Orthofix Medical Inc. Q1 2023 Earnings Call

Thank you for standing by my name is Brendan and I'll be your conference operator today.

I would like to welcome everyone to the ortho fixed medical Inc quarter, one earnings call.

Excuse me.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad, if you'd like to withdraw your question again press the start on one thank you.

Senior director of Investor Relations.

You may begin the conference.

[music]. Thank you operator, and good afternoon, everyone. Welcome to the first quarter 2023 earnings call. Joining me on the call today are president and Chief Executive Officer, Keith Valentine.

<unk> Chief Financial Officer, John Beth Jantzen Garen.

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.

Any statements about our plans beliefs.

Strategies expectations goals or objectives investors are cautioned not to place undue reliance on such forward looking statements and 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 may nine 2023.

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 31, 2022, and Form 10-Q filed this afternoon.

Nine 2023, 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 measure.

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 first quarter 2023 results for a reconciliation of these non-GAAP financial measures to our U S GAAP financial results at.

At this point I will turn the call over to Keith.

Thank you Alexia and thank you everyone for joining us this afternoon.

Pleased with our strong financial and operational performance in the first quarter. Following the combination of orthopedics and fee spine on January five the merger of these two companies creates a leading global spine and orthopedics company.

And the new leadership team has remained focused on continuing to execute on our growth strategies and cross selling opportunities across all portfolios.

Revenue for the first quarter was $175 million.

Representing reported growth of 65% pro forma growth of 11% year over year.

Our strong quarter is indicative of our commitment to deliver consistent above market growth through innovative products via our expanded commercial reach.

January our team has worked tirelessly to integrate the two companies and I believe we are already starting to see some of the benefits of our complementary portfolios throughout the stronger and more aligned organization.

For today's call.

I'll start my remarks, with some commentary on each product category, including any product innovation initiatives, followed by operational highlights and commercial channel update then.

Then I'll ask John to provide a more detailed look at financial performance and guidance for the full 2023 year before we open the call for your questions.

Our bone growth therapies division or BGP enjoyed a solid start to the year with 14% year over year revenue growth totaling $48 million in the first quarter.

We generated double digit growth in both the spine and fracture management channels in.

In 2022, we invested in a realignment of the BGP sales and sales management teams to expand the organization and to bring more dedicated focus to each of the spine and fracture management channels.

This positioned us well to take advantage of the anticipated cross selling opportunities and spine following the merger and to accelerate market share taking in the fracture management share following the launch of the siltstone. Our most recent solution, which adds a fresh fracture indication to her.

Already expansive portfolio of indications with.

Within the spine channel, we generated growth from both spine stem and cervical stim, the only PMA approved cervical bgs device in the U S market.

While we're pleased with the significant inflection in sales growth in the first quarter, we believe that annual growth rates will normalize to mid single digits throughout the remainder of 2023 to account for the fairly low comp in the first quarter of 2022.

As for spinal implants, and enabling technologies, which includes both legacy companies technology portfolios, we reported global revenue of $61 million, reflecting 13% year over year growth on a pro forma basis.

More specifically in the U S market, where we generate the substantial majority of that revenue, we reported 21% growth in the spinal fixation franchise at mid single digit growth in the <unk> Sea motion preservation product lines.

As we continue to focus on stabilizing that franchise.

Overall U S sales growth was driven by the more exclusive high volume distributors. We on boarded in recent years, who are leading the efforts to take market share generated by increasing surgeon interest in the multiple products to be launched within the past couple of years.

We remain committed to continuous product innovation and have made critical decisions on rationalizing the spinal implants portfolio by leveraging the best of both companies spinal implant systems to enable above market revenue growth with a more streamlined product offering that we expect to increase overall.

Asset utilization and therefore, the efficiency of our revenue.

In Q1, we announced the full commercial launch of the Mariner deformity pedicle screw system and extension of our foundational Mariner technology platform, which will address the unique clinical requirements of complex adult deformity and spine cases. In addition, we expanded our access solutions for that.

One $8 billion MIF procedures market with the full launches of the lattice lateral retractor system, which optimizes the lateral procedure to provide access to challenging anatomy during surgery and the SaaS pedicle based retractor system, which allows the surgeon to control.

The precise length of each blade and dial in a customized lateral medial killed providing a rigid construct to address each patients unique anatomy.

In early February we announced the new U S sales leadership team for spinal implants, and biologics and we defined smaller more focused territories to increase our presence in those markets.

We are excited to bring that sales leadership team and our key distributor partners together for our inaugural combined company Global sales meeting next month.

Within the enabling technologies franchise, the first quarter marked the sale of our 50 70 Flash system unit outside of the United States.

This comes on the heels of having announced the 100 global placement of 70 Flash system unit in late 2022 to.

To date, we have placed seven units under active earn out arrangements that are expected to generate an average of $4 million of revenue per year over the respective earn out periods.

This machine vision technology is providing significant value to the institutions that are utilizing its capabilities and we look forward to expanding our market reach across the world through the expanded global distribution network.

In the first quarter, we launched four new tracked tools to be used in our navigated percutaneous model and we also completed our first fully integrated 70 flash system case, utilizing a legacy or is it fixed spinal implant system, which signals the flexibility and ease of use of the <unk>.

System.

And finally, we are pleased with the publication of a study in a recent journal of pediatric orthopedics that highlights radiation and time savings benefits when using the 70 flash system and complex pediatric cases this.

This study noted that the system reduced operative time by approximately 64 minutes and reduced inter operative radiation exposure and time by 66% and 68% on average respectively.

We are excited to now be able to leverage our enabling technologies platform to support growth across all product lines of the combined company and to service the full continuum of care with this novel technology.

We have seen a shift in the sector as more and more cases are relying on navigation and planning systems and we believe this creates an opportunity for us to accelerate share gains.

<unk>, we generated global revenue of $41 million, representing 7% year over year growth on a pro forma basis in the U S where the substantial majority of that revenue is generated we also reported 7% revenue growth on a pro forma basis, which was driven primarily by recently.

We on boarded distribution in the U S.

The biologics franchise provides surgeons with a full spectrum of biologic solutions.

By our flagship a cell based demineralized bone matrix and Trinity cellular bone matrix solutions.

To enhance the fusion process and promote bone repair and growth to the surgeon preference market.

There are significant cross selling opportunities across the entire or the fixed portfolio in conjunction with the use of biologics for improved patient outcomes.

Global Orthopedics sales grew by 14% at constant currency over the first quarter of 2022 with revenue totaling $26 million.

This performance was driven across our diverse portfolio and was led by a solid commercial execution in both the U S and international markets.

<unk> acceleration from 2022 product launches the investment in U S sales leadership and our European direct sales channels over the last 12 months are bearing fruit and we're enjoying continued pickup from the 2022 launches of the <unk> Evo and Galaxy Gemini systems.

The single use sterile pack products are simple and efficient solutions for surgeons and hospitals, reducing complexity in the MLR and.

In 2023, we intend to continue our investment in product innovation targeting end of year to introduce the next offering from the fit platform.

Our investments in product innovation sales channel and our market leading medical education programs are all designed to continue our current higher than historic growth in the orthopedics business.

We're still in the early stages of identifying and leveraging cross selling opportunities between all of our highly complementary portfolios and business segments. We believe that we are making good progress to be able to realize many of these opportunities to generate accelerated revenue growth later this year.

Carry that growth momentum into 2024 and to help us further expand our commercial reach.

Finally, we believe that the announcement of our new U S sales management responsible for spinal implants, and biologics was an important first step and removing the uncertainty paralysis that can result from our merger like ours.

And that certainly is now supporting our efforts to attract more strategic distribution to date, we have not experienced any meaningful revenue dis synergies.

Spinal implants business as our first quarter results would support and we remain cautiously optimistic that we can successfully navigate through.

We are encouraged by the momentum we have coming out of the first quarter that momentum and the confidence we have in our teams to continue to execute was a major factor in raising our revenue guidance to between $750 million to $756 million for the full year 2023.

The two companies is progressing smoothly and we are pleased to report that we are ahead of plan with respect to revising the many operating expense synergies outlined in prior communications.

Seizing on the opportunity to capture market share and expand our commercial footprint on a global scale with our combined portfolios and we have plenty of runway for a balance of further growth and scale.

Macro perspective, we've seen procedure volume trends rebounding and some expansion in developments within the spine market because I believe <unk> is in a great position to capitalize on competitive pressures across all our markets will reward innovative organizations like ours, thats fixed and we have the robust portfolio.

Meeting the needs of patients and surgeons across the continuum of care with initiatives like increased product utilization and offerings higher revenue per case and effective cross selling our commercial team is ready to leverage the steady underlying market demand, we're experiencing and I can't wait to see what else 2023.

With that I'll turn the call over to John to provide a more detailed look at our financials in the first quarter and to provide more robust financial guidance for the full year. Thanks, Keith and good afternoon, everyone. As Keith noted earlier total revenue for the first quarter of 2023 was $175 million.

At 65% increase over the prior year as reported and an 11% increase over the prior year on a pro forma basis in the U S. Total revenue was $146 million or 83% of revenue and revenue outside the U S totaled $29 million or 17% of total revenue.

The 14% growth from Bvt came from both the spine and fracture.

Commercial channel with Excel stim revenue growing in high teens sequentially compared to the fourth quarter of 2022.

On a pro forma basis U S. Spinal implant sales, which include motion preservation were up 18% over the prior year, while international spinal implant sales were down 10% due to legacy spines exit from the European market in the third quarter of last year U S. Biologics revenue grew 7% on a pro forma basis.

Driven by Onboarding, New high volume distributors with significant growth coming from our DBM portfolio.

We will continue to see new opportunities in biologics with our broad portfolio that allows for a targeted approach to meet surging needs.

This quarter is the last quarter, we will be showing biologics as a standalone product category beginning in the second quarter of 2023, we will consolidate biologics into the same product category is spinal implants and enabling technologies.

Those products are typically sold through the same U S distribution channel is spinal implants are predominantly used in spine procedures and are part of the enabling technologies earn out opportunity.

In orthopedics, we saw double digit growth in both the U S and international when measured at constant currency rates with that growth driven by sales channel investments and new products GAAP gross margin for the first quarter of 2023 was 63% compared to 73% for the first quarter of 2022.

Adjusted gross margin was 71% for the first quarter of 2023 compared to 74% for the first quarter of 2022 on a pro forma basis, including our financial results of C. Spine for the first quarter of 2020 to revise to conform to the orthopedics presentation, we estimate that.

Adjusted gross margin increased by 300 basis points to 71%.

The decrease in GAAP gross margin was almost entirely driven by the following merger related factors and $11 $6 million noncash purchase accounting fair value step up charge attributable C spine acquired inventory that was amortized during the quarter.

Recall that legacy <unk> financial results for the first quarter of 2022 are not reflected in the fixes GAAP results.

Likewise, the year over year decrease in adjusted gross margin is entirely due to the dilutive impact of the acquired legacy spine business and fourth that fixes overall adjusted gross margin.

We expect adjusted gross margins to increase over time as we recognized additional efficiencies from spinal implant set utilization and other economies of scale that we expect to generate from the merger.

GAAP sales and marketing expenses for the first quarter of 2023 or 54% of net sales up from 51% in the first quarter of 2022, adjusted sales and marketing expenses were 51% for the first quarter compared to 50% for the first quarter of 2022.

The increase in GAAP is primarily driven by integration related severance and retention costs associated with the merger as well as costs related to the national sales meeting for the BTT organization in 2023 that meeting was cancelled in 2022 for Covid related reasons GAAP G&A expenses for the first quarter 2020.

Three or 28% of net sales up from 18% in the prior period.

Adjusted G&A expenses were 13% for the first quarter compared to 14% for the first quarter of 2022.

The increase to GAAP G&A expenses was driven by $5 $9 million and higher stock based compensation as a result of a larger employee based post merger and from accelerated vesting of certain equity based awards directly as a result of the merger as well as other merger related costs, including more than 9 million.

A financial advisor and other professional fees and approximately $6 million of accrued severance and retention costs.

We expect to record additional severance and retention expenses throughout the remainder of 2023.

At lower dollar amounts per quarter as those affected employees worked through their respective end dates.

GAAP R&D expenses in the first quarter of 2023 were 13% of net sales up from 11% in the prior year period.

Adjusted R&D expenses were 10% for the first quarter compared to 9% for the first quarter of 2022.

The increase to GAAP R&D was primarily driven by spend related to EU MTR compliance accrued severance and retention costs associated with the merger and MTF development milestone payment and higher stock based compensation expense.

Our focus in R&D continues to be on bringing innovative and differentiated new products to market adjusted EBITDA for the first quarter of 2023 was $3 2 million compared.

Compared to $7 1 million for the first quarter of 2022.

On a pro forma basis, including our financial results of <unk> spine in the first quarter of 2022, we estimate that adjusted EBITDA increased by $4 1 million.

Compared to a loss of $900000 in the prior year period.

We expect adjusted EBITDA to increase in subsequent quarters in 2023, as we begin to realize an increasing amount of merger related operating expense synergies through the remainder of the year.

Adjusted EBITDA is a non-GAAP financial measure that we believe provides valuable information on our operating results that facilitates comparability of our core operating performance from period to period and against other companies in our industry are.

A reconciliation of GAAP to adjusted gross margin and adjusted EBITDA is presented in the financial tables of the news release, we issued this afternoon.

Reconciliation of pro forma adjusted gross margin and adjusted EBITDA is the back of our updated investor presentation that was posted to our website today.

Cash and cash equivalents at March 31, 2023 totaled $50 million and we currently have $51 million of outstanding borrowings under our $300 million credit facility.

Our free cash flow, which includes operating cash flows and capital expenditures was an outflow of $46 million for the first quarter of 2023.

The significant items that generated the heavy cash spend in the quarter included the following.

More than $15 million of cash spend related directly to the merger, including the success fees paid to each company's respective financial advisors professional fees to facilitate the closing of the merger as well as post closing integration assistance and employee severance.

$13 million paid for 2022 employee cash bonuses and a $17 million cash spend related to inventory to support future revenue growth and upcoming product launches.

In terms of financial guidance as Keith previously indicated we expect our revenue for the full year 2023 to now be between $750 million and $756 million, which.

<unk>, 7% to 8% reported year over year growth compared to the approximately $701 million of pro forma combined company revenue for full year 2022, after giving effect to anticipated classifications to conform <unk> revenue reporting to that of north effects.

Also I'd like to remind everyone that any revenue generated by C spine for the pre merger period between January one through January four 2023 is not included in the combined company's GAAP or pro forma first quarter revenue results nor in the full year 2023 revenue guidance for.

We realized anticipated operating expense synergies.

We still anticipate generating more than $40 million of operating expense synergies by year three post merger with the bulk of the synergies coming from redundant corporate overhead included in G&A redundant headcount and program spending and spinal implants, R&D sales and marketing and from a meaningful reduction in system related cost.

As we integrate our portfolio a very common and in many cases overlapping systems.

We expect to realize more than $15 million of those synergies in 2023 alone.

Cost to achieve those synergies are still expected to total $40 million, we anticipate spending more than $30 million of those costs in 2023, where the remaining amounts in future quarters, largely related to severance and retention cost for head count synergies.

Given the large nonrecurring cash spend related to the merger in 2023, we expect our free cash flow burn to be approximately $100 million for full year 2023.

However, we remain confident that as we gain P&L leverage throughout the year as we increase our revenue and more fully realize those operating expense synergies.

We'll have more than sufficient borrowing capacity under the credit facility to finance all of that spending and to maintain a very healthy cash balance.

As we get further into the integration process, we will continue to provide additional reporting and guidance metrics at this point I'd like to turn the call back over to Keith to wrap up before.

Before we open the line for questions I would like to thank all of the employees the board to fix for their loyalty and commitment. During this time of transition I'm very proud of what our combined organization has been able to accomplish during the four months since closing our merger I would also like to specifically, thank our field sales teams for continuing to place the patient first.

As we expand and strengthen our market presence.

And I'm extremely excited about the future of worth of fixed and look forward to continuing our momentum from the first quarter into the rest of 2023 and beyond at this point operator. Please open the line for questions.

At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.

Cause for just a moment to compile the Q&A roster.

Your first.

Question comes from the line of Mathew Blackman.

Your line is now open.

Okay. Thank you appreciate you taking my questions.

Got a couple maybe to start Keith and John .

In about five months since you closed the deal and call. It about eight months since you first announced the transaction provided we'll call. It an aspirational three year outlook, but I think it was something in neighborhood of $1 billion in combined revenues and mid teens EBITDA margins looking at consensus numbers, frankly, 25, I think we're both coming in closer to the.

The low $900 million range, which is still a lot of near double digit CAGR. So I guess my question is really any updated thoughts now that you've been in that seat.

For the last several months on how we should be thinking about the longer term outlook relative to those admittedly very ensure financial Mileposts you provided back in September .

Hey, Matt Yes. It is John Thanks for the question. So now that we've had time to dive deeper into both companies organizations right looking at the collective distributor base as the collective product portfolios and geographies.

We're definitely going to take a more targeted and balanced approach to revenue growth, that's accompanied by increasing P&L leverage so I mean growth at all costs.

Current market environment, we don't think is a winning strategy.

We thank our stakeholders are going to benefit more longer term from this balanced approach to growth increasing P&L leverage. So our goal is to still grow above market rate, we want to grow at a level that demonstrates we're still taking market share through innovation through our focus on meeting our customers' evolving needs.

That accompany that with the strategy that Scott a little bit more focus on the operational and financial efficiency. Other revenue that we're generating from those products that we're launching to the market because.

We're just much more cognizant of making sure that the ROI on those investments exceeds the cost of capital. So we're going to look at some low margin product lines.

And try to minimize our exposure there and only keep those alive to the extent that they are helping.

Meet the evolving clinical needs of our customers, but our overall goal is to help reduce the complexity of the organization, we have very comprehensive product portfolio and the more products you are managing the more complexity you have to manage so theres a lot of hidden costs, the hidden opportunity costs that come with sustaining those older product lines with <unk>.

Diminishing revenue and contribution margins. So we are definitely going to focus on minimizing our exposure there and really look at the portfolio. So that we're generating higher margin more efficient revenue.

As we go forward, so it'll be a more balanced approach because we've all learned particularly in the spinal implants market. All revenue is not created equal right. So I think we're going to be a bit more selective in how we grow again, we still want to demonstrate and above market growth rate that shows we're absolutely taking market share.

[noise] early portfolio synergies and then I'll just throw this other one out there it's related to biologics still lagging a hardware growth is that complex headwinds that are still manifest thing or something else. Thanks.

Yeah. Thanks for that so few few details on the spinal implant side.

I think we did see a benefit of both as you as you mentioned I think the market has had a nice recovery part of that recovery I think as you can remember is a more consistent quarter this quarter versus last year, where we still had some headwinds if you will from from Covid <unk>.

And related issues with hospitals being able to be at fault surgical capacity and so I I think that both of those things are going on one a couple of nice things as you saw over the past few weeks us being able to go into full launch with with a couple of products as well we got good momentum in the first quarter.

Especially the retraction sides retraction systems create the ability for us to have a more procedural cell meeting the ability to.

Be able to.

Not just the pedicle screw, but also the inner body opportunity as well as the Orthobiologics and so I think that we're seeing a more complete procedural selling opportunity and we're seeing uptick in momentum because new distributors are excited about that procedural sell we've even had you know the ability to cross sell.

We've had 70 cases that we're we're done with Firebird pedicle screw system. So we're we're seeing the integration just as we had anticipated and hoped and and seeing the field get excited about the broader product portfolio that they're able to help move now your <unk>.

Question on the Orthobiologics. It is interesting I I think that the D. B M franchise is still quite robust.

We still seeing good uptake, we seen the ability to continue to drive that not only in larger buying group hospital systems, but also seeing you know across the country are you having nice growth rates I think what you see is so puts and takes when it comes to the higher priced cell based allograft.

Opportunity I I still feel it's a very strong opportunity. We're fortunate to have the best product in Trinity as as the offering but I think there is some puts and takes across the United States. When you take a look at hospital systems and what they're doing with their.

You know pricing in ability to sell that broadly.

I appreciate it I'll I'll hop back in the queue, but congrats on a great first quite out of the gate.

[noise] this afternoon.

The momentum we have coming out of a successful first corner and appreciate your interest in art.

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