Ladies and gentlemen, good afternoon. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Orthofix Medical Second Quarter 2023 Earnings Conference Call. Today’s conference is being recorded, and all lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. And I will now turn the conference over to Louisa Smith at Gilmartin. You may begin.

Thank you, operator, and good afternoon, everyone. Welcome to the Orthofix second quarter 2023 earnings call. Joining me on the call today are President and Chief Executive Officer, Keith Valentine; and Chief Financial Officer, John Bostjancic. 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 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, August 8, 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 risk factors disclosed under the heading Risk Factors in our Form 10-K for the year ended December 31, 2022 and Form 10-Q filed this afternoon, August 8, 2023 as well as additional SEC filings we make in the future. 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 news release announcing our second quarter 2023 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 Keith.

Thank you, Louisa, and thank you everyone for joining us this afternoon. Orthofix had a strong quarter marked by solid operational and financial performance following the merger in January. We grew order volumes and leveraged cross-selling opportunities across the complementary portfolios and perhaps, most significantly, continued to effectively manage through the revenue dis-synergy risk associated with the business combination. The Orthofix team is incredibly motivated by these successes and our teams are working relentlessly to capture market share and deliver value. I’m pleased with the progress in the business and I’m eager to share with you some high level achievements from the second quarter. Revenue for the second quarter of 2023 was $187 million, representing reported growth of 58% and pro forma constant currency growth of 7% year-over-year. The strong quarter reflects our commitment to delivering consistent above market gains through innovative products and an expanded distribution reach. For this afternoon’s call, I’ll begin by providing color on each product category, including revenue, innovation initiatives, operational highlights and commercial channel updates. Then John will provide a detailed look at financial performance and guidance for full 2023 year before we open the call for your questions. Bone Growth Therapies, or BGT, revenue for the second quarter 2023 was $52.7 million, an increase of 10% year-over-year. This marks 2 consecutive quarters of double-digit BGT growth, which was primarily driven by the fracture channel on the strength of the recently launched AccelStim product and investments made in 2022 to create a more focused sales organization. The spine channel also performed well, growing mid-single-digits year-over-year, driven by cross-selling through the legacy SeaSpine distribution channel and from healthy complex spine surgery volumes. Overall, both commercial channels have also benefited from more than 6% rate increases that were approved by Medicare this year. Moving on to…

Thanks, Keith, and good afternoon, everyone. As Keith noted earlier, total revenue for the second quarter of 2023 was $187 million, a 58% reported increase over the prior year and 7% growth on a pro forma basis. Revenue growth was led by BGT, which grew 10% year-over-year to $52.7 million. This marks the second consecutive quarter of double-digit growth for the BGT franchise and was led by the recently launched AccelStim product, which grew more than 20% sequentially over the first quarter of 2023. While we are very enthusiastic about the 12% year-to-date growth rate, we are setting expectations for mid- to high-single-digit growth for the remainder of this year. GAAP gross margin for the second quarter of 2023 was 63.9%, compared to 73.2% for the second quarter of 2022. Adjusted gross margin was 71.6% for the second quarter of 2023, compared to 73.9% for prior year period for legacy Orthopedics. The decrease in GAAP gross margin was almost entirely driven by the following merger-related factors, a $9.4 million non-cash purchase accounting fair value step up charge attributable to SeaSpine acquired inventory that was amortized during the quarter; $3.8 million of excess and obsolete spinal implants inventory charges recorded in connection with merger-related product rationalization decisions; and the dilutive impact of the acquired legacy SeaSpine business on legacy Orthofix’s overall gross margin, which we estimate to be more than 200 basis points. Recall that legacy SeaSpine’s financial results for the second quarter of 2022 are not reflected in Orthofix’s GAAP results. Likewise, the year-over-year decrease in adjusted gross margin is entirely due to the dilutive impact of the acquired legacy SeaSpine business on Orthofix’s overall adjusted gross margin. On a pro forma basis, including the financial results of SeaSpine for the second quarter of 2022 revised to conform to the…

I’m extremely proud of the Orthofix team and all that we’ve been able to accomplish so far, just 7 months after the closing of the merger. I’d like to thank all the employees of Orthofix for their dedication to the company and their renewed commitment to our mission, which we unveiled earlier this year. We collaborate, innovate and improve the lives of patients, we make it personal. And we aim to do this through our new [rally clouding] [ph] be bold, relentlessly innovate, and creatively disrupt. At this point, operator, please open the line for questions.

Thank you. [Operator Instructions] And we will take our first question from Matt Blackman with Stifel. Your line is open.

Good afternoon, everybody. Thanks for taking my questions. Maybe to start, is there any way and I appreciate this is probably challenging, but is there any way to quantify the magnitude of dis-synergies you saw in the second quarter? So revenue dis-synergies and then maybe this is related. But the SKU rationalization, how far along are you in that? And is there anything baked into the now higher guide for potentially lost sales as you rationalize the portfolio bit? And then I’ve got a follow-up. Thanks.

Hey, Matt. So with respect to the first question, we haven’t seen a meaning, [Technical Difficulty] so there’s not much to quantify, which is the good news, right? It’s more focused on growing and taking market share and we’ve been most successfully navigate through any of the early term revenue dis-synergy risks we saw in the due diligence. The second question was…

Just on rationalizing the portfolio and whether there’s potential revenue lost sales as you sort of get rid of some of the legacy products. And is that baked into the higher guide that you have now for the rest of the year?

Yes. So one of the early decisions made in the first quarter was the rationalization of the overlapping spinal implant systems. And we’re really pleased that there’s an opportunity to reduce those by about 50%, right? So that’s a meaningful reduction in the systems. And the good news is it was a balanced outcome of about half of the go-forward systems will be from legacy Orthofix and the last about half from legacy SeaSpine. So moving forward with both portfolios and while there’s potential for lost revenue, we’re being very careful to outline plans for that product rationalization. We’ve got sort of a runway of short-term – kill immediately short-term and then longer term transition plans. So our goal as we deploy additional sets is to put those first to revenue generating growth activities and then opportunistically look to cannibalize existing sales for the systems that aren’t going to survive that rationalization over time. And that’s going to take time communicating with the surgeons and distributors to make sure that we have a good plan of attacked to do that without losing any revenue. So we feel confident with the plans we’ve outlined. The goal is to get all of that done within the next 2 years. Some systems will be rationalized sooner than others, others could take as much as 2 years. But, again, we’re going to look at how we deploy sets first and foremost for growth and then opportunistically redeploy those sets that aren’t going to growth to just accelerate the rationalization where possibly.

I really appreciate that. And then I’ll just ask one follow-up, obviously nice to hear sort of an increase in the cost synergy expectation. Just maybe give us an example – I think I heard you mentioned gross margin or cost of goods, just give us an example perhaps of some of the incremental savings you found. And would it be your hope that as you continue to sort of dig in here, that you may uncover incremental opportunities on the cost side above and beyond what you’ve just laid out? Thanks.

Yeah, there’s definite upside possibilities as we continue to get through each business unit and our long range strategic planning. But for the cost of goods sold, you might recall when we put out our first synergy targets, the $40 million by year-3 that was really just focused on operating expense synergies, because we didn’t really have a good sense of what the COGS opportunities would be. And one of the critical decisions to determine what those COGS synergies could be was the product rationalization as a first important step. So the bulk of the increase to approximately $50 million of saving of cost synergies by 2025 is coming from the COGS line, because now that we’ve made those critical decisions around product rationalization, we can outline sort of the expectations of savings we’ll get from higher purchase volumes for those surviving systems, right? Looking at our suppliers and rationalizing suppliers to increase our volumes. There’s lots of ancillary cost benefits that come with a supplier rationalization, fewer supplier audits, fewer sustaining resources needed to maintain those legacy systems and that supplier base. So I think there’s more opportunity ahead. But we certainly wanted to update the investor community with the savings opportunities we found, particularly of that cost of goods sold line, which should drive the margin increase we’ve talked about on prior calls.

And, I apologize I have one more sort of follow-up question on that. Is there a rule of thumb on, again, let’s take this as an example, the higher number for cost synergies as we think about drop through versus reinvestment just in terms of outperformance across any line, are you guys thinking about, again, a sort of rule of thumb of how much you’d let drop through to the bottom line versus how much you’d think about reinvesting? Just any sort of framework to think about that. Thanks.

Yeah, we’re doing that as part of our strategic planning process, which we deep into. And we’d mentioned the Analyst Day that we’ve got scheduled for September 20, I think, that’s where we’ll be able to provide some further color onto how much of those synergies we’ll kind of take to the bank versus reinvest in other opportunities. So we’re certainly looking at both. And some of them will go to the bank and others will be redeployed towards growth or other efficiency or both economies of scale type activities, so more color to come on then as we provide that long-term financial guidance at that investor call.

All right. We’ll stay tuned. Thank you so much, guys.

Thanks, Matt.

We will take our next question from Ryan Zimmerman with BTIG. Your line is open.

Hi. This is Izzy [ph] on for Ryan. So just one for me. How has the integration of the salesforce progressed so far? And what areas have been most challenging or most impacted by this integration process?

And really most of the integration is going on as we speak, I think, that a lot of what we did first as we started merging was just to make sure there’s stability. Obviously, the first step is getting all sales management in place, getting structure in place. There’s obviously relationships to both existing and turning over new relationships. So feel good about the stability of the teams. I think we have some great examples already of distributors actually coming together and joining forces instead of having to pick through opposing forces. So, I think, we have a good formula in place and we’re going to continue to rationalize and integrate as the year and early next year progresses as well. But we’ve always kind of mapped this out. This is not a quick play. This is something that will be done over the course of a few to, 5 quarters, something like that.

Great. Thank you for taking the question.

[Operator Instructions] And we will take our next question from Jeffrey Cohen with Ladenburg Thalmann. Your line is open.

Hi, Keith and John. How are you?

Good. How are you doing, John?

Hi, John.

Just a couple from our end. So could you talk about some of the – hate to ask again about the selling channels and how 7D involved in driving some of the complex cases that you called out? And specifically in the complex cases, could you stratify for us, where that’s being driven from and what’s become more complex? Is it the sales of Orthofix products or the cases that you’re seeing and that are being conducted by your physicians being more complex in nature?

Yeah, it’s a good direction, Jeff, I’ll tell you, it’s interesting. Part of what we’re seeing in the complexity of cases is don’t forget we’ve advanced and nicely kind of integrated portions of our Mariner deformity system in with our 7D. Certainly, a lot of the momentum we’re getting on 7D’s excitement in and around deformity we continue to not only advance applications, but make sure that the more we’re doing in that area is really demonstrating radiation lists or limited radiation for those patients. And deformity care often has some of the highest uses of radiation overall. And I think the combination of the two with the product line expansion and the ability of 7D to continue to be the preferred choice for deformity has created this greater awareness and greater opportunity for us in that sector. And then, of course, there is a great opportunity that Mariner [ph] if needed for the patient from a BGT perspective. So we’re excited that that true continuum of care is we can help plan a case, we can help integrate the case in the OR [ph]. And then, of course, post-operatively if it’s necessary to have an additional treatment modality, we can assist with BGT.

Okay. Got it. And one more for me. You talked a little at the beginning of the call about AccelStim and its 20% quarter-over-quarter sequential growth. Has that become material yet for BGT? And then secondly, within biologics, you did call out Osteoco, the collagen matrix. What was the status there, if you could recap with us on that? Thank you.

Yeah. The second one I will answer first. That’s going to be later this year launch, but we’re excited about it and certainly getting plans and place and getting everything organized. We’re most excited just because that has been traditionally an area for both legacy companies that we haven’t really been able to fully penetrate. And we want to make sure that this particular product line has that ability. We think that it has the features and the kind of handling properties that are going to be exciting the marketplace for those that like synthetics. The first question was in and around on AccelStim.

Yeah, it’s a meaningful part of the year-over-year growth dollars, Jeff. It’s still not a meaningful part of the overall revenue base. So the good news is there’s lots of room to grow for AccelStim, and I think that’s helping create some pull through on the PhysioStim part of that franchise as well. So…

Yeah, I think what’s a good marker for that, too, Jeff, is that we had a focus, obviously, at the beginning of the year, was our sales meeting, and obviously that was a product that was focused on and love seeing that post-sales meeting, we continue to see more and more momentum with it. So we’re certainly very excited about the uptake and the opportunity that’s ahead with that.

Got it. Perfect. Thanks for taking our questions.

You got it.

And we will take our final question from Dave Turkaly with JMP Securities. Your line is open.

Hey, good evening.

Hi.

I think you called out, actually maybe it was Keith, the cervical being the fastest growing component of…Hello?

You’re back. We lost you for a moment. So you said about cervical?

I apologize. I felt like nobody could hear me, so that’s my bad. I think you called out cervical as being the fastest growing component of the spine franchise, and if we look at that sort of $105 million base. I was wondering if you could maybe help us think about how big cervical is, maybe even relative to lumbar in that spinal implant business.

Yes, I think you know that cervical procedures largely as an average revenue per case, are often lower. The biggest opportunity or the highest billable is posterior cervical. I think the excitement we have though specifically on the cervical product line is it was a newer portfolio for legacy SeaSpine. And so we’re getting a lot of excitement and we’re putting investments and sets and making sure that we can take advantage of a broader distribution base now being able to promote all of the cervical fusion range. And then in addition to that, obviously, a good cervical fusion portfolio meets nicely with strong motion preservation at cervical, and we’re excited about, as I mentioned, the 7-year data. That 7-year data really aligns nicely to what we’ve seen elsewhere in the industry. But, again, we have to make sure that we have enough sets and enough support to properly launch that in the broader distribution area. But it is an area of focus and it is one that I think that we have the newest product range on the market.

I guess as a quick follow-up, if you look at Bone Growth Therapies obviously growing well, any thoughts about, Keith, from your standpoint about that selling channel? Should your spinal implants and maybe the Stim be sold together? Should you have separate forces or I guess I’d love to hear your thoughts on how you plan on managing sort of those two franchises specifically on the spinal side.

Yeah, it’s actually something we do are strategically looking at and trying to continue to refine. I’ll tell you it’s been great. We just had our quarterly business review just a couple of weeks ago, 10 days a couple of weeks ago with that team. And they without a doubt are the team that has seen more cross-selling synergies and have been doing a very nice job of getting more and more of the new distribution channel to them involved. When I say involved, making sure that there’s an incentive for the spine teams that are out there to not only engage with their surgeons, but also engage with local representation. Keep in mind, our BGT group is very unique in that they have a very close relationship with patients as they’re fitted and as they’re taken care of. And so there is an important handoff. And so it was great at that QBR to see how much cross referencing is going on and how much co-selling is going on. And so, clearly, there is an opportunity to continue to expand that and I think that team’s got some really nice plans to continue to incentivize and drive that forward because keep in mind, there’s a very large team that’s now been introduced to BGT that did have that exposure late last year or anytime last year.

Thank you.

And there are no further questions at this time. I will now turn the call back to Mr. Keith Valentine for closing remarks.

Thank you again for joining us this afternoon. We look forward to the rest of 2023 and will leverage the momentum we’ve built since the merger to deliver even more impressive performance going forward. Have a great afternoon and evening, and thank you again for your interest in Orthofix.

Ladies and gentlemen, this concludes today’s call and we thank you for your participation. You may now disconnect.