Good afternoon and welcome to Orthofix Medical’s Q4 and Full-Year 2022 Earnings Call. All participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Alexa Huerta, Senior Director of Investor Relations. Thank you. Please go ahead.

Thank you, operator, and good afternoon everyone. Welcome to the Orthofix fourth quarter 2022 earnings call. Joining me on the call today are President and Chief Executive Officer, Keith Valentine; and Chief Financial Officer, John Bostjancic; as well as our Executive Chairman of the Board and Orthofix’s Former Chief Executive Officer, Jon Serbousek; and Former Chief Financial Officer, Doug Rice. 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 financial 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 matter 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, March 6, 2023. 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, 2022 filed this afternoon March 6, 2023, 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 and full-year 2022 results for reconciliations of these non-GAAP financial measures to our U.S. GAAP financial results. We will begin today’s call with commentary from Keith Valentine and John Bostjancic on standalone SeaSpine fourth quarter results followed by Jon Serbousek and Doug Rice, who will speak to the standalone Orthofix fourth quarter results. Keith will conclude the call with information on the newly combined company, including 2023 revenue guidance and some additional future looking commentary from Orthofix. At this point, I will turn the call over to Keith.

Thank you, Alexa, and thank you everyone for joining us this afternoon. Before we get into each company's standalone results, I'd like to take a moment to highlight the recent closing of the merger of equals between Orthofix and SeaSpine. This merger significantly advances our objective to become a surgeon's partner of choice in their efforts to increase patient mobility and quality of life. Together, we will continue to develop creative, quality driven procedural solutions through expanded commercial access and commitment to innovation. The new Orthofix has an improved profile of scale, growth, and potential operating leverage. In addition to a highly complementary portfolio, expanded commercial reach, and the capacity to make meaningful investments in organic and inorganic innovation. We believe our comprehensive product offering puts us in a highly differentiated position in the Spine market by combining [lean] [ph] bone growth therapies, enabling technologies, spinal fixation, motion preservation, and biologics We see this combined company as a transformative organization in the musculoskeletal space that will address unmet clinical needs to improve the lives of patients worldwide. Turning to the results. SeaSpine had a strong year marked by the consistent execution of our growth strategy capturing a market share and the announcement of the pivotal merger with Orthofix. We are excited by the momentum coming out of our fourth quarter results and the work our teams have done since the business combination on January 5. SeaSpine's revenue for the fourth quarter was $63.4 million, representing 14% growth over the prior year. Additionally, we posted full-year revenue of $237.5 million up 24% year-over-year. U.S. Spinal Implants and Orthobiologics revenue grew 23% and 20% respectively in the fourth quarter over the prior year, primarily for new products and expanded distribution as a result of our efforts in recent years to partner with…

Thanks, Keith, and good afternoon everyone. As Keith noted earlier, SeaSpine's total revenue for the fourth quarter of 2022 was $63.4 million, a 14% increase over the prior year. In the U.S. we posted 16% growth. The U.S. spinal implant and enabling technologies revenue in the fourth quarter increased 12%. Within that category, U.S. spinal implant revenue increased by more than 23%. Products launched or enhanced via line extensions within the past five years continue to grow revenue and accounted for 82% of U.S. spinal implant revenue in the fourth quarter of 2022. International spinal implant sales were down 57% in the fourth quarter, due to our recent exit from the European spinal implant market in the third quarter of 2020. U.S. Biologics revenue in the fourth quarter [increased 20%] [ph] and continues to be driven by growth in the OsteoStrand Plus Demineralized Bone Fibers product family. Our U.S. spinal implant surgery volumes increased 23%, compared to the fourth quarter of 2021, while revenue per case increased 4%, compared to the prior year. Utilization of our spinal implant systems and Orthobiologics products increased over 9% to 2.3 per procedure in the fourth quarter of 2022, compared to 2.1 a year ago. We experienced mid-single-digit average price declines in spinal implants and no price declines in biologics. As a reminder, the substantial majority of SeaSpine's revenue was generated in U.S. dollars, so foreign currency exchange rate changes did not have any meaningful impact on our reported growth rates. GAAP gross margin for the fourth quarter of 2022 was 62.5%, compared to 53.7% for the fourth quarter of 2021. Adjusted gross margin was 64% for the fourth quarter of 2022 compared to 61.8% for the fourth quarter of 2021. The increase in adjusted gross margin was primarily due to the greater relative…

Thank you, John. As announced early year in January, total revenue in the quarter was 122.2 million, decreasing 2% over 2021 on a reported basis and flat to 2021 on a constant currency basis. Strategic investments in our commercial channel and new products are paying off as Global Orthopedics and Bone Growth Therapies continued their strong performance through the fourth quarter. Specific to innovation, we are encouraged by several new products we introduced in 2022. The Accell stem bone healing therapy for fresh fracture and nonunion fractures, TrueLok EVO, which added radiolucent rings and struts to our market leading ring fixation system and Galaxy Gemini, our next generation pin-to-bar system have all been well received in the marketplace. We've also launched two new biologic solutions in 2022 with our partnership with MTF Biologics. The Virtuos Lyograph, a shelf stable complete autograph substitute and legacy, a demineralized bone matrix. Turning to the performance of each of our product categories, starting with Bone Growth Therapies or BGT, sales for the quarter were $51 million, up 3% on both a reported and constant currency basis, compared to the fourth quarter of 2021. Growth was driven by revenue from a cell stem, our most recent bone growth therapy solution with a new indication for fresh fracture care, which grew almost 50% sequentially over the third quarter of 2022 as we continued our commercial roll-out. Moving to Spinal Implants, which includes both Spinal Fixation and motion preservation, revenue was down approximately 7% on both a reported and constant currency basis, compared to the fourth quarter 2021. The decline is driven mainly by continued global competitive headwinds in our motion preservation area, as well as a decline in procedural ASPs in the Spine Fixation on flat volumes in the U.S. We did see an encouraging 20%…

Thanks, Jon, and good afternoon, everyone. As 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] [ph] noted earlier, total net sales in the quarter were $122.2 million, reflecting flat sales at constant currency when compared to the fourth quarter of 2021. In the U.S., total net sales were $95.7 million or 78% of total revenue, down approximately 2% versus the prior year. The primary drivers were declines coming from competitive pressure in biologics and Spinal Implants, as well as decreased procedural ASPs and Spinal Implants offset somewhat by growth coming from the BGT new product introduction of Accell stem and continued momentum in Orthopedics. International total net sales were $26.6 million, or 22% of total revenue, up 6% in constant currency over the fourth quarter of 2021 as a result of strong growth from strategic investments in the commercial channel and momentum coming from new product introductions. Full-year revenue came in at $460.7 million, up 1% at constant currency and down 1% as reported. The highlight for 2022 was 11% constant currency growth in our Global Orthopedics segment as a result of the strategic investments we made in our commercial channels and new product momentum. GAAP gross margin in the fourth quarter of 2022 was 73%, which was consistent with the prior year period, despite changes in sales mix and volumes. GAAP sales and marketing expenses in the fourth quarter were 49% of net sales, up from 46% in the fourth quarter of 2021. This increase is primarily driven by an increase in event spending, due to the timing of trade shows, as well as an increase in marketing and sales training spend to…

Thanks, Doug. As you've heard today, we are excited about the momentum both standalone companies generated coming out of 2022 and are very much looking forward to building a leading global spine and orthopedics company in the years to come. The combination of these two innovative and ambitious organizations is incredibly energizing. The combined company will ultimately and most importantly provide surgeons with the best resources, technologies, products, and procedures needed to improve patient outcomes. We believe that the combined product portfolios are very complementary. And that we can leverage the best-in-class technologies for each organization to offer the most innovative solutions along the continuum of care, pre and post-operatively. Orthofix will be hosting an Analyst Teach-In on March 13 at our Lewisville facility where our business unit President will provide additional color on these complementary product portfolios, our planned commercial strategies and expected future growth drivers within each segment and franchise. We invite investors to join us via webcast. In terms of financial guidance, at this point, we are providing a revenue range for the full-year 2023 between $743 million to $753 million, which represents 7% to 9% year-over-year constant currency growth, compared to the approximately $701 million of pro forma combined company revenue for full-year 2022 after giving effect to anticipated reclassifications to conform SeaSpine's revenue reporting to that of Orthofix. Because we are still very early in the integration phase, we suggest that investors and analysts set their expectations towards the low-end of that range until we can provide more clarity later this year on how effectively we are managing the approximately $20 million of revenue [dis-synergies] [ph] risk and how quickly we can take advantage of the greater than $25 million of cross-selling opportunities in 20-23. So far, we are very pleased with our ability to…

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

Good afternoon, everybody. Thanks for taking my questions. Hey, Keith. Let me start with the, and I appreciate the top line guidance for 1Q and 2023, but maybe be helpful, for both you, Keith and John, you know we've obviously worked with you before. We know your philosophy on guidance from your time at SeaSpine, but how should we think about your views now on guidance sitting in this new [seat] [ph] in particular, guiding during in integration? Is your philosophy you put out guidance we can hit, guidance we can beat? Is there any cushion in there perhaps for the unknown? And then just a quick follow-up on that. I just want to be clear, it sounds like in the commentary from the press release, at least that there are no revenue or no material revenue synergies baked into the 2023 guide. Is that full 20 million of dis-synergies baked into that guide? And if so, does that manifest largely in the global spine business of spinal implant business? And then I've got one follow-up question.

All right. That's a lot to unpack. First question, on the guidance, the Q1 number obviously were more than two-thirds of the way through the quarter. So, we feel pretty good about how things are shaping up and really pleased to see the growth across just about all portfolios on both companies in those Q1 numbers. So, I think that speaks to the confidence we have in mitigating the dis-synergy risk that seemed to be a lot of concerns when we first talked about the merger. For the full-year number, I think Keith's comments were spot on that we'd expect everybody to, kind of set expectations towards the low end of that range because it is still early and that's why we gave a fairly wide range for the full-year as to kind of set a baseline, and yes, you know us Matt and our historical practice of wanting to make sure we set a realistic bar that we're not going to come under. And so far the success we've had with managing that dis-synergy risk, we feel really good about that. Two months into the merger. The fact that all the portfolios on both sides of the company are growing in the first quarter, I think is a good trend for the full-year. But yes, we do want to be cautious about setting full-year expectations for such a wide timeframe because there is still the potential for dis-synergy risk. We think the timing of when we'll get spinal implant sets to create some of the upside revenue synergy opportunities is fairly extended lead times, which will probably be most impactful later in the year Q4 to set a realistic timeframe. So, we still need to manage those dis-synergy risks and we don't see a lot of near-term opportunity on the revenue upside for the synergies. So, we are being cautious about setting full-year guidance and as Keith said, we’d expect everybody to start on the low-end and hopefully we'll have opportunities to raise that as the year goes by and get past more of those revenue dis-synergy risks and continue to mitigate those, but also have better clarity as to what the upside can be for the full-year on the revenue synergy possibility as we get delivery of some of those sets that we've ordered on the spinal implant side. So, I think that’s [indiscernible].

Yeah, I appreciate that, John. I'll try to make this follow-up a little bit shorter. Just curious and I think you've, sort of touched on as you’re early days still, but maybe dis-synergies tracking as expected. Just any commentary on sales force stability in 4Q after the announced deal and now into 1Q 2023. Just any, sort of early commentary on retaining the folks you want to retain and any discussions going on with distributors moving in to more exclusive or pulling in new distributors entirely? Just any color on that would be helpful. Appreciate it.

Yes, you bet, Matt. So, we are very excited how Q1 has kicked-off. I mean, we gave some color to being two months in and part of that is because there is a great deal of strength just as we had anticipated when we did our first, kind of [indiscernible] review of what overlap would be? We're really excited about the lack of concerning overlap, if you will. But more importantly, the opportunity for real synergy. And so, we're already seeing cross cases. We're already seeing cases that go on that are using both legacy original company products together as a true merged company, including 7D as part of that as well. And I think that's a testament to how we're approaching it also from a sales management perspective. I think the sales management process and the selections we've made and what the team looks like is a nice combination of leadership that also brings with it, I think, a good deal of stability to those sales teams. And without a doubt, we're excited about what's going on in the marketplace right now with a number of, I think very interesting opportunities for us to take advantage of even greater sales penetration, due to other opportunities out there from other companies merging.

All right. I'll let other people follow-up on that thread. Appreciate it, Keith. And thank you everybody.

Our next question comes from Jeffrey Cohen from Ladenburg Thalmann. Please go ahead. Your line is open.

Hi, Keith, John, and Doug. How are you?

Good. How are you?

Super. Congrats on the to call and the merger. So, I guess firstly, John, you knew this one was coming, but I wanted to ask about segmentation reporting going forward. How you're going to look at that? Is that going to be U.S. International? Is it going to be hardware biologics, etcetera?

Yes, we're still in the evaluation phase of what the reportable segments will be like, because we got to figure out right how we're going to run the business internally along portfolio lines. So, we'll definitely plan to give more color as to the segment reporting once we've made those final decisions and I think we'll have those by the first quarter reporting deadline. So, no decisions made at this point yet, but clearly something we're evaluating as we go forward and look at how we want to run the business.

Got it. Okay. And then can you give us a sense of some of the G&A expenditures [indiscernible] and some of the synergies that you talked about? It looked like Q4 had about 9 million higher on G&A from [3 plus 6] [ph] from each side and how should we think about that for Q1 and then balance of the year before some of these synergies start kicking in at least on the G&A front?

So, you're asking about how Q1 will compare to Q4 in expectations for deal costs?

Yes, I think as you're – it looks like about 9 million spend in the fourth quarter. So, does that tail off in the first quarter swiftly or not swiftly or is it kind of going to take a few quarters?

So, deal specific costs will probably be another heavy quarter in Q1 in terms of spend, right, because there's still ongoing legal fees, kind of read it to the end. A lot of the banker fees will get paid at post-closing. So, that's a Q1 transaction timeline. Then we'll shift to more cost to achieve the synergies. As Keith mentioned in his scripted comments, right, the severance costs will increase and can be probably most heavy in the middle part of this year. So, we'll transition from what I call deal setup in closing costs to now cost to – one-time cost to achieve the synergies, the bulk of which this year will likely be IT system integration costs and headcount costs occurring over Q2 and Q3 probably.

Okay, got it. That does it for us. Thanks for taking the questions.

[Operator Instructions] Our next question comes from Dave Turkaly from JMP Securities. Please go ahead. Your line is open.

Hi, good evening, guys. Maybe one for Bos. I don't want to put them on the spot here, but like I guess what I'm trying to look at here is either range or targeted area for either free cash flow or earnings. I imagine you're not going to want to comment on that and I understand, but how about even timing, like when do you think we'll be ready to, sort of put this together and have sort of directionally some bottom line targets as well?

Yes, clearly a focus for the first quarter to be able to get through the integration and now we're running our annual operating plan for the combined company and digesting the synergies going through what we built into the deal model. So, I think we have a good sense at a high level and talk about some high level financial metrics and expectations that we're built into the deal model. But yes, we're just not in a position to give any kind of clarity beyond the top line because we're still working through that first combined company operating plan, but I suspect we'll be in a better position to give more color down the P&L and in terms of big picture cash flow on our first quarter call in early May.

Got it. And then I know that both the companies have worked on the commercial, you know expanding the teams. I think Spine said, they focus on larger distributors of late. Will you guys combined be able to take advantage of all the changes you've made both on the Orthofix and the SeaSpine side? I think you said, not a lot of overlap, but even some of these new changes, would that be true that you'll be able to maintain some of the new choices you've made both sides?

I do. I think that there's even opportunities we're already in some discussion of current territories that even there's light overlap and how they can combine together. I think there's been – I think we're fortunate that we have a distribution teams that are excited about what the company's new portfolio is and how broad it is. And they want to be part of this growth profile. So, I do feel very comfortable that the continued innovation will drive excitement for them as well because they see the future. They see the future as not just what the company looks like today, but we have a 2-year to 3-year plan of even more innovation that will be exciting for the marketplace.

And maybe one last one, if I could squeeze one in, you mentioned on the SeaSpine part, the exit from Europe, and I know for Orthofix it's been, you know, some of the legacy sort of a geography with that certainly at least in Italy and some other places was important. Is that when you combine, do you wind-up Orthofix still stays there and you cross-sell with them or what are your thoughts on Europe specifically if you had just recently, I think exited at least for some of your products?

Yes. I think Europe is a complicated challenge right now to be frank. There's a lot of regulation. Some of it's getting pushed down the road, but still creates a great deal of, I would say, not even additional, it's dramatic expense to how you're going to promote and be able to market a product and sell a product in Europe. I think we're very fortunate that the traditional orthopedic business based out of [indiscernible] has been in place for a very long time and they're in a different situation than I would categorize what spinal implants specifically has to deal with. And so, we'll continue to evaluate. We’ll continue to evaluate how the European regulatory groups drive forward with some new plans that they're promising. But at this time, we wanted to be a cost effective, a profitable venture for Spinal Implants in Europe and we'll continue to pursue it in such a way.

Thanks a lot.

We have no further questions in queue. I would like to turn the call back over to Keith Valentine for closing remarks.

So, thank you again for joining us this afternoon. I'd like to [say] [ph] some over 1,500 dedicated employees in the Orthofix family, we appreciate your interest in the call in joining us today. We look forward to speaking to many of you throughout the rest of 2023 and hope you all have the opportunity to join us online at the Teach-In Event coming up on March 13. Have a great evening.

This concludes today's conference call. Thank you for your participation. You may now disconnect.