Q2 2023 Orthofix Medical Inc Earnings Call
Ladies and gentlemen, good afternoon. My name is Abby and I will be your conference operator today.
At this time I would like to welcome everyone to the ortho fixed medical second quarter 2023 earnings Conference call.
Today's conference is being recorded and all lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
He would like to ask a question during that time simply press the star key followed by the number one on your telephone keypad.
If you would like to withdraw your question Press Star one a second time.
Thank you and I will now turn the conference over to Luisa Smith Aqeel Martin you may begin.
Okay.
Thank you operator, and good afternoon, everyone and welcome to the <unk> second quarter 2023.
Joining me on the call today, President and Chief Executive Officer, Keith Valentine, and Chief Financial Officer John .
During this call we will make forward looking statements involve risks and uncertainties.
Statements other than those of historical facts are forward looking statements.
Any earnings guidance, we provide and any statements about.
Beliefs strategies expectations.
Correct.
Investors are cautioned not to place undue reliance on such forward looking statements.
<unk> just a matter contained in such statements will occur.
Forward looking statements.
We will make on today's call are based on our beliefs.
As of today August eight 2020, we do not undertake any obligation to revise or update such forward looking statements and factors that could cause actual results to be materially different from the forward looking statements made by us.
Include risk factors disclosed under the heading risk factors.
Form 10-K for the year ended December 31, 2022, and Form 10-Q, I'll just add.
Afternoon August eight 2023, as well as additional SEC filings, we need 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 care 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 <unk>.
Today's news release announcing our second quarter 2023 results a reconciliation of these non-GAAP financial measures to our U S GAAP financial results.
At this point I will turn the call.
Thank you Lisa and thank you everyone for joining us this afternoon.
The picture of the strong quarter marked by solid operational and financial performance with the merger in January .
We grew order volumes and leverage cross selling opportunities across.
Sure.
Yes.
And perhaps most significantly continued to effectively manage through the revenue dis synergies risk associated with the business combination.
There was a big theme is incredibly motivated by these successes.
And our teams are working relentlessly to capture market share.
Yes.
I'm pleased with the progress of the business and I'm eager to share with you some high level achievements.
For the quarter.
Revenue for the second quarter 2023, with a $187 million representing reported growth of <unk>.
58% and pro forma constant currency growth, 7% year over year.
For this afternoon's call I'll begin by providing color on each product category, including revenue innovation initiatives.
Operational highlights in commercial venture.
Then John will provide a detailed plan.
Financial performance and guidance.
2023 year before we open the call for your questions.
Tom growth therapies were BGC revenue for the second quarter, 2023 was $52 $7 million, an increase of 10% year over year.
This marks two consecutive quarters of double digit BGC growth, which was primarily driven by the extra channels was strengthened with the recently launched <unk> product.
<unk> made a 2022 to create a more focused sales organization.
Spine Channel also group worked well through a mid single digits year over year, driven by cross selling through the legacy spine distribution channel and from healthy complex spine surgery volumes.
Both commercial channels are also benefited from the more than 6% rate increases that were approved by Medicare This year.
Moving on to spinal implants, biologics and enabling technologies.
Revenue totaled $105 3 billion.
Representing 145% growth year over year on a reported basis and five 4% on a pro forma basis.
Growth in the U S exceeded 7% on a pro forma basis, while international revenue declined as a result of the C spine exit from the European spinal implants market in the third quarter of last year, we continue to see strong growth generated by the larger more exclusive distributor partners.
We on boarded in recent years, which has allowed us to be more aggressive in rationalizing the loss exclusive revenue inefficient distributors.
From a product perspective, our surgical franchise led by Northstar and wave forms C was the fastest growing franchises in the quarter in June we commercially launched the wave form David inter body system to target anterior lumbar interbody fusion or <unk> procedures.
Procedures to better address the $200 million market in the U S. Additionally, we see increasing interest in our foundational Mariner modular pedicle screw system technology as adoption of the Fathom Pedicle based retractor system for use with the Mariner Mis system accelerates as we participate in more calm.
Flex spine procedures through the Mariner adult deformity system, which we launched earlier this year with respect to the <unk> motion preservation franchise. We were pleased to present in June initial results from a seven year study of the <unk> device at the International Society for the advancement of spine surgery.
Or Ics.
The abstract is the first public presentation of specific seven year clinical results associated with the use of the <unk> C. Artificial cervical disc for the treatment of a single level symptomatic cervical predictive accuracy.
The study highlights that using the <unk> artificial cervical disc leads to decreases in disability as measured by the.
Disability index and decreases in the neck pain.
Pain scores that were observed at prior follow up periods and were then repeat through seven years post op only six 9% of secondary surgical interventions were observed among the <unk> C. Diff cohort, which is comparable to seven year Ssi rates reported for other commercially.
Downhole artificial cervical disc.
The biologic franchise, we were looking forward to the expected launch of osteoporosis and advanced.
Collagen matrix in the fourth quarter, which should significantly strengthen our product offering and drive growth in this approximately $250 billion market segment, which has not historically been a strong product category for the combined company to biologics team also has several additional line extensions.
And new product launches scheduled in 2024, turning to the enabling technologies franchised. We placed 670 units in the second quarter with five being placed in the U S and one of those earn out arrangement. This brings the total number of 70 units placed via earn out to eat.
With an annual revenue commitment of $4 8 billion in total in the global orthopedic segment revenue totaled $29 million, which represents six 4% year over year growth on a reported basis and 5% on a constant currency basis, we posted mid single digit growth in.
Both our U S and international markets, our increased investments in product innovation, our sales channel and our market leading surgeon education programs continue to yield positive results revenue growth in the quarter was led by our recently launched true lock Evo Galaxy Gemini.
And fifth bone product lines in June we announced the launch of <unk> for anthem and terminated hinges. The latest addition to the <unk> circular frame portfolio for which we recently celebrated 30 years of clinical use in more than 100000 patients worldwide.
Based on our progress to date and the meaningful market share taking opportunities ahead of US we are confident in our ability to drive topline growth across multiple business segments, coupled with an improving macro environment as a backdrop the confidence led us to raise our guidance for full year 2023 revenue to be within <unk>.
Range of $752 million and $758 million, an increase of $2 million to the low and high end of our prior guidance.
The integration of the two merged businesses continues to progress nicely and the team's made many critical decisions and executed on many programs that will benefit revenue growth reduce complexity and generate future P&L and cash flow leverage for the combined organization some of those key decisions.
And actions included the implementation of the cross selling capability to distributors for each of the legacy companies spinal implant systems decisions to meaningfully rationalize the many redundant spinal implant systems final selection are critical ERP and other information systems and the development of a new mission and vision.
For the company. We are also continuing to refine and identify new operating expense and cost of good.
<unk> synergies, which John will provide more details on later from a macro perspective procedure volume trends are improving throughout the med tech sector, especially within the spine market where of course, the fix is an advantage position to strategically capture additional share.
Our broad and innovative product portfolio satisfies demand from patients and surgeons across the continuum of care and with an increased number of product offerings increased product utilization higher revenue per case, and an effective cross selling strategy. Our commercial team is ready to capitalize on those underlying tailwind.
I'm thrilled with our momentum coming out of this successful second quarter as a combined organization and I'm confident that the best is yet to come with that I'll turn the call over to John for further detail with respect to our second quarter financial results and updated financial guidance for the full year.
Thanks, Keith and good afternoon, everyone as Keith noted earlier total revenue for the second quarter of 2023 was $187 million.
8% reported increase over the prior year and 7% growth on a pro forma basis.
Revenue growth was led IPG, which grew 10% year over year to $52 $7 million.
This marks the second consecutive quarter of double digit growth for the BTT franchise and was led by the recently launched <unk> product, which grew more than 20% sequentially over the first quarter of 2023.
While we are very enthusiastic about the 12% year to date growth rate, we are setting expectations for mid to high single digit growth for the remainder of this year.
GAAP gross margin for the second quarter of 2023 was 63, 9% compared to 73, 2% for the second quarter of 2022.
Adjusted gross margin was 71, 6% for the second quarter of 2023 compared to 73, 9% for prior year period for legacy <unk>.
The decrease in GAAP gross margin was almost entirely driven by the following merger related factors of $94 million noncash purchase accounting fair value step up charge attributable to cease buying acquired inventory that was amortized during the quarter.
$3 $8 million of excess and obsolete spinal implants inventory charges recorded in connection with merger related product rationalization decisions and the dilutive impact of the acquired legacy spine business on legacy <unk> overall gross margin, which we estimate to be more than 200 basis points.
We call it legacy spine financial results for the second quarter of 2022 are not reflected in with <unk> 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 on orthopedics as overall adjusted gross margin.
On a pro forma basis, including the financial results of six <unk> for the second quarter of 2020 to revise to conform to the orthopedics presentation. We estimate that adjusted gross margin increased by 120 basis points to 71, 6%.
We expect adjusted gross margins to increase over time, as we recognize efficiencies from spinal implant set utilization and product rationalization as well as other economies of scale that we expect to generate from the merger.
GAAP gross margin in the second half of 2023 is likely to be negatively impacted by additional merger related inventory charges driven by further product rationalization decisions GAAP sales and marketing expenses in the second quarter of 2023 were 53% of net sales up from 51%.
In the second quarter of 2022.
Adjusted sales and marketing expenses were 60% of net sales for the second quarter consistent with the prior year period. The increase in GAAP is primarily driven by integration related severance and retention costs associated with the merger and higher stock based compensation.
GAAP G&A expenses in the second quarter of 2023 were 18% of net sales up from 13% in the prior year period.
Adjusted G&A expenses were 11% of net sales for the second quarter compared to 10% for the prior year period.
The increase in GAAP G&A expenses was driven primarily by $6 $2 million and higher stock based compensation.
As well as $3 million of merger related costs, including accrued severance and retention costs and professional fees.
We expect to record additional severance and retention expenses throughout the remainder of 2023, albeit at lower dollar amounts per quarter and those affected employees worked through their respective dates.
GAAP R&D expenses in the second quarter of 2023 were 10% of net sales down from 11% in the prior year period.
Adjusted R&D expenses were 8% of net sales for the second quarter consistent with the prior year period.
The decrease to GAAP R&D was primarily driven by lower spin related to EU MTR readiness and compliance.
And the realization of merger related synergies, which were slightly offset by higher stock based compensation expense.
Our focus continues to be on bringing innovative and differentiated new products to the market and to that end, we expect to invest between 8% to 9% of revenue on R&D in 2023.
Adjusted EBITDA for the second quarter of 2023 was $9 9 million compared.
Compared to $11 $4 million for the second quarter of 2022 on a pro forma basis, including the financial results for <unk> for the second quarter of 2022, we estimate that adjusted EBITDA increased by $3 2 million in the second quarter of 2023 compared to $6 $7 million in the prior year.
Period, we expect adjusted EBITDA to continue to increase in subsequent quarters of 2023, as we realize increasing amounts of merger related operating expense synergies through the remainder of the year.
Adjusted gross margin and adjusted EBITDA are non-GAAP financial measures that we believe provides valuable information on our operating results. This facilitates comparability of our core operating performance from period to period and against other companies in our industry. A reconciliation of GAAP to adjusted gross margins and adjusted EBITDA is.
Presented in the financial tables of the news release, we issued this afternoon, a reconciliation of pro forma adjusted gross margin and pro forma adjusted EBITDA is included in the back of our updated Investor presentation that was included in the current report on form 8-K that we filed today.
And cash equivalents on June 32023 totaled $37 6 million and including the $8 million of additional borrowings. We made in July . We now currently has $59 million of outstanding borrowings under our $175 million credit facility, our free cash flow, which includes operating cash.
Flows and capital expenditures was an outflow of $18 $3 million for the second quarter of 2023, a significant sequential decrease from the $45 $9 million reported for the first quarter of 2023 free cash flow for the first and second quarters of 2023 included an estimated 15.
<unk> 5 million and $5 $8 million, respectively spend on merger related items.
As Keith indicated we are increasing our revenue guidance and now expect revenue for the full year 2023 to be between $752 million and $758 million, which represents 7% to 8% year over year growth on a pro forma basis.
While we aren't providing specific quarterly guidance, we expected third quarter revenue will be fairly consistent with second quarter revenue and we are anticipating a meaningful increase in the fourth quarter due to typical seasonality patterns and for the additional revenue enabled by the deployment of a significant number of spinal implant.
Here in the third quarter for adjusted gross margin. We are maintaining previously issued estimates to range between 71 and 72% for the full year 2023 for adjusted EBITDA, We are raising the range from $40 million to $45 million to $42 million to $46 million.
Full year, 2023, which represents a 53% to 60% increase on a pro forma basis, we expect to generate a very modest sequential increase in third quarter. Adjusted EBITDA, followed by a meaningful increase in the fourth quarter as we increased revenue and more fully realize.
Operating expense synergies, we continue to expect that free cash flow will be in approximately $100 million outflow for the full year 2023 as revenue continues to grow and we continue to gain operating leverage throughout the remainder of the year. We believe that we will have sufficient borrowing capacity under the credit facility to.
Maintain healthy cash balance despite the heavy cash spend in the first half of the year. Finally, we are updating our estimates of merger related expense synergies to include initial estimates for cost of goods sold synergies related to product rationalization and other initiatives, we now anticipate generating more than $50 million of annualized.
Cogs and Opex synergies by 2025 in comparison to the previously estimated $40 million, we expect to have realized more than $30 million of those synergies on an annualized run rate basis as we exit 2023, the cost to achieve that higher synergy target is now expected to <unk>.
Total approximately $45 million compared to the previous estimate of $40 million with more than $30 million being spent in 2023. We are very pleased with the financial operational and integration progress that we have achieved so far this year, we will continue to highlight and update our progress.
On those initiatives on future earnings calls, we plan to host an Investor day, our Lewisville, Texas headquarters on Wednesday September 20th at which executive leadership will provide important business updates and longer term financial guidance at this point I'd like to turn the call back over to Keith to wrap up.
I am extremely proud of your 16 and all of that we've been able to accomplish so far just seven months. After the closing of the merger I'd like to thank all the employees of worth of fixed for their dedication to the company and the renewed commitment to our mission, which we unveiled earlier this year, we collaborate innovate and improve the lives of patients we make it personal.
And we aim to do this through our new rally cry people relentlessly innovate and creatively disrupt.
At this point operator, please open the line for questions.
Thank you.
As a reminder, if you would like to ask a question press star.
Then the number one on your telephone keypad, we will pause for just a moment to compile the Q&A roster.
And we will take our first question from Matt Blackman with Stifel. Your line is open.
Good afternoon, everybody. Thanks for taking my questions.
Maybe just start.
Is there any way and I. Appreciate this is probably challenging but is there any way to quantify the magnitude of dis synergies you saw in the second quarter. So revenue disinherit dis synergies and then maybe this is related but the SKU rationalization, how far along are you in that and is there anything baked into the <unk>.
Higher guide for potentially lost sales as you rationalize that portfolio a bit and then I've got a follow up thanks.
Hey, Matt So with respect to the first question, we haven't seen a meaningful amount of revenue dis synergies.
Not much to quantify which is the good news ratings, it's more focused on growing and taking market share and we've been most successfully navigate through any of the early term revenue.
Revenue dis synergy risks we saw.
The due diligence.
The second question was.
Just sounds like rationalizing the portfolio.
And whether there is potential revenue loss sales as yet.
He is going to get rid of some of the legacy products is that baked into the higher guide that you have now for the rest of the year.
Yes, yes, so what are the early decisions made.
First quarter was the rationalization of the overlapping spinal implant systems.
We're really pleased that theres, an opportunity to reduce by about 50% right. So that's a meaningful reduction in the system.
The good news is it was.
The balanced outcome of about half of the go forward systems will be from legacy <unk> and Alaska.
I have from legacy <unk>, so moving forward in both portfolios.
While there is.
The potential for loss revenue, we're being very careful.
Outlined plans for that product rationalization, we've got.
Sort of a runway of short term kill immediately short term and then longer term transition plan. So our goal as we deploy additional sets us to put those first revenue generating growth activities.
And then Opportunistically look to cannibalize existing sales for this kind of survived that rationalization overtime and.
That's going to take time communicating to surgeons and distributors to make sure that we have a good plan attacked to do that without using any revenues that we felt confident with the plans. We have outlined the goal is to get all of that done within the next two years sub systems will be rationalized sooner than others, others can take as much as two years, but again, we're going to.
Look at how we deploy sets first and foremost for growth and then Opportunistically redeploy those sets are going to growth to just accelerate the rationalization where possible.
I really really appreciate that and then I'll just ask one follow up obviously nice to hear sort of an increase in the cost synergy expectation could you give maybe give as an example, I think I heard you mentioned gross margin our cost of goods you can give us. An example, perhaps of some of the incremental savings you've you've found and would it be your hope that.
As you continue to sort of dig in here that you may uncover incremental opportunities on the cost side above and beyond what you've you've just laid out thanks.
Yes, there is definitely upside possibilities as we continue to get.
Get through each business unit in our long range strategic planning, but the cost of goods sold you might recall when we put out our first <unk>.
Synergy targets.
$40 million by year, three that was really just focused on the operating expense synergies because we didn't really have a good sense of what the Cogs opportunities would be and one of the critical decisions.
To determine what those cost synergies debate, what's the product rationalization is it is the first important step so.
The bulk of the increase to approximately $50 million.
Saving aflac cost synergies by 2025 is coming from the Cogs line, because now that we've made those critical decisions.
Around product rationalization, we can outline sort of the expectations of savings, we'll get from higher purchase volumes.
Surviving systems right looking at our suppliers and rationalizing suppliers to increase our volumes, there's lots of ancillary cost benefits that come with a supplier rationalization fewer supplier audits fewer sustain.
Sustaining resources needed to maintain those legacy systems in the end that supplier base. So I think there's more opportunity ahead, but we certainly wanted to update the investor.
Investor community with the savings opportunities, we found particularly at across cost of goods sold line, which should drive that margin accretion we've talked about on prior calls.
And I apologize.
I have one more follow up question on that is there a rule of thumb on again, let's take this as an example, the higher.
Number for cost synergies as we think about drop through versus reinvest every investment just in terms of your outperformance across any line are you guys thinking about again any sort of rule of thumb of how.
How much you'd let drop through to the bottom line versus how much you'd think about reinvesting just any sort of framework to think about that thanks.
Yes, we're doing that as part of our strategic planning process, which.
Deep into and we've mentioned that analyst day that we've got scheduled for September 20th I think that's what we'll be able to provide some further color on how much of those synergies.
Take to the bank versus reinvest in other opportunity. So we're certainly looking at both and some of them will go to the bank and others will be redeployed towards growth or other.
Efficiency of our economies of scale type activity, so more color to come on that as we provide that long term financial guidance at the investor call.
Alright, we will stay tuned thank you so much guys.
Thanks Pat.
We will take our next question from Ryan Zimmerman with <unk>. Your line is open.
Hi, This is <unk> on for Brian first one for me.
The integration of the sales force progressed, so far and what areas have been most challenging or most impacted by this integration process.
Really most of the integration is going on as we speak I think a lot of what we do at first as we as we started the barging was just to make sure. There's stability. Obviously the first step is getting our sales management in place getting structure in place.
Thank you relationships too.
Both existing and turning over new relationships. So.
Feel good about the stability.
And so I think we have some great examples already of distributors actually coming together.
Joining forces stood up having to pick through.
Posing forces and so I think we have a good formula in place for to continue to rationalize.
As the year.
Next year progressed as well, but we've always kind of map. This out. This is not a quick play. This is something that will be done over the course of a few to five.
Five quarters something like that.
Great. Thank you for taking the question.
As a reminder, it is star one if you would like to ask a question.
And we will take our next question from Jeffrey Cohen with Ladenburg Thalmann. Your line is open.
Oh, Hi, Keith and John how are you.
Yes.
Just a couple from era and so could you talk about some will be.
Cash again about.
Selling channels.
70.
<unk> involved in driving some of the complex cases that you called out and specifically in the complex cases could you could.
Could you stratify for us, where thats being driven from and whats become more complex as it does sales of ortho fixed products or the cases that youre seeing in that are being conducted by our physicians being more complex in nature.
Yes, good good direction, Jeff I'll tell you it's interesting part of part of what we're seeing in the complexity of cases is don't forget we advanced in nicely kind of integrated portions of our Mariner deformity system bandwidth are 17, certainly a lot of the momentum we're getting up 17 as excitement in it.
Out of form and as we continue to not only advanced applications, but make sure that.
What we're doing in that area.
Really demonstrating presentation lists unlimited for aviation.
For those patients and deformity care off it has some of the highest uses of operation overall and I think the combination of the two with the product line expansion and the ability of 70 to continue to be the preferred choice for our deformity has created this greater awareness and greater opportunities for us.
That sector and then of course, there is a great opportunity that areas that if needed for the patients from a PTT perspective. So we're excited that that true continuum of care as we can plan a plan a case, we can help integrate the case in Dr. And then of course post operatively, if it's necessary to have an additional treatment.
Modality, we can we can assess what piece of your team.
Okay.
Okay got it and one more for me.
You talked a little at the beginning of the call so still in its 20%.
Quarter over quarter sequential growth could you has that become material yet for BGC and then secondly within BGC you.
Obviously that was a product that was focused on it love seeing the posts sales meeting we continue to see more and more moment with it. So we're certainly very excited about the app uptake in the opportunity that's ahead with them.
Got it perfect. Thanks for taking my questions.
Got it.
And we will take our final question from Dave carefully with J M. P Securities. Your line is open.
Alright.
Alright that they can call that or maybe it was keith at the <unk>.
Growing component of.
Hello.
You're back we lost you for a moment. So you said about Sir [laughter].
<unk>.
I felt like nobody [laughter], that's my bad.
I didn't call that cervical as being the fastest component of the spine.
Franchise, and if we look at that sort of $105 million.
<unk> I was wondering if you could maybe help us think about how big cervical is maybe even relative to lumbar.
And that's final implant business.
Yeah. So I think you know that cervical procedures largely as a.
Revenue per case are awfully tomorrow, or the biggest opportunity or the highest.
Billable is posted to your cervical I think the excitement we have no specific liana cervical product line is that was a newer.
Portfolio for legacy C spine, and so we're getting a lot of excitement putting investments and sets and making sure that we can take advantage of a broader distribution base now being able to promote all of the server confusion range and then in addition to that obviously a good serve a confusion poor.
Folino meets nicely with a strong.
Motion preservation of cervical and we're excited about it as I mentioned, the seven year data that seven year data really lines nicely to what we've seen elsewhere in the industry, but then again, we have to make sure that we are have an upset enough support to properly launch that in the broader distribution area, but it is it is.
Area of focus and it is one that I think that we have.
<unk> product range on the market.
And I guess as a quick follow up you know if you look at Burger therapies.
Obviously growing well any thoughts about from Keith <unk> from your standpoint.
About that selling channels should your spinal implants, and maybe the stem. So together should you have separate forces or.
Yes, I'd love to hear your thoughts on how you plan on managing sort of those two franchises specifically on the spinal side.
Yeah, it's it's actually something.
Something we do our strategically looking at and trying to continue to refine it I'll tell you. It's been great. We just had our quarterly business review. Your just a couple of weeks ago 10 days couple of weeks ago with that team and they without a doubt or the team that has seen more cross selling synergies.
I've been doing a very nice job of getting more and more of the new distribution channel to them involved when I say involved making sure that there's an incentive for the spine. Despite teams that are out there to not only engage with their searches, but also engage with local representation keep in mind are are.
B G. T group is very unique in that they have a very.
Close relationship with patients are fitted as are taken care of and so there is a important handoff and so it was great. Thanks, you B R and see how much cross referencing is going on and and how much co selling is going on.
So clearly there is an opportunity to continue to expand that and I think that he's got some really nice plans to continue to incentivize and drive that far because we keep in mind.
There was a very large team has now been introduced to be G. T that didn't have that exposure.
Like bashed your anytime last year.
Thank you.
And there are no further questions at this time I will now turn the call back Connectkey Valentine for closing remarks.
Thank you again for joining us. This afternoon, we look forward to the rest of 2023 members of the momentum we bill since the merger to deliver even more impressive performance going forward.
Great afternoon and evening. Thank you again for your interest in <unk>.
Ladies and gentlemen, this concludes today's calling me. Thank you for your participation you may now disconnect.
Please wait the conference will begin shortly.
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