Orthofix Medical Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Business Updates: Third quarter was an inflection point with record U.S. sales orthopedics, a high number of 7D earnout agreements, and strong demand for spine fixation products. The company is focused on innovation and responsible growth, with positive adjusted EBITDA margin expansion and free cash flow of $5.9 million.
• Strategy and Innovation: Focus on sharpening commercial focus for margin expansion, continuing innovation in enabling technology, emphasizing high-quality revenue streams, operational excellence, and disciplined cash flow management. New 3-year financial goals include 6%-7% net sales CAGR, mid-teens adjusted EBITDA margin, and positive free cash flow.
• Segment Specifics: U.S. spine fixation grew 18% driven by Reef and WaveForm interbody products and new distribution partners. BGT grew 9% with cross-selling in spine and orthopedic channels. U.S. Orthopedics grew 15% due to TrueLok, Fitbone, and Oscar product performance. 7D had record earnout agreements and unit placements, leveraging its differential platform with surgeons.

Segment Performance

• Bone Growth Therapies (BGT): Q3 revenue was $57.9 million, growing 9%. BGT structure grew 13%, with over 50% growth from new customer acquisitions. BGT spine holds the #1 market share position. Growth is expected to moderate but remain above market rates, with focus on adding new surgeons and growing in the fracture market.
• Global spinal implants, Biologics, Enabling Technologies: Q3 revenue was $108.2 million, up 7% year-over-year. U.S. spine fixation revenue grew 18%, driven by deeper account penetration and expansion of the customer base, including a record number of 7D flash navigation system earn-out agreements and unit placements. U.S. biologics growth was impacted by distributor transformation but expected to return to above-market pace.
• Global orthopedics: Grew 3% in Q3, with 15% growth in the U.S. due to strong portfolio performance, distributor expansion, and sales channel investments. International business declined 2% year-over-year but was in line with market growth when adjusting for tender orders.

Guidance

• 2024: Maintaining full-year net sales guidance of $795 million to $800 million (6.6%-7.2% constant currency growth), non-GAAP adjusted EBITDA of $64 million to $69 million, and expecting free cash flow to be positive for the remainder of 2024.
• 2027 Targets: Aim for 6%-7% net sales CAGR from 2025-2027, mid-teens non-GAAP adjusted EBITDA margin by 2027, and positive free cash flow from 2025-2027. Drivers include profitable above-market growth, innovation pipeline, and a stronger financial profile.

Risks

• Market Factors: Fluctuations in market growth rates, competitive actions, regulatory changes, and reimbursement environment could impact performance.
• Execution Risks: Challenges in integrating commercial strategies, achieving expected margin expansion, and sustaining growth rates, particularly in the BGT fracture market where penetration is lower.

Question and Answer

• Q: Mathew Blackman asked about key metrics and lifts to targets, where the biggest lift to get to those targets lies. **A: Julie Andrews stated confidence in hitting targets, noting market growth and internal factors like gross margin expansion, merger-related synergies, and scale on G&A costs as key levers.
• Q: Iseult McMahon inquired about sustaining above-market growth and EBITDA margin drivers. **A: Julie Andrews and Massimo Calafiore mentioned U.S. spine's 3% market share and growth potential, Orthopedics' focus on limited construction, and gross margin expansion, merger synergies, and G&A scale as drivers for EBITDA margin.
• Q: Jason Wittes asked about 7D customers, impact of hurricanes/IV shortages, and growth expectations. **A: Massimo Calafiore said 7D's main customers focus on spine utilization, with open surgery still dominant but MIS solutions growing. Julie Andrews confirmed guidance is exclusive of hurricane and IV shortage impacts, and growth expectations are based on 6%-7% net sales CAGR from 2025-2027.