Q3 2024 Orthofix Medical Inc Earnings Call
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Thank you, Julie.
Speaker Change: Good morning everyone and thank you for joining us for our third quarter earnings call.
I'll spend some time providing business updates and outlining our long-term strategic initiative before I turn it over to our CFO, Julie Andrews, to cover the specifics of our Q3 results.
guidance and our new three-year financial goals.
The third quarter represents an important inflection point in this new chapter for orthophysics.
including record performances in our USA orthopedics business and in the number of 70 earnouts agreements.
Speaker Change: We also matched our record for the highest number of 7D unit placements in any quarter to date and keep seeing strong demand for our spine fixation products.
As shown on slide 5, we continue to deliver above-market growth led by strengths in our USA markets. The entire company is focusing on innovation and responsible growth.
Speaker Change: We had another quarter of strong adjusted EBITDA margin expansion, with positive free cash flow of $5.9 million, reaching the significant milestone earlier than we expected.
All of this keeps us on a clear course to achieve our 2024 financial targets.
Speaker Change: Our operating and financial discipline allows our team to execute on our key growth initiatives and reinvest in our innovation priorities.
I can confidently say that the business fundamentals are excellent and we have positive momentum to continue leveraging our strategic advantages in 2025 and beyond.
Speaker Change: Our third quarter net sales results of $196.6 million represents year-over-year growth of 7% on a constant currency basis.
Growth was led primarily by strengths in our U.S. spine fixation and bone growth therapy, or BGT, businesses, as well as continued market penetration in U.S. orthopedics.
Speaker Change: U.S. spine fixation had an outstanding quarter and grew 18% more than triple the market rate with healthy double-digit growth across all three of our franchises.
Cervical fusion, interbody and thoracolumbar fixation.
Speaker Change: Revenue growth was driven by continuous strong market demand of the recently launched REEF and Waveform Interbody products, along with the onboarding of new, experienced distribution partners.
More specifically, our ALIF, LADERAL and MIS portfolios all grew in excess of 35% and significantly outperformed the market due to increased focus on procedural selling.
Speaker Change: New product introductions are a driving force and continue to open doors to new surgeons.
Speaker Change: The combination of our Access Instrumentation, 7D, our Biologic Portfolio and the new Interbody Designs that features orthofix proprietary advanced surface technologies is supporting our differentiation in the marketplace.
Speaker Change: We are committed to our surgeons and patients that look to our technology to increase speed, improve accuracy, and advance outcomes.
Speaker Change: BGT grew 9% overall and 13% in fracture, further highlighting the benefit of cross-selling in our integrated spine and orthopedic channels.
Speaker Change: We already hold the number one market share position in BGT spine market and continue to take share with more than 50% of the growth coming from new customer acquisitions.
Speaker Change: In addition, investment in the fractured market sales channel drove 13% growth in BGT fracture, with the Axelsteem bone growth therapy device continuing to outperform the market.
Speaker Change: As a reminder, the fractured market represents an opportunity of more than 200 million dollars, and we are still in the very early innings of building our position in the market, with a clear goal to become the number one player.
Speaker Change: U.S. orthopedics benefited from strong execution and grew 15 percent. Growth was led by the combination of our TrueLock and FitBond products, as well as growth in the Oscar product family, which facilitates the removal of bone cement during joint revision.
Speaker Change: As a result, I'm happy to report that our USA Orthopedics business delivered a record revenue quarter.
Speaker Change: In enabling technologies, we entered into a record number of 7D flash navigation system earnouts agreements.
Speaker Change: and matched the record for the highest number of 70 unit placements in any quarter to date. We are leveraging our differentiable platform to create long-standing relationships with our surgeon partners.
Speaker Change: In addition to reiterating our full year 2024 financial guidance, we are also introducing our new 2027 financial targets, which reflect our confidence in sustainable growth trends,
Speaker Change: the strength of our differentiated and expanded product portfolio, which continues to win share, and our commercial strategy and focused execution.
Speaker Change: Julie Andrews will discuss this in detail later in the call.
Speaker Change: I believe we are very well positioned to accelerate our positive momentum and delivery on our commitment to drive discipline, profitable growth and innovation, while increasing long-term shareholder value.
Speaker Change: In summary, I am pleased with our third quarter performance and remain optimistic about the opportunities ahead.
Speaker Change: It's clear that OrthoFix's focus on executing a clear strategy for profitable growth is delivering compelling results.
Speaker Change: Through our focus on bringing to market a comprehensive portfolio of transformative solutions and delivering unmatched customer service, which collectively are helping us drive more profitable sales.
Speaker Change: We have significantly improved our operating and financial position and paved the way for sustainable growth.
Speaker Change: As we look to 2025 and beyond, we plan to build on our progress by 1. Further sharpening our commercial focus and discipline for margin expansion
Speaker Change: to continue to innovate our enabling technology platform to support our renewed focus on spine deformity.
Speaker Change: and three, ensuring we are well positioned to create value for our shareholders over the long term.
Speaker Change: As outlined on slide 8 in the presentation, we have continued to successfully execute this transformative agenda.
Speaker Change: and are now at an inflection point in our journey that is focused on strategic innovation and operational and financial discipline.
with our world-class executive leadership team in place.
Speaker Change: And reinvigorated by our new vision and mission, it's time to introduce our long-term strategy and financial goals, which build on our strong foundation and set us on a clear course for profitable growth.
Speaker Change: I would like to provide more detail on the multiple levers and vital few initiatives in our long-range plan that we believe will fuel profitable growth and propel our business forward.
Speaker Change: These include an innovation focus and continued development of differentiated products to meet diverse surgeon preferences.
Speaker Change: Commercial Strategy Enhancement to drive deeper market penetration through comprehensive portfolio offerings. Technology Leadership that harness advanced systems for improved surgical outcome efficiencies.
Speaker Change: Emphasis on high-quality revenue streams and operational excellence for growth sustainability. And disciplined cash flow management, a strategic financial planning to sustain positive free cash flow.
Speaker Change: At high level, our strategy will capitalize on our clear competitive advantages in addressable markets of approximately $15 billion.
Speaker Change: that are outlined on slide 11 and 12, and includes three key components.
One, going deeper into existing accounts.
Speaker Change: 2. Taking advantage of multiple commercial access points across our product portfolio and 3. Leveraging our 7D flash navigation system to drive surgeon engagement and build brand loyalty.
Speaker Change: We are poised to unlock the company's full potential in each of these respective markets with a highly capable team that is ready to execute and deliver on our commitment to discipline, profitable growth by providing life-changing solutions and maximizing value creation.
First.
Speaker Change: Referring to spinal implants on slide 13, we believe we are well positioned to serve over 90% of the spine surgeons' needs with a comprehensive product portfolio which includes spinal hardware, biologics, and enabling technology.
Speaker Change: We also believe that our comprehensive portfolio and steady cadence of innovation will enable us to attract top sales talent.
Speaker Change: Increase excluded distributor relationships and drive sticky relationships with surgeons and hospital accounts.
Speaker Change: which we expect to result in incremental product pull-through as well as ASP lift from mixed benefits.
Speaker Change: Moving to slide 14, our BGT business is focused on maximizing our number one market position with the most comprehensive portfolio and most indication of bond growth stimulation devices in the market.
Speaker Change: We will continue to focus on cross-selling with orthopedics and spine, add new market channels with established sales representatives, and drive penetration in the fractured market with axial steel.
Speaker Change: Our biologics portfolio, featured on slide 15, is growing from a position of strength.
Speaker Change: We are a market leader with the number two shares position in biologics, with solutions to enhance the fusion process and promote bone repair and growth in each of the major bone grafting categories.
Speaker Change: Supported by a strong foundation of long-term clinical research, we will continue to leverage opportunities for growth by capturing share with our current biologic offerings in spine and orthopedics.
Now, turning to orthopedics on slide 16.
Speaker Change: We are redefining the category of limb reconstruction with a unique portfolio of solutions that address the most challenging orthopedic conditions in patients of all ages.
Speaker Change: We are just beginning to expand into the US orthopedics market, which presents incredible growth opportunities given our unique and innovative product lines.
Speaker Change: Our focus is on areas where we can win, particularly in deformity correction, limb restoration and limb lengthening.
Speaker Change: We have received recent 510K clearances for a number of products.
Speaker Change: that are now in limited market launch and are expected to capture additional market share including the FitbonBond Transport Lengthening Nail, the only bond transport nail available in the United States.
Speaker Change: Finally, as shown on slide 17, we believe that our 7D Flash Navigation System represents a unique opportunity to drive surgeon and hospital account interest and growth across our broader Orsofix portfolio.
Speaker Change: The reorganization of our 7D commercial structure under the leadership of our SPINE team is already paying dividends, as evidenced by the record number of 7D earn-outs agreements and unit placement in 3Q.
Speaker Change: As the world's first radiation-free, machine-vision, image-guided surgical system, 7D continues to revolutionize spinal navigation, making it faster and more efficient. With the capability for registration in mere seconds,
Speaker Change: versus 30 minutes or more for competitive system and requiring no intra-operative radiation, 7D technology is proving compelling to surgeon.
Speaker Change: While we offer both MIS and open surgery solutions, keep in mind that open surgery still represents approximately 80% of the total current spine interventions.
Speaker Change: Positioning 7D as a key driver of incremental navigated procedure penetration.
Speaker Change: With the evolution of our 7D strategy, we are more confident than ever in its increasingly significant role in our portfolio.
Speaker Change: This shift will allow our enabling technologies team to drive software innovation and enhance product integration alongside the R&D pipeline as we launch impactful products across all our franchises.
Speaker Change: We are highly motivated by the opportunity to differentiate ourselves through the combination of our hardware portfolio with our enabling technology platform system.
Speaker Change: Surgeons and their patients remain our primary focus and we will continue to provide a differentiated and unique approach to navigation in the OR.
Dr. Wittes.
Speaker Change: Underpinning our business strategies are significant cross-portfolio commercial opportunities that are highlighted on slide 18.
[inaudible]
Speaker Change: For example, we are already taking advantage of opportunities to cross-sell our BGT products into spine accounts, as well as introducing spinal hardware, biologic, and navigation to our spine BGT surgeons.
Speaker Change: We also have additional opportunities with our biologics and fracture stimulation products through our orthopedics channel.
Speaker Change: Overall, OrthoFix is in a great position to capitalize on our recent product launch successes and deliver meaningful innovation to improve outcomes and efficiencies for our surgeon customers and their patients.
Speaker Change: We remain the market leaders in bone growth therapies, have a comprehensive market-leading biologics portfolio, and differentiated products in several specialized orthopedic markets.
such as Complex Trauma Reconstruction and Limb Deformity Correction.
Speaker Change: Additionally, our broadened spine portfolio is world-class and is fully supported by the highly differentiated and compelling enabling technology.
Speaker Change: As shown on slide 21, we intend to invest in differentiated technologies in areas where we can lead and win with innovation.
Speaker Change: We will take a systematic approach to driving innovation with rigorous allocation of resources to higher return opportunities.
Speaker Change: Over the course of our plan, we anticipate investing approximately 8% to 9% of sales
each year in R&D.
Speaker Change: which you expect to fuel a regular cadence on meaningful, high-impact new product launches and support sustained share capture in our U.S. spine, U.S. orthopedic businesses.
Speaker Change: Turning to slide 23, we believe we can continue to capitalize on a number of access points that we already have with surgeons to grow the business.
Speaker Change: For example, we see plenty of opportunities to introduce additional products from our portfolio, such as BGT, Biologics, and 7D, to accounts that already use our spine or orthopedics products.
Speaker Change: This not only provides us with new entry points and cross-selling opportunities, but also enables us to develop sticker-surgeon relationships, solidify our presence in the account, and widen our competitive mode.
Speaker Change: In summary, we have successfully executed and improved our financial and organizational metrics over the last three quarters, and we expect the positive momentum to continue.
Speaker Change: Our new leadership team and the entire company is well positioned to implement our strategic plan and achieve sustainable, profitable growth across the portfolio.
Speaker Change: We are on a strong, positive trajectory, and I continue to be optimistic as I look forward.
Speaker Change: Our new financial targets reflect our confidence in sustainable growth trends in our commercial strategy and execution.
Speaker Change: I believe we are set up well for a bond market net sales growth, significant EBITDA margin expansion, and improving levels of free cash flow generation in 2025 and beyond.
Speaker Change: With that, I'll now turn the call over to Julie to review our third quarter financial results and outline our new financial targets.
Thank you for watching. See you next time.
Julie Andrews: Thank you, Massimo, and good morning, everyone. ForzaFix had a strong third quarter, delivering total company net sales of 196.6 million or 7% constant currency top-line growth.
Julie Andrews: Adjusted EBITDA was 19.2 million with adjusted EBITDA margin expansion of approximately 6 million or approximately 250 basis points.
Julie Andrews: I'll now review financial results for the quarter for each of our business units and then discuss our full year 2024 guidance and new 2027 targets.
Julie Andrews: Bone growth therapies revenue grew 9% to $57.9 million in Q3 and 13% in the BGT fracture market driven by investments in the fracture market sales channel.
Speaker Change: This growth was driven by above market performance in both the spine and fracture channels.
Speaker Change: We do expect our BGT growth to remain above market growth rates but should moderate somewhat as we move forward in the fourth quarter and beyond.
Speaker Change: Keep in mind that we hold the number one market position with more than 50% market share in our BGT spine business
Speaker Change: This unrivaled leadership position, coupled with the impact as we anniversary gains from surgeons acquired in Q3 and Q4 of last year, impacts our ability to maintain the pace of growth that we have been enjoying over the past several quarters.
Speaker Change: We will continue to focus on adding new surgeons and competitive surgeon conversion and BTT spine at the same time. We will also continue our commercial focus and the BTT fracture market, where we are significantly less penetrated and see substantial opportunity to drive new business with orthopedic surgeons.
Speaker Change: We will continue to focus on adding new surgeons and competitive surgeon conversions in BGT spines.
Speaker Change: At the same time, we will also continue our commercial focus in the BGT fracture market where we are significantly less penetrated and see a substantial opportunity to drive new business with orthopedic surgeons.
Speaker Change: Global spinal implants, biologics and enabling technologies third quarter revenue was 100.
Speaker Change: Global Spinal Implants Biologics and Enabling Technologies third-quarter revenue was 108.2 million with year-over-year growth of 7 percent.
Speaker Change: $8 2 million with year over year growth of 7%.
Speaker Change: U S spine fixation revenue grew 18% over three times the market growth rate driven by deeper penetration of existing accounts and expansion of our customer base.
Speaker Change: U.S. fine fixation revenue grew 18% over three times the market growth rate driven by deeper penetration of existing accounts and expansion of our customer base.
Speaker Change: Massimo said earlier, we entered into a record number of 70 flash navigation system earn out agreements and match the record for the highest number of 70 unit placements in any quarter to date.
Speaker Change: As Massimo said earlier, we entered into a record number of 70 flash navigation system earn out agreements and matched the record for the highest number of 70 unit placements in any quarter to date.
Speaker Change: Our U S biologics business grew below the overall market in the third quarter as we accelerated our distributor transformation, which had a disproportionate impact on our biologics business. We expect this performance to get back to and above market pace as we continue to focus on new distributor partnerships cross selling.
Speaker Change: Our U.S. biologics business grew below the overall market in the third quarter as we accelerated our distributor transformation, which had a disproportionate impact on our biologics business.
Speaker Change: We expect this performance to get back to an above-market pace as we continue to focus on new distributor partnerships, cross-selling initiatives, and the launch of new products such as Osteostrand Plus C and Osteocove, which were featured at the recent NAS meeting.
Speaker Change: <unk> initiatives and the launch of new products, such as <unk>, plus fee and Osteo Cove, which were featured at the recent NASS meeting.
Speaker Change: The global Orthopedics business grew 3% in the quarter led by 15% growth in the U S. As a result of strong performance across our portfolio as well as distributor expansion in sales channel investments the international business declined 2% versus prior year.
Speaker Change: The global orthopedics business grew 3% in the quarter, led by 15% growth in the U.S. as a result of strong performance across our portfolio, as well as distributor expansion and sales channel investments. The international business declined 2% versus prior year.
Speaker Change: As we've previously said due to the nature of this business, particularly around the timing and volume of stocking distributor intend to orders, we expect to see variability from quarter to quarter in the growth rate.
Speaker Change: As we've previously said, due to the nature of this business, particularly around the timing and volume of stocking distributor and tender orders, we expect to see variability from quarter to quarter in the growth rates.
Speaker Change: Adjusting for nonrecurring tender orders international sales that were in line with market growth.
Speaker Change: Adjusting for non-recurring tender orders, international sales were in line with market growth.
Speaker Change: non-GAAP adjusted EBITDA of $19 2 million was driven by the capture of merger related synergies and driving leverage on sales growth and represented a 45% drop through on incremental revenue dollars. We remain encouraged by these results and we are seeing the impact of merger related synergies and our ability to drive.
Speaker Change: Non-GAAP-adjusted EBITDA of $19.2 million was driven by the capture of merger-related synergies and driving leverage on sales growth and represented a 45% drop-through on incremental revenue dollars.
Speaker Change: We remain encouraged by these results as we are seeing the impact of merger-related synergies and our ability to drive leverage on sales growth materialize.
Speaker Change: Leverage on sales growth materialize from.
Speaker Change: From a cash standpoint, our total cash balance including restricted cash at the end of Q3 increased to approximately $32 6 million as shown on slide 27, our free cash flow generation with $5 9 million in the quarter a significant improvement over the first half of this year.
Speaker Change: From a cash standpoint, our total cash balance, including restricted cash at the end of Q3, increased to approximately $32.6 million.
Speaker Change: As shown on slide 27, our free cash flow generation was $5.9 million in the quarter, a significant improvement over the first half of this year. This was a result of higher EBITDA as well as improvements in working capital usage.
Speaker Change: This was the result of higher EBITDA as well as improvements in working capital usage.
Speaker Change: We also announced today that we successfully completed a new $275 million financing to replace our existing credit facility, which will further optimize the company's capital structure to support long term profitable growth.
Speaker Change: We also announced today that we successfully completed a new $275 million financing to replace our existing credit facility, which will further optimize the company's capital structure to support long-term profitable growth.
Speaker Change: On slide 28, the completion of this refinancing initiative is an important step in orthopedics. This trajectory and provides us with more favorable terms and a lower cost of capital under which we can continue to invest in the growth and evolution of the company.
Speaker Change: Summarized on slide 28, the completion of this refinancing initiative is an important step in OrthoFix's trajectory and provides us with more favorable terms and a lower cost of capital under which we can continue to invest in the growth and evolution of the company.
Speaker Change: Overall, we are pleased with our third quarter results and our performance to date, which has been characterized by steady improvement throughout the year, including significant progress in adjusted EBITDA, and becoming free cash flow positive both of which underpin our confidence and our ability to drive long term profitable growth.
Speaker Change: Moving on to 2020 for full year guidance on slide 29, we are maintaining our guidance for full year net sales of $795 million to $800 million, representing implied growth of six six to seven 2% year over year on a constant currency basis.
Speaker Change: Please note our expectations are based on current foreign exchange rates and do not account for rate changes that may occur through 2024, or contemplate any potential impact to elective procedures as a result of IV fluids Jordan.
Speaker Change: Our other hurricane related effects.
Speaker Change: We are also maintaining our full year 2024, non-GAAP adjusted EBITDA of 64 million to $69 million and expect to be free cash flow positive for the remainder of 2024.
Speaker Change: For the remainder of the year, we expect gross margin operating expenses depreciation expense stock based compensation expense interest and other expense and adjusted EBIT margin improvement to remain in line with the directional remark we provided on our second quarter call in August.
Speaker Change: Now I would like to discuss our new three year financial targets for 2025 through 2027. These are outlined on slide 30, we are still early in our journey focusing on the vital few initiatives not similar outlined earlier and that we believe will enhance operational excellence and drive business performance.
Speaker Change: We also have a strong infrastructure in place with plenty of available runway to drive higher margins and profitability across the company importantly, we believe these target to build on the positive momentum we've generated and put us on an accelerated path to profitability with a stronger financial profile to maximize value creation.
Speaker Change: <unk>.
Speaker Change: First we expect to deliver 6% to 7% net sales CAGR from 2025 through 2027. This assumes sustained market demand with weighted average market growth of 45%.
Speaker Change: <unk>, a negative pricing impact of 1% to 2% and no material change in the reimbursement and regulatory environment.
Speaker Change: We expect mid teens non-GAAP adjusted EBITDA as a percentage of net sales for the full year 2027. This assumes approximately 300 basis points of gross margin expansion over the period capture of about $10 million in remaining merger synergies fixed cost leverage and moderating expense growth.
Speaker Change: Yes.
Speaker Change: We anticipate positive free cash flow generation from 2025% in 2027. This assumes continued adjusted EBIT improvement redemption and inventory days on hand improved instrument utilization.
Speaker Change: With a compelling combination of profitable above market growth and a stronger financial profile. We believe our focused commercial strategy and broad differentiated technologies combined with our robust innovation pipeline and our pace setting, enabling technologies position us well to achieve these targets and deliver.
Speaker Change: Increased value to our shareholders.
Speaker Change: Now before we open up the call for questions. Let me turn it back to <unk> for concluding comments Massimo.