Good day, and thank you for standing by. Welcome to the Orthofix Q3 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Alexa Huerta, Senior Director of Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to the Orthofix Third Quarter 2021 Earnings Call. Joining me on the call today are our President and Chief Executive Officer, Jon Serbousek and Chief Financial Officer, Doug Rice. I'll start with the safe harbor statement and then pass it over to Jon. During this call, we will be making forward-looking statements that involve risks and uncertainties. All statements other than those of historical facts are forward-looking statements including any earnings guidance we provide and any statements about our plans, beliefs, strategies, expectations, goals or objectives. Investors are cautioned not to place undue reliance on such forward-looking statements as there is no assurance that the matters contained in such statements will occur. The forward-looking statements we will make on today's call are based on our beliefs and expectations as of today November 5 2021. We do not undertake any obligation to revise or update such forward-looking statements. Some factors that could cause actual results to be materially different from the forward-looking statements made by us on the call include the risk factors disclosed under the heading Risk Factors in our Form 10-K for the year ended December 31, 2020 and Form 10-Q for the quarter ended September 30, 2021 filed this morning November 5, 2021 as well as additional SEC filings we make in the future. If you need copies of these documents, please contact my office at Orthofix in Lewisville, Texas. In addition, on today's call, we will refer to various non-GAAP financial measures. We believe that in order to properly understand our short-term and long-term financial trends, investors may wish to review these matters as a supplement to the financial measures determined in accordance with US GAAP. Please refer to today's press release announcing our third quarter 2021 results for reconciliations of these non-GAAP financial measures to our US GAAP financial results. At this point, I will turn the call over to Jon.

Thank you, Alexa. Welcome everyone. Thank you for joining our third quarter 2021 results conference call. On today's call, I'll provide an update of our third quarter performance. I will then review each of our strong progress we've made against each of our strategic initiatives before handing the call over to Doug who will provide our financial update. I'll close with our perspectives on the balance of 2021 before opening the line for questions. Starting with our third quarter performance, total revenue in the quarter was $112.4 million growing above 1% over 2020 on both a reported and constant currency basis. During the quarter, we experienced the negative impacts of hospital restrictions on elective and complex procedures and hospital staff shortages in each US key geographies namely the Southeast, Mid-Atlantic and South-Central regions. However, despite these COVID-19 challenges, we were able to grow relative to 2020 highlighted by double-digit growth in both our global spinal implants and orthopedic businesses. Our performance in the quarter was aided by our diversified portfolio that includes therapies and sites of service less impacted by COVID as well as our international footprint that includes areas beginning to recover from COVID restrictions. Despite these disruptions in the third quarter, we made solid progress against all of our growth initiatives and remain confident in the investments we have made and we'll continue to make in product development, commercial channel and operational excellence. Now let's turn to the performance of each of our product categories. Starting with bone growth therapies or BGT, sales for the quarter were $45.2 million, down 4% compared to the third quarter of 2020. The decrease in the quarter was largely a result of increased COVID-19 related restrictions affecting complex overnight procedures, which are a large part of the patient population receiving BGT spine…

Thanks, Jon, and good morning, everyone. I will provide some additional details into our net sales and earnings results and then discuss some of our other financial measures. Because many of the financial measures covered in today's call are on a non-GAAP basis, please refer to today's earnings release for further information regarding our non-GAAP reconciliations and disclosures. Starting with revenue, as Jon mentioned, total net sales in the quarter were $112 million up 1% on a reported basis, and on a constant currency basis when compared to the third quarter of 2020. In the US, total net sales of $86 million for the third quarter were down 4% over the third quarter of 2020, mainly due to hospital restrictions on elective procedures offset by US M6-C growth that Jon mentioned earlier. International total sales of $26 million, were up 25% as reported over the third quarter of 2020, reflecting the growth from our FITBONE limb lengthening system as well as strong sales to stocking distributors. Gross margin in the third quarter of 2021, was 75% compared to 76% in the prior year period. The decrease was primarily due to sales mix and the short-term increase in electrical procurement costs, due to the global microchip shortage offset somewhat by decreased non-cash inventory reserves. For the full year 2021, we now expect gross margin to be approximately 75% to 76%, which reflects the continued impact of the changes in our sales mix as well as an expected short-term increase in microchip costs as a result of the global microchip shortage. Sales and marketing expenses in the third quarter of 2021 were 50% of net sales up from 48% in the third quarter of 2020. The increase was primarily a result of the timing of three major tradeshows in the third quarter…

Thanks Doug. Looking to the remainder of 2021, we remain highly focused on our three near-term growth drivers including M6-C, FITBONE, and our comprehensive spinal interbody portfolio. I'd like to provide a quick update on each of these growth drivers. Starting with M6-C, artificial cervical disc, demand for M6's innovative motion preservation technology continues to grow as evident by over 1,000 US surgeons we have trained since the launch in 2019 and the recently surpassed milestone of 60,000 global M6-C implants. We remain confident that our ability to attract and onboard new surgeons as well as support expanded utilization by existing surgeons allow us to expand the market and take market share to drive growth for the foreseeable future. From a US indication expansion perspective, we are progressing the M6-C 2-level clinical trial, which remains on track. Sites are actively enrolling and we expect to continue to initiate additional sites for both the M6-C, investigational and concurrent ACDF control study arms. We also recently kicked off a real-world evidence study that will access over 3,000 patients and bolster our body of clinical evidence in support of M6. The second key near-term growth driver is FITBONE. We have made quick progress in commercializing the FITBONE system with a third quarter revenue contribution of $2 million as compared to $800,000 in the third quarter of 2020. Early demand has been strong with over 180 surgeons trained since the acquisition, the majority of whom are located outside the US, a key differentiator and growth opportunity for FITBONE is its adult and pediatric labeling, which no other interventional limb lengthening solution has. In early September, we announced the first US pediatric patient implanted with FITBONE for the femur and tibia. Given the current limited options available for pediatric surgeons and the clinical performance of…

Thank you. [Operator Instructions] Your first question comes from Mathew Blackman with Stifel.

Good morning, everybody. Thanks for taking my question. I kind of have three questions. Maybe to start reflecting on the quarter is there a way to quantify how much COVID impacted 3Q results? And is there also a way to maybe tease out how much of that headwind was volume-based versus let's call it mix headwinds?

Yes, Matt this is Jon. Thank you very much for the question. What we look at as far as the volume base is we're seeing the same macroenvironment that everyone else is in the marketplace. And those volumes are basically in the mid to single -- mid to high-digit double-digit rate. Single-digit rate excuse me. And so with that we bring our technology forward in that area and we adapt as far as what are the site application for those procedures. We saw restrictions greater in the hospital on large multilevel procedures, which impacted not only our Biologics or our BGT business in the long-term, but on the ASC or the same-day surgery activity we saw more volume increase there. So it's a mix story between type of procedure and the COVID impact.

All right. I appreciate that. And I don't know if you're willing to comment on sort of how October played out, but if so how does that fit with what's sort of baked into the 4Q guide as we think about COVID headwinds and some of the persisting staffing headwinds? And then how should we think about deferred procedure recapture cadence? Is it fourth quarter will bleed into the first half of 2022? Just help us think through that. And then I have just one follow-up on a product.

Yes. Let me start with the COVID impact. We saw COVID impact August and September. We believe it peaked towards the back half of September and started to come reside into October which we're still with it and we're going to see it through the fourth quarter and how it impacts ourselves. We've taken those into accommodations with our views forward. When it comes to procedural reallocation we know that those larger cases, those multilevel cases, those more revision cases are out there. Those patients want to be cared for. The surgeons want to do those cases and take care of those patients and the hospitals want to provide those cases. So we know they're out there. How they come back into will be dependent upon how open hospitals are. And that's also a regional discussion because there are -- we've highlighted there were certain regions in the US that are being more heavily impacted in the third quarter. We're also seeing some other dynamics as far as lifting in some of the northern states some more reemergence of COVID. So it's going to be a region-by-region, case-by-case basis. The good news in the international markets that we've seen more of a level setting more of a stability of those COVID cases and so we're seeing a little bit more predictable business in the international markets. So as we look forward in the quarter, we've accommodated through those dynamics in our view.

All right. I appreciate that. And I'll sneak this last one in. Could you just remind us of the opportunity maybe addressable market opportunity with AccelStim? And as we think about sort of primarily 2023 -- 2023 and beyond what kind of impact could it have on segment growth? Thanks so much. Appreciate it.

Yes. Thank you, Matt. AccelStim when we looked at that market in the US we were up around $100 million of the market opportunity. And we'll launch this in the second half of 2022 based on all the variabilities we'll deal with the FDA. That's our prediction as far as what we know as the FDA works, but I think we have a good submission going in and so how we look at that as far as it's a portfolio for us. We have a very strong distribution channel with BGT. And as we highlighted in our remarks we saw an uptick in Physio-Stim 16% in the quarter dealing with nonunion care. And that nonunion care we looked at that as far as a portfolio and it's another piece of that activity where we can go after fresh fractures as well as nonunion care.

Thank you so much.

Your next question comes from Anthony Petrone with Jefferies.

Thanks and hope everyone is doing well. First question would be just sort of a macro question then I'll go into a couple of product-specific questions. And so maybe just kind of going through Jon the themes of this quarter, which certainly is still Delta, but also staffing shortages at hospitals and then supply chain. If we could just kind of go over those three headwinds. You spoke on Delta. Maybe a little bit deeper on staffing shortages. We're hearing a lot about that this quarter. And then anything on the supply chain of note that may or may not be impacting Orthofix? And then I'll have a couple of product-specific questions.

Sure. Thanks Anthony. We talked about the Delta side of it. And we're still in Delta, I mean, COVID Delta. And we see that -- we see more hospitals opening up and they're gradually coming back. The key thing is that the surgeons are there, the patients are there and the hospitals want to basically care for these patients, provide care to these patients. So that will come. Those people do not go away. They're not getting better on their own. So they're out there and how they come back in over the next month, two months and into 2022 will be dependent on how those dynamics play out. Regarding the staffing shortages, we believe they're real. I will give you a real-life point. We had a very high volume surgeon in visiting us, and he said, I'm back to doing the number of cases, I was before. However, I don't know how long that's going to last, because I'll start at 7:00 A.M. in the morning and where I typically would end at 3:00 in the afternoon, it now takes me until 8:00 P.M. to finish those. So I essentially burn through two shifts of staffing to do what I used to do. And that's anecdotal, but the fact is those are the type of things we're hearing that the cases are there, and the patients are there, and there's a willingness to do those. But the staffing shortage also comes into that many of -- there's transportability in some of those that staff. Those nurses can go locum tenens, and basically go to different parts of the country where they can make money and basically different lifestyle. We're seeing that as well play out in different parts of the country as well. Regarding supply chain, we focus on that as far as not only microchips as we highlighted, but all the other materials we deal with and always make sure we have adequate supply. And so we've actually increased our inventories we touch to make sure that when the cases come back, we'll have all the adequate products to basically address any needs that are put in front of us. We've also spent time working with our sales teams, basically mapping out where those might occur, so the supply chain can adapt and make sure the correct products are there and appropriate for those surgeries.

That's helpful. Maybe just a quick follow-up on staffing. I mean, if there's any -- if you could use your own crystal ball, I mean, how long do you think that particular headwind lasts? And is it transient, or is it maybe perhaps a couple of quarters? And then on product-specific questions just M6, it looks like another record quarter. Maybe just a little bit on the specific Q-over-Q dynamics with M6 in terms of adoption. And then anything you can share as it relates on the IDE for the 2-level indication and then I'll hop back in the queue. Thanks.

Crystal ball on staffing as far as it's so regionally variable, I will tell you that we track it. There's also we saw -- we've been hearing from some of the hospital systems that some of the people have taken early retirements and those will have to fill the funnel with new nurses and hospital staff. It's not just nurses either though because it comes down to it is turnover in rooms and things of that nature that basically they have to find staffing for. So they're struggling with it. They're doing a great job trying to accommodate for it for sure. I can't tell you whether it's a quarter or two quarters. I'll give you a point that we have in the UK. It was published that they're looking for 70,000 new nurses over the next four years. So they're trying to basically refuel that and that's an educational process. So we map all those data we look at. But right now the cases are being done and I think that that's part of the reason why some of the systems have been a little stressed out there. Regarding M6, we've stayed on a continual cadence as far as -- continued cadence as far as M6. And what it looks like is that we continue to attract new surgeons. We continue to track surgeons that basically want to do M6 for all of its features. It's the only device out there that has six degrees of natural motion compression ability. And so what it comes down to it's unique and it's naturally appealing to a surgeon, because it looks like a natural disc. So we track those surgeons. Additionally, we also, once the surgeon uses them, we track whether they become users, in fact, because on multi cases, we track that as well. And so we're seeing a good lift in those that become not only first time users, but also continue to use that product. M6 has been nice, because we've been able to use not only in the hospital on same-day surgery, but also in ASC environment and that's helped us basically continue through COVID environment. On the 2-level study, we're making good progress in adding really key sites to that. That's a focus for us. And so we'll continue to add sites and we'll continue to basically enroll not only the study patients with M6, but also the ACDF patients that we're doing to collect a database that we'll have for use in the future.

Your next question comes from Jeffrey Cohen with Ladenburg Thalmann.

Good morning. Thanks for taking the questions. Just to follow-up to Anthony's question on timing on the M6 study, what does that look like or what's your current anticipation as far as filing and a commercial launch?

Thanks for the question Jeff. We initiated that study in late July and it's a traditional prospective randomized study. It's in a four to five-year window, if we accelerate on our enrollment, which we're basically putting good energy behind. So as we map it out, we can look at it in that range as far as the four to five-year horizon before there. I would note that we do multilevel cases throughout Europe and that's part of our real-world evidence plan that we put together and I highlighted. So we're going to track those patients in Europe and also bolster our IDE with the real-world evidence, because we have great results in Europe as well. And so, we look at it as standard basis and this is one of those items we want for future benefit and we're going to continue to put M6 in the market with the current indication we have and be relative there.

Fantastic. And some of that study some of the enrollment is coming out of outside the US as opposed to the US. What's the breakdown?

All of the enrollment for the US IDE 2-level is coming from the U.S. We have bolstered a second study of real-world evidence where we're going out to collect data of patients that have already been treated with M6 outside the US. The FDA allows us to bolster that IDE study with real-world evidence. That doesn't impact our study it's a two-level study per se but it just bolsters our overall portfolio clinical evidence for M6.

I got it. That's helpful. And then for AccelStim, you did submit the PMA for that. What does that look like as far as timing?

Yeah. We did submit a PMA submission to the FDA. And as we highlighted, we project to be in the market in 2022. And that's -- typically PMA submissions have anywhere from 180-day window to basically be reviewed and approved or basically reviewed and set for questions. Avoiding any secondary questions, it could be six, seven months from now to have the approval. Putting to a second round of questions, it could be three months longer than that.

Got it. And then lastly for me, could you talk about external fixation, and specifically how those channels look for Europe and how the outlook looks there?

Just on external fixation, it's one of the real strong points for our Orthopedics business and specifically in the US, I mean in Europe. I will tell you right now, there's 12 surgeons being trained on external fixation in our building in our skills lab today, they were just here today. There's a keen interest in external fixation in a couple of different areas. One in the foot and ankle area, specifically for Charcot, most of those Charcot patients get external fixation. In Europe, it's a little different. It's used not only in those patients, but also in a broader trauma application. And so, we'd use our TL-HEX for rings and lengthening deformity activities. We also use our Galaxy product for external fixation. And we proceduralize those, so there's a Galaxy shoulder and a Galaxy ankle. And those are very attractive procedures for surgeons in Europe and other parts of the world. And so the team in Europe, this year is really excelling in that external fixation area.

Got it. Thanks for taking my questions.

Thank you, Jeff.

Your next question comes from Jim Sidoti with Sidoti & Company.

Hi. Good morning, and thanks again for taking the questions. First one is regard to distribution. You did a really good job today laying out all the new products you have in the Spine Fixation and Biologics and Stimulation. But can you talk a little bit about what changes you've made over the past 12 to 18 months on distribution and how that's been impacted by COVID and where you think that's going over the next couple of years?

Jim thanks for the question. Distribution channel is one of our key investment areas and drive areas. Let me break it down a little bit as far as US and OUS. In the US we're looking to bring in strategic distributors and we're looking to bring them in not only in our Spine business but our Orthopedics business. Strategic distributors are those that commit to Orthofix to use both our fixation products and our biologics products. And in doing so, we invest in specific regions initially, but we then go broadly for all regions of the US for strategic distributors. And those people will build an organization will want to build more and more of their volume being committed to Orthofix. And so we track it. We track it by daily basis. We had two of them here this week who were looking to basically engage and there's a continual effort for not only the spine leadership but also the orthopedics leadership in the US. Outside the US, we use a combination of distributors and also our subsidiaries. And so we continue to invest in our subsidiaries. Those are company managed areas and those are the large areas in Europe and so we continue to invest in distribution sales reps in those areas. As well as distributors to go to different parts of the world that we may not want to set up a subsidiary. So distribution channel is an area where we have our sales management keenly focused on it and bringing talent that can basically sell a broader portion or a broader array of our products.

And has COVID helped you add, or has that been more of a headwind in regards to distribution?

COVID has been I would say neutral, it's plus or minus. Distributors that have an ongoing business that may not be 100% satisfied with where they're at it maybe a little bit slow to change as far as in a COVID environment, because they have a situation and they don't want to jump to a new situation where they'll have to bring in new products and convert their business. But at the same time, it gives us more time to talk to those individuals and begin to build a relationship and to build trust with those individuals. Because this is -- it's a long-term process of bringing a distributor into your organization. We have a seasoned and experienced team. They have great relationships throughout the industry. And so we are working on building those relationships and making those conversions on a daily to monthly basis.

And then the last one for me is on, strategic investments. You're calling out several million dollars a year on strategic investments. Can you just remind me exactly what that is? Is that you shopping for new deals or what else is involved in that?

We have both organic and inorganic strategies. And I highlighted some of the key features on the organic side as far as building in the Spine business and also in the Orthopedics business. On the external side as far as inorganic, we look at technology we look at tuck-ins. And I stated previously that, we were not looking for bigger deals because we couldn't consume them. But actually we're expanding our view that, we could be looking for midsized deals that could basically complement our existing portfolio and bring channel with it as well.

And similar question with COVID has that process been hindered, or is it possibly more people are likely to sell as a result of COVID?

I think in the first year there were people that may have panicked a little bit and wanted to sell. I don't think that's the case right now. I think that the valuations are quite high and people are very proud of it. I think it does allow new time to work with these companies and basically get to know them and then see, -- and they actually want to mature their companies a little more right now before they transact. But at the end of the day, it's variable. And we have a great team that looks at these deals and does diligence on these deals. And so we combine that with our commercial teams and also our in-house product teams. And we have a good process going here. And we look forward to being active in that space.

Great. Thank you.

Your next question comes from David Turkaly with JMP Securities.

Hi. Thanks. Good morning. The $100 million you mentioned for AccelStim, I was just curious is that fresh fracture and non-unions, or can you segment that at all?

It is fresh fracture and non-union. And it's with LIPUS low-ultrasound.

So that's your view of sort of the ultrasound market, as it sits today correct? So the addressable market is probably much larger, but that's sort of your guess of maybe what Exogen is doing?

Yeah. David thanks for raising that. We think that the whole BGT market is actually -- has areas that have potential to expand. And so that's the reason why we're investing here. AccelStim is focused ultrasound fresh fracture nonunion. But we think that that market as I highlighted is $100 million will expand. If you think about the dynamics in today and part of the reason we had the lift and our PhysioStim is that it's non-operative. It's done in the office. And so where some of those patients may have gone back to be revised in the OR, now it's a good opportunity to go ahead and try the ultrasound before you go back and operate. So I think we're seeing some traffic there. And from a fracture standpoint, it avoids the second surgery for a patient. And it's a good opportunity for them to seek a firm fusion in that fracture.

And when you think about, PEMF versus ultrasound I just -- I guess, will your PMA will there be data that you could maybe not apples-to-apples, but look at sort of how those devices work? Maybe they're very similar. I don't know the answer to that. But what are your thoughts there?

The energy source is very different and PEMF is a very proprietary process that we basically have developed over decades. And so it is our mainstay. We have all of our clinical data in spine. We have our nonunion data. And so we're not going to steer away from that at all. That is part of that robust portfolio we have. The AccelStim with ultrasound is going to be focused at fresh fracture and basically put us in that market to expand the portfolio not only AccelStim and there's other technologies out of the IGEA license agreement that we have opportunities to explore as well.

Got it. Thanks a lot.

Thanks, David.

At this time, there are no further questions. I will now turn the call back over to Jon Serbousek for closing remarks.

Thanks Operator. Thanks everyone for joining the call. I appreciate your interest in learning more about Orthofix. And the progress we're making. And with that I'll close the call. And thank you very much. Have a wonderful day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.