Thank you for standing by. My name is Krista and I will be your conference operator today. At this time, I would like to welcome everyone to the Orthofix Medical Second Quarter 2024 Earnings Conference Call. 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. I will now turn the conference over to Julie Dewey. Julie, the floor is yours.

Thank you, operator, and good morning, everyone. Welcome to the Orthofix Second Quarter 2024 Earnings Call. We appreciate you joining us. I'm Julie Dewey, Orthofix's Chief IR and Communications Officer. Joining me on the call today are President and Chief Executive Officer Massimo Calafiore and Chief Financial Officer Julie Andrews. During this call, we'll 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 6, 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-Q filed this morning, August 6, 2024, 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 2024 results for information regarding our non-GAAP results, including our reconciliation of these non-GAAP financial measures to our U.S. GAAP results. Additionally, all revenue percentage changes discussed will be on a constant currency, year-over-year basis. As a reminder, as noted in the first quarter call, we have annualized the impact of the SeaSpine merger and will, therefore, no longer be referring to pro forma growth. In addition, all results of operations that we refer to in our prepared comments will be on a non-GAAP as-adjusted basis. With that, I'll now turn the call over to Massimo.

Thank you, Julie, and welcome to the team. Glad to have you on board with us. Good morning, everyone, and thank you for joining us for our second quarter earnings call. I'll spend some time providing business updates and information about other key initiatives. Before I turn it over to our CFO, Julie Andrews, to cover the specifics of our Q2 results and revised guidance. Orthofix had a strong second quarter, delivering above-market growth across virtually the entire portfolio. Our team continues to execute the plan, and after two quarters in my role, I can very confidently say that the business fundamentals are excellent. We have the momentum to continue leveraging our strategic advantages, and we have made considerable progress in cash usage, paving the way for much earlier than expected positive free cash flow for the second half of this year. Both operationally and commercially, I'm pleased with our first-half performance and encouraged by what's to come in the remainder of 2024 and beyond. Net revenue for the second quarter was $198.6 million, representing year-over-year growth of 6% on a constant currency basis. Growth was led primarily by strength in our U.S. spine and Bone Growth Therapy, or BGT, businesses, as well as continued market penetration in U.S. orthopedics. U.S. spine fixation grew 12%, more than twice the market rate, and we are capturing increased market share with every quarter. Spine and fracture steam in the BGT markets were once again bright spots and have benefited from cross-selling efforts from our spinal and orthopedic implant business. During the second quarter, we began a limited market release for two new interbody designs. It features Orthofix proprietary advanced surface technologies and expands our portfolio of lumbar interbody fusion products to address varying patient anatomies. Our new LLIF-L, lateral lumbar interbody is…

Thank you, Massimo, and good morning, everyone. Orthofix had a strong second quarter delivering total company net sales of $198.6 million, or 6% constant currency, top-line growth, and adjusted EBITDA margin expansion of approximately 310 basis points. For my commentary, I'll go through each of our business units and review financial results for the quarter, as well as provide an update to our guidance for the full year 2024. Bone Growth Therapy's revenue grew 12% to $59.1 million in Q2 and marked the sixth consecutive quarter of double-digit growth for the BGT franchise. This growth was driven by above market performance in both the spine and fracture channels. In the BGT spine market, where we hold the number one market share position, we continue to take share with more than 50% of the growth coming from new customer acquisitions. In addition, investments in the fracture market sales channel drove 14% growth in fracture with the AccelStim Bone Growth Therapy device continuing to outperform the market. As a reminder, the fracture market represents an opportunity of more than $200 million, and we are still in the very early innings of building our position in that market. Global Spinal Implants, Biologics, and Enabling Technologies' second quarter revenue was $108.9 million with year-over-year growth of 3%. U.S. spine fixation revenue grew 12%, well above market growth rates, driven by deeper penetration of existing accounts and expansion of our customer base. Additionally, in the U.S. biologics business, we saw a positive impact of new distributor partnerships, as well as cross-selling initiatives, which drove growth in line with the overall market. The global orthopedics business grew 6% in the second quarter, led by 7% growth in the U.S., as a result of strong performance across our portfolio, as well as distributor expansion and sales channel…

Thanks, Julie. In closing, I want to express my appreciation to our entire Orthofix team for their efforts in Q2. Their contributions have been instrumental in driving our performance and I'm very proud of the progress we have made. With our full leadership team in place, it is now time for us to continue executing against our commitments, drive sustained profitable growth, and expand the shareholder value. The fundamentals are strong and we have an innovative mindset to carry us forward. I'm encouraged by what we have achieved and excited for what's to come. Operator, let's now open the line for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Your first question comes from Mathew Blackman with Stifel. Please go ahead.

Good morning, everybody. Can you hear me okay?

We can. Hi, Matt.

Hi, Matt.

Hi. Hello, everybody. Julie, I've got a couple for you, Julie Andrews, to be precise. You talked a little bit about it at the end of your comments, but could you talk a little bit more about the levers you pulled to get to cash flow positive faster than expected and maybe more important, how much more opportunity there may be in those levers or others? And then maybe I'll just throw it out here, just some clarification on that free cash flow guide. Should we expect positive free cash flow in 3Q and 4Q or just in the second half in some? And then with the exception maybe of the seasonally heaviest spend in 1Q '25, should free cash flow stay positive from here out?

Okay. Thanks, Matt. So I'll start with your first question, the free cash flow usage and the improvement. We saw a really good drop through on our EBITDA that was one driver, as well as we're seeing improved working capital efficiency with inventory utilization and had improvement there, as well as DSO improvement as well. Those were the main drivers within the quarter. We do still think that there is opportunity within, of course, with adjusted EBITDA as that increases that we'll see a good conversion to cash there. And then we do still think that there's opportunity within our inventory line and a less opportunity with DSO efficiency, but some there as well. And that's really what's driving kind of our outlook on the back half of the year, being free cash flow positive. We're not guiding to Q3 and Q4 individually being free cash flow positive. Q4, you know, we are, but the full back half of the year. And then--

Yeah, sorry.

Your second question was about [multiple speakers] yeah, sustainability. Yeah, I mean, we believe for, you know, we will be free cash flow positive for 2025. It won't be every quarter. You know, as you mentioned, Q1 has seasonal payments that we make, and that won't be a free, we wouldn't expect that to be free cash flow positive.

Okay. And if Julie, do allow me one follow-up question. I think the implied, and this is for you, Julie Andrews, again, the implied drop through, I think in the second half is something like 40%, something in that neighborhood. Is that how we should be thinking about drop through as a rule of thumb beyond 2024? Or does it go lower than that as you annualize some of these cost synergies and maybe some of the initial initiatives? Thanks.

Yeah. I mean, generally, you know, we would expect to be in the 30%, 35% range as we annualize our synergies. We won't maintain the 40% range over time. We haven't specifically given numbers.

Okay. I'll get back in queue. Thank you so much.

Thanks, Matt.

Your next question comes from the line of Ryan Zimmerman with BTIG. Please go ahead.

Good morning. Thanks for taking our questions and congrats on all the progress this quarter, guys.

Thank you, Ryan.

Thank you, Ryan.

I want to ask you two questions on products, if I may. First, you know, as I look at the overall spine growth, particularly in hardware, biologics, and enabling tech, you know, appreciate the color on the hardware, the commentary on biologics. I'm wondering if you could spend a little bit on enabling tech, Massimo. Kind of how is that shaping up relative to the growth of that segment? What do you see for the pipeline in terms of, you know, 7D demand? And just how to think about kind of, going forward that contribution to that segment in enabling tech? And then I have a question on Stim after that. Thank you.

Yeah, look, great question. You know, we discussed this multiple times and we see 7D as a fundamental for us on creating sustainable growth. There is a lot of interest around 7D and a lot of focus that we're putting right now on creating more placement of our machine for earnout. Actually, there was a pretty strong effort by the team on start to be focused on that because we believe that creating more earnout there is going to drive a higher implant utilization and a sustainable growth. Because you can, you know, I've said multiple times, 7D is a unique technology that really creates a differentiable experience in the OR and all of this is translating and is for us on bringing more surgeons on board. At the same time, from the R&D perspective, we are very excited about what we can do with 7D. There's going to be a very focused investment on '25 and beyond around the technology because we believe that we can have peace that no other company can have given our proprietary machine vision. So, in brief, again, great focus on development on 7D, great focus on creating earnout opportunities out there to become an alternative not just to other navigation systems but also to robotic systems out there.

Okay. Next question on Stim. You continue to, I think, surprise, you know, not just myself but everyone on your continued success in Stim. Six quarters in a row double digit. It's very impressive. Part of that is a benefit, I would imagine, from cross-selling, particularly from the legacy SeaSpine business. Where do you think you're at in that, in terms of that penetration? I mean, how much more can you benefit from cross-selling bone Stim into the legacy SeaSpine customer base? And, you know, again, if this is a market that's growing low single digits, at some point, I worry, maybe not you guys, but I worry that that growth may slow. And so, help me understand kind of, how long these tailwinds, you think, in your mind can continue?

Yeah, this is a great question because it's a question that we ask of ourselves. So, right now, you can see that we are like at the infancy of our merger with SeaSpine. So, I think that before the foreseeable future, we keep seeing the opportunity to leverage, as you said, the synergistic approach that we are bringing up on cross-selling within our segment, given the default point is the same. Over time, I think that, you know, given our dominance in the market, we're going to see a slowdown, a natural slowdown of the growth to, let's say, market rates, above market rates. But, I've said before, we are still at the infancy of our merger. So, I think that there is still room to drive a synergistic, let's say, to drive and leverage synergies that you're seeing right now. But again, I think that you're seeing the right set of eyes.

Well, congratulations again.

Thank you.

Thanks, Ryan.

[Operator Instructions]. Your next question comes from Jason Wittes with ROTH MKM. Please go ahead.

Hi, thanks for taking the questions. Maybe just a quick follow-up on 7D. In your commentary, it sounds like most of the growth or placements are focused on open surgical procedures and MIS is still sort of a work in progress. Is that the right interpretation or how should we think about 7D, especially for MIS and percutaneous applications?

Yeah, Jason, thank you for the question. Look, at the end, that one is, I've said before, and I said on my remarks, you know, like we also, 7D, given the footprint, is poised to be a machine that can be easily used on the ASC setting where we are going to see what we're expecting over time, the switch on the MIS procedure. So, right now, you need to see 7D as a system that for MIS is comparable to all of the systems out there in the market. Of course, we talk about open procedure because on the specific, for the specific market, 7D is the state of the art, but again, given that we believe on MIS, we're investing in MIS on the hardware side and we want to create a tighter connection between hardware and software. You see that as an investment on the specific MIS module that they're going to bring 7D, if not, at the same level, let's say, of 7D for open procedure. So, the system right now, again, you can do MIS, it performs as well as others, but over time, as I've said before, given that we believe that for open procedure, we are state of the art, over time, we're going to work to make our MIS capability even better than the competitors out there.

Okay, thanks. That was very helpful. And then, on distribution, I think, at least that was my read that, you know, until you go to cash flow breakeven, you're going to be somewhat selective and pretty careful on distribution. I guess two questions related to that. One, can you give us an update in terms of what's happened with your salesforce this quarter in terms of ads? And then, secondly, am I right to assume that when the cash position improves, which sounds like it's certainly happening at a faster pace, there may be a more aggressive increase in the salesforce?

This is a great question. We don't give specifics about how our distribution network is -- how the distribution network is today, what I can tell you is that, look, our philosophy about commercial, our commercial strategy is not going to change. It's not going to be dependent on our ability to spend. I think that I've said multiple times, we want to create sustainable growth and we will not force our commercial leaders to find growth just for the sake of growth. Look, what has made me very proud right now is not how much we are growing, but the quality of revenue that we're bringing to the organization. At the end of the EBITDA pull-through that you saw this quarter, it's just a function of our ability to be very dogmatic on how we are doing. So, if you want to see us, if you want to imagine us in the future, this is a company that is going to keep focusing on growing above the market rate that it's going to make. It's going to trade accelerated revenue to decrease EBITDA profitability and it's going to stay always focused on being the best partner that we can find. Because at the end of the day, success is not just growth rate but also our ability to utilize the assets that we have in the best way as possible. We can do that if we have a very good commercial partner.

Great. Congrats on a solid quarter. I'll talk back in queue.

And that concludes our question-and-answer session. I will now turn the conference back over to Julie Dewey.

Thank you. We appreciate all of you joining us and we look forward to talking with you next quarter. This now concludes our call.