Orthofix Medical Inc. (OFIX) Earnings Call Transcript & Summary

All right. Good afternoon, everyone. Thank you for joining us. I'm Danielle Antalffy, I'm the U.S. med tech analyst here at UBS. Very honored to have with us Orthofix Medical. We have President and CEO, Massimo Calafiore. We have Chief -- well, we don't have the Chief Financial Officer, reading off that. We have Julie Dewey, Head of Investor Relations. Unfortunately, Julie Andrews, Chief Financial Officer, could not make it because of travel issues. But I think we got it covered with the folks on this stage.

So Massimo, maybe give a minute or two or five, whatever you need, to give a quick overview of the business for folks that might not be as familiar with Orthofix?

So Orthofix is a med tech company focused on the spine -- on the spine market on both Bone Growth Therapy market, Biologics and Orthopedics. We are a pretty competitive portfolio. We joined -- we started this journey 2 years ago. And -- with the idea in mind to make sure that we would -- to utilize all the commercial synergies that we could of the portfolio that we had while at the same time, funding specific pocket within this broad market where we compete where we can win, but with, in mind, this idea of profitable growth and free cash flow creation. So in the Spine vertical, we are still subscale, but a pretty strong portfolio with a clear innovation strategy. We have a very competitive and highly differentiable Enabling Technology platform that is 7D that is helping us to create strides in the market and compete with our largest -- with the largest players in the market, but also at the same time, creating a lot of room for us to grow, dislocating a lot of the small companies that participate in to spine within the Spine portfolio, so we cross-sell our Biologic portfolio, which is where we have a pretty good market share in some subcategory. On the opposite side, in Orthopedics, we did a very good job narrowing our focus on specifics of the category that is the limb reconstruction market. In this specific market, we enjoy a portfolio that is highly differentiable and if you see in between, we are taking advantage of the commercial synergies that we are seeing between the Bone Growth Therapy portfolio into spine and the Bone Growth Therapy portfolio into trauma. So let's say, a very well-balanced and diversified company focus on value creation.

Okay. Got it. And since you and Julie joined back in 2024, you've made a lot of progress on solidifying the foundation of Orthofix. Maybe talk about the progress you've made thus far.

Yes. So at the beginning, when Julie and I started, first thing first was we needed to solidify the base -- the financial base of the organization. So we work very hard to refinance our debt. There was a big overhang for us very successfully. We turned around the cash flow -- the free cash flow generation for the organization when we joined -- the year that we joined the company lost more than $100 million on free cash flow.

$109 million to be exact.

And now let's say, we are free cash flow positive. And since we started, we have 7 quarters in a row of positive EBITDA. So that one great. Second was, okay, everything happened. You need to have a strong team around you. So we hired -- we create a brand-new management team, all people that have specific experience in the spaces where we compete. We believe that in spine orthopedics, you need to have people that know the market is kind of -- to understand the nuances. And third, we defined a pretty clear innovation agenda focused on 7D, our Enabling Technology platform, refining the portfolio in Spine and funding this area where we can very differentiated very much as in Orthopedics. So finance first, with people and now focus on execution with innovation and growth.

And on that point on execution, you actually did have a pretty solid third quarter that you just reported. Can you give us some of the highlights from the quarter. And I think one of the questions investors have had is with a quarter like that, why didn't you raise revenue guide?

Okay. So from the quarter, as you said, has been -- was very well executed in every single area, so we enjoy growth well above the market, taking -- start to take the benefit, a lot of the -- all of the choices that I mentioned before, together with the work that we are doing on optimizing our distribution network. So I was very pleased about how the organization performed. The beat in Q3 was mostly due at some timing related to some international order that came earlier than expected. So we decided to maintain the guidance for Q4 as it was just because of the timing of these specific orders. So nothing as shattering, but again, I was very, very pleased about the quarter.

Great. Let's talk about the spine business. So it sounds like you are very excited about the upcoming Virata. Am I saying that correctly, Virata, launch in spine. Can you talk about what differentiates the platform? And what can we expect as it relates to the launch, the ramp cadence?

We are very excited because in -- if you see the portfolio of all our competitors, thoracolumbar fixation is one of the highest, if not the highest, revenue generator and within the portfolio that we found in Orthofix, this area was the area that need -- that still need some innovation coming. So great work of our engineer on developing a record time Virata, which pretty much encompass year-on-year of history spine around this type of product. So just to give you a couple of examples, during the alpha launch, we targeted just surgeons that didn't have any relationship with Orthofix. And because we start to see, okay, what are the system out there and we start to bring -- they start to bring and improve the philosophies that we already utilize a very easy transfer between us and between them and us on the product side. Also, during the merger, we inherited -- the company narrated a pretty strong patent for a specific feature from Orthofix, which is the ability to pop the head of the screw in the shank. And what it does, it creates a lot of opportunity, opportunity for the surgeon to -- during the operation decide which kind of screw to use. Just speaking, let's say, this specific feature; and b, we are creating a very big operational efficiency for us. because the amount of inventory that you need to send in order to perform the case is much lower. So a lot of excitement for 3 reasons, the ability to now fully compete in the largest market in spine; b, more operational efficiencies for us; and three, the ability to, over time, to keep addressing different area of the fixation space because right now, Virata just -- this launch of Virata is just for the open platform. We're going to have the MIS coming; and third, deformity. So a multiyear journey on this product.

Okay. Got you. In the third quarter, your top 30 U.S. distributor partners grew sales -- net sales, 25% year-over-year, 33% trailing 12 months following targeted transitions. What further transitions remain there and what near-term disruption or uplift could we expect into fiscal '26?

Yes. We're going to -- this -- we're always going to -- of the company and us especially, we're going to look we're going to be very critics about the quality of the partners we have and the ability of the partners that we have to scale. So we are just kind of the middle of the road of our journey. How strategically we go about this -- our, let's say, the commercial strategy is in some area, we consolidate -- so we bring -- we eliminate some smaller shop to consolidate to a bigger partner where we see, let's say, a little bit more time to uplift because you need to start to -- there is some transition period that needs to be managed. But in many, there are a lot of new revenue coming because there is many areas of the country where we're not present. And we are taking advantage of some of the dislocation that you see with our competitor taking advantage of larger distributors that are available for us. So a twofold strategy that is not just bringing this accelerated growth for us in the top line, but also helping us to maximize the utilization of our asset. So this strategy is creating not just top line benefit, but also better cash flow utilization, EBITDA creation for us.

Sure, sure. International Spine Fixation grew 86% in the third quarter. How much was driven by new geographies, channel restructuring or nonrecurring tenders? And what is a normalized growth cadence for that business?

Yes, I think that we're going to keep growing on the foreseeable future, not at the same rate, but pretty accelerated rate. It's driven by a couple of factors. A, we are being very strategic about how we're going, especially into Europe, focusing on markets where we still can enjoy decent pricing. So -- and we are doing a very good and efficient work to reap our MDR certification for the product out there. So a good opportunity coming from defocusing of international from some of our competitors. But also now, we are funding -- we'll start to focus on APAC and the Middle East where we can have a pretty competitive pricing in -- and with product that surgeon enjoys as much as United States. So it's been a surprising quarter, but I think that we can -- an area where we can grow still in a profitable way.

Okay. What about the sales force here? Should we expect the sales force to grow meaningfully? Or do you think you've reached critical mass to support your current growth expectations?

Just to give you -- just to level set here, in Spine and Orthopedics, we use just distributors. In Bone Growth Therapy is 50-50 between direct sales force and distributor. So on the distributor side, we are like subscale in both segment that you mentioned. So I think that there's still a lot of opportunity to grow and a lot of partners out there that are asking for a competitive technology that the competitive technology that we have. So I think that from the growth perspective is mostly in our hands to make sure that we don't deviate by our strategy of profitable growth. And we're going to be -- we're going to keep improving our go to market. We're going to keep improving the quality of our partner in a responsible way, but a lot of it -- a lot of room to grow there.

Okay. And earlier this year, you did have a U.S. spine price decrease at a major account that should now mostly be anniversaried or annualized and you are trending towards flat ASP. How are you thinking of the balance between price and volume to protect ASPs in 2026?

Yes. We are expecting that in our long-range business plan, we expect 1% or 2% price pressure. So I think that we can overcome with a volume increase. What's happened this year was just a coincidence of a merger between 2 accounts. So kind of not really market macro -- not driven by a macro environment, which at price level, if you think since post COVID has been pretty stable in Orthopedics and Spine.

Yes, totally fair. Let's shift to orthopedics and limb reconstruction. You're the only U.S. company offering a complete suite of internal and external limb reconstruction solutions. Where are you on the adoption curve for TrueLok Elevate and FITBONE nails? And what does the ramp into 2026 look like by procedure type.

Look, we are still at the infancy. It's -- especially on the TrueLok Elevate is a market creation activities. So a lot of education, a surgeon level, lot of education and rep and distributor level around the procedure. What we have, what we call a vital fuel. So like a clear priorities that was set in the organization for '26 about developing the full go-to-market strategy for this product. So we are foreseeing to be a growth driver for '26 and beyond. At the same time, on the internal lengthening, a lot of opportunities that are coming to us because focusing -- because the focus on this market segment from our large competitor, and I personally like what we are doing in orthopedics because we found this $2.6 billion market where we can clear be the market leader. And on top of this, we're talking -- going back to about pricing, we compete in an area that is less price-sensitive than everything else. Our patient population is very demanding, so less attention on the cost. So a great opportunity with very good margin.

Okay. And within this business, what are the key barriers to surgeon adoption of deformity correction and bone transport? And how are you scaling training programs to accelerate conversions?

Yes. So we -- in our vital field education is important. One thing that we are doing -- we are focusing before the company was very focused on podiatrist and DPA. Now we are -- start to work in a more diligent way on partnering with institution around United States is actually focusing on limb reconstruction. This one is going to give us the opportunity to start to meet fellow and residents that are about to go out in the market, they're going to go in the market in the future. So we're doing a very good strategy to create not just a strong foundation for this business, but also longevity in the business. So clinical education, clinical publication and fellow -- resident and fellow strategy is key for us to succeed.

Is it part of fellowship training program?

There are just a couple that start to focus. One, actually, in New York City being HSS.

Okay. Okay. Let's talk about Enabling Technologies and 7D flash navigation. Can you share the latest placement cadence and utilization for 7D flash, building on the record placement year you had in 2024? And what is the road map software modules, imaging integration or robotics partnerships here?

Okay. So let's start from the innovation side. which I like. We spend around 8% in average of R&D per year. And there is a lot of investment that goes into feeding 7D. We have a great group of engineers and the ability to release -- we have a very good cadence of software release on the system that keep increasing the usability of the system and keep increasing the number of devices that we can navigate on the system. So a good innovation coming there. But at the same time, we are lesser focused on keep changing and keep innovating within the space of navigation so excited about what we can do there from -- starting from a platform that, as it is today, is very -- is highly differentiable. And all of this is translating on clear commercial success. So one of the things that we did since we started -- since we start to run Orthofix focusing on enabling tech. We changed our strategy from straight capital sales to start to leverage the earn-out program that we call Voyager. We did this for 2 reasons: A -- for 3 reasons: a, because I believe in pull-through. So if you see all of the company that was successful in leveraging Enabling Tech, they create a real pull-through for the hardware; b, I truly believe that we had already a very highly differentiable portfolio to sell in Spine. So we needed 7D and a strong commercial organization to give this portfolio a voice and I believe on 7th -- of the quality of 7D. So just to give you a sense of the success in aggregate, the account that they use 7D under disposable -- under disposed. they have 7D available with them. The earn-out program is 50% ahead of their volume commitment. So is -- this one is a great testament about the quality of the product and the quality of the implants that we have.

Right. So just on that point, what is the average? So that was one example. You're doing very well for that account. But what is the average implant Biologics revenue uplift per account post 7D Flash installation. And how does that influence capital allocation to enabling tech versus instrument sets.

So we haven't provided specific amount of that uplift, what Massimo just said, in terms of the aggregate, it's pretty compelling in terms of what it can do, and that's very sticky -- I would say, very sticky revenue in terms of that. So we love doing these Voyager agreements all day long.

And on the capital allocation, it's one area where we improved a lot since our tenure and mostly because what I said before -- what I said before about the type of partner that we're using. We can do biggest -- a larger amount of surgery with the same amount of capital that we invest. So very pleased about the progress we're making there.

Okay. Let's talk about Bone Growth Therapies now. So you grew 6% in Q3 with above-market performance and traction and fracture. What is the mix of growth from competitive conversions versus new surgeon adds? And what is the multiyear runway for AccelStim?

Yes, we don't give a specific statistic around that. What I can tell you is we have been very successful on creating synergies between the commercial organization into Spine with the commercial organization of Bone Growth Therapy. This is why you see that despite the clear market leadership we have, still growing 6%. And if you see how sustained was the growth since the tenure in the specific segment is a big testament about the discipline that we're bringing on the execution of the organization. On fracture is a little bit different because we can manage the growth also keep investing on direct sales force. So very pleased about how the team is performing. AccelStim per say -- we already have the same method of delivering care in our portfolio what 2.0 is going to bring it to us is going to be an uplift on our margin, given that right now, we're going to start to manufacture the product in-house that we licensed.

Okay. And maybe talk about payer policies here and what are the potential mitigation strategies should CMS revisit prior auth or HIX changes for this class?

Yes. We don't expect big changes on macro level. The [ systems ] has been very stable for BGT. And we are protecting our market leadership with our PMA. We are the only Class III device and we didn't see in the recent history -- in the recent past, any pushback or sign of the classification of the -- of our technology. So pretty pleased there.

Okay. Got you. Let's shift gears to the pipeline and R&D and how you think about the cadence of product launches. So you've got -- and specifically for 2026, what's on the docket there? You've got Virata that sounds like we'll go into full launch in 2026? And what's coming behind Virata from a product launch perspective.

Yes. So on the Virata side, it's just going to be just the open platform that is going to end to full launch in '26. So we're going to do an alpha launch on early '26 with MIS. So on the Virata side, it's a multiyear product development. So a catalyst, we're going to have different catalysts coming in the short term. So very excited about that. We need to keep commercializing all of the latest innovation interbody. So we have our Reef technology that we use for lumber, for anterior support -- anterior column support that needs to be -- that is going to get still in the infancies of the launch piece. So a clear strategy on Spine. On the Orthopedic side, we're going to get -- Elevate is going to be fully launched in '26. But similar to what I said to Virata, you're going to see different version on Elevate coming in the horizon year-over-year. It's a market segment that we are creating is a market segment where we want to keep winning and growing. So a great focus on that. FITBONE is another area where we are investing a good amount of resources in order to complete and evolve the product line. So clear 7D, we talk about it. We want to honor the continuum of care. So not just focus on what's happening in the OR. The Q1 '26 is going to give access also to preoperative planning and custom patient-specific roles that we're going to launch. And in BGT, keep leveraging our strong market position to collect data. We have award-winning Stim on Track platform that let us not just manage patient compliance, but also collect data that over time you can feed into the system. So you go segment by segment, we have a pretty clear innovation agenda.

Yes. Yes. Sounds like it. Let's talk about the long-term targets that you guys have provided. So to level set everyone, 6.5% to 7.5% net sales CAGR through over '25 to '27, mid-teens adjusted EBITDA by 2027, sustained positive free cash flow. As we look forward, what are the catalysts that support you achieving this goal? Where do you see the biggest risks.

From the opportunities, I think that is clear. We are working -- keep working on how we go to market. We keep working on our product -- on our very deliberate product launch cadence. So a lot of excitement of what is going to happen late this year -- late of 2026 with Virata and full -- we are expecting to enjoy the full year of launch of Elevate. From the risk perspective, I think that the market is pretty healthy at a macro level. I think that we're going to have -- we already talked about the tariff effect that we're going to have in our P&L, which for us is highly manageable given that we have just a little exposure in Europe with Orthopedics. So I think that Orthofix story now is a study of relentless execution and keep improving on improving on what we discussed on the commercial side. I'm very pleased about the discipline that the company has. We beat -- we were growing EBITDA constantly quarter-over-quarter together with all of the other metrics. So excited about what we can do.

Yes. And I think something that's top of mind for investors as well is what's happening in the competitive landscape with -- so J&J is now spinning, selling their orthopedics business, Stryker sold their spinal implants business. What are you seeing out there? How is the competitive landscape changing? And is it impacting your go-to-market strategy at all?

For us, it's just opportunity.

Disruption.

It's a clear sign that the market is demanding companies that are focused on -- that the surgeon -- that they are focused on surgeon needs from the technology perspective, from the service perspective, I think that the surgeon and distributor like to partner with nimble company that have 1 mission in mind. It is interesting. If you go back a few years ago, all of this big competitor had this idea to invest in multiple -- this desperate market, the different type of market in order to try to own specific accounts at multiple level, but also -- but you start to realize today that surgeon preference is still more important, sometimes the contractual obligation. So when you start to learn that I think at the macro level, there may be not interested to participate in market like Spine and Orthopedics, which is a great opportunity for us and a great opportunity that we're going to take advantage of. At the same time, the fact that we own this neighboring technology platform like 7D is created differentiation in spine from all the smaller competitor. So you then start to see consolidation or dislocation at a macro level, but also for sub-$100 million company. So good opportunity for us.

And let's maybe talk about capital allocation. What are your priorities when it comes to capital allocation?

So we are investing R&D innovation is important for us. We -- in our 8%, I think that we can -- it depends on our priorities. We are very disciplined on how we invest capital. 7D is important. It is a differentiated platform. So a lot of focus there. And within the market where we compete, this is why I said that one of the work that we did is really focus on areas where we believe that we can win. The limb -- before Orthopedics, the Orthofix were participating in different segment of trauma in order to optimize capital allocation area where we can win, we decided to win there. In spine, there are 2, 3 areas where we can be highly differentiated, like cervical now, Virata with thoracolumbar interbody. So somebody asked me a few weeks ago during a podcast, like how can -- how well despite our size that you can win in innovation. I think that you can win just to prioritizing and be able to say, no instead to say yes to everybody. And this is what we did. We discontinued more than 40 product lines. We discontinued a large product line that was a headwind for us. We are consolidating this all of this just to create the discipline that let us invest and win a specific area of innovation.

Okay. And in the last minute here, I'd like to wrap up by asking, where do you think there's dislocation between how -- and what investors are either focused on or how they perceive Orthofix versus what you think Orthofix is delivering and can't deliver?

Yes. I think that there is a disconnection between -- I think the people needs to -- an investor need to step back one second and see what is the history of Orthofix. When we are in the continuum of our growth strategy, we -- sometimes we are compared with companies that are 10, 12 years ahead of us on the execution side, we are just in 2 years in our journey. And if you see just the amount of progress that we made since the beginning of our tenure, it is astonishing the difference between the company that we inherited with the company that we are now. And I don't think that we get enough credit of innovative -- of innovating and growing -- creating profitability still being subscale in many markets where we compete. So I think that it's going to be a great story from now on.

Well with that, we're out of time. So great timing. Thank you, guys.

Perfect. Thank you.