Ed Joyce – IR Director Dave Demski – President and COO Richard Baron – SVP of Finance and CFO David Paul – Chairman and CEO.

William Plovanik – Canaccord Genuity Bob Hopkins – Bank of America Matthew O'Brien – William Blair David Roman – Goldman Sachs Richard Newitter – Leerink Partners Matt Miksic – Piper Jaffray Steven Lichtman – Oppenheimer & Co..

Welcome to the Globus Medical Second Quarter Earnings Call. [Operator Instructions] I will now turn the call over to Ed Joyce, Investor Relations Director. Please go ahead..

Thank you for being on our call today. Joining today's call from Globus Medical will be David Paul, Chairman and CEO; Dave Demski, President and COO; and Richard Baron, Senior Vice President of Finance and CFO. I will now read our required legal disclaimers.

During this call, certain items may be discussed that are not based entirely on historical facts. These items should be considered forward-looking statements and as subject to many risks, uncertainties and other factors that are difficult to predict that may affect our businesses and operations.

As a result, our actual results may differ materially and adversely from those expressed or implied by our forward-looking statements. A discussion of some of these risks, uncertainties and other factors is set forth in our forms 10-Q and 10-K on file with the SEC. These documents are available at www.sec.gov.

We undertake no obligation and do not intend to update any forward-looking statement as a result of new information or future events or circumstances arising after the date on which it was made.

The financial information discussed in connection with this call reflects estimates based on information available at this time and could differ materially from the amounts ultimately reported in our 2014 Form 10-Q for the second quarter.

Our revenue, earnings, operating margins, cash flows and similar items are sometimes expressed on a non-GAAP basis and had been adjusted to exclude certain items including, among other things, interest income and expense and other non-operating expenses, provision for income taxes, depreciation and amortization, stock-based compensation, changes in the fair value of acquisition-related contingent considerations in connection with business acquisitions, provisions for litigation, and with respect to computation of free cash flow, purchases of property and equipment.

The comparable GAAP financial information and a reconciliation of non-GAAP amounts to the comparable GAAP amounts can be found in the tables included in today's earnings release which is available on the Globus Medical Investor Relations web page at www.globusmedical.com.

I will now turn the call over to Dave Demski, our President and Chief Operating Officer..

Thank you, Ed, and welcome to everyone on the call. Our worldwide sales for the second quarter were $113.6 million, an increase of 6.1% over the second quarter of 2013. In the U.S., sales growth was 3.6%. While we are still taking market share, domestic sales growth in the quarter was below our historical standards.

This was primarily the result of two factors. First, early in the quarter we made the decision not to renew our existing contract with a significant U.S. distributor, negatively impacting our sales. Second, we experienced an uptick in pricing pressure during the quarter, increasing from the low to mid-single digits to the mid-single digits.

We made the decision not to renew the distributor contract based upon our belief that our long-term goals will be better met by going in a different direction.

We understood the risks to our short-term results, but feel very confident that our decision was in the best interest of Globus and that we will be able to recoup these losses and more in the future. We are currently in litigation with this entity and cannot comment further on the specifics.

For those of you who have known us for some time, you will recall that we made a comparable decision in 2010 for similar reasons. The decision also negatively impacted our results in the short term but was the right long-term decision.

Our company has created significant value since our inception by following principles that focus on the long-term health of the organization. While these decisions can sometimes result in short-term pain, there is no doubt that by consistently following these principles we have been able to achieve outstanding long-term growth and profitability.

We're very pleased with the revenue from our international operations, up 34.1% over the second quarter of 2013. Through the first six months of 2014, our international growth stands at 38.5% over the first half of 2013.

Our strong growth is primarily being achieved through greater penetration in the existing markets, although we did expand into several smaller markets in the second quarter, reaching a total of 32 countries. We continue to see improved profitability in our o-U.S. operations as a result of achieving operating leverage on our improved sales.

Adjusted EBITDA for the quarter was 35.4% of sales, 140-basis-point improvement over the 34.0% EBITDA margin we achieved in Q2 2013. The 2014 results include the impact of the significant ramp-up in R&D expenses associated with our purchase of Excelsius at the end of 2013.

It further demonstrates that our strategy of growth through innovation coupled with diligent expense control produces outstanding financial performance. Diluted earnings per share were $0.22 for the second quarter. Free cash flow was $6.3 million for the quarter and $29.4 million year to date.

We ended the quarter with $313 million in cash, cash equivalent and marketable securities. We remain debt-free. As I mentioned above, pricing pressures increased to the mid-single digits during the quarter. Hospitals continue to aggressively manage implant costs through contract negotiations.

We are able to mitigate this pressure to some extent by shifting the mix towards new and better technology, but the decline in prices negatively impacts our results. There had been no significant developments concerning POD since our last call.

Procedural volumes continue to be at levels that are less than during the fourth quarter of 2013 but remain relatively healthy. We are not aware of any systemic changes on the part of carriers or patients. Recruiting for the quarter and year to date is down from the 2013 hiring pace.

However, our current pipeline of recruits is robust and we continue to believe Globus is the destination of choice for the top sales talent in our industry. For the remainder of 2014, we are intent to throwing our focus on ramping sales from the large bolus of new hires that we made in the second and third quarters of 2013.

Many of the competitive hires are rolling of non-competes and we expect to see increased sales as a result. The other area where we'll be paying particular attention to as we look to offset the impact of pricing and the distributor loss is new product introductions.

We've had several key strategic introductions in the past 12 months that we expect to see significant gains from in future quarters.

In particular, the continued expansion of our biologics portfolio, with the addition of Kinex and Signify, and most significantly, the launch of our CREO pedicles group platform that David Paul will discuss in his remarks.

As we look forward to the remainder of 2014 and beyond, we are confident in our ability to continue to take market share and grow well in excess of the market. We will remain focused on driving innovation and expanding our sales footprint both domestically and abroad.

We will continue to strive to be good stewards of our resources, operating the business efficiently and profitably. I will now turn the call over to Rick Baron to provide detail on our financial measures..

Thank you, Dave. Today I will review our financial performance for the second quarter of 2014 as compared to the second quarter of 2013, for key elements of the income statement, balance sheet and statement of cash flows. Our worldwide sales for the second quarter of 2014 were $113.6 million, a 6.1% increase over the second quarter of 2013.

Innovative Fusion sales increased this quarter to $65.9 million or by 4.6% from the prior year's quarter, while Disruptive Technology sales increased this quarter to $47.7 million or by 8.4% from the prior year's quarter.

Sales in the United States for the second quarter of 2014 grew to $101.6 million or by 3.6%, while international sales grew to $11.9 million or by 34.1% from the prior year's quarter. Overall growth in sales was attributed to the expansion of both domestic and international territories and the greater penetration in existing territories.

Gross profit for the second quarter of 2014 was $87 million or 76.6% of sales for the current year's quarter, as compared to $82.2 million or 76.9% of the sales from the prior year's second quarter.

Research and development expenses this quarter were $7.7 million or 6.8% of sales as compared to $7 million or 6.6% of sales from the same period of 2013. The net increase in the expense was due to the current year's expenditures for our robotics project, offset partially by decrease year to year of certain R&D expenses.

As planned, we anticipate additional increases in expense for R&D in future quarters due to the expenditures relating to the robotics project. Selling, general, administrative expenses were $46.4 million or 40.9% of sales compared to $45.8 million or 42.8% of sales for the prior year's second quarter.

This represents a lower percent of sales due to the leverage in our operating model. Our operating income, income tax rate, quarterly net income and GAAP fully diluted earnings per share reflect the effect of the Synthes litigation and related expense of $19.5 million in the prior year for each of these variables.

Operating income increased to $31.6 million or 27.8% of sales for the second quarter of 2014 as compared to $11.2 million or 10.5% of sales for the prior year's quarter. Adjusted EBITDA for the second quarter of 2014 was 35.4% of sales or $40.2 million, as compared to 34% of sales or $36.3 million in the prior year's quarter.

As Dave indicated earlier in the call, our adjusted EBITDA further demonstrates that our strategy of growth through innovation, coupled with diligent expense control procedures, continues our outstanding financial performance. The income tax rate for the current quarter was 35.2%, as compared to 32.3% in the second quarter last year.

Quarterly net income was $20.6 million, as compared to $7.4 million in the second quarter of 2013. And GAAP earnings per diluted share were $0.22 for the second quarter of 2014 and $0.08 for the prior year's quarter.

Non-GAAP earnings per diluted share, which excludes provision of litigation, net of tax effects, was $0.23 per share as compared to $0.21 per share in 2013. The diluted share count as of the end of June was 95.5 million.

Cash, cash equivalents and marketable securities balance was $313 million as of June 30, 2014, compared to $275 million as of December 31, 2013. Operating cash flow for the six months at June 30, 2014 was $41.6 million. Free cash flow, as defined as operating cash flow less capital expenditures, was $29.4 million. We remain debt-free. Guidance.

As Dave indicated earlier, the decision not to renew a distributor and the impact to pricing will affect our top-line expectations. We now expect full-year revenue to be in the range of $460 million to $465 million.

We are, however, reiterating our EPS guidance for the year as we estimate our full-year's adjusted earnings per share, diluted share, in the range of $.90 to $0.92. I will now turn the call over to David Paul, Chairman and CEO, for our closing remarks..

Thank you, Rick, and good evening everyone. We have come a long way since our founding just over 11 years ago, having just completed our second year as a public company.

Our strong performance since the IPO has been a testament to our focus on improving patient outcomes by delivering innovative products, growing our sales force worldwide, and a disciplined approach to expense control. As Dave explained earlier, this quarter had some unexpected challenges that led to sales growth below our historical trends.

However, we were able to generate very strong profitability while continuing to take market share. Our EBITDA margin of 35.4% was particularly strong despite increased pricing pressures, validating our disciplined business model.

On the product development front, we have continued to execute and launch new products out of our R&D pipeline, launching five new products this quarter, for a year-to-date total of 10. I will touch upon some of those here. First, we further expanded the CREO platform by launching the CREO Threaded System and the CREO MCS Cortical Screw System.

CREO Threaded is part of our growing new pedicle screw platform and offers control, gradual correction for complex deformity users who prefer threaded locking caps. This product caters to the threaded sub-segment of pedicle screws which is the largest segment of the spine market.

The CREO MCS System facilitates a simple, minimally invasive midline approach that minimizes soft tissue disruption, with fixation equal to a traditional screw trajectory.

The combination of CREO MCS and our line of expandable interbody spacers including Caliber, Rise and soon-to-be-launch Altera expandable articulating device, provides for a powerful tool for minimally invasive posterior procedures.

Earlier this month we launched the Direct Look platform for lateral procedures, a lateral retractor instrumentation system and technique that allows surgeons to have direct visualization of the psoas muscle and the neuro structures.

The system is designed to minimize injury to the lumbar plexus, reduce retraction time and pressure of soft tissue within the incision, and increase the safety profile of the lateral approach. This approach may help shorten the learning curve for lateral fusion surgeries and potentially lessen or eliminate the need for neuro monitoring.

Also, as mentioned during the last call, we added Signify Bioactive to our family of bioactive glass-based bone graft substitutes. Bioglass has been shown to recruit and signal osteoblasts that promote bone formation. Signify also provides an osteo-conductive matrix for newborn growth.

Our intensified efforts in the biologics space are beginning to yield returns and we are continuing to work in this arena to further strengthen our position. I believe our long-term prospects as a leading innovator and share-taker will continue for the foreseeable future.

In summary, we have confidence in our ability to execute on our long-term growth strategy by bringing new products to the market, continuing to expand our sales territories both in the U.S. and international markets, while maintaining a steadfast focus on profitability and cash flow. We will be happy to take questions..

[Operator Instructions] And our first question comes from the line of William Plovanik with Canaccord Genuity..

Great, thanks. Good evening.

Can you hear me okay?.

Yes, Bill..

Thank you. So the question I have, it's multi-parted, but it really is all going to stem from the distributor change, and as you think about this, the first piece of this is, how much of the change in guidance is a function of the change in the distributor versus the pricing? And then I have a follow-up based on that..

We're really not prepared to talk about those details, Bill, in terms of the guidance or the components of guidance..

Okay. The follow-up to that is, when would you expect the, obviously if you take out the distributor, don't renew a contract, you're putting direct distribution into that channel.

When would you expect the new distribution that's being put into place to start gaining traction? So, when, you know, obviously you're guiding something like 5% to 6% growth in the back half of the year.

I would assume that, as that new distribution, that territory comes up, and your other -- the reps you added last year which are now rolling off of non-competes, that as we think about at some point in the future, is it Q4, Q1, when do we start to see the growth rate reaccelerate again?.

Well, we'll just isolate your question to the loss of the distributor. We'll start seeing some sales immediately. I mean there are steps happening in the market right now. We are maintaining some of the business. We'd lost a significant amount of it.

But to get back to the levels that it was, I mean that will take at least a year to work through that cycle, and probably more.

Does that help you from that standpoint?.

It does. And then again on those new reps, just if there's any quantification for the reps you hired last year and the ramp.

I mean how should we think about when they really start contributing to the numbers?.

It varies over time and by each territory, but as we track them, we're satisfied with the progress of the recruits that we've made in the last 18 to 24 months. They typically have non-compete, so you don't see as big of an impact in that first 12 months.

There's somewhat of a vacuum effect, if you will, when we take them out of their territory, where there's -- their business becomes up for grabs many times, so we're able to capture that. But they're not able to be part of that process.

So when they come off their non-competes in month 13, they're able to go back in there, and that's where we see a more accelerated ramp in that next one -- in that next year. It can take them a while to reestablish relationships, and things happen while they're gone.

So it's hard to say certainly how that's gone the curve, but we really see a ramp in the second year..

Consistent with the way that we've described it, the bolus of those reps occurred late in Q2, very late in Q2 of last year, through the end of the year. And we've indicated that the timing of that increase happens within that second year and by the end of the second year. So we've always put a timeframe on it in the 18 months timeframe.

So hopefully that's helpful..

So if you start hiring late Q2 2013 through the end of 2013, then we should think that the contribution from them is really a mid 2015 event?.

Right. You'll start seeing some of the increase in revenue now, but you'll ramp all the way up fully into the territory by that point in time..

We start seeing it now..

Yeah. You begin to see on month 12 and then you get fully ramped up in that 18-month or so timeframe..

Okay. And you're not at this point willing to quantify kind of how much of the loss of that distributor versus pricing? Because what we're trying to figure out is, you know, what would the quarter have been if they weren't, you know, if you had kept that distributor and kind of how's the rest of the business tracking.

That's what I'm trying to back into. And that's all I have, thank you..

Okay..

Our next question is from the line of Bob Hopkins with Bank of America..

Hi.

Can you guys hear me okay?.

Yes, Bob..

Great. Maybe just want to finish that thought. I mean the first question I would have was -- would be, what was the growth of your U.S.

business ex that distributor here in Q2?.

Essentially it was the 3.6%..

No, no. That was the growth rate of the whole U.S. business this quarter. What I'm curious about is, excluding that, the issues with that distributor, what was the growth rate of the rest of the U.S.

business?.

Traditionally we haven't segmented it in that way. But the losses is largely attributable to the two items that Dave had mentioned. Clearly the pricing, which is down 2-point-something percentage points, and then the loss of the distributor. Those are the two main items.

With the loss of the lower sales price, remember also that Dave indicated in his remarks that normally we'll see some mitigation of that price decline through the introduction of new products..

So one of the first questions that pops into my head here as I listen to your disclosures, you commented that the distributor issue happened at the beginning of the quarter, and I guarantee you, from all the emails I'm getting, that investors view this as a material disclosure. So I'm just curious why this wasn't disclosed earlier on in the quarter..

Well, I don't think it rises to the level of materially. We looked at that from a legal standpoint and it doesn't rise to that level..

Okay.

So approximately in 2013, can you share with us what the revenues from this particular distributor were?.

Bob, we're not prepared to discuss the details of what the specific loss was related to that..

Okay.

So the basic comment here is that the distributor issue and the pricing issue, ex that, you would have been at normal growth rates? Is there anything else going on in any of the other geographies? So basically outside of the distributor area and the pricing, everything was kind of normal with the quarter? Or were there other things that slipped this quarter that are things that you want to disclose here?.

It would be the normal ebbs and flows of business. What we've tried to do each quarter is identify the things that are plus and minus. And unfortunately this is one of those quarters where there is a minus. There are plans in place to replace that territory, that distributor. They will come in over time.

At this point we're not willing to put an end date on it as we would feel uncomfortable in not being able to achieve that. So we've modified the guidance to take into account the fact that this is something that will take some time to pull into it.

The good things that have happened this quarter, hopefully not to be lost, would be the growth internationally has continued. So that remains very helpful and as a driver of growth, that was called out separately.

And the strategy of continuing to introduce the new products and meaningful products which again help attract and will be most likely part of the attraction for the replacement strategy for that distributor. So those things are the good things..

Last question for me is really, is the reason why you guys aren't disclosing more is because you're involved in litigation with this distributor? Because obviously without the details, we're just left to speculate with what's going on with the business and what's going on with the rest of the business.

So is this really a legal issue here as to why you're not disclosing more?.

That's part of it, but I also think historically we felt like we -- we've limited our disclosure in terms of particular customers, particular products, particular sales reps, because we feel it puts us at a competitive disadvantage. We want the business to be strong.

And we understand you guys need to run your models and help value the stock, but we want to protect the business from fundamentally being able to compete..

Was pricing bad across the board or was it just in certain geographies?.

We're just talking U.S. here, but it was -- it's throughout. Most of the impact we're talking about involves like national chains, the larger, larger customers, so they're not just regionally focused..

Okay. Thank you..

And your next question is from the line of Matthew O'Brien with William Blair..

Afternoon. Thanks for taking the questions. Just a follow-up on the first two, Dave Demski, and to push a little bit, you talked about this increase from mid -- sorry, low-single digit pricing to mid-single digit pricing.

When I look at your overall business in totality, I'm getting to something around $7 million to $8 million of the reduction in guidance from pricing, with around $12 million -- $12 million, $13 million from the distributor.

Are those numbers even in the right ballpark?.

Well, I think we've given you enough pointers on the pricing to do some math like that. I'm not going to confirm, but I'll just repeat it. Mid-single digits, increase to the mid-single digits from the low to mid-single digits. So your thinking is directionally correct there..

Okay. And then when I think back to 2010 and knowing you guys back to then, with the distributor turnover at that point, if memory serves, it took about a year to 15 months to get that territory kind of back up to where it had been, and then growing from there.

Is that what we should anticipate here or do you think there's been some learning that's gone on since then or some direct employees that you can potentially put into those which is that geography to shorten that timeframe?.

Well, I think that geography was much larger than this geography, so that actually took us almost two years to get back to where we were..

Okay, David --.

Your memory, Matt, your memory is accurate, and that was a situation that Dave referred to, where the company itself has decided to take the decision. The easier decision would have been to maintain and not be able to grow as effectively in that area, and we've hopefully taken a -- we've only taken a small step backwards to take two steps forward..

Got you.

And then along those lines, Rick, or anybody, are there any other bigger distributor contracts that are coming up for renewal over the next 12 months?.

There's a constant flow of those, yeah..

Okay.

But generally speaking, your relationships right now with those distributors are fairly healthy?.

They're very good..

Okay. And then finally for me, fairly large reduction to the top line guidance, but supporting the bottom line outlook.

Can you just help us understand where that -- where those savings are going to come from specifically in terms of R&D projects or sales and marketing activities you were going to do that you're not going to do, and then how that could impact the business as we look into 2015?.

This company is all about making pretty constant and steady, and hopefully good, decisions for the long run. That guidance really doesn't impact any of the anticipated spend that we would have been making.

As you could see by the performance in this quarter, even with the decrease in sales, we still managed to hit the consensus within the adjusted EBITDA and the adjusted earnings per share line. So, fundamentally we've been able to do the right things hopefully internally to maintain those metrics, which are important I think to you and to everybody.

That's one. Two, the leverage in the model historically has been from those areas that had been underperforming. And as we talked about earlier in the year, the adjusted EBITDA out of our international and some of those other areas have topped appropriately, which allows us to make this kind of reaffirmation of the EPS..

Maybe I'll take another crack at that. I think we're doing a little better than we thought we would when we gave the guidance initially. So we expect those trends to continue through the end of the year..

Got it. Thank you..

And your next question is from the line of David Roman with Goldman Sachs..

Thank you. Good afternoon everybody. I know we've been through the distributor discussion a few times now, but I was just hoping you could give us a little bit broader perspective on to what extent do you think we need to monitor things like this and factor the potential contract losses into our thinking and design on a go-forward basis.

And the reason I ask this is it's the second time in four years there's been a major distributor disruption.

And is this something that we should need to model and think about more volatility in your top line on a go-forward basis?.

We don't have any other, you know, any plans to do that, David. But as we have distributors, they have -- we're committed to certain geographies, and if they're not able to grow up to the level we need them to, we have to look at restructuring their contracts. And there's always the potential of something like this in that event.

But there's nothing on the radar screen that we can see that causes us to anticipate another one of these..

Another thing, David, to keep in mind is, you know, it has been two in four years, but it's actually been two in 12 years. Since our inception, this is really the second one of any significance that we've had to not renew..

Although I guess my pushback to that would be that the time period we're talking about, 2010 to 2014, has been one of very difficult growth for the market, so the likelihood of underperformance of the distributor, where everyone's fighting to take an incremental piece of a pie that's not growing, the likelihood of underperformance has got to go up, right?.

I don't know that that's true. We would judge the performance based on -- as it relates to the market and the dynamics in their markets. So we have not -- we weren't able to do it in this case, but we have been able to restructure contracts successfully with other folks facing a similar situation.

So I don't think the likelihood goes up because the market is more competitive. If that -- if those individuals are our best option in those geographies, we're going to stick with them..

Okay, that's helpful perspective. And then maybe if you could go on to a little bit more detail on the pricing side. That just seems like a relatively meaningful change for a metric that's pretty stable.

Understandably that pricing has been negative, but you've able to talk about that low to mid-single digit number I think for several, several quarters now.

Do you -- could you give us maybe any further context to why you think that took a step down this quarter and why you don't think that's going to be a one-time aberration?.

Well, it's just -- it's a function of the hospitals coming on renegotiating as their contracts come up, particularly the bigger chains, and they become better buyers over the last several years. Last year was -- we saw a lessening of the pressure throughout the year. And it started to dip down. It went down pretty precipitously in the second quarter.

So that goes back to our guidance. We don't have a reason to think that it's going to improve immediately, so we've taken the guidance down to account for that this year.

We can't turn the business on a dime in response to that, but taking it out a few more quarters, we're going to overcome it by continuing to release new products, by continuing to hire. And frankly the products that we've introduced to date and the reps we have on our team right now, there's a lot of capacity there that we can exploit..

Okay, that makes sense. And I guess my last question would be, if you sort of add up all the pieces of the markets so far, pretty much everyone has reported except obviously Medtronic, but this does look like a tough quarter for the overall spine market.

And I'm just wondering, you made in your prepare remarks, Dave, the comment that growth continues to trend below Q4 levels, whether you think we're in a prolonged period of slower growth versus where we exited last year or this is just pronounced seasonality and we should expect to ramp through 2014 just like we've seen on a seasonal basis the past couple of years..

Well, that's a great question. We're -- I think I -- from our experience, the seasonality last year was profound. It was unusual.

So we're still trying to understand whether, was that the pending Obamacare implementation or was that the high deductible policies people that are shifting to, what caused that fourth quarter spike, and hoping that this year we'll see the same kind of spike.

But -- so if it's related to Obamacare, we probably won't see the same kind of spike this year. But we're not counting on it. We're hoping that's the case, but I think we got to go through one more season here to see really what's driving that..

Okay, I got it. Thank you..

Okay.

Do we have another caller?.

And your next question is from the line of Richard Newitter with Leerink Partners..

Hi. Thanks for taking the questions.

I was hoping, you know, David, maybe you can tell us, just looking at the guidance which you're now implying about a mid-single digit growth rate for the year, what's the right normalized growth rate for the company? I mean I appreciate you're not willing to go much deeper into the granularity and breaking down the pricing commentary from the distributor, but at least can you give us a sense of where you see your business in light of all the changes that have taken place this quarter, and what you know to be true for all the positive momentum drivers going forward? What do you see this business growing at? You know, where you were kind of before this, as of the first quarter? Do you see us getting back into the high to low double-digit kind of sustainable growth rate trend?.

Yeah. Rich, I think about the question, I view that what's happened this quarter as more or less an air pocket, a couple of events happened at the same time. I don't think that undermines our business model in any way. Very bullish on our long-term prospects.

It's not the kind of thing you can turn around in one or two quarters, but I think next year and beyond we will be back into double-digit growth..

Okay, that is helpful. And the other question I just had, it sounds like pricing took a step worse, and -- but you still feel confident that with your product flow and kind of like you said, your business model and what you've been doing in the past, that you can help to offset that somewhat.

So my question really is, what happened this quarter that you think you couldn't offset it as much, or what is it about the new products flow or the things that happen in, you know, over the next several quarters that you do think you can kind of potentially combat that pricing?.

So just before Dave or David respond, I want to make sure that the context of how we calculate this is, you know, I just want to remind. This is -- think of it as the same-store sales type of a calculation. So if we didn't sell the item or we didn't sell it through that particular endpoint last year, that's not included in the calculation.

So this is the same-store sale thing. What we do talk about is the overall innovation that we have throughout it which has mitigated some of that over time.

Dave?.

Yeah. In terms of your question, we're not changing anything fundamentally in the business model, so I think it's a matter of just more focused execution, continuing to believe in what we're doing, the products that we're developing, the technology that we're developing, and the team we have on the ground, as well as continuing to recruit.

It's a change in the business. Well, one of which we precipitated ourselves, the other is more exogenous. So we need to compensate for. And we've done that historically. We've been able to overcome these sorts of challenges in the past and I don't see any reason we won't be able to now..

Thank you. And just if I can, just two very quick follow-ups.

So would you have changed guidance if not for the distributor issue and it was just the pricing?.

To be honest, I don't think we should comment on that. I think that overall we're still comfortable with the fundamental aspects of the business, which is really what we're trying to give out this evening.

The issues at hand are the two issues that have been identified, and they are things that, either through refilling that one territory, that one area, we can do, or the continued strategy that has happened over the past 11 years of introduction of new and meaningful products. So we feel comfortable with the rest of the business and the execution..

And how long do the contracts you just signed last on the pricing front? Clearly there are some prices and contracts that you had to resign. Just curious to know how long were they for..

Most of the hospitals, ones we signed, are one to three-year agreement. None of them go beyond three years. But unfortunately they kind of hold the unilateral power to renegotiate when they want to. So there's not a lot of protection from our standpoint..

Thank you..

And your next question is from the line of Matt Miksic with Piper Jaffray..

Hey guys. Thanks for taking the questions. I wanted to -- I want to, you know, listening to you talk about this distributor, I think Rick making the comments and maybe Dave also commented on the idea that there are potentially some opportunities or alternatives as to how you might fill this territory.

And just sort of I guess hearing you talk about a little bit and understanding that you're not telling us an awful lot about where it is or how big it is, is part of that issue potentially that, I think, Dave, you mentioned in some cases we want to determine whether a distributor is our best option in a given geography, is part of the issue here that your underperforming distributor, and that may be a matter of contention with you and this organization, but do you have someone that you would prefer to be selling harder and at a higher rate? And there are other options in that region that you're balancing I guess.

Is that a fair way to look at what you're doing?.

I think generally the way to think about that is we're committed contractually to a fairly significant geographical area. So we have certain situations. We have a concentration of sales into, you know, of small number of surgeons or kind of in a large geography that they're occupying.

And when we try to renegotiate, we try to reduce that geography down to where they have the ability to have an impact and open up the rest of it so we can develop it and invest in it. And in this case we weren't able to convince the person that that was a good thing for them, for their organization, and we parted ways.

Whereas in the past we've had folks who were able to see that that was good for them and for Globus, and -- there are some incentives built in there for them to do that. And so where that would come up again, we would make the same kind of approach, where it's applicable.

We really want to get back geography that's underperforming so we can invest in it..

Okay.

And as you get further into this process of rebuilding that or you get through these discussions with this entity that you're separating with, is this something that you'll be able to give us some sense as to which way you're going to fill this in terms of your hiring indirect reps in some cases, or contracting with another organization or whatever it is as you work that out?.

Probably not. I'll just go back to my earlier comment from a competitive standpoint, we would rather not share that information publicly..

All right.

Well, you know, despite the disappointment in the way the revenues have gone, and we appreciate you holding the line on the bottom line, may seem like an ironic question, but you talked a little bit about some of the new launches going better than you anticipated or some of the trends that you've seen going better than expected, you know, headline year [ph] to look better than expected, but can you talk about maybe where you're seeing some encouraging traction, things that are working out better related to the CREO launch or other products that would be helpful color for us?.

Thank you, Matt. I think the CREO launch is really the biggest launch that we have undertaken in our history and it's still an ongoing launch because the platform has multiple products and systems to it. And this quarter we launched two more products to it.

So that's really where we've been seeing a lot of excitement, and we're very confident that this is going to be our biggest product by 2016. I alluded to this two quarters ago. And we still see tremendous upside and potential within the CREO launch. I also mentioned in my prepared remarks about [Altera].

We just recently got FDA 510(k) clearance on an articulating expandable device. With all the talk about sagittal balance being so important in the lumbar spine, we think that [Altera] will be a great alternative to enhance sagittal balance. And that's another product that we're very excited about in the second half of this year and beyond..

And any color as to, you know, there seems to be this battle, maybe it's sliding down, but maybe not, as to who is picking up some of the reps dropping out of these other organizations, either combining like Synthes and DePuy [indiscernible] any color as to how you're faring in terms of just generally new hires and into the end of the year?.

Well, I think last year was a record for us, and we're off that record, but we're still strong. There's still some -- the Synthes-DePuy combination has declined somewhat from where it was. The pace is off, but there's still individuals leaving that organization regularly.

Regarding the other ones, we really haven't been paying a lot of attention nor have we been a factor in those..

Okay. All right. Well, thanks for the color..

Thank you, Matt..

And your next question is from the line of Steven Lichtman with Oppenheimer & Company..

Thank you. Hi guys. Dave, just to give context again, back to 2010, I think you mentioned it was in that second year after the distributor and that you kind of came back to normalcy and I think you saw some really strong growth because obviously the comparables were also easier from that prior year.

Are you indicating also that you think the, you know, based upon the work you're going to be doing here, that the return to normalcy potentially could be faster in this case just given the territory size?.

It's possible, but we're not predicting that. So I don't want to set expectations. It's a hard process. It's a long-term view that we're taking. So we're working as we speak to make some changes there that will help us improve. But it's a work in process..

Okay. And then just -- looking back at the map we were talking about earlier on the two components for the full-year guidance on price versus the distributor, just to make sure they're on apples to apples, the pricing discussion of low to mid, down to mid, it's just based upon the U.S.

sales base, is that right?.

That is correct..

Okay. And then just lastly, the balance sheet obviously, the clean balance sheet you've got here and the continued cash flow, updated thoughts if you could in terms of where you think overall there are opportunities for you guys to bolster the portfolio..

Well, we have always made it clear that biologics is a space that we have intensified efforts with in-house product development. But we also have been looking at opportunities there. And that is one area that we could potentially see ourselves use some of that cash in our balance sheet..

Okay, great. Thanks guys..

Thank you..

[Operator Instructions] And we do have a follow-up question from the line of William Plovanik with Canaccord Genuity..

Great, thanks.

Can you hear me okay?.

Hey, Bill..

Just -- the follow-up questions are this. One, what do you consider material. Is it 10% or greater? And then just two, given that the stock's probably going to get hit tomorrow, do you have any thoughts on stock buyback or anything like that, or is it still just purely M&A for cash usage? And that's all I had..

Okay. Material is a combination of things. The -- give and take between the top-line miss and the bottom-line hit clearly impacted the decision-making process. So with essentially if you had dropped sales by the amount that you dropped, I think that the expectation throughout the market would have been that we would have missed on the bottom line too.

So we either equaled or exceeded expectations depending upon how you calculate it. So, top-line miss and those two things clearly, I'm sure in the way that your voice would indicate it, Bill, and perhaps Bob's, that there is a little bit of discussion in there, but it would have to be a combination of that.

I think that's the way others have felt with this type of an issue. Also I think the permanence of it. This is something that from time to time we will have people that we will terminate, let go, distributors that we'll hire, distributors that we'll fire. But we do that in a way that we hope is good for the long-term benefit of the company.

And the long term for us, and we talk company, it's for the investors and for you guys, not necessarily for those in the room. So those are the basis that we look at. So it's top and bottom line as a combination. And then please, the second part of your question, Bill, if you could repeat it, I would appreciate it..

Sure. Just given there's a high likelihood of the stocks coming off tomorrow.

Is there, you know, any thoughts on the stock buyback for uses of cash?.

We still view that the -- right now that the cash that's there, we have still the potential for appropriate acquisitions, and that may be the best use of the cash into the future..

Okay, thanks..

Thank you, Bill..

Thank you..

And we have no further questions in queue at this time. And I would like to thank everyone for joining today's conference call. This does conclude the call, and you may now disconnect..