Good morning and welcome to today's Orthofix Medical Inc. Fourth Quarter 2021 Earnings Conference Call. My name is Candy and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for question-and-answer at the end. [Operator Instructions] I would now like to pass the conference call over to our host Alexa Huerta, Senior Director of Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to the Orthofix fourth 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 February 25 2022. 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, 2021 filed this morning February 25, 2022 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 U.S. GAAP. Please refer to today's press release announcing our fourth quarter 2021 results for reconciliations of these non-GAAP financial measures to our U.S. GAAP financial results. At this point, I will turn the call over to Jon.

Thank you, Alexa. Welcome everyone and thank you for joining our fourth quarter and full year 2021 results conference call. On today's call, I'll provide an update of our fourth quarter performance and review progress against our strategic initiatives before handing the call over Doug who will provide our financial updates. I'll close with our perspective on the business in 2022 before opening lines for questions. Turning to our fourth quarter performance, we're very pleased with what we were able to accomplish and the momentum we will continue to build despite the prevailing macro landscape. In the quarter, we delivered total revenue of $125 million, an increase of 6% on a reported basis and 7% on a constant currency basis compared to the prior year quarter. This growth we're seeing across both franchises. Starting with a Global Spine business unit. The Spinal Implants team executed another outstanding quarter with strong U.S. motion preservation performance and market share capture overall. In our Global Orthopedics business unit, we executed double-digit growth year-over-year growth predominantly coming from our recovery among our international markets and share capture with FITBONE. On a sequential basis, we drove double-digit growth across all product categories compared to our third quarter of 2021. Now shifting to the performance within each of our product categories, starting with our Bone Growth Therapies or BGT, sales for the quarter were $50 million down 2% versus prior years due to the negative impact of COVID including nursing shortages on complex spine procedures within the fourth quarter, partially offset by continued market share capture with PhysioStim. We are happy to announce that in the fourth quarter, we reached the 1 million patient treated with our BGT portfolio. This major milestone demonstrates our committed leadership position in the bone growth stimulation on that we look…

Thanks, John, 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 John mentioned, total net sales in the quarter were $125 million, up 6% on a reported basis and 7% on a constant currency basis when compared to the fourth quarter of 2020. In the U.S. total net sales of $97 million or 78% of our global total revenue for the fourth quarter, were up 2% over the fourth quarter of 2020, mainly due to U.S. M6-C growth offset by the reduction in complex procedures seen early in the fourth quarter. International total net sales of $28 million were up 23% as reported over the fourth quarter of 2020, reflecting the growth from our FITBONE limb lengthening system as well as international market recovery. Gross margin in the fourth quarter of 2021 was 73% compared to 75% in the prior year period. The decrease was primarily due to changes in our sales mix from the timing of international orders as well as a short term increase in electronic procurement costs due to the global microchip shortage, offset somewhat by decreased non-cash inventory reserve charges versus 2020. For the full year 2021, gross margins were 75% of total net sales. For the full year 2022, we expect gross margin to be similar to 2021 or approximately 76%, which reflects the continued impact of the changes in our sales mix as well as the expected short-term increase in microchip costs in the first half of the year. Sales and marketing expenses…

Thanks Doug. Looking ahead, we view 2022 is an inflection point for our business. In recent years, we have been a low single-digit top-line growth company. As you just heard, our guidance for this year represents mid-single-digit growth, which is largely a result of the investments we've made over the last two years across the organization and in particular those investments into our talent leadership, product portfolio, and commercial channels. As we move into '23 and beyond, we expect to further accelerate our trajectory to become a mid to high single digit growth company while still delivering a positive adjusted EBITDA. To achieve that growth, we are focused on two areas. First, continued product innovation and differentiation. This includes delivering near-term growth through the increased adoption of recently launched products, as well as accelerating our organic and inorganic investments in new products, new indications, and new solutions that build on our core strengths as an organization. Second, the ongoing development of our commercial channels to drive our products into the hands of surgeons and physicians worldwide. Beginning with product innovation and differentiation. In a continuation of last year, the primary drivers of growth in 2020 will be our M6-C cervical disc, FITBONE limb lengthening system and our recently bolstered technology leading interbody portfolio. We also expect additional top-line growth to benefit from the over 20 new products we launched in 2020 and the products we will launch in 2022. As we work to drive accelerated growth in future years, we plan to increase investments during 2022 in the key areas of strength within our product portfolio. All we have a real sweet broad product portfolio today which is required to enable the type of distribution needed to compete in this market with by no means want to be everything to…

[Operator Instructions] Our first question comes from Mathew Blackman of Stifel. Your line is now open. Please go ahead.

Maybe just to start with the housekeeping questions for Doug on the '22 guidance. The one point top-line currency headwind, is there any way to quantify that drops through impact the EBITDA and/or EPS? And then I have a couple of follow-ups?

It's a good question. So, you're right about 1% on the top line. It's mostly reporting translation risk obviously at revenue level as well as the cost level. We're fairly and actually hedged at most of the GEOs where we have exposure primarily to the Euro dollar rate and some to the Brazilian real. So, I would look at it as a lot less or fairly material at the EBITDA and EPS level in terms of FX impact.

And then, Jon, a couple for you. Just sort of thinking about the longer term expectation for upper single digit growth, what's the bridge to get there from mid single digit growth? Is it another step up in Spinal Implants growth that gets you there? Does it contemplate rotator cuff and bone stem? Essentially just asking whether the acceleration would be balanced across the business or to be disproportionately weighted to any particular segment or new product launch? And then one more follow-up after that.

Matt, thanks for the question. I think there's a general maturation of our strategies going forward. I mean, it's a combination between new product innovation and launch as well as differentiating the marketplace, which attracts these surgeons through organization as well as building the commercial channel and those two go hand in hand. We continue to focus on commercial channel both direct and indirect as well as and we tract better talent when we have better portfolios. So, they tighter back and forth across one another. As far as where it's going to occur, we look at -- we've seeing growth and we've been focused on both the orthopedics limb reconstruction and deformity sectors as well as the spine areas. And so, you saw the performance in Europe with the limb reconstruction deformity, that's a combination of both our TL-HEX our FITBONE and then also our JuniOrtho Plating System have a very comprehensive line partner reports OrthoNext for a planning standpoint. For spine, we saw that we also had good performance in Europe and the other regions, where we'll continue to invest in that area as part of our investment strategy, as well as in the U.S. and we continue to execute those plans, not only in spine fixation, but also in BGT. And then, also a BGT, we look forward to the new product innovation which is not occurred in many, many years with BGT with the [cell stem], and we look forward to lunch now the second half the year.

And then the last question and I'm not asking for more explicit long-term guidance. I appreciate what you gave this morning, but as we think about where EBITDA margins could go beyond 2022. Is there anything structurally that prevents you from getting to upper teens or even 20% of really just trying to frame what the profitability profile could be with a higher single-digit top-line growth trajectory?

We stated consistently that as we build or rebuild the organization that we know where we're spending our dollars, and as we basically get those product portfolios refreshed and sales channels put in place that we believe there'll be EBITDA leverage in the out years, so that is, by plan and designed. And so from that standpoint, we do expect to EBITDA leverage in the out years. And we should be able to operate in any incomparable to any other company of our size and style and that increase our profitability over the near-term in the park and mid-term.

Thank you. Our next question comes from Jeffrey Cohen of Ladenburg. Your line is now open. Please go ahead.

Firstly, is there any update on the M6 two-level study?

Jeff, we continue to add enrollment sites here you see enrollment within those sites we've already established and we are just on plan as far as the M6 two-level study.

Could you talk a little bit about the substance technology and how that falls into the BGT platform, and on commercial standpoint, it's sounds like late this year or is that back half of '22 will be commercial on that, and those channels will be largely the same and they'll kind of bolt-on to your current platform?

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Would you expect the [cell stem] substance technology to as well as BGT to be roughly focused domestically here?

Yes, we contemplated looking outside of U.S. but really this is a U.S. position for our product and has been for BGT for many years and it be will remain focused on the U.S.

And then a couple for Dug, I guess firstly, the 23.3 income tax expense I know you've been carrying there for a number of years and it's 23 last quarter. So that hits to zero looks like your actual 1.77 on the balance, so we should expect that to remain at that very low level going forward. Is that a safe assumption?

Jeff, if I understand the question correctly, you're asking about the volatility or income tax rate?

No, directly the income tax expense that the $23.2 million Q4 income tax expenses. Is it something that caused that to come toggled off because we were a bit unexpected that that will come through now?

So, we're still normalizing to a long-term rate. In the script, I mentioned that we're moving from 27% for an adjusted long-term rate to 28% to reflect changes in the world. International tax rates starting to interrupt in jurisdictions where we do business, but what you're seeing in Q4 was the GAAP charge. It was a non-cash charge of the expense related to evaluation allowance on our U.S. deferred tax assets. Because of our historical GAAP losses over the last couple years, you're seeing pressure on our ability to record the full value around our DTAs and so we were in a position in the U.S. similar to Italy last year to reserve our tax rates. So, that's about $45 million of tax expense additional in the fourth quarter, but I would simply look to the longer term rates for more normalized. We do continue to expect to fully realize all of our net operating losses carry forwards in tax assets as our earnings improve overtime.

Okay. And then related to the acquisition-related amortization and remeasurement of 12.56 for the fourth quarter, what should we expect or what should we model for '22 and going forward on that line?

For the Spinal Kinetic final milestone, I would expect that in 2022 to accrete up a lot closer to the ultimate payment amount of $30 million. It will happen semi-ratably over each quarter. Also notice in our balance sheet, that that final milestone liability payments slip from long-term to current. So, that'll give you an idea of the speed of the accretion.

Okay. So, is the 12.5 part of the 30 or should we expect 30 during 2022?

The current liability is simply an accounting fair value that's discounted to today's dollars, and we go through a lot of simulations with a third-party to value that payment, the ultimate payment. And so, the liability at the end of the fourth quarter was roughly $17 million, that 12 is just a part of the 30.

Okay. And then lastly, any specific commentary and labor issues that you've been seeing or you expect see going forward into '22 both domestically as well as internationally?

Jeff, this is an ongoing issue, it's going to be an ongoing issue for all companies. I was just recently with three institutions, East, Mid and West Coast, very large institutions, and they see labor going out in 12, 18 months plus as far as just the dynamics that are going on in their institution. So, the good news is that, the good news, I think, the positive side of that is that those institutions as well as the surgeons are out there ready and motivated to care for those patients that come to them. And we'll be there right with them as far as ready to do that.

[Operator Instructions] Our next question comes from Jim Sidoti from Sidoti & Company. Your line is now open. Please go ahead.

It's nice to hear somebody asking questions about the non-GAAP adjustments or even me for a change. Can you repeat what your guidance was for gross margin for 2022?

Gross margin for '22, we expect to be at 76% approximately reflects sales mix. We've got some pressure in the first half of the year for the chip shortage that we experienced late last year and so those are the primary items at 76%.

And then I wanted to focus in on the capital spending because I think you said you're going to be roughly $25 million to $27 million for CapEx, which is about $10 million more than you did this year and I assume that's more mostly instruments set. Is that primarily for the spine business? And is that a function of the new products or the new distributors or combination of both?

It's a little bit of both. It's about a $7 million increase over a $20 million CapEx level in 2021. I would characterize it in big buckets of about two-thirds of that spend is related to instruments and the majority of that is to increase distribution. It just takes more cash to support the increased distribution for our products like M6 and [Excel Stem] rolling out. So, those are the primary drivers. We've also got some investments in operations in some of our facilities as well.

And then last one for me. And this is strictly long-term question. But I mean, if you look at the new products you have coming out for stem and you have the M6, you have the increased distribution. Do you think at some point did this becomes a double-digit grower, because I mean, there just seems to be a lot of levers here that you can push? And I know it's not going to happen right away, but it's just feels like growth to be going beyond that mid-single-digit target at some point.

We've basically stated where our trajectory is at right now. And also, the new product activity does not include any M&A. And so we actually have the organic side and so we see as markets grow and as we basically improve our portfolio and improve our channel that we see a good future for Orthofix. I can't really say right now as far as what we're going to be at as far as the ultimate, high singles, doubles and all the rest of that. I don't think that's fair to do that right now, but we are very comfortable where I look at provided.

Okay. And then I just want to be clear one thing, it's spending for seen approvals [indiscernible] like that's starting to taper off a little bit. I mean, does that mean there's a light at the end of the tunnel with regard to getting wellness products registered?

I know your questions related to MDR and maintaining our CE Marks in Europe, your questions about spending levels. We're getting each word you were saying there, but anticipating if I say correctly, yes.

Is there light at end of the tunnel to that process?

Yes. So from a spending perspective, we are on track. We spent about $8 million in '21. We'll spend -- we call out about 200 basis points or about $10 million this year. And then, we expect to start tapering as everything comes together in advance of the spring of 2024 deadline for MDR.

Thank you. There are no additional questions waiting at this time. So, I'll pass the conference over to management team for closing remarks.

Thank you for everyone who joined the call today. I look forward to a very positive year in 2022 and beyond, and we'll be talking to you throughout the year. Have a wonderful day.

This concludes today's conference call. You may now disconnect your lines.