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

Thank you for standing by. At this time, I would like to welcome everyone to the Orthofix Second Quarter 2026 Earnings Call. [Operator Instructions] I would now like to turn the call over to Julie Dewey.

Thank you, and good morning, everyone. Welcome to Orthofix' Second Quarter 2026 Earnings Call. I'm Julie Dewey, Orthofix's Chief IR and Communications Officer. Joining me today are President and Chief Executive Officer, Massimo Calafiore; and Chief Financial Officer, Julie Andrews. Earlier today, Orthofix released its financial results for the second quarter ended June 30, 2026. A copy of the press release and supplemental presentation are available on our Investor Relations website, and a replay of this call will be posted shortly after we conclude. Before we begin, please note that our remarks include forward-looking statements. These statements involve risks and uncertainties, and actual results may differ materially. All statements other than those of historical facts are forward-looking statements. We do not undertake any obligation to revise or update such forward-looking statements. Factors that could cause actual results to differ materially are discussed in our most recent filings with the SEC and may be included in our future filings with the SEC. We will also reference certain non-GAAP financial measures during today's call. including certain growth rates presented on a pro forma constant currency basis and excluding discontinued M6 artificial disc product lines. Reconciliations to the most directly comparable U.S. GAAP measures and additional information are included in our press release and supplemental materials. Here's today's agenda. Massimo will start with business performance and operational highlights. Julie Andrews will follow with our financial results and guidance, then we'll open the call for Q&A. With that, I'll turn the call over to Massimo to discuss our second quarter performance and the progress we're making across our strategic priorities. Massimo?

Thank you, Julie, and good morning, everyone. I appreciate you joining us today. Our second quarter results provide further evidence that the operational actions we have taken over the past year are showing up more clearly in the business. While that progress is encouraging, our transformation remains a work in progress, and we are staying disciplined in how we evaluate growth quality, commercial productivity and returns. We delivered 5% pro forma constant currency net sales growth over prior year and saw encouraging trends across several areas of the portfolio, including double-digit growth in global limb reconstruction and spine fixation, sequential momentum in Biologics and the restoration of Medicare reimbursement for bone growth stimulators, which removes a meaningful headwind for our Therapeutic Solutions business as we enter the second half of the year. While we recognize that transformation are rarely linear and not every part of the portfolio will improve at the same pace, we believe Orthofix today is operating from a stronger position than it was a year ago. Our approach remains disciplined and focused. We believe the underlying drivers of our performance are becoming more constructive, supported by clearer execution priorities and better visibility in key parts of the business. With that context, let me walk through our business performance in Q2, starting with Spine. In Spine, Global Spine Fixation net sales grew 10% on a constant currency basis, with U.S. spine fixation net sales up 3% in the quarter. Our top 30 distributors represent approximately 80% of our spine fixation sales continued to perform well. At the same time, we saw a steeper decline across the remaining smaller distributors, where productivity has been below our expectation for several quarters. We are actively evaluating where we can generate the best long-term returns among this group. As part of the process, we are being disciplined about where we invest resources and where we make choose to consolidate or exit relationships that are not delivering sustainable growth. This approach reflects our focus on profitable growth and strong returns. We expect these challenges with our smaller distributors to continue through the balance of the year. Longer term, our objective is to build a higher quality, more productive distributor network that can support sustainable growth, stronger adoption of new products and better returns on future commercial investment. We are also preparing to bring new innovation into the channel. We completed our first clinical cases with our Virata minimally invasive system in Q2 and are continuing to prepare for the full market launch of our Virata spinal implant system later in the fourth quarter. Importantly, the initial surgeon feedback has been encouraging and supports our continued focus on building an integrated procedural platform that combines Virata with our interpay solution surgical technology, a 70D enabling technologies portfolio. Beyond spine, we believe early signs indicate that our focused execution is contributing to better performance in areas that had been under pressure. In biologics, we saw encouraging signs that the business is moving in the right direction. Net sales were approximately flat year-over-year, represented a market improvement from the contraction we experienced through 2025. This was the second consecutive quarter of improved year-over-year performance moving from double-digit declines last year to approximately flat performance in Q2. While we are encouraged by this progress, we believe more consistencies needed before declaring a sustained return to growth. Our priority now is converting this more constructive trajectory into durable growth. supported by stronger account engagement, higher utilization and targeted commercial focus around the key products such as Osteo bioactive synthetic bone graft. To further support the long-term growth potential of the business, we are pairing improved commercial execution with targeted investment in clinical evidence generation for Osteocove and Virtus and product registry for STEM. This investment is intended to support a more durable recovery. We saw a different but equal important dynamic in therapeutic solutions where underlying demand remained resilient despite the reimbursement pressure that affected part of the quarter. Therapeutic Solutions formerly Bone Growth Therapies delivered 3% year-over-year net sales growth. Despite the impact from the America reimbursement decrease that was in effect for a portion of the second quarter. That performance reinforces the durability of the franchise, which continued to benefit from steady demand, a strong margin profile and favorable cash generation characteristics. We were also pleased that CMS restored medical reimbursement for bond growth stimulator to its prior level, following stakeholder feedback, including concerns we raised. This decision removes a meaningful headwind and supports improved second half visibility with utilization and prescribing trends during the quarter remaining constructive. As we return to more supportive reimbursement environment, we plan to continue investing in elevating the patient and physician experience within the therapeutic solutions franchise. During the quarter, we launched Access STIM 2.0. This award-winning bone growth therapy device was redesigned with a streamlined form factor to provide enhanced [indiscernible] greater visibility into device utilization and [indiscernible] patient reach provides a valuable channel for evaluating adjacent growth opportunities [indiscernible] where we see clear clinical relevance and attractive returns. Global limb reconstruction demonstrated solid performance during the quarter, supported by strong international momentum and sustained demand across key product families. Net sales grew 11% on a constant currency basis, led by the TrueLok Elevate and Fit Bone. In the U.S. growth was below our expectation, but the primary dynamic was not a lack of clinical interest. Rather, we are still building the commercial infrastructure required to more consistently convert interest into revenue in what remains an emerging in reconstruction market. Our focus is on improving distributor productivity expanding market development activities, increasing commercial consistency. As those capability mature, we expect U.S. performance to become more consistent over time. We also see opportunities to extend our limb reconstruction expertise into adjacent areas of unmet clinical need. One example is diabetic foot wholesale, a large and underserved market where we believe our core technologies may have broader clinical applications. Our near-term focus is on generating the clinical evidence needed to support the potential expanded indication while maintaining a disciplined approach to investment and development. We view this as an important pipeline opportunity that could expand the reach of our limb reconstruction portfolio. and support durable long-term growth. [indiscernible], Q2 showed tangible progress in several areas of the business. while also reinforcing where continued execution is required. Our focus remains on improving quality of revenue strengthening commercial productivity and building a more consistent path to profitability and cash generation. Just as importantly, we believe the combination of focused innovation, a more productive commercial organization and disciplined capital allocation position us to create sustainable long-term value for shareholders. With that, I'll turn the call over to Julie Andrews, to review our financial results and guidance.

Thank you, Massimo, and good morning. For purposes of consistency, the growth rates I'll reference today are on a pro forma constant currency basis and exclude the impact from discontinued M6 product lines. From a financial perspective, Q2 results reflected improving revenue trends across several areas of the portfolio, while profitability was impacted by geographic mix and continued investment in priority growth initiatives. Let me briefly review performance by business segments. Global spinal implants, biologics and enabling technologies generated $109 million in net sales, an increase of 4% versus the prior year period. Growth was led by spine fixation, which benefited from continued international momentum and timing of international distributor orders. Therapeutic Solutions generated $64.2 million in net sales up 3% year-over-year. The business grew despite temporary reimbursement pressure, reinforcing our view that underlying demand remains resilient. With Medicare reimbursement restored, we expect Therapeutic Solutions to contribute more favorably in the second half. Global Limb Reconstruction delivered net sales of $37.7 million in the second quarter, an increase of 11%. Growth was driven by strong international demand and continued adoption of key product families, including TrueLok Elevate and FITBONE, while growth in the U.S. was more modest during the quarter, our second half assumptions reflect greater commercial productivity, the lapping of sunsetting product lines and continued prioritization of our highest return growth opportunities. Moving down the P&L. Non-GAAP adjusted gross margin was 71.7%, reflecting an unfavorable geography mix during the quarter. Adjusted EBITDA was $20.1 million, while net sales trends improved during the quarter, profitability was impacted by geographic mix, credit losses in certain international markets and continued investment in key launches partially offset by ongoing cost optimization initiatives. We remain confident that the resource alignment and cost actions underway will support our full year profitability outlook. We ended the quarter with $104.4 million in total cash, including restricted cash, providing us with flexibility to support both our operating priorities and strategic investments. Before turning to guidance, I want to provide context around our European MDR strategy for Spine that is reflected in our updated net sales outlook and is important to understand and model appropriately. As background, SeaSpine made the decision in 2022 to exit the European spine market and focus resources on the U.S., and that strategy remains in place following the merger. Accordingly, we had not been pursuing MDR compliance for the spine portfolio. More [indiscernible] related work required to support continued market access for these spine products. This allows us to preserve a targeted opportunity in Europe while maintaining our disciplined investment priorities. To support this arrangement, the [Audio Gap] $15 million of incremental net sales in 2026, with the majority expected to be recognized in Q4. We are calling this out explicitly because it would be a discrete timing benefit and to be distinguished from the underlying run rate performance of the business. As a result, the arrangement is also expected to create an approximately $22 million net sales headwind in 2027, while MDR requirements are completed. Let me now turn to our updated full year outlook. Again, all measures are provided on a non-GAAP pro forma basis are based on current foreign currency exchange rates and do not contemplate any additional exchange rate changes during the remainder of the year. We now expect full year 2026 net sales in the range of $845 million to $855 million, representing approximately 5% pro forma constant currency growth at the midpoint and an increase of approximately $7 million from the outlook we provided in May. The updated outlook reflects underlying business trends plus several discrete factors that are shaping our expectations for the balance of the year. First, Medicare reimbursement for bone growth stimulators has been restored to its prior level, retroactive to May 18, 2026. Second, our strategic arrangement with our European distributor contributes revenue associated with inventory purchases tied to the MDR transition. Third, we are seeing encouraging trends across several areas of the business, including stabilization in biologics and continued strength in portions of limb reconstruction. And fourth, those positives are offset by ongoing softness among smaller U.S. spine distributors performance remains below our expectations and is reflected in our outlook for the balance of the year. We are increasing our adjusted EBITDA guidance range to $95 million to $98 million. while the MDR-related distributor revenue carries a different margin and timing profile than our core revenue, the restoration of Medicare reimbursement, ongoing cost actions and continued operational progress returns our profitability outlook to the level we expected before the Medicare reimbursement reduction was introduced in May. Our focus remains on balancing net sales growth profitability and cash generation as we execute against our long-term value creation priorities. As you think about the second half, we expect third quarter net sales to generally be consistent with Q2 and as reimbursement restoration and improving trends in several businesses are expected to be largely offset by ongoing softness among smaller U.S. spine distributors. Looking to the fourth quarter, sequential growth is expected to be driven by the timing of inventory purchases associated with the European distributor arrangement and normal seasonality. We currently expect the majority of the approximately $15 million to 2026 net sales benefit to be recognized in Q4. I also want to note that the European distributor arrangement creates a temporary free cash flow timing headwind in 2026 as some cash receipts are projected to occur in 2027, while inventory-related cash outflows occur this year. Importantly, this timing dynamic does not change our view of the underlying cash-generating potential of the business or the quality of earnings reflected in our outlook. Taken together, we believe our updated outlook reflects more favorable performance indicators in key areas of the business balanced by the timing of the MDR related net sales benefit and the continued softness among smaller U.S. spine distributors. We remain focused on improving growth quality, expanding profitability and strengthening cash generation. Now let me turn it back to Massimo for closing remarks. Massimo?

Thank you, Julie. Q2 was an important proof point in our transformation. We made progress in several parts of the business, but we remain focused on consistent execution, disciplined investment, and improving the quality of our growth. We believe Orthofix is entering the second half with greater clarity, more favorable trends across several businesses and a focused approach to driving profitable growth and cash generation. Our priorities remain clear, improving commercial productivity, advancing differentiated innovation and generating the clinical evidence needed to support future growth opportunities. Our objective is not growth at any cost. It is durable, profitable growth supported by better commercial productivity, disciplined investment, a stronger business fundamental. Before we take your questions, I want to thank our team members and commercial partners around the world for their continued commitment and execution. With that, let's open the call for questions.

[Operator Instructions] Your first question comes from the line of Caitlin Roberts with Canaccord Genuity.

Great. I guess just to start on guidance. You increased the guidance again, but not as much as prior to the CMS changes. Maybe some more color on what's changed since that time, whether that's the partial quarter impact of the pricing change or if there's more in there from possibly the small by distributor challenges? Any color on that would be great.

Yes. Thanks, Caitlin. So the updated outlook reflects the combination of underlying business trends and several discrete factors that are shaping our expectations for the balance of the year. So first, on the positive side, we have the restoration of the Medicare reimbursement, which is approximately a $12 million benefit as well as the European distributor arrangement, which is expected to contribute approximately $15 million of incremental net sales in 2026. We're also seeing stabilization across an encouraging trend across several areas of the business, including biologics and portions of our limb reconstruction business. At the same time, those factors are being offset by the ongoing softness among our smaller U.S. spine distributors where performance remains below our expectations, and that's what's reflected in our outlook for the balance of the year. And we believe it was important to be transparent about both the progress we're seeing and the execution risk that remains. And those are the factors that are influenced our reset of our guidance.

Yes. And like every transformation is not always linear, and we didn't change our main pieces to be very disciplined on prioritizing quality revenue. So what we see, the softness on this 20% of our smaller distributor is not related to demand. It's really related to spine channel. And we didn't feel to change how we operate in the business. But at the same time, I think that it's very important to highlight the fact that we are maintaining our EBITDA target. At the same time, we are doubling down on innovation. I'm sure that you heard about our investment that we're making biologics. Biologics is the recovery very well. We strongly believe on our product and investing on clinical evidence for Osteocove and start a big registry for Strand plus. In orthopedics, we see a great opportunity with this diabetic foot ulcer, and we just submitted our IDE to the FDA and we're waiting for their feedback. All of these to open up a great very great and potentially very lucrative opportunity for the organization.

Understood. And then just any thoughts on the reinstating and LRP now with the pricing decision reversed and the guidance for this year increased.

Yes, I think we're still assessing where we are and looking at our actions, particularly related to the smaller spine distributors and how that may impact our LRP over the next year or so.

[Operator Instructions] And your next question comes from the line of Tom Stephan with Stifel.