Good morning, everyone, and thank you for joining us at this year's Canaccord Genuity Growth Conference. My name is Caitlin Roberts, and I am one of the medical device analysts here at Canaccord Genuity. I am pleased to be joined this morning by Orthofix, a global medical device company specializing in differentiated orthopedic and spinal solutions. With me today are Massimo Calafiore, CEO, and Julie Andrews, CFO. Thank you for joining us. Before we begin, I want to remind everyone of any relevant disclosures, which can be found on our conference and/or firm website. We will begin with a fireside chat. I will try to leave a couple minutes at the end for any questions from the audience. Let us start off with Q2.
You guys raised guidance on the Q2 call. This comes after having lowered expectations and removing your long-range targets intra-quarter, post the CMS bone growth stimulation reimbursement changes, which have since been reversed. Guidance, while raised, it was lower than it was prior to the bone growth stim noise. Maybe if you could walk us through the pieces of the updated guidance, including the CMS impact and some newer pieces of that guidance change.
Yeah. Thank you, Caitlin, and I'm happy to be here again. Before I let Julie answer the question, I want to step back and remind everybody of the progress that we made in just two years. Since the beginning, we more than doubled our EBITDA since the inception. We moved from more than $100 million user cash, almost break even last year. We arrive today, after we made the very deliberate choice about how to strengthen our business, how to make our commercial organization more predictable, and with a very clear path of innovation moving forward. All of this drove the decision that we just made.
Yeah.
I will answer your question regarding guidance. Our updated guidance reflects several moving pieces. On the positive side is the reimbursement restoration, as well as a European MDR-related inventory purchase in the back half of the year and strengthening that we are seeing in both our biologics and limb reconstruction business. That is partially offset what we have talked about in the spine business, on the smaller U.S. spine distributors, where we are seeing a steeper decline than we had originally anticipated for that business. That kind of makes up the pieces behind the guidance reset.
How are you thinking about the cadence of growth and profitability through the remainder of the year, just given that updated guidance?
Yeah. On our call last week, our comments around that was Q3 we expect to be really in the same range as Q2 from a revenue perspective. Profitability will follow that. We expect a little bit of expansion versus prior year EBITDA margin. Q4 is where we expect the majority of the European MDR inventory purchase will be in Q4.
Anything to call out here from a procedural volume demand standpoint?
No. I would say we see procedural volumes being relatively consistent. We were encouraged by what we saw in our therapeutic solutions business, with really showing resilience there in spite of the reimbursement noise in the quarter. Overall, pretty consistent procedural volumes.
Yes, the 80% of the distributors, our top 40 distributors, they kept growing above market, so no noise from this point of view.
Turning to therapeutic solutions, maybe a little bit more color on this segment. I think there has been a lot of noise the past few months, as you guys mentioned, with the down-classification of the products by the FDA, the CMS pricing decrease, then reversal of that decision. Can you speak to what really drove the reversal of that initial decision?
Yeah, I think that was a very concerted effort that we spear, being the market leader in the space. A lot of work that we did internally with our team, driving a very positive interaction with CMS. We were able also to connect with MDM and some of our competitor in the space to create a unified voice about the decision that was made. If you think about, there was a lot of skepticism about what we did was pretty unprecedented for CMS. Very pleased that we rectify a decision that clearly was made, let's say, a little more abruptly from the government decision. Good.
Anything in that about a month where that pricing change had occurred, that there was an impact in Q2 or nothing that you really saw?
Yeah. So we saw about a $1 million impact over that six-week period. So we will actually be able to recoup that revenue in Q3, as well as the proceeds from the billing.
Great. The FDA down-classification remains in place. How does this down-classification change the market dynamics or your own approach to the segment going forward?
Well, actually, if we step back thinking about the down-classification, it was there for a while, so we are pretty ready on what to do next. For any newcomer, it is not going to be, let us say, so linear to get the same indication. It is to go through specific requests from the FDA. From our point of view now, it is opening up the opportunity to leverage our commercial organization to go to other markets. Being a Class III device, there was a lot of constraint for us in order to make any changes at every level. Now we can start to really think about how we can innovate in the space, something that we couldn't do before.
Great. Then moving to Spine. Last year, you implemented efforts to concentrate the business in larger and higher-quality distributor partners, which I think you noted you have done about 80% of revenues now really concentrated in these partners. On the Q2 call, you also noted that the remaining 20%, the smaller distributors, have been performing under your expectations for a few quarters. These impacts really indicated in your revised guidance. How are you approaching management of these smaller distributors, and when do you expect to see this headwind ease?
Look, we're going to keep being deliberate on our choices. Within the 20%, there are, let's say, we're going to identify the group that we want to keep participating with, and we're going to keep moving resources from the 20% to the 80% in order to keep driven the profitable growth that we promised our investors since the inception of our leadership. We stay the course. It's very, let's say, transformational and nonlinear. I believe that we're still going to have some noise moving forward, but I'm very optimistic about what we can achieve now with this concentrated effort that we're making.
Julie, you called out the EU dynamic as one of your legacy distributors is planning to fund your EU MDR cost in the region. Can you speak to this year and then next year's kind of expected impacts and just why strategically it makes sense to remain in the region and supplying this distributor?
Yeah. I'll start with the impact. We expect a $15 million stocking order from this distributor, most of it, we'll see, we believe, in Q4. Then next year, the headwind is $22 million. The reason it's more than the 15 is there was a base business, right, of about $7 million. The $15 million is really to bridge them until kind of the expected timeline of when all of the approvals would be back in place again. I think for us, strategically staying in the market when the distributor came forward and offered to fund it, and it gives us a pathway eventually to stay in the market, maybe to even expand in the market. It just seemed to make sense.
I think on us funding it, I think the decision was rightfully made to not fund it, based on, again, really focusing on markets where we had higher growth opportunities as well as more profitable growth opportunities. But certainly, if someone's willing to fund it, they wanted to stay in the market. They saw our portfolio as something that they wanted to continue to carry. So, it seems to be a win-win for both of us.
Great. Then just from a cash flow perspective, what are your expectations for that?
Yeah. There will be a little bit of near-term headwind on cash flow in 2026, as we have to pay for the inventory purchase, and then most of the cash receipts will be into next year. It is timing. It is a profitable sale, and it will generate cash, but just timing between quarters, which happen to be between years in this case.
Then just turning more broadly to Spine leadership. I think you eliminated that leadership earlier in this year, and Massimo, you are now more directly overseeing this business. How has that structure change been going, and any plans to add leadership back?
No, the idea is that, first of all, I think that being more directly involved helped me to drive the strategy that we implemented, so I am very pleased. But also, I have to recognize the fact that we have a lot of talent around the Spine business, and I do not foresee to bring anyone from the outside. But actually, I am working personally with the person that right now is helping me to manage the business, which I believe has a lot of potential to take over in the near future. So great impact from me right now, and I am very optimistic of a smooth transition of leadership given the talent that we have.
Great. Spine is always a competitive segment. Anything to call out from a competitive dynamic standpoint, or maybe your place within the competitive landscape as you look to really shape your business going forward?
Yeah, look, for us, the thesis didn't change. Actually, we have a lot of requests from partners of our competitors that we really analyze on weekly basis. I think that being very deliberate, especially with the 20%, is helping us to free up capital in the future to keep adding big shop. It's interesting that I still see the Spine market very dynamic. I feel that we are very well-positioned in the space because, A, the quality of our technology, B, the fact that we have access to 7D, and that give us a big differentiator out there. The demand, the interest at a surgeon level and the distributor partner level is out there. It's as usual on us making sure that we make the right choices to keep managing our resources.
Then just touching on 7D quickly, could you update us on your installed base and if any signs of Verata helping out through some demand and helping pull through for 7D?
Yeah. From an installed base perspective, we don't give those numbers. We have been giving kind of metrics on what we're seeing in terms of performance. Last updated those, I think, at the end of the year, and that's kind of our cadence. But Massimo can speak to VIRATA, but we are seeing kind of some encouraging use with VIRATA. It's early days, of course. We haven't fully launched VIRATA yet. But certainly VIRATA is the first system that's custom purpose-built, I would say, to be used with 7D. So we're seeing encouraging things there.
Yes. With VIRATA, we are ready for commercial launch for open procedure, and the early feedback has been very encouraging. A lot of excitement out there. On the MIS side, we are going through alpha right now. Even on the alpha's launch for the MIS system, a lot of great support. We actually recently did the first MIS case together with the new software update on 7D. That has been a great success. I am very optimistic about what we can do with the two system combined. What is also important now, having a competitive pedicle screw system, we can go back and start to really create proceduralized all of the different approach that we have. You are going to start to see in the other year a very systematic approach of proceduralization with Access, VIRATA, our interbody, and 7D.
Just turning to biologics, I think they were somewhat impacted by the spine distribution changes you made last year. Maybe talk about why this business was impacted from the distribution changes and if there could be risk to further disrupted performance with the management of these smaller distributors.
No, I think we accelerated what we were doing in spine and biologics. All of these two favor, like our 80%. The noises around, let us say, distribution, I believe that right now is much lower, if not gone. Very good encouraging signs that we got from the business. The last two quarters were the best two quarters in a while. Now for us, we have a pretty much a brand-new commercial team, very strong leadership in the vertical. We are investing heavily in the business. During the last call, I reminded the market that we are clinically start to create clear clinical evidence for the entire portfolio, from our synthetic OsteoCove to VIRTÙOS to Strand Plus. So very optimistic about the space and very optimistic about a segment that is very important for us from value creation.
You brought the business under limb reconstruction leadership. How important is driving usage of biologics in the limb recon portion of the business, like vital to the overall success of biologics?
No. It's giving us two opportunities right now. Besides if you focus just on biologic, of course, a new channel, but also help us implement the similar strategy that we had in spine into the limb reconstruction segment, where we can engage a larger distributor given our ability to offer a bigger bag combining the limb reconstruction bag with biologics. We are in the right track there. Very pleased.
What's your timeline for returning the business to market growth and then your confidence in your ability to execute within this timeframe?
We're not guiding 2027 yet. But we feel like, if you look at the underlying pieces in our business, we feel really good about where those are headed. Again, limb reconstruction, really strong quarter, biologics stabilizing, the therapeutic solution business really, if you adjust for the $1 million impact, really at market growth there. Really the piece left that we're continuing to work on is U.S. spine and working through kind of that smaller distributor network, and feel good about our ability to execute in that area.
Maybe just touching more on financials, Julie. With the free cash flow guidance for the year removed, how long could it be for the free cash flow inflection to occur?
Yeah. Well, so just, I guess, to step back and remind everyone, we've had quite an inflection already, right, from $108 million use of cash in 2023 to near breakeven in 2025. This year, I would say, it's timing more than anything between 2026 and 2027. We don't see a change in fundamental underlying cash generation of the business. When we had guidance earlier in the year, we said we'd be positive, excluding kind of the impact of settlements with our three former executives. We have made those payments now in Q2, so that's kind of that noise is out of the cash flow numbers. So again, I see inflection just with some timing on working capital in the next few quarters.
Great. With a lot of that progress, how are you thinking about your capital allocation priorities over the next several years?
Yeah, I think we'll continue to try to strengthen the balance sheet, invest in organic R&D. Our organic R&D pipeline are kind of our two biggest priorities as we move forward.
You also removed your LRP earlier this year. How are you thinking about potentially reinstating this LRP and what needs to happen before that occurs?
We do not have a timeline at this moment for reinstating the LRP. I think we want to really be thoughtful and deliberate and intentional about the actions that we are going to take in the U.S. spine business before we do that to make sure that we have stability in that. As we work through that over the next couple of quarters, we will be considering when is the appropriate time to reinstate our long-range guidance.
Then, just with M&A, what are your thoughts on that and what a potential M&A candidate could be for you?
I think right now our focus is on growing organically. If we saw an opportunity for something that made sense in our bag, we would consider it, but at the moment, we are focused on organic execution of the business.
Any questions from the audience?
Just probably two. One is, can you kind of deconstruct where growth came from in last year? Generally, it was price or another, or was it true organic growth? Then the next part is, can you just break down the margins domestically versus internationally?
Yeah. Our growth really was organic volume-driven growth, not price growth. Generally speaking, our guidance is that we have about a 1%-2% price pressure annually kind of baked into our number, and that's generally what we're seeing. So our growth is really driven by volume and market acceptance of our products. We don't break down the international U.S. margin difference. But you can generally assume international is going to be a little lower than the U.S. depending on. Some markets in international were direct, so they're going to have a little higher than a stocking distributor. But generally, stocking distributors don't pay commissions. So you'd probably want to look at the contribution margins, which are relatively similar. Thanks.
Great. Awesome. In the last few minutes, anything you guys want to leave with the audience about the business and the trajectory going forward?
Yeah, look, just to reiterate what I said at the beginning. We are today with a much stronger business. I believe that we have a clear strategy that we keep executing since day one and not deviating. We are entering in this next chapter of our leadership with a stronger commercial organization, with an organization that can use resources much more wisely, and a very clear path for innovating in all of the markets where we compete. So, very excited about the opportunities that we have in limb reconstruction, excited about the progress we made in biologic. OTS, which is our BGT business, is very resilient. And the spine, we have a clear path to create the real responsible growth that, given the scale that we have, is pretty dramatic, I said, the progress that we're making.
Very pleased of where we are and a big believer of what we can do in the future.
Great. We will leave it at that. Thank you both.