Orthofix Medical Inc. (OFIX) Earnings

Management highlights

### Overall Transformation Progress - Q2 2026 delivered 5% pro forma constant currency net sales growth year-over-year, marking tangible progress from operational changes implemented over the prior year, though management notes the transformation remains incomplete and maintains discipline around growth quality, commercial productivity, and returns. - The company ended the quarter in a stronger operating position than one year prior, with clearer execution priorities and improved visibility across key business areas. ### Spine Segment Updates - Top 30 distributors (accounting for ~80% of spine fixation sales) continue to perform well, while smaller underperforming distributors are seeing steeper declines than expected. - Management is actively evaluating return potential across smaller distributors, and plans to consolidate or exit non-performing relationships to build a higher-quality, more productive distributor network long-term. These challenges are expected to persist through the end of 2026. - First clinical cases for the new Virada Minimal Invasive System have been completed, with a full market launch planned for Q4 2026. Initial surgeon feedback has been positive, and the system will be integrated with the company's existing inter-body and enabling technologies portfolio. ### Biologics Segment Updates - Net sales were flat year-over-year in Q2, marking the second consecutive quarter of improving performance after double-digit declines in 2025. - Management is focused on converting this improved trajectory into sustained durable growth via stronger account engagement, higher utilization, and targeted focus on key products like OsteoCov bioactive synthetic bone graft. - The company is making targeted investments in clinical evidence generation for OsteoCov and Virtuos, and launching a product registry for Strand Plus to support long-term recovery and growth. ### Therapeutic Solutions Updates - CMS restored Medicare reimbursement for bone growth stimulators to prior levels after stakeholder outreach, removing a major headwind ahead of the second half of 2026. - The company launched AXEL STEAM 2.0, a redesigned bone growth therapy device with a streamlined form factor that is now compatible with the company's STEAM on Track patient mobile app and STEAM MD physician platform, strengthening the franchise's value proposition. - Management views the profitable, cash-generating therapeutic solutions franchise as a valuable channel for evaluating adjacent high-return growth opportunities with clear clinical relevance. ### Global Limb Reconstruction Updates - Strong international growth drove overall segment performance, while U.S. growth was below expectations due to incomplete commercial infrastructure required for consistent conversion of clinical interest to sales. - Management is focused on improving U.S. distributor productivity, expanding market development, and increasing commercial consistency to drive more consistent U.S. performance over time. - The company is pursuing an expanded indication for core technologies in diabetic foot ulcers, a large underserved market, and is currently generating required clinical evidence with disciplined investment, positioning this as a key long-term pipeline opportunity.

Guidance

• Full year 2026 net sales guidance is revised upward to a range of $845 million to $855 million, an increase of approximately $7 million from the May 2026 outlook, representing ~5% pro forma constant currency growth at the midpoint. The revision reflects three positive factors offset by one ongoing headwind: the retroactive restoration of Medicare reimbursement for bone growth stimulators, the incremental revenue from a new European MDR transition distributor arrangement, stabilizing trends in biologics and strong limb reconstruction performance, partially offset by ongoing softness from smaller U.S. spine distributors. • Adjusted EBITDA guidance is increased to a range of $95 million to $98 million, returning profitability guidance to the level expected before the Medicare reimbursement cut was implemented in May 2026, supported by the reimbursement restoration, ongoing cost optimization, and operational progress despite the lower margin profile of the incremental MDR-related distributor revenue. • The European distributor arrangement for MDR compliance is expected to contribute $15 million in incremental 2026 net sales, with the majority recognized in Q4 2026, and will create a $22 million net sales timing headwind in 2027 while MDR certification is completed. • Q3 2026 net sales are expected to be roughly consistent with Q2 2026 levels, as reimbursement restoration and improved core business trends will be largely offset by ongoing softness among smaller U.S. spine distributors. Sequential growth is expected in Q4 2026 driven by the MDR-related distributor inventory purchases and normal seasonality. • The European arrangement creates a temporary 2026 free cash flow timing headwind, as inventory-related cash outflows occur in 2026 while most cash receipts are projected for 2027, but this does not change the company's view of underlying business cash generation potential.

Segment performance

1. Global Spinal Implants, Biologics and Enabling Technologies: Net sales of $109 million, representing a 4% year-over-year increase. Growth was led by spine fixation, which delivered 10% constant currency year-over-year growth, with US spine fixation net sales up 3% year-over-year. This segment contributed 51.6% of total Q2 2026 net sales. 2. Therapeutic Solutions: Net sales of $64.2 million, up 3% year-over-year. This segment contributed 30.4% of total Q2 2026 net sales, and grew despite temporary Medicare reimbursement headwinds in the quarter. 3. Global Limb Reconstruction: Net sales of $37.7 million, an 11% year-over-year increase on a constant currency basis. Growth was driven by strong international demand for core product families including TruLock, Elevate, and FitBone. This segment contributed 17.9% of total Q2 2026 net sales.

Risks & headwinds

• Ongoing underperformance of smaller U.S. spine distributors will persist through the remainder of 2026, creating a sustained headwind to topline growth in the back half of the year. • The European MDR-related distributor arrangement creates a temporary timing headwind for 2026 free cash flow and a $22 million net sales headwind for 2027. • Transformational progress is not linear, and not all portfolio segments will improve at the same pace, requiring continued disciplined execution to achieve long-term targets. • While biologics performance has improved, management notes more consistency is needed to confirm a sustained return to growth. • U.S. limb reconstruction performance remains below expectations due to incomplete commercial infrastructure, limiting near-term segment growth in the region.

Analyst Q&A

• Q: Caitlin Roberts (Canaccord Genuity) asked for additional color on the updated guidance, which was increased but not back to pre-CMS reimbursement cut levels, and what factors have changed since May. /

  A: Management explained the upward guidance adjustment comes from two large discrete benefits: $12 million from the restored Medicare reimbursement and $15 million in incremental net sales from the new European MDR distributor arrangement, plus improved underlying trends in biologics and limb reconstruction. These positives are offset by larger-than-expected softness from smaller U.S. spine distributors, which is fully reflected in the updated outlook. Management reaffirmed its commitment to prioritizing high-quality revenue over growth at all costs, and noted it is continuing to invest in key growth opportunities including biologics clinical evidence and the new diabetic foot ulcer indication for limb reconstruction.

• Q: Roberts also asked whether the company plans to reinstate its share repurchase program (LRP) now that reimbursement has been restored and guidance has been increased. /

  A: Management stated that it is still assessing the impact of ongoing changes, particularly the expected restructuring of the smaller U.S. spine distributor network, on the company's capital position over the next 12 to 18 months, and has not made a decision on reinstating the LRP at this time.

• Q: Tom Steffen (Stifel) asked whether the $15 million in incremental MDR-related distributor revenue is correctly classified as incremental to prior guidance, and why implied core business growth would slow to 1-3% in the second half after mid-single-digit growth in 1H and Q2. /

  A: Management confirmed the $15 million is fully incremental to prior guidance, and noted that the core growth slowdown is entirely driven by larger-than-expected declines among smaller U.S. spine distributors. Management reaffirmed it is intentionally prioritizing long-term channel quality and productivity over accelerating topline growth from non-performing partners, consistent with its stated disciplined capital allocation strategy.

• Q: Steffen asked for additional detail on why smaller spine distributors are tracking weaker than expected, and how management plans to address the ongoing headwind. /

  A: Management explained the weakness stems from the company's disciplined approach to asset allocation: it is limiting resource allocation to small distributors that do not deliver expected returns on investment, and will continue to consolidate or exit underperforming relationships, similar to the disciplined turnaround strategy that led to the recent stabilization of the biologics business. Management expects this headwind to continue through the end of the year, but expects the strategy will deliver better long-term sustainable growth.