sales levels you have, by just maintaining them, you would get to the growth that you're used to seeing from us. That's what really gives me the confidence of that. Then given the strength that we're going to do with our launches and our recruiting and our drives, I don't see why we wouldn't have a couple of strong levers to get into stronger deliveries in the second half of the year.

And just a follow-up, and again, sorry, I was hopping around, so you might have answered this already. But just the spine market procedure recovery, there's been some comments, it's hard to parse through what everyone is saying. Some people calling out a little bit of softness, some sluggishness, just wanted to get your thoughts from where you guys sit?

No, it's a great question. And listen, there is a level of uncertainty out there. We have record weeks. I called out that June was a record month. Then you'll come in and there's some soft weeks. So the procedures are certainly not fully stabilized, certainly not throughout the country. I think we continue to monitor it where we're going with that, but certainly a lumpy move as we get through the second half of the year and what we've experienced in the first half of the year.

Our next question comes from Kyle Rose with Canaccord.

Great. I hope my mute button works this time. I wanted to ask two follow-up questions. One was regarding the sales force conversions you mentioned or the pipeline. I'm encouraged to see continued strong hiring. Where are the new hires coming from? What types of representatives are you seeing? Is it primarily on the spine side, or is it more focused on other areas of the business such as trauma and imaging?

So I call them in kind of two different things, and they are obviously different sources. So Trauma is having a lot of competitive conversions. And again, if you want to market appropriate and looked at who the players are, that's where you see a lot of that sourcing come. I think with Spine as well, that would be the same comment. It's almost based on the market share. There are certainly quarters where it's heavier for one versus the other. But if you map it out over time, it's pretty appropriate just given the amount of reps they are for those sizes that you see that kind of prorated recruiting type effort. Well there's a navigation system that we had, had approved last year. We're still finishing up a few things before we go out. We had mentioned that in a few previous earnings calls. And it's just part again of that ecosystem that we'll bring out. So we've always talked about the robotic solutions, whether it be for spine or orthopedic, and then with that comes the imaging. And then again, Hub will be a subpart of that at the right time. We'll look to bring that to the market and make sure that we can drive that growth as well.

With no further questions, that concludes Globus Medical's Second Quarter Conference Call. Thank you for joining us, and have a good evening. You may now disconnect.