Orthofix Medical Inc.

Good day and thank you for standing by. Welcome to the OrthoVix Q3 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If anyone should require assistance during the conference, please press star 0. Please be advised that today's conference is being recorded. I will now like to hand the conference over to Alitza Huerta, Senior Director of Investor Relations. Please go ahead.

Thank you, Operator, and good morning, everyone. Welcome to the OrthoFix Third Quarter 2021 Earnings Call. Joining me on the call today are our President and Chief Executive Officer, John Cervosic, and Chief Financial Officer, Doug Rice. I'll start with the safe harbor statement and then pass it over to John. During this call, we will be making forward-looking statements that involve risks and uncertainties. All statements, other than those of historical facts, are forward-looking statements, including any earnings guidance we provide and any statements about our plans, beliefs, strategies, expectations, goals, or objectives. Investors are cautioned not to place undue reliance on such forward-looking statements as there is no assurance that the matters contained in such statements will occur. The forward-looking statements we will make on today's call are based on our beliefs and expectations as of today, November 5th, 2021. We do not undertake any obligation to revise or update such forward-looking statements. Some factors that could cause actual results to be materially different from the forward-looking statements made by us on the call include the risk factors disclosed under the heading risk factors in our form 10-K for the year ended December 31st, 2020 and form 10-Q for the quarter ended September 30th, 2021 filed this morning, November 5th, 2021. as well as additional SEC filings we make in the future. If you need copies of these documents, please contact my office at OrthoFix in Louisville, Texas. In addition, on today's call, we will refer to various non-GAAP financial measures. We believe that in order to properly understand our short-term and long-term financial trends, investors may wish to review these matters as a supplement to the financial measures determined in accordance with U.S. GAAP. Please refer to today's press release announcing our third quarter 2021 results for reconciliations of these non-GAAP financial measures to our U.S. GAAP financial results. At this point, I will turn the call over to John.

Thank you, Alexa. Welcome, everyone. Thank you for joining our third quarter 2021 results conference call. On today's call, I'll provide an update of our third quarter performance. I will then review each of our strong progress we've made against each of our strategic initiatives before handing the call over to Doug, who will provide our financial update. I'll close with our perspectives on the balance of 2021 before opening the line for questions. Starting with our third quarter performance, total revenue in the quarter was $112.4 million, growing above 1% over 2020 on both a reported and constant currency basis. During the quarter, we experienced the negative impacts of hospital restrictions on elective and complex procedures and hospital staff shortages in each U.S. key geographies, namely the Southeast, Mid-Atlantic, and South Central regions. However, despite these COVID-19 challenges, we were able to grow relative to 2020, highlighted by double-digit growth in both our global spinal implants and orthopedic businesses. Our performance in the quarter was aided by our diversified portfolio that includes therapies and sites of service less impacted by COVID, as well as our international footprint that includes areas beginning to recover from COVID restrictions. Despite these disruptions in the third quarter, we made solid progress against all of our growth initiatives and remain confident in the investments we have made and will continue to make in product development, commercial channel, and operational excellence. Now let's turn to the performance of each of our product categories. Starting with long-growth therapies of BGT, sales for the quarter were 45.2 million, down 4% compared to the third quarter of 2020. The decrease in the quarter was largely a result of increased COVID-19-related restrictions affecting complex overnight procedures, which are a large part of the patient population receiving BGT spine therapies. These restrictions were a reversal of the positive trends we saw in the last quarter. The decline in the quarter for spine procedures was offset by somewhat by 13% growth in our physio stem, our bone healing therapy for nonunion of long bone fractures. Our commercial channel investments are yielding benefits in these non-elective trauma segments. Moving to spinal implants, which includes spine fixation and motion preservation, revenue was up over 10% on both a reported and constant currency basis compared to 2020. This growth was primarily driven by US M6 artificial cervical discs and international spine fixation sales. In the US, gains were led by the M6 disc revenue, driven by our continued success in attracting new users as a result of our ongoing education and training efforts. Internationally, growth was driven primarily by a mix of new distributors coming online and existing stocking distributors reinvesting following COVID delays. Turning to our biologics portfolio, revenue was down 16% compared to 2020. The decrease was not surprising given that a large percentage of the procedures where our biologics products are used are complex elective procedures requiring multi-day hospital stays, and these procedures were impacted by the restrictions in key U.S. COVID-affected geographies mentioned prior. This decrease was partially offset by the increase in new customers driven by new distribution and strong early adoption of new technologies. Lastly, moving to our global orthopedic business, sales were up 14% on a reported basis and 12% on a constant currency basis over 2020. The increase was primarily due to the rebound in the international markets from COVID restrictions and reorders from international stocking distributors following COVID-elected delays. During the third quarter, we also saw a solid contribution from the FitPro limb lengthening system with over a 30% sequential growth over the second quarter of 2021 and encouraging physician training trends with over 180 surgeons trained since the acquisition of this technology platform. Before providing an update on our key initiatives, I want to share how excited we are to have Wayne Burris join our board of directors. He brings over 35 years of experience in U.S. and international finance from various diagnostics, pharma, and orthopedic businesses. Mr. Burris spent much of his med tech career at Roche Diagnostics where he served in a number of executive roles including CFO of North America from 1996 through his retirement in 2019. We are excited to add someone with his financial and business leadership experience, and we look forward to working with him for years to come. Now moving to our first initiative, product innovation and differentiation. During the quarter, we made solid progress in our efforts to develop and acquire products and procedure solutions to address unmet needs in the marketplace. Since January 2020, we have launched 23 spine and orthopedic products, which include expansions into key product categories during the quarter. Within spinal implants, we expanded our Firebird SI 3D offering by launching new implant and instrument additions in this high-growth market segment. further improving our differentiated MIS solution designed to compress and stabilize the sacroiliac joint. Within biologics, we expanded our portfolio with a full market launch of our Opus MG set, an osteoconductive injectable scaffold to fill non-structural bony voids or gaps during orthopedic fracture care or trauma surgery applications. I'll now touch on our second initiative underway, commercial channel development. For this initiative, we are focused on our U.S. channels for biologics, spinal implants, orthopedics, and working to make these channels as dedicated and predictable as our BTT channel. In Q3, our U.S. strategic channel partners, which we define as distribution partners that commit to OrthoFix and carry both hardware and biologics, generated over one-third of our spinal implants, biologics, and orthopedics U.S. revenue. Revenue related to these strategic distribution partners was grown 9% when compared to the current third quarter as compared to third quarter of 2019, despite being mostly in the heavily impacted COVID regions. While investment in these channels is ongoing, we have made steady progress in this initiative to date. Our final initiative is operational execution. Given the recent regional occurrences of COVID-19, our global supply chain remains our top priority. Our goal is to make our company as nimble as possible with efficient structures and processes that encourage product innovation. Our success in securing a future supply of microchips for our bone growth therapies devices in light of the continued disruption of global supply chain highlights the improvements we have made in our operational execution. There will always be continuous improvement in operational efficiency, and we intend to adapt as needed to keep up with the changing macro environments and build value within orthofix. I am very pleased with our results in the quarter. Despite the return of COVID-19 in certain geographies, we've kept moving forward with our transformation, laying the groundwork for long-term growth and innovation while maintaining operational execution. We're excited to build on that momentum as we approach year-end. With that, I'll turn the call over to Doug to review our financial performance. Doug? Thanks, John, and good morning, everyone. I will provide some additional details into our net sales and earnings results and then discuss some of our other financial measures. Because many of the financial measures covered in today's call are on a non-GAAP basis, please refer to today's earnings release for further information regarding our non-GAAP reconciliations and disclosures. Starting with revenue, as John mentioned, total net sales in the quarter were $112 million, up 1% on a reported basis and on a constant currency basis when compared to the third quarter of 2020. In the U.S., total net sales of $86 million for the third quarter were down 4% over the third quarter of 2020, mainly due to hospital restrictions on elective procedures offset by U.S. M6C growth that John mentioned earlier. International total sales of $26 million were up 25% as reported over the third quarter of 2020, reflecting the growth from our FitBone Lend Lengthening System as well as strong sales to stocking distributors. Gross margin in the third quarter of 2021 was 75% compared to 76% in the prior year period. The decrease was primarily due to sales mix and a short-term increase in electrical procurement costs due to the global microchip shortage, offset somewhat by decreased non-cash inventory reserves. For the full year 2021, we now expect gross margin to be approximately 75% to 76%, which reflects the continued impact of the changes in our sales mix, as well as an expected short-term increase in microchip costs as a result of the global microchip shortage. Sales and marketing expenses in the third quarter of 2021 were 50% of net sales, up from 48% in the third quarter of 2020. The increase was primarily a result of the timing of three major trade shows in the third quarter of 2021 that did not take place in person in 2020, as well as an increase in travel expenses. As anticipated, spending in the third quarter was more in line with our pre-COVID levels. In 2021, we still expect sales and marketing to approximate our year-to-date average of 48.5% of net sales as travel and event spending have seen a return in line with historical spend and as we invest further in our commercial channel. GAAP G&A expenses in the third quarter of 2021 were 15% of net sales, right in line with the prior year period. As a reminder, spending levels in the third quarter of 2020 reflected several cost savings measures, including 401K match suspension, a travel freeze, and a pause in investment spending, offset by succession-related expenses in 2020. GAAP R&D expenses for the third quarter increased to 11% of net sales, up from 9% in the prior year period. The increase reflects spending to support new product development, clinical studies, fit bone integration expense, as well as costs associated with our EU MDR compliance efforts. We will continue to ramp up our efforts to drive organic innovation and differentiation, invest in clinical studies such as rotator cuff and our M6C two-level indication study, and continue to spend to build a robust product pipeline in both spine and orthopedics. As a reminder, this is causing our R&D spending as a percent of net sales to significantly outpace revenue growth in the near term. Due to the timing of certain expenses, we now expect 2021 GAAP R&D expense to be approximately 11% of net sales, including an impact of about 175 basis points related directly to our EU MDR compliance efforts, for which we adjust within our non-GAAP financial metrics. Adjusted EBITDA in the third quarter decreased to $11.99 or 11% of sales compared to $19.79 in the third quarter of 2020, driven by the investments we have made in R&D related to product development and clinical trials, as well as increased spend in marketing trade shows as they returned in person. Our cards have also increased with the changes in our sales mix and the expected short-term increase in microchip costs. We mentioned all of these investments in temporary increases during our second quarter call, so the reduction in adjusted EBITDA is in line with our expectations. Now turning to tax, we had GAAP income tax benefit for the quarter of $400,000 or 14% of loss before income taxes as compared to GAAP income tax rate of 12% of income before income taxes in the same period of 2020. The primary factors affecting tax rate for the third quarter of 2021 were the financial expenses not recognized for tax purposes related to the acquisition-related remeasurement, as well as losses in certain foreign subsidiaries for which we did not recognize a tax benefit. For our non-GAAP results, we continue to use 27% as our adjusted long-term effective tax rate, which normalizes for acquisition-related expenses, certain law changes, and operating losses that have no GAAP tax benefit. For the third quarter of 2021, we reported GAAP loss of 11 cents per share as compared to GAAP earnings of 24 cents per share in the third quarter of 2020. After adjusting for certain items and when normalizing for tax using our non-GAAP long-term effective tax rate, adjusted earnings for the third quarter of 2021 was 10 cents per share compared to an adjusted earnings per share of 31 cents in the third quarter of 2020. The decrease was primarily driven by the increased short-term expenses due to the global microchip shortage, increased R&D spend to drive organic innovation and differentiation, and increased travel and marketing trade show spend. Regarding cash, we continue to maintain a strong liquidity position with $83 million at the end of the third quarter of 2021 compared to $81 million at the end of the second quarter of 2021. We currently have no borrowings outstanding under our $300 million senior secured revolving credit facility. We commenced repayment of the $14 million 2020 Medicare advance in the second quarter. The balance as of September 30, 2021 is about $8 million. We still expect the repayment to be substantially complete by early Q2 next year. Net cash provided by operating activities was an inflow of $6.4 million in the quarter, down $15.5 million compared to an inflow of 21.99 in the third quarter of last year, primarily due to the recruitment of the 2020 Medicare advance. Inventory investments this quarter and the savings in 2020 related to the cost reduction initiatives, such as the 401 match suspension, travel freezes and conferences only being held virtually. Capital expenditures were $3 million in the quarter compared to $3.4 million in the prior year period due primarily to the timing of spend for instruments to support our future growth plans. We now expect CapEx to be in the $19 to $21 million range for 2021. The decrease over prior guidance is due to the timing of the deployment of instrument sets and the implementation dates of certain projects. Consistent with our decreased operating cash flow, our free cash flow, which we define as cash flow from operations minus CapEx, was a $3.49 inflow during the quarter, which was down from an $18.5 million inflow in the third quarter of 2020. As anticipated, our free cash flow has decreased significantly in 2021 compared to 2020 due to several items, including the repayment of the Medicare advance, additional investments in our sales channels, and product innovation to support our future growth. and the spinal kinetics milestone payment, as well as increased spending on the EU MDR compliance efforts. I'll now turn the call back over to John. Thanks, Doug. Looking to the remainder of 2021, we remain highly focused on our three near-term growth drivers, including M6C, FitBone, and our comprehensive spinal interbody portfolio. I'd like to provide a quick update on each of these growth drivers. Starting with M6C artificial cervical disc, demand for M6's innovative motion preservation technology continues to grow, as evident by over 1,000 U.S. surgeons we have trained since the launch in 2019 and the recently surpassed milestone of 60,000 global M6C implants. We remain confident that our ability to attract and onboard new surgeons, as well as support expanded utilization by existing surgeons, will allow us to expand the market and take market share to drive growth for the foreseeable future. From a U.S. indication expansion perspective, we are progressing the M6C two-level clinical trial, which remains on track. sites for both the m6c investigational and concurrent acdf control study arms we're also recently kicked off a real-world evidence study that will access over 3 000 patients and bolster our body of clinical evidence in support of m6 the second key near-term growth driver is fitbone we have made quick progress in commercializing the fitbone system with a third quarter revenue contribution of 2 million as compared to 800 000 in the third quarter of 2020. Early demand has been strong, with over 180 surgeons trained since the acquisition, the majority of whom are located outside the U.S. A key differentiator and growth opportunity for FitBone is its adult and pediatric labeling, which no other intermediary limb lengthening solution has. In early September, we announced the first U.S. pediatric patient implanted with FitBone for the femur and tibia. Given the current limited options available for pediatric surgeons and the clinical performance of the FitBone system, we expect to see accelerated adoption and use as more surgeons are trained. The third key near-term growth driver is our technology-leading inner body portfolio. Overall, we believe we have one of the most comprehensive inner body portfolios in the industry with technology offerings spanning peak, PTC, and now 3D printed titanium materials. All 3D printed titanium designs incorporate our innovative NanoBait technology and optimize design, porosity, and surface that allows bone to grow into and through the device. We are seeing accelerated adoption of these technologies with strong performance of our Forza XP expandable P-Lift cage and our new Construct Mini titanium 3D printed cervical inner body product, which we expect to see continued focus in the future. In addition to the number of exciting near-term growth opportunities, we also have select high priority segments of our business that we believe will drive growth over the medium and long-term periods. The first is expanding our commitment to the bone growth stimulation market. The second is the expansion of the FitBone technology platform from limb lengthening to spinal deformity. Third is our spinal fixation platform expansion in the areas of posterior cervical, MIS, anterior column support, and deformity correction. And last is the focused expansion of our biologic portfolio offering. I want to highlight two key updates on these initiatives. The progression of our BGT portfolio is part of our IGEA partnership and the launch of new biologics products. As announced during the second quarter, we entered into a partnership with EGEA to commercialize a portfolio of stimulation devices in the U.S. As part of this, we recently submitted a PMA application to the FDA for the approval of a cell stem bone healing therapy, a low-intensity pulse ultrasound product for the healing of fresh fractures and non-union fractures. Upon approval, this will expand our bone growth therapies portfolio and complement our current hemp technologies that focus on non-union fractures and spinal treatments, positioning us as a leader in regenerative bone healing technologies. The initial market release is expected during the second half of 2022. Within biologics, our goal is to have a comprehensive offering of biologic products and solutions for surgeons to use with our spine and orthopedic procedures. With the recent additions of Opus MG Set Bone Void Filler and FiberFuse Strip, which we launched in partnership with MTF Biologics, we have meaningfully bolstered our portfolio, which we believe will not only support the top line growth of our biologic segment, but will also help drive incremental pull through of our spine and orthopedics hardware offerings. Now shifting to guidance, for the full year of 2021, we now expect top-line revenue to be in the range of $460 million to $464 million, which includes approximately $1 million in FedFX rate headwinds since our last guidance update. This range assumes modest seasonality disruption due to the continued COVID impact throughout portions of the U.S. and certain European markets. We now expect our adjusted EBITDA to be in the range of $57 million to $58 million, and our adjusted earnings per share is expected to be between $0.71 and $0.75 using a non-GAAP long-term tax rate of 27%. Despite an increase in COVID-19 pressure on procedures across the business that we've experienced, we continue our transformation, concentrating on executing against not only our short-term but long-term goals of providing physicians with innovative products and solutions to care for their patients. We've made significant progress already and expect to continue to do so in the last quarter of this year and beyond. In closing, and with enduring gratitude, I would like to thank our worldwide team for all their hard work, resiliency, adaptability, and commitment to delivering our patient-centric mission. With that, I'd like to transition to the question and answer session. Operator, please open the lines.