Good afternoon, and welcome to Orthofix Medical’s Q4 and Full Year 2023 Earnings Call. All participants are in a listen-only mode. After the speakers' remarks, we will have a question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Louisa Smith, Vice President of Gilmartin Group. Thank you. Please go ahead.

Good afternoon, everyone. Welcome to the Orthofix fourth quarter 2023 earnings call. Joining me on the call today are President and Chief Executive; Massimo Calafiore, and Chief Financial Officer, Julie Andrews. During this call, we will make 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, March 5, 2024. 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 filed this afternoon, March 5, 2024, for the year ended December 31, 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 fourth 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 Massimo.

Thank you, Louisa, and thank you everyone for joining us this afternoon fourth quarterly earning call as Orthofix CEO. I'll begin by saying how happy I am to be part of Orthofix, and this impressive organization. The company has strong fundamentals and I believe great potential for future value creation. This is why I joined Orthofix. Yes, the company has been through much change in the last 12 months, but our business fundamentals have remained strong and our talented leaders and committed employees have executed exceptionally well. Fourth quarter performance was no exception. We executed against our guidance, gained momentum and accelerated strategic initiatives. Despite that prediction otherwise, we also expanded our distribution network in our U.S.A’s spine sales channel. I'm so pleased to be part of the Orthofix team and I will work to build on past successes, leverage our current momentum and unlock future value creating opportunities. During the last eight weeks, I've had the chance to speak to many stakeholders and are more encouraged than ever about the opportunity for growth and value creation that is in front of us. I joined Orthofix having admired the company and its innovative solutions and my early insights have affirmed those long-held beliefs. I want to spend some time on this call sharing my initial thoughts and observation about our business and highlighting some areas we prioritize throughout the year. Then I'll turn the call over to, Julie to provide a more in-depth look at our fourth quarter performance and financial results. First and foremost, I observed that the company has remained stable throughout the recent periods of transition, demonstrating our durable business model. I have spent a great deal of time understanding internal operations as well as how Orthofix fits into the markets where we are competing. I'm confident…

Thank you, Massimo, and good afternoon everyone. Like Massimo, I'm very happy to join Orthofix at this important time and look forward to contributing to the company's future success. Before I begin, I'd like to remind you to please refer to our press release published earlier today for information regarding our non-GAAP results, including our reconciliation of these results to our GAAP results. Additionally, all percentage changes discussed will be on a year-over-year basis and revenue growth rates will be on a pro forma constant currency basis unless otherwise noted. In addition, all results of operations that I refer to in my prepared comments will be on a non-GAAP as adjusted basis and comparisons to prior year will be on a pro forma basis including the combined results of Orthofix and SeaSpine in 2022 unless otherwise stated. Starting in Q1, we will annualize the impact of the merger and no longer refer to pro forma growth. As noted earlier in the call, Orthofix finished the year with a strong fourth quarter. Operating performance remained on track and we were pleased to deliver net sales above the high-end of the range provided in our third quarter call. For my commentary, I'll go through each of our business units and review financial results on the quarter and for the full-year as well as provide guidance for 2024. Total company net sales were $200.4 million in the fourth quarter of 2023, up 6.9% over prior year. For the full-year 2023, net sales were $746.6 million growing 8.1% on a pro forma constant currency basis and normalizing for a one-time stocking order that occurred in the third quarter of 2022 prior to SeaSpine's exit from the European market. Bone Growth Therapies revenue grew 15.3% to $58.8 million in Q4 and delivered 13.5% growth for…

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

All right. Good afternoon, everybody. Thank you so much for taking my questions. Maybe, Massimo, to start with you, I really just help us understand what your marching orders are from the Board and what's on the table and what's not in terms of your ability to drive value creation here, divestitures, more M&A, etcetera. Does any help there? And then I've got one follow-up for, Julie.

Yes. Thank you. Thank you, Matt, for the question. Look, the marching order right now is to create value for the company focused on profitable growth. So, my team and I would be solely focused right now on driving the company and creating, let's say, accelerating market growth. There is a lot of opportunities out there and really take care of the full portfolio that we have. Like Orthofix is not just a spine company. We have a lot of lever to use in spine, biologic, orthopedics, BGT, enabling technology. So, reiterating what I said that in my remark, profitable growth and value creation, leveraging the full portfolio and keep working on innovation, leveraging a greater technology that we have in 7D. So right now, focus on execution.

Got it. I appreciate that. And, Julie, if I'm looking at it correctly, I think the 2023 MDR add-back was about $9.5 million. Is that right? And does that mean we should be looking at this ‘24 guidance, sort of on an apples-to-apples basis approaching mid $70 million? Is that sort of the right way to think about it? And then, if I could just tack on there, it would be helpful if you could maybe just describe your guidance philosophy in general. Are these ranges and the ranges you'll provide in the future, ranges you have high conviction in and meeting and there's some upside or no we should take them literally? Just help us frame that, and then I'll get back in queue. Thank you.

Sure. Thanks, Matt. Yes. So, the MDR expenses for, 2023 were $9.5 million. We expect that to ramp down. I think our expectation is that it ramp down to around $3 million and that's kind of the ongoing run rate that we'll see in the business. So, if you think about that that's included in our adjusted EBITDA guidance going forward. In terms of philosophy on guidance, we've set the guidance at a number that we're confident in. We believe that we can deliver and, that's our commitment. We want to be prudent. Massimo and I are both two months into the job, but our estimates are informed what we've seen in the pipeline and, I've also tried to provide some parameters around this quarterly cadence as well. But we believe we've said it. We were confident that we can execute against it.

Got it. Thank you so much.

Our next question comes from Ryan Zimmerman from BTIG. Please go ahead. Your line is open.

Good afternoon. Can you hear me okay?

Yes.

Hey, guys. First off, congrats on your first quarter here at Orthofix, First earnings call, I should say. I got a bunch of questions. I want to follow-up on a one on math, but I want to start maybe with, segment expectations. And, Julie, I really appreciated all the color you gave on quarterly pacing and so forth. But, when you think about kind of the business segments and specifically within that, when we think about kind of Legacy SeaSpine versus Legacy Orthofix, I mean, the spine business of SeaSpine was kind of putting up, kind of low-double-digit type numbers and you're guiding the 5% to 7%. I'm wondering kind of how that splits out in terms of kind of your expectations for growth, be it BGT or, Orthopedics versus, the core spine. Any commentary there would be appreciated, and I have a couple follow ups. Thank you.

Sure, Ryan. So, we're not breaking out specific product line guidance, today. So, but I think generally speaking, you can we talked about U.S. spine fixation market or our growth at 13.5% for the quarter. And so, we feel really good about that, but we're not breaking out specific line item guidance.

Okay. Fair or no? Sorry. Massimo, did you wanna chime in?

No. No. I'm good.

Okay. I'll keep rolling. So, I want to ask another question, which is about segment profitability. And if you look in the 10-K, you can see where most of the profit's coming from a segment perspective. And there's not a lot of profit coming from orthopedics. Why remain committed to that business at this point? And what can you do to potentially drive that growth higher? And frankly, is it worth keeping that business, given the profitability it ascribes to the company?

Yes. Look, this is a great question. But, like, we need to remember one foundational thing for Orthopedics. And Orthopedics is the DNA of this organization. And if you think how the business is structured, right now, it's totally skewed on in Europe where we are at the level of maturity that is very, very high. I think what we see in front of us is an enormous opportunity in United States where we have a very small market share. So, there is a lot of focus investment that right now we are making in the specific market, not just around the marketing and sales, but also innovation. So, what you should expect that over time with the market, let's say, if you start to share the market between United States and Europe, with the United States market that grows much faster, you will see automatically a much higher profitability. So, as I said, we are very excited about all of the opportunities that we have in all of the different market segments. Orthopedics is one of them.

Understood. Appreciate that. And if I could squeeze one more in, just a follow-up to Matt's question. Julie, if I look at kind of operating expenses dropping 200 basis points, 300 basis points, I think it's in the range around 6 to 10 maybe call it. Let's say euro MDR costs come down a little bit. Where else do you feel like you have opportunity to kind of manage those costs? And, just your thoughts there would be appreciated.

Yes. So, we're going to be, still analyzing our synergies that we, achieved in 2023. And, we talked about last year that the majority of that was coming from headcount. So, we'll see that go down in 2023 or excuse me, 2024 as we fully annualize those. In addition, part of it is just, it's creating leverage on our incremental revenue growth where we don't believe that we need to invest at the same rate. G&A, and R&D were holding flat to revenue. So, that's what we're looking at for our leverage points.

Okay. Well, thank you both for taking the questions. That's much appreciated.

[Operator Instructions] Our next question comes from Jeff Cohen from Ladenburg Thalmann. Please go ahead. Your line is open.

Hi. This is actually Destiny on for Jeff. Thank you for taking the questions. I wanted to quickly talk about the BGT segment. Can you describe some of the drivers that are really helping you grow within this growing market and how your growth rate is comparing to the overall market? And a special shout out to Jason, for getting a promotion. Do you see him adjusting the strategy? Are you as part of your marching orders as previously asked, is BGT growth really central to it?

Look, this is a great question. We are very excited about this segment for many reasons that I'm sure that you're familiar with. But if you see how the BGT business is divided, we have market leadership in spine where we have not just an advantage from the technology perspective, but also from the infrastructure perspective. I think what Jason did and the team has built up, a great system to convert all of the order that we have to cash. So, the idea is that, okay, how can we bring all this know how that we have on different market? And then right now, we are focusing on the fracture market where we have a very, very good opportunity right now with very small market share. And so, you will see us really focused on the structure, keep growing well above market and bringing, let's say, all of the EBITDA and the gross margin positive that we see from BGT. So, let's say a great a great focus on creating value on additional market and spine right now.

Excellent. Okay. And then, Julie, one for you. I really appreciate the commentary around the synergies, especially on the topline, and how it'll affect adjusted EBITDA. I'm wondering if you could just give us an update on the current headcount, and how the synergies impacted that.

So, I think most of the headcount action was taken last year. And, we don't expect to have much more headcount, impacted or more headcount impacted this year. You can see in our, K, I believe, our headcount numbers. So, it bring there --

That does it for me. Excellent. That does it for me. Thank you.

Our next question comes from Jason Wittes from Roth MKM. Please go ahead. Your line is open. Jason, your line is open. Please go ahead.

Hi. Can you hear me now? I apologize. I think I was muted. Hello?

We can hear you, Jason.

Hi, Jason, yes, we can hear you.

Okay. Thank you very much. Hi. Just, I know this is, you're not giving line-by-line guidance by division, but the numbers do look somewhat conservative. Is this just a reflection of, sort of, I think, your stated goals, Massimo, when you started, which were profitable growth versus growth, high growth or growth with heavy investment. Is that the way you should be thinking about it or is it just a combination of conservatism? Just conservatism, but generally speaking, the business trends look pretty good.

Yes. I mean, this is Julie. I'll take that. Our business trends look good. We're expecting all of our businesses, while we're not giving line item details, to grow at or above market. And, like I said earlier, Massimo and I are two months into the job. We want to set, guidance where we have confidence that we can execute against it and deliver on that commitment. And that's what we believe we've done with the guidance that we've provided.

Understood. And then, I don't know if you said it mentioned anything on 7D. Could you give us some color in terms of placements or what the outlook is for 7D?

Look, as Julie said, we're not giving, let's say, right now specific forecast for market segment. But I said during, something is important to notice that, 7D has been a great contributor of the success of the spine franchise even the last year, like we had 29%, if I remember of the overall revenue that came from 7D. And you know that all of our competitors have been successful leveraging enabling technology. And you will see us really focus on a platform that is unique in the marketplace. So, we are pretty excited about the contribution of 7D, 2023, and what can what we can achieve together in 2024.

Okay. Thanks. Maybe just one follow-up. You kind of addressed this, but I'm just curious, kind of what the outlook is. And that is on distributors, it sounds like it's stable and you're adding, can we anticipate that you'll continue to add high quality distributors throughout the year, especially particularly in spine?

Yes. Yes. Thank you for the question. Look, there is a lot of excitement about what we're doing today around spine and orthopedics, and we have a very healthy pipeline. So, like, spine market always go through fluctuation. You see what's happened in the last few years. But, right now, given the recent mergers, there is even, like, a greater opportunity of reps and a distributor to go get. Look, we are fully capitalized to do that and the results on Q4 helped us just to show that the thesis of the part of our product is there. So, I think towards the year, you see, we would be able to keep adding high-quality distributors that is going to that married our vision around what we want to accomplish in Orthofix. So, a lot of deal of opportunities out there.

Wonderful. Appreciate the color. Thanks. I'll jump back in queue.

Yes. And just to amplify, verify on what Massimo said, we had 25% revenue growth in Enabling Technology last year in Q4. I'm sorry.

We have no further questions. I would like to turn the call back over to Massimo Calafiore for any closing remarks.

Thank you. Look, I said earlier, I close today by reiterating my enthusiasm to be part of Orthofix and my optimism about the company future. My first two months have really underscored the stability of Orthofix fundamentals and the breadth of portfolio offering. I would also to thank all of our employees worldwide for their commitment to Orthofix and their initiative in maintaining momentum across our whole portfolio. We are going to continue building a dynamic organization dedicated to collaboration, innovation and patient care. 2024 would be a great opportunity for growth and value creation. And, I look forward to providing more granularity on specific initiatives in future updates. Thank you.

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