Orthofix Medical Inc.

any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. And if you'd like to withdraw that question, again, press star one. Thank you. I will now turn the conference over to Julie Dewey. Julie, the floor is yours.

Thank you, operator, and good morning, everyone. Welcome to the OrthoFix second quarter 2024 earnings call. We appreciate you joining us. I'm Julie Dewey, OrthoFix's Chief IR and Communications Officer. Joining me on the call today are President and Chief Executive Officer Massimo Calafiori and Chief Financial Officer Julie Andrews. During this call, we'll 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 matter 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, August 6, 2024. 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-Q filed this morning, August 6, 2024, as well as additional SEC filings we make in the future. 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 news release announcing our second quarter 2024 results for information regarding our non-GAAP results, including our reconciliations of these non-GAAP financial measures to our U.S. GAAP results. Additionally, all revenue percentage changes discussed will be on a constant currency year-over-year basis. As a reminder, as noted in the first quarter call, we have annualized the impact of the C-spine merger and will, therefore, no longer be referring to pro forma growth. In addition, all results of operations that we refer to in our prepared comments will be on a non-GAAP as adjusted basis. With that, I'll now turn the call over to Massimo.

Thank you, Julie, and welcome to the team. Glad to have you on board with us. Good morning, everyone, and thank you for joining us for our second quarter earnings call. I'll spend some time providing business updates and information about other key initiatives. Before, I turn it over to our CFO, Julie Andrews, to cover the specifics of our Q2 results and revised guidance. Orsofix had a strong second quarter, delivering above-market growth across virtually the entire portfolio. Our team continues to execute to plan, and after two quarters in my role, I can very confidently say that the business fundamentals are excellent. We have the momentum to continue leveraging our strategic advantages and we have made considerable progress in cash usage, paving the way for much earlier than expected positive free cash flow for the second half of this year. Both operationally and commercially, I'm pleased with our first half performance and encouraged by what's to come in the remainder of 2024 and beyond. Net revenue. for the second quarter was 198.6 million, representing year-over-year growth of 6% on a constant currency basis. Growth was led primarily by strength in our U.S. spine and bone growth therapy, or BGT, businesses, as well as continued market penetration in U.S. orthopedics. U.S. pine fixation grew 12%, more than twice the market rate, and we are capturing increased market share with every quarter. Pine and fracture steam in the PGT markets were once again bright spots and have benefited from cross-selling efforts from our spinal and orthopedic implant business. During the second quarter, we began a limited market release for two new interbody designs. The features are to fix proprietary advanced surface technologies and expand our portfolio of lumbar interbody fusion products to address varying patient anatomies. Our new RIF-L lateral lumbar interbody is designed to maintain the favorable mechanical and imaging properties of peak while also supporting bone-on growth. Importantly, RIF-L further augments our competitive position in the 400 million lateral interbody fusion market in the US. Building on last year's successful launch the Meridian ALIF portfolio has been expanded to include additional solutions that pair our best-in-class 3D printed waveform surface technology with new options to address the vast majority of surgeon preferences. U.S. orthopedics grew 7% and we received 510K clearances for the fitbone trochanteric nail and fitbone transport and lengthening system, further bolstering our comprehensive portfolio used in limb reconstruction and deformity correction procedures. We are in a limited market release for both of these products, which we expect to launch in Q2 2025. In prior calls, I've outlined the key priorities that we're focusing on this year, including profitable growth, strategic innovation, and a synergistic and balanced approach to our portfolio and products platforms. We remain committed to these efforts and are benefiting from key decisions made as a result. In addition to those priorities, I'd like to call out some highlights relating to the leadership team, expanded commercial innovation opportunities, and successes across merger integration milestones. One of my first tasks in taking on this role was to recruit a world-class leadership team capable of shaping a culture of value creation and successfully executing on a long-term vision for Orthofix. I am pleased to report that we have finalized the executive leadership team with the latest addition of a seasoned business leader for our orthopedics team, who will start in mid-August. We have a blend of new and tenured talent ready to deliver on our commitments and fuel future profitable growth. Collectively, this team has more than 250 years of experience in the orthopedics and spine space. And now, more than ever, I believe we are poised to unlock the company's full potential in each of our respective markets. The team's focus is now on prioritizing the most impactful initiatives. that will fuel profitable growth. To achieve this, we will be bringing together a cross-functional group of leaders at the end of August to further define our long-range plan and align on the specific strategies and vital few initiatives to propel our business forward. We plan to share our strategy as well our intermediate to longer term goals and financial targets with you on a third quarter earning call in November. As it relates to reaching other key milestones post-merger, I'm pleased to say that the integration with C-SPINE has gone exceedingly well from an operational and cultural perspective. including the recent successful achievement of a key milestone to complete the ERP system implementation at CISPINE. We are laying the foundation for sustainable above-market growth across our portfolio with a more focused commercial strategy to drive meaningful innovation to improve outcomes and efficiencies for our patients and surgeon customers. At high level, this strategy includes three key components. One, going deeper into existing accounts. Two, taking advantage of multiple commercial access points across our product portfolio. And three, leveraging our 7D flash navigation system to drive surgeon engagement and build brand loyalty. I'll now spend the next few minutes covering each of these in more detail. First, following the C-Spine merger and recent product launches, we believe we are well positioned to serve over 90% of the spine surgeon's needs with a comprehensive product portfolio which includes spinal hardware, biologics, and enabling technologies. We also believe that our comprehensive portfolio and steady cadence of innovation will enable us to attract top sales talent, increase exclusive distributor relationships, and drive sticker relationships with surgeons and hospital accounts, which we expect to result in incremental product pull-through as well as an ASP lift from mixed benefits. Second, the breadth and depth of the orthophic spine and orthopedic offerings provides multiple paths to grow the business and sustain above market rates. For example, we are already taking advantage of cross-selling opportunities to sell our BGT products into C-spine accounts, as well as introducing spinal hardware, biologics, and navigations to our spine PGT customers. We also have additional opportunities with our biologics and fracture simulation products through our orthopedics channel. Finally, we believe that our 7D flash navigation system represents a unique opportunity to drive surgeons and hospital account interest in the broader Orthofix portfolio. As announced last quarter, we have reorganized parts of our commercial structure such that 7D flash navigation will be under the leadership of our spine team. This commercial innovation has positioned 7D as an asset to drive growth across our portfolio, as evidenced by our success in spine fixation. As the world's first machine vision image-guided surgical system, 7D continues to revolutionize spinal navigation, making it faster, more efficient, and radiation-free. With the capability for registration in mere seconds versus 30 minutes or more for competitive systems, and requiring no intraoperative radiation, 7D technology is proving compelling to surgeons, especially those performing open surgeries. Keep in mind that open surgery still represents approximately 80% of total current span interventions, positioning 7D as a key driver of incremental navigated procedure penetration. The ambulatory surgery center market for 7D is also of interest to us, since some spine surgery procedures have been slowly moving into the ASC settings. We believe the 7D system is well positioned for MIS procedure in the ASC, with its small relative footprint, efficient workflow, and pricing. Although still in the very early stage, we've been able to gain some initial experience in the ASP with a few accounts where we have placed a 7D system. With the evolution of our 7D strategy, we are more confident than ever in its increasingly significant role in our portfolio. Additionally, This shift will allow our enabling technologies team to drive software innovation and enhance product integration alongside the R&D pipeline as we launch impactful products across all our franchises. We are highly motivated by the opportunity to differentiate ourselves through the combination of our hardware portfolio with our enabling technology platform system. Our surgeons and patients have become the product focus and we will continue to provide them with a unique approach to navigation in the OR. Overall, Orsofix is in a great position to capitalize on our recent product launch successes. and deliver meaningful innovation to improve outcomes and efficiencies for our patients and surgeon customers. We remain the market leaders in bone growth therapies, have a comprehensive market-leading biologic portfolio and differentiated products in several specialized orthopedic markets, such as complex trauma reconstruction and deformity correction. Additionally, our broad and defined portfolio is best in class and fully supported by the highly differentiated and compelling enabling technology. In summary, I am pleased with our second quarter performance and remain optimistic about the opportunities ahead. Based on continued positive momentum, the strengths of our differentiated and expanding product portfolio which continues to win share and our confidence in sustainable growth trends, we are raising our full year net sales and adjusted EBITDA guidance. And as I mentioned earlier, we are on track to achieve a positive free cash flow for the second half of this year, much earlier than we originally anticipated. With a clear line of sight, I believe we are well positioned to achieve our objectives this year and beyond. We are not letting up on the operational efficiencies and strategic execution it will take to deliver long-term value for customers, patients, and shareholders. I'm looking forward to a productive second half of 2024 and what's to come for Orthofix. With that, I now turn the call over to Julie to review our second quarter financial results and updated guidance.

Thank you, Massimo, and good morning, everyone. OrthoFix had a strong second quarter, delivering total company net sales of $198.6 million, or 6%, constant currency, top-line growth, and adjusted EBITDA margin expansion of approximately 310 basis points. For my commentary, I'll go through each of our business units and review financial results for the quarter, as well as provide an update to our guidance for the full year 2024. Bone Growth Therapy's revenue grew 12% to $59.1 million in Q2 and marked the sixth consecutive quarter of double-digit growth for the BGT franchise. This growth was driven by above-market performance in both the spine and fracture channel. In the BGT spine market where we hold the number one market share position, we continue to take share with more than 50% of the growth coming from new customer acquisitions. In addition, investments in the fracture market sales channel drove 14% growth in fracture with the Excel stem bone growth therapy device continuing to outperform the market. As a reminder, the fracture market represents an opportunity of more than $200 million and we are still in the very early innings of building our position in that market. Global spinal implants, biologics, and enabling technologies second quarter revenue was $108.9 million with year-over-year growth of 3%. U.S. spine fixation revenue grew 12%, well above market growth rates, driven by deeper penetration of existing accounts and expansion of our customer base. Additionally, in the U.S. biologics business, we saw a positive impact of new distributor partnerships, as well as cross-selling initiatives, which drove growth in line with the overall market. The global orthopedics business grew 6% in the second quarter, led by 7% growth in the U.S. as a result of strong performance across our portfolio, as well as distributor expansion and sales channel investment. The international business grew 6% versus prior year, primarily due to recent line extension in our Galaxy fixation Gemini system. Due to the nature of this business, particularly around the timing and volume of stocking distributor orders, we expect to see variability from quarter to quarter in the growth rates. Moving on to some detail below the sales line. Starting with our Q2 non-GAAP adjusted gross margins, which were 71.3%, for the quarter compared to 71.6% in Q2 2023. Non-GAAP sales and marketing expenses were 50% of net sales for the second quarter compared to 52% of net sales for Q2 2023. The decrease as a percent of sales was primarily driven by the realization of cost synergies and a lower effective commission rate due to product mix. Non-GAAP general and administrative expenses were 14% of net sales for Q2 compared to 16% in the same quarter prior year. The decrease as a percent of sales was primarily driven by the impact of cost energies and a reduction in stock-based compensation. Non-GAAP research and development expenses were relatively flat at 9% of net sales for the quarter. Below the operating income line, non-GAAP interest expense and other with $4.8 million for the quarter. Altogether, this resulted in non-GAAP adjusted EBITDA of $16.6 million, or 8.4% of net sales for the quarter, a 310 basis point expansion over Q2 2023 due to the capture of merger-related synergies and driving leverage on sales growth. This represented a 58% drop through on incremental revenue dollars. We remain encouraged by these results as we are seeing the impact of merger-related synergies and our ability to drive leverage on sales growth materialize. From a cash standpoint, our total cash balance, including restricted cash, at the end of Q2 was approximately $28.9 million. Our free cash flow usage was $700,000 in the quarter, a significant improvement over the first quarter of this year. Adjusting for the annual bonus payment and one-time merger-related retention payments, free cash flow improved approximately $10 million over Q1 2024. This was a result of higher EBITDA as well as improvements in DSO and inventory utilization. We have achieved $38 million in annualized synergies to date and are confident in our ability to achieve $50 million in synergies three years post-close of the merger. Overall, we are pleased with our second quarter results and we continue to be confident in our ability to drive profitable revenue growth moving forward. Moving on to 2024 full-year guidance. As Massimo stated, we are increasing our guidance for full-year net sales to range between $795 million and $800 million, representing implied growth of 6.7% to 7.4% year over year on a constant currency basis compared to our previous guidance of 790 million to 795 million or 6% to 7% growth. Please note our expectations are based on current foreign exchange rates and do not account for rate changes that may occur through 2024. We are also increasing our full year 2024 non-GAAP adjusted EBITDA to 64 million to 69 million compared to our previous guidance of 62 million to 67 million. Finally, we are continuing to focus on improving our working capital management, specifically our inventory and instrument utilization and DSO efficiency. With these efforts, as well as continued execution of merger-related cost synergies, we now expect to be free cash flow positive in the second half of 2024 earlier than we had originally anticipated. While we do not provide quarterly guidance, I will provide directional commentary on the expected cadence of our business to assist you in modeling our quarterly performance. These comments remain in line with the directional remarks provided on our fourth quarter call in March. We expect Q3 net sales growth to be at the high end of the guidance range due to disruption in the prior year as we close the quarter and the impact of one additional selling day in 2024 versus 2023. For gross margin, we continue to expect 2024 full-year gross margin to be in the 71% range in line with 2023. We also expect operating expenses to decrease approximately 200 to 300 basis points through leverage on incremental sales and additional cost synergies. To assist you with modeling EBITDA, We reiterate our outlook for depreciation expense, which for the full year 2024 is in the range of approximately $36 million to $37 million. Stock-based compensation expense is now expected to be in the range of $33 million to $35 million, below the operating income line. Our expectation for interest and other is approximately $5 million per quarter. We expect adjusted EBITDA margin improvement of approximately 200 basis points for the full year with margin expansion in the second half of the year to be slightly lower over prior year as we annualized the bulk of 2023 synergies in the first half of 2024. Q3 adjusted EBITDA margin expansion is expected to be less than in Q4. Now before we open up the call for questions, let me turn it back to Massimo for concluding comments. Massimo?

Thanks, Julie. In closing, I want to express my appreciation to our entire Orthofix team for their efforts in Q2. Their contribution has been instrumental in driving our performance and I'm very proud of the progress we have made. With our full leadership team in place, it is now time for us to continue executing against our commitments. Drive sustained, profitable growth expand the shareholder value. The fundamentals are strong and we have an innovative mindset to carry us forward. I'm encouraged by what we have achieved and excited for what's to come. Operator, let's now open the line for questions.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. And if you'd like to withdraw that question, again, press star 1. We also ask that you limit yourself to one question and one follow-up. Your first question comes from Matthew Blackman with Stiefel. Please go ahead.

Good morning, everybody. Can you hear me okay?

We can. Hi, Matt.

Hi, Matt. Hi. Hello, everybody. Julie, I've got a couple for you, Julie Andrews, to be precise. You talked a little bit about it at the end of your comments, but if you talk a little bit more about the levers you pulled to get to cash flow positive faster than expected, and maybe more important, how much more opportunity there may be in those levers or others. And then maybe I'll just throw it out here, just some clarification on that free cash flow guide. Should we expect positive free cash flow in 3Q and 4Q or just in the second half in some? And then with the exception maybe of the seasonally heaviest spend in 1Q25, should free cash flow stay positive from here out?

Okay. Thanks, Matt. So I'll start with your first question, the free cash flow usage and the improvement. We saw a really good drop through on our EBITDA. That was one driver. as well as we're seeing improved working capital efficiency with inventory utilization and had improvement there, as well as DSO improvement as well. Those were the main drivers within the quarter. We do still think that there is opportunity within, of course, with adjusted EBITDA as that increases, that we'll see good conversion to cash there. And then we do still think that there's opportunity within our inventory lines and a less opportunity with DSO efficiency, but some there as well. And that's really what's driving kind of our outlook on the back half of the year being free cash flow positive. We're not guiding to Q3 and Q4 individually being free cash flow positive. Q4, you know, we are, but the full back half of the year.

And then your second question was about

Yeah, sustainability. Yeah, I mean, we believe, you know, we will be free cash flow positive for 2025. It won't be every quarter. You know, as you mentioned, Q1 has, you know, seasonal payments that we make, and that won't be a free, we wouldn't expect that to be free cash flow positive.

Okay, and if Julie Dooley would allow me one follow-up question. I think the implied, and this is for you, Julie Andrews, again, The implied drop-through, I think, in the second half is something like 40%, something in that neighborhood. Is that how we should be thinking about drop-through as a rule of thumb beyond 2024, or does it go lower than that as you annualize some of these cost synergies and maybe some of the initial initiatives?

Thanks. Yeah, I mean, generally, you know, we would expect to be in the 30%, 35% range as we annualize our synergies. We won't maintain the 40% range over time. We haven't specifically given numbers.

Okay, I'll get back in queue. Thank you so much. Thanks, Ben.

Your next question comes from the line of Ryan Zimmerman with BTIG. Please go ahead.

Good morning. Thanks for taking our questions, and congrats on all the progress this quarter, guys. I want to ask you two questions on products, if I may. First, as I look at the overall spine growth, particularly in hardware, biologics, and enabling tech, You know, appreciate the color on the hardware, you know, the commentary on biologics. I'm wondering if you could spend a little bit on enabling tech, Massimo. Kind of how is that shaping up relative to the growth of that segment? What do you see for the pipeline in terms of, you know, 70 demand? And just how to think about kind of, you know, going forward that contribution to that segment in enabling tech. And then I have a question on STEM after that. Thank you.

Yeah, look, great question. We discussed this multiple times, and we see 7D as a fundamental for us on creating sustainable growth. There is a lot of interest around 7D and a lot of focus that we're putting right now on creating more placement of our machine for earn-out. Actually, there was a pretty strong effort by the team on start to be focused on that because we believe that creating more iron outs out there is going to drive a higher implant utilization and a sustainable growth. I've said multiple times, 7D is a unique technology. that really creates a differentiable experience in the OR, and all of this is translating and is going to translate for us on bringing more surgeons on board. At the same time, from the R&D perspective, we are very excited about what we can do with 7D. There's going to be a very focused investment on 25 and beyond, around the technology because we believe that we can have peace that no other company can have given our proprietary machine vision. So in brief, again, great focus on development on 7D, great focus on creating an opportunity out there to become an alternative not just to other navigation systems but also to robotic systems out there.

Next question on STEM. You continue to, I think, surprise, you know, not just myself, but everyone on your continued success in STEM. Six quarters in a row doubled it. It's very impressive. Part of that is a benefit, I would imagine, from cross-selling, you know, particularly from the legacy Ceasefire Business. Where do you think you're at in that, in terms of that penetration? I mean, how much more can you benefit from from cross-selling bone stem into the legacy C-Spine customer base. And, you know, again, if this is a market that's growing low single digits, you know, at some point, I worry, maybe not you guys, but I worry that that growth may slow. And so, you know, help me understand kind of, you know, how long these tailwinds, you think, in your mind can continue.

Yeah, this is a great question because it's a question that we ask of ourselves. So right now, you can see that we are at the instances of our merger with Sysbind. So I think that for the foreseeable future, we keep seeing the opportunity to leverage, as you said, the synergistic approach that we are bringing up on cross-selling within our segment, given that the whole point is the same. Over time, I think that given our dominance in the market, we're going to see a natural slowdown of the growth to, let's say, above market rates. But as I said before, we are still at the infancy of our merger, so I think there is still room to drive and leverage the synergies that you're seeing right now. But again, I think that you're seeing that I've set the line.

Well, congratulations again. Thank you.

Thanks, Ryan. And as a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Your next question comes from Jason Witts with Roth MKM. Please go ahead.

Hi, thanks for taking the questions. Maybe just a quick follow-up on 7D. From your commentary, it sounds like most of the... growth or placements are focused on open surgical procedures and MIS is still sort of a work in progress. Is that the right interpretation or how should we think about 7D, especially for MIS and percutaneous applications?

Yeah, Jason, thank you for the question. Look, at the end, that one is, I've said before, and I've said on my remarks, you know, like we also, 7D, given the footprint, is poised to be, you know, a machine that can be easily used on the ASC setting where we are expecting over time a switch on the MIS procedure. So right now, you need to see 7D as a system that for MIS is comparable to all of the systems out there in the market. Of course, we talk about open procedure because for the specific markets, 7D is the state of the art, but again, given that we believe on MIS, we're investing in MIS on the hardware side, and we want to create a tighter connection between hardware and software, you see that an investment on the specific MIS module that they're going to bring 7D, if not you know, at the same level, let's say, of 7D for open procedure. So the system right now, again, you can do MIS. It performs as well as others, but over time, as I've said before, given that we believe that for open procedure we are state of the art, over time we're going to work for make our MIS capability even better than competitors out there.

Okay, thanks. That was very helpful. And then On distribution, I think at least that was my read that until you go to cash flow breakeven, you're going to be somewhat selective and pretty careful on distribution. I guess two questions related to that. One, can you give us an update in terms of what's happened with your sales force this quarter in terms of ads? And then secondly, am I right to assume that when the cash position improves, which sounds like it's certainly happening at a faster pace, there may be a more aggressive increase in the sales force?

This is a great question. We don't give specifics about how our distribution network is today. What I can tell you is that our philosophy about our commercial strategy is not going to change. It's not going to be dependent on our ability to spend. I think that I've said multiple times, we want to create sustainable growth and we will not force our commercial leaders to find growth just for the sake of growth. Look, what has made me very proud right now is not how much we are growing, but the quality of revenue that we're bringing to the organization. At the end of the EBITDA pull through that you saw this quarter is just function of our ability to be very dogmatic on how we are doing. If you want to see us, if you want to imagine us in the future, it's a company that is going to keep focusing on growing above market rate. It's going to make, let's say, it's going to trade accelerated revenue to decrease EBITDA profitability and it's going to stay always focused on being the best partner possible. that we can fund. Because at the end of the day, success is not just growth rate, but also our ability to utilize the assets that we have in the best way as possible. And we can do that if we have a very good commercial partner.

Great. Congrats on a solid quarter. I'll jump back in here.

And that concludes our question and answer session. I will now turn the conference back over to Julie Dewey.

Thank you. We appreciate all of you joining us and we look forward to talking with you next quarter. This now concludes our call.