Good afternoon, everyone, and thank you for joining us at this year's Canaccord Genuity Growth Conference. My name is Caitlin Cronin, and I am one of the medical device analysts here at Canaccord Genuity. I'm here today with Orthofix, a global medical device company specializing in orthopedic and spinal solutions. We're very pleased to be joined today by Massimo Calafiore, CEO; Julie Andrews, CFO; and Julie Dewey, Chief IR and Communications Officer. Before we begin, I want to remind everyone of any relevant disclosures, which can be found on our conference and our firm website. We'll begin with a brief presentation by the Orthofix team, followed by a fireside chat, and I'll try to leave a couple minutes at the end for any questions from the audience. With that said, I'm going to hand it over to management.
Thank you. Good afternoon, everyone. So we're a forward-looking statement. Okay, for who doesn't know Orthofix, you know, we are a leading global med tech company that participate in five specific markets. We have a biologic market, spinal implant, enabling technology, bone growth therapy, that we call BGT, and orthopedics. It's a very comprehensive portfolio that give us the opportunity to have multiple level of growth, and it's something that right now we, we are enjoying it, given that give us the opportunity to be very consistent and dogmatic where we invest capital. To make you understand better how we work from the commercial perspective, you have a biologic, a spinal implant, enabling tech and bone growth therapy that use the same call point, and we have an orthopedic space that can share a call point with biologic and BGT.
So if you think about, yes, five distinctive markets, but the opportunity to horizontally creating to leverage, let's say, multiple points of contact with surgeons. You know, we participate on a $15 billion market that distill to $7 billion when you think about the products that we have right now on each segment. So why invest in Orthofix? Look, we have a company with strong foundation, first, strong fundamental, and we have a compelling growth opportunity among all of the different segments where we participate. So if you want to think about us, we are a company that is growing faster than the market in all of the segments where we participate, but in a very responsible way. So in a way that also create return for our shareholders in EBITDA and cash flow.
We are very focused commercially. As said, we are taking the advantage of many synergies that we are creating horizontally among all of the business unit, but at the same time, a pretty strong innovation machine that create interest for our end customer. I'm very proud to have a brand-new leadership team. I think that we have more than 250 years of experience in the space that we participate combined. Actually, tomorrow, we're gonna announce also the new leader for Orthopedics. So, you know, like, I start this job six months ago, so laser focus on, A, stabilize the company and, two, and maintaining a strong growth trajectory, and as a second part of the- of my tenure on focusing on build the best team that we could.
It's very interesting that the quality and the caliber of the people we were able to attract was due to the fact that it's pretty well known that there is a big discrepancy between the quality of the company, the portfolio, and the valuation that we have right now. As I said, you know, like, the team has been very focused on executing, so if you see a lot of interest and a lot of improvement already in the first six months of the year, and that all of this drove us on a beat and raise in both quarters, you know, that the last couple of quarters of the year.
So, a demonstration that we can grow, as said, above market, but at the same time, keep creating value, focusing on the right stuff. So what are the key priorities for us entering, you know, like, in the second part of the year? I said before, profitable growth. You know, if we want to position, let's say, Orthofix in this world of med tech, we can be an alternative to small companies that wants to grow at all costs, so very fast-growing company burning a lot of cash, or to companies that are much larger than us, that have a growth profile lower than us, but of course, with stronger EBITDA. So we have a kind of we want to be a nice blend between, as said, above market growth and value creation.
I think that how we differentiate, if you think about our end customer, given our portfolio, we can enter an account from different avenues. I said, yes, we have five different businesses, but most of them share the same customer. So an ability to enter from the spine side, from the enabling technology side, biologics, et cetera. At the end, a real focus on strategic innovation. I think one of the product that differentiate us in the market is that we have a very strong enabling technology platform with 7D. 7D pretty much is a navigation system that we use in the OR. This is a proprietary technology named Flash, Flash technology.
For who is familiar with the market, right now, if you wanna do a robotic surgery or if you wanna use a competitive system, you need to spend a good 20-30 minutes to before starting a case. Our 7D let the surgeon map the entire spine in 52 seconds. So we are thinking about highly differentiable technology that deliver real advantage in the OR. So where are we? Where are we now? You know, I think that as you see in for the people who follow us, you can see that we are marching towards our goal. We are focusing on the area that are very profitable for us. I think that we start to talk from the innovation side, we start to talk about investing, for instance, in spine deformity, in open deformity, which is a market that is very lucrative.
All of this because the combination between the 7D technology and our hardware, I think that the multiple contact that we have in the account also let us go deeper and create a much better return per surgery. Not just selling more product on a specific segment, but creating following the patient in this continuum care. Because we can work and address a pathology in acute, but with bone growth therapy, we can also address, we can follow the patient post-op until the fusion. Again, I think that we have a very strong platform that is creating a lot of commercial synergies right now.
I think that we are building up a company with a solid foundation for a bright future because we are not focusing on specific top-line growth, but also a real focus on value creation with EBITDA and cash flow. So as said, we are being very consistent right now, and focusing on delivering the best technology that we can to our end user, the best technology that we can to our commercial partner, but without forgetting what is important for all of the investor community, so creating value for an organization. So this is our story. Thank you.
Great. Well, thank you, Massimo. Maybe let's just start with the Q2. You know, really strong quarter for you guys, and you also raised revenue guidance. You know, what really gives you the confidence to do so, and how do you expect revenue to really ramp in the second half?
Yeah, look, I think that for us, we start to see, you know, we are seeing, like, a strong demand for our product and a lot of, a lot of interest. Plus, you know, like, we keep learning about the team and our ability to execute. And as said, the fact that we have multiple points of contact with the surgeon, the fact that we can keep following the patient for a long time is giving us the opportunity to go much deeper. So I think that where we are increasing our revenue per case vertically, but at the same time, I think that there is a lot of interest to attract very strong partners and distributors.
So, you know, I think that you know, we had some thesis when we enter, let's say, the beginning of the year, and we are start to see that what we were thinking in January is actually happening today.
Mm-hmm. And you also announced that you expect positive Free Cash Flow for the second half, which was an increase from your prior expectations for, just the Q4. You know, what helped you drive this increased expectation?
Yeah, I think so. We're seeing, you know, more drop through from an EBITDA perspective, cash conversion, as well as working capital improvement, so specifically some DSO efficiency, as well as inventory and instrument efficiency in terms. So those things kinda gave us the confidence that we'll exit the, you know, the back half of the year cash flow positive.
Maybe let's just touch on your spine business. You grew U.S. spinal fixation in the Q2 12%, which is a very strong number. What really drove this growth?
Yeah, I said before, you know, it is a combination of two, two factor. A, we are keep getting more money per procedure. You know, the fact that we can sell the hardware in the account, that we can sell the biologic in the account, and the fact that our portfolio, with the combination of SeaSpine and Orthofix, led us address more than 90% of the procedure for the procedure, also increasing as the revenue that we see per, you know, the, the, the revenue we see per case. But at the same time, I think that we are seeing a big improvement on the quality of our, of our distribution. I think that we are getting partner that can manage a scale and partner that, that, that are helping us to utilize our resources better.
You could see, as Julie said, on our drop through to our EBITDA and an improvement on asset management. So I think the combination of stronger commercial footprint and the ability to go deeper with our technology.
Mm-hmm. And maybe just touching on 7D, you mentioned it earlier, but what are really the key points that make this technology differentiated versus other spinal navigation platforms?
Yeah. I think that, you know, like 7D is based on what we call, what we call flash technology, which pretty much, if you go in the OR and you see the lighting that is used, so it's a similar the footprint is very similar, and it had a technology utilize LED to map the, to, to map the open spine. This mapping, that we call registration, pretty much is happening in less than a minute. So you can appreciate how, you know, the fact that you can have a fully free X-ray, let's say, you can create a fully X-ray procedure, a procedure that is faster compared to all of the, you know, all of the technologies that are out there.
So I think that the combination of the quality of the system, the quality of the performance that we can give, with the speed, with the ease of use, is creating a lot of interest on the marketplace. And the fact, you know, leveraging this technology that we have over time, we can bring some more add-on development with the Flash technology that will further differentiate us from competition. So, the interesting part for us is that it's not anymore, okay, you buy 7D or you buy a robot. I think that the technology is so differentiable that you can see multiple accounts, our technology with our robotic technology, whatever.
So it is very compelling for us, and it is one of the ability that we're gonna have to create stickiness in the account.
Mm-hmm. And, just jumping off of that, what are you seeing from a capital demand perspective? And what's kind of the purchasing strategy-
Mm-hmm
... that you have for, for hospitals?
Yeah. So we are very flexible on how we sell the capital to the hospital. I think that one of the changes that we made has been, first of all, before the entire, you know, the entire capital infrastructure was separated from spine. Now we created a unique vertical between commercial spine, biologic, and 7D. So let's say, we are creating a more, let's say, synergy between the commercial team. Our favor right now is, of course, to create placement of 7D into account, so have hospital that can pay for the device through earn-out. I think that the earn-out, yes, it's gonna have a lower impact commercially short term, but it's gonna create more longevity stickiness into account.
But in general, I think that we are very flexible about how we go into, you know, how we sell our device.
Maybe let's just turn to orthopedics. You know, why is your product offering here differentiated than some other large ortho players?
Mm-hmm. So in orthopedics instead, we are very focused strategy. If you think about us, we are the company that can solve the most, let's say, complex trauma, trauma cases out there. I think that we are the only company that right now combining the ability to address all of the worst cases for surgeon with internal lengthening, so internally and externally with our external fixation. So again, a very strong presence overseas. Right now, 80% of our revenue for Orthofix is coming from there. Orthofix was born in Verona, was born in Europe, so a big, big, strong presence there. But in United States, we start to see- we start to find our place, given the fact that, again, we are unique on how we address complex trauma, complex trauma reconstruction.
And that, again, we have a very small market presence, and we are very excited about the leader that we're bringing on board because it's gonna bring a lot of experience of managing a scale in the U.S.A. market. So I think that the combination of better and larger distribution with the product, we see the opportunity to grow multiple of the market in orthopedics as well.
That's great. And then maybe just a quick one on Bone Growth Therapies.
Mm-hmm.
I think you noted that you're, you know, a leader in the space, and growth here has been very impressive as well. Can you touch on your two channels within BGT and their respective distribution strategies?
Yeah. So I said, so BGT, on, on the spine side, we are the market leader. We are the only PMA product for cervical indication, and we have a distribution. As we, we have a commercial infrastructure, this is a blend between direct and distributor. We are seeing, let's say, a, a very healthy growth right now, given despite, let's say, our market leading position, because we are leveraging, I said, these, horizontal synergies between, the touch point that we have in spine with our bone grown therapy. So I think that this, this is like a demonstration of the thesis of the merger between SeaSpine and Orthofix, that is creating, let's say, a real benefit, from the commercial point of view. So very happy about how the team are collaborating and working together.
On the fracture side, instead, we entered the market recently. We are, like, already 20% of market share, and again, similar infrastructure that we have for spine, and we start to see we are at the infancy about creating even deeper synergies between the commercial infrastructure that we have in orthopedics and BGT. So you know, like, we're very excited about what we, what we are doing right now. We are the opportunity, even in orthopedics, to address both acute trauma and malunion. And thinking about scale, we are creating economy of scale because if you think about it, yes, we have two different segment, but the back office infrastructure is the same. So the opportunity to, the opportunity to leverage expertise we already have and grow into different market.
... And just, you know, touching on your commercial strategy more broadly, I think the merger was a year and a half ago, and, you're now graduating to a more focused, combined commercial strategy. Can you just talk a little bit about, you know, the strategy and its three components? I think you've talked about going deeper into existing accounts, utilizing commercial access points, and then also leveraging 7D, going forward.
Mm-hmm. So on top of this, you know, like, if you think about what the merger brought us, is the opportunity now to have a portfolio that address the vast majority of cases out there. All of this is giving us the opportunity to start to create more exclusivity with our distributor. So where we are working on right now, it really start to think about more a scale, so to bring a partner that, again, can scale within the market, can be more focused on us, and improving the utilization of the asset that we have. So what you're gonna see from us, keep, let's say, bringing quality distributor in-house, test where we can some more direct distribution, and eliminate all of the small distributors that can just create a lot of inefficiencies for us.
Makes sense. Julie, just wanna make sure I give you some air time on the financials. I know, you know, you're now a year and a half removed from the merger. You know, where do you stand on your goal of achieving $50 million in synergies post the merger?
Yeah, so we've achieved $38 million to date. We announced that in Q2. And so we feel like we're making really good progress on achieving our synergies of $50 million. The $12 million we have left, you know, the majority of that, we believe, will come from gross margin, in the gross margin area, a little longer-tail projects, so into 2025 when we think we'll realize that. But making good progress, and we're encouraged by what we're seeing.
That's great. And then, can you speak to the working capital management improvements you're driving, specifically, you know, inventory and instrument utilization, DSO efficiency, et cetera?
Yeah. So, you know, I think, last year the company made, you know, an outsized investment in inventory and instruments in terms of, you know, ramping up for distributor conversions. And so, you know, we're able to use that, this year to fund our growth, as well as looking at kind of turn improvements that are sustainable over time. The company had kind of built up, I'd say, a bolus of inventory and warehouses through COVID and a number of other things that we're bringing back into line, into kind of a normalized, days on hand. So a lot of opportunity there this year. And we see, you know, kind of going forward, that we'll be operating at a different level.
And then from a DSO perspective, you know, just focusing on, you know, the basics, collecting over 90 days and, you know, reducing our DSO. That's more of kind of a near-term opportunity, but then we expect to maintain that.
Okay. As you near cash flow profitability, where are you sitting from both a cash burn and cash on balance sheet perspective at this point?
Yeah. So we finished Q2 with just under $29 million on the balance sheet. Almost break even for the quarter. Seven hundred thousand in free cash flow usage. And again, back half, we expect to be free cash flow positive. So we feel good about where we are and where we're going. We also announced that we'll be free cash flow positive for the full year of 2025.
That's great. Any questions from the audience? Okay, well, maybe just to wrap it up, would love if you could leave us with some, you know, words of wisdom about where Orthofix is going, and you know, what you wanna leave investors with.
Yeah, look, as I said, I think we are a very exciting company right now with the space because I think we are blending, we are blending, let's say, three different thesis. We're exciting because we can grow above market. We're exciting because we have a very strong innovation-enabling technology platform and a very good innovation pipeline. But again, we are not bounded to growth of all cost. I think that we are right now making the smart choices to balance, again, the innovation that give to our customer, but also the return of investment that we give to all the people that are believing on us. And at the end, if you see, the street is kind of liking it, our story.
And, for us, for the strong management team that we have, is gonna be just to be laser focused on executing and improving that, you know, proving the thesis that I just said. So again, I think that we have the innovation engine and the people to make everything that I said happen. So I think that we're gonna write a very good story here.
That's great. Well, thank you all for your time.
Thank you.
All right. Thank you.