Conference Transcript - ATEC 2026-09-09

Ross Osborn, Analyst — Wells Fargo

All right. Good afternoon. My name is Ross Osborne, and I'm on the MedTech team here at Wells Fargo. I'm pleased to introduce management from Alatech for this session. Joining us from the company is Todd Conning, the CFO, and Robert Judd from Investor Relations. Thanks for being here. Thanks for having us. Maybe we'll start at a high level. Curious to hear your thoughts on how the spine markets evolved since Q2. We've heard mixed reviews of normal seasonality, other softness, and status quo. So I'm curious what you're seeing in the field.

Speaker 3

Yeah, thanks again for having us, Ross. I think as you look at how we came out of the quarter in the first half, I think volumes were 20% in the first half, maybe a little bit north of, and that feels really, really good for us in terms of the consistent volume, number of procedures that we're seeing in the space, and I think the confidence that it gives us going into the second half. Clearly, that's underpinned by a level of surgeon adoption that's in the low 20% range as well. So increasing the net number of new surgeons who are doing procedures with the company growing. And that really is the underlying engine of the business. And so first half at 20% plus, and I think our guide implies high teens in the second half. And so I think we like to set up from a procedural volume standpoint going into the second half of the year.

Ross Osborn, Analyst — Wells Fargo

Absolutely. And then in regard to ACA's subsidy expirations, are you hearing any noise in the field related to you guys?

Speaker 3

Not particularly. I think as we did some of that math earlier this year, I think we have sized our exposure to that population.

Speaker 3

Yeah, low single digit. Low single digit.

Speaker 3

So we just don't think that we're that exposed. And I think as we've gone through the year, haven't heard really any noise around that. And I think that would then suggest our math earlier in the year was probably correct.

Ross Osborn, Analyst — Wells Fargo

And to your point, your volumes are obviously much higher than the traditional spine market. You know, where do you think you guys are differentiated from that aspect?

Speaker 3

Well, if you look at the company's history and I think really how our thesis is, we create clinical distinction, meaning we help surgeons do better surgery. and and when we do that we'll compel a surgeon to adopt the procedure i think part of our distinction is in the proceduralization of the experience meaning we don't sell you know piece parts obviously that is how you sell and how you create the the economic relationship with the hospital but what we're trying to do is is create procedures that surgeons can choose to use to treat a pathology and a patient surgeons will think of the patient understand the pathology and then ask themselves what procedure will I use to treat that pathology and so if we can architect a procedural approach we're more likely to get more of that revenue share of that procedure as well as we're higher likelihood of actually creating a procedural experience that delivers a better outcome over time when you do that you're going to attract surgeons and those surgeons will adopt those procedures. And when you do that, you can ultimately attract the right sales talent to support that surgeon adoption. And so when I tie that back to what we're seeing, which is strong volumes and strong surgeon adoption, I think you come to the conclusion that the thesis is working.

Ross Osborn, Analyst — Wells Fargo

Great. And sticking along, similar thought, how much room is left for surgeon adoption versus driving utilization?

Speaker 3

Well, if you kind of look at where we are in terms of surgeons who have adopted AlphaTech procedures, you'd probably come to the conclusion that we're between 25% and 35% penetrated. And so at that rate, you could grow your surgeons at a 15% to 20% clip for a number of years and only get half of the potential surgeon adoption that's available to you. So I think there's plenty of years ahead of us of opportunity to continue to grow for the number of surgeons who adopt the procedures that we provide.

Ross Osborn, Analyst — Wells Fargo

Great. And then maybe you turn it into surgical revenue. It grew 17 percent, while I believe volumes increased 20 percent. Can you parse out revenue growth versus volume growth and how you expect that to shift throughout the balance of the year and next?

Speaker 3

So, as you know, when we look at our surgical revenue, we think about procedural volume, which we've kind of pitched at 20%, and the other half of that equation is the revenue per procedure, which in the second quarter declined year over year by about 2.7%. Really, I would say two dynamics going on there. One of those dynamics is mix-related, and the other dynamic is really a biologics attachment rate. And so if you look at the history of the company and the history of our revenue per procedure growth, we've grown substantially over the last number of years. And this year, coming into the year, what slowed was our biologics attachment rate. And so we really have not expanded the attachment rate of biologics to our procedures beyond what it was exiting last year. And so that's been a bit of a headwind from a year-over-year standpoint. And then as you look at the other component of that, we've seen some mixed headwinds in terms of pricing, which is both our international business and our cervical portfolio have grown faster than our overall average procedurally, and they hold lower revenue per procedure values than our overall average. While they individually are growing, they're at a lower rate than our average revenue per procedure. And so that mixes the revenue per procedure down. But that's strong volume, and, you know, that's the core of the business, and I'll take that all day long. I think what, you know, what we're more interested in is really addressing our biologics attachment rate going forward. In the second half of the year, what we've assumed is the biologic attach rate doesn't improve, and we ultimately see about the same revenue per per surgery decline in Q3 as we did in Q2. And then that really comes down to zero as we comp out some of the mix-related impacts in the fourth quarter.

Ross Osborn, Analyst — Wells Fargo

Okay.

Speaker 3

On the biologics attachment rate, I think on the Q2 call, you said it's stabilized. so in the second half it not improving is that year over year so it won't grow or does it improve relative to the q2 stabilized relative to q2 so you'll still have some year over year headwind okay do you think it can grow in 27 well i think the interesting point is if you stabilize you you won't have a headwind in 27 as you begin to comp out of that and i think to the extent that we can continue to see it grow then yeah it does become a tailwind when you look at our biologics attached rate it's sub 50 percent and given the portfolio we have we believe it should be well north of that and so there should be ample opportunity for us to improve it improve the execution okay um and then sticking with 26 and numbers um you know you establish i think guidance of 882 million you know the confidence confidence in that is you know it implies a good step up in the back half fourth quarter yeah and i think the the foundational assumption there is the the volume component so our first half of the year volume was 20 plus uh the implication is high teens in second half and so feel like we like to set up going into the second half and then the other piece to that of course is the seasonality associated with our eos business which you know Again, given what we're looking at in terms of backlog and funnel, we feel good about the second half EOS numbers.

Ross Osborn, Analyst — Wells Fargo

That's where I was going next. Maybe walk through the current state of EOS. It seems like everything's trending okay.

Speaker 1

So we've taken some actions in the first half of the year, made some additions to the team and some process rework and some reconfiguring of the team a bit. And I think all of that has resulted in us feeling better about the process, both from a kind of two steps in the process. You have creating the pipeline up until the order, and then you have the timeline from the order to the delivery, which is when we recognize revenue. And so as we've dialed that process in over the last quarter or two, and I think professionalized it a bit, we look at the order book. We have higher confidence in our order book. I think it gives us confidence as we go into the back half of the year, because to Todd's point, it does require a step up from our 17 and a half to 19 in Q3, and then the balance is in Q4, which we do have some OUS seasonality from a distributor standpoint, which is always a Q4 phenomenon. on so that's not unusual for us but also in the US and and just across the board having a strong order book feeling like it's a quality under order book that we understand gives us confidence about our ability to place the units and I think the the technology itself is is is fantastic you know people people want it so I think a lot of these little bit of a hiccup we had in Q1 on EOS is really a sales execution thing and versus a demand thing in the market and so feel real good about where that's positioned. And I think even more importantly, although this is maybe not the question, I'll take the liberty of just adding this in. I think the thing that's exciting about EOS is the EOS Insight. So the software we're putting on top of it, allowing us to integrate with the workflow surgically and seeing the post six months go live, we're seeing 30% uptick in surgical business at those accounts that have EOS Insight. So really excited about, that's the vision of what EOS should be to our business longer term.

Ross Osborn, Analyst — Wells Fargo

Okay. So based upon, is it fair to say, based upon the order book today, you're comfortable with the $77 million target this year? Great. And then EBITDA, can you walk us through the bridge there? I think the goal is $140 million this year. Another decent step up.

Speaker 3

Yeah. I think a couple of things. As we looked at Q2, our overall EBITDA was about 16.8% of sales. And so that makes you feel pretty good about the full year number. And if you think about absolute dollars, really there's two things going on in the fourth quarter. One, you clearly get more EBITDA because you're stepping up. And two, you get more drop-through, or not drop-through, rather, but you get a higher ratio of EBITDA revenue. Now, I think the first half of the year, we've seen our drop through in the mid 40% of year-over-year revenue growth dropping to EBITDA increment. The second half implies about 35% of that. And so I feel pretty good about that given our first half performance and what we think we can do in the second half. And, you know, I think we've shown good spending discipline with OPEX growing about 10 or 11 percent year over year in the first half. And that's implied in the full year guide. And then clearly Q2, we had a really nice gross margin performance. Some of that being mixed, of course. But we're definitely seeing improvements in our overall cost structure as a result of some of the improvements we've put in place. and would expect to see some of that continue throughout the balance of the year, which is really how you saw us guide to the second half gross margin numbers that we did.

Ross Osborn, Analyst — Wells Fargo

Okay, great. Continuing down the bridge, free cash flow of $20 million. What are the biggest puts and takes from EBITDA conversion to free cash flow?

Speaker 3

Yeah, if you look on a full-year basis, it's kind of like you take your EBITDA, you subtract out your instrument and inventory investment, and this year that's about $100 million. You subtract out your cash interest, which is probably $18-ish this year. You add back your E&O, $10 or so, $15. You kind of get pretty close to where we're guiding on $20. And, of course, there's puts and takes on kind of working capital from there. But those are the big levers on an EBITDA basis, bridging down to free cash flow.

Speaker 1

And maybe just to talk about the seasonality of that a bit, because it is back half-weighted. But I think it makes sense when you think about the $90 to $100 million of instruments and inventory that we're procuring this year. We spent $66 million through the first half, so you obviously got a much smaller portion to swallow the back half of the year. And with the increased revenue, there'll be a little more EBIT to drop through. And so you end with, we've taught on the call in Q2, said $5 million in Q3 on free cash flow, and then the balance in Q4 to get to $20. So it is a bit back half-weighted, but I think when you see the pieces and parts, it makes sense.

Ross Osborn, Analyst — Wells Fargo

And then looking at 27, you guys have discussed a billion in revenue. I think consensus is at over 15%, so a bit over a billion. You know, level of comfort there. It seems like it should be pretty easy for you guys to hit at this point based upon where you're exiting the year.

Speaker 3

Yeah, I feel good about where that's at and I think about the growth algorithm that we've put in place. And I think as we think about the volume growth in the business, again, driven by surge in adoption, I feel like that's in a good spot and puts us in a spot to have the opportunity to have a good result next year. And to your point, I think our long-range plan commitments of a billion, 18%, and kind of $65 million of free cash flow feel like that's all certainly well within our sights. and how much room is left on the gross margin? Yeah, that's a good question. Our long-range plan implied really kind of a flat gross margin experience from the 24 base to 2027, and we're starting to track ahead of that. And that's not by accident. We've certainly put in actions. I think our operations team, our engineering team have done a great job of identifying areas that we can improve. I think some of the work we've done on our field assets and kind of the chain of custody of those field assets and our ability to hold accountability in the field reduces some of our, you know, expense over the long run, also reduces some of our inventory loss over the long run. And so those are some of the things in addition to 3D printing and some of the kind of the more normal cost reduction ideas that you have and volume leverage that you get on top of things. And so all that to say, I think as we think about a longer-term horizon, I think there are, you know, multiple hundreds of basis points of improvement that we can ultimately get to beyond the 71 where we're at.

Ross Osborn, Analyst — Wells Fargo

Okay, great. A lot of time on numbers. Maybe we'll go back to products. We like the numbers. Yeah, we do. Valence, you know, what's the feedback been? What are you guys excited about?

Speaker 3

Yeah, I think that, you know, going back to what Pat shared on the call, you know, our goal objective this year to place around 20, 25 units and do that in kind of a limited launch way. I think a couple of the positives there are we're placing those in really kind of smaller, I'd say physician centric ASC type settings, midsize kind of community hospitals, as well as larger academic settings. And so like you're seeing all three of those being receptive and interested and and not just clinically, but willing to pay for it as well, which is part of the trick here. And so I think that's been a good experience thus far, and I think it gives you confidence the strategy's right. Two, and probably should have started with this, is it's the clinical experience that we intended. And what we believed in how we were going to integrate that technology into the procedure was, Because if you're going to have a navigation and a robotic platform, it needs to add value to a clinical experience in a way that isn't today. And so our view was integrating valence into PTP was the right opportunity. Why? Well, one, because you have the infield camera, which has a fisheye lens technology, which gives you a wide field of vision, which allows you to ultimately navigate some of the lateral access. And that's important because part of the most time-consuming part of lateral surgery is placing the initial retractor to create the surgical corridor. And in addition to that, it also is very, very fluoroscopy heavy. So a lot of radiation for the patient and the surgeon. So navigating the placement of the retractor allows the surgeon to have great confidence and efficiency and predictability in placement of the retractor in the right space and do so with a lot less radiation. And then, of course, you can do your disc prep through a navigated approach then as well as your traditional posterior fixation. So I think all of that combined gives you greater predictability, precision, and time savings with a lot less radiation exposure to the patient and the surgeon through the valence integration. I think that's what we designed, and that seems to be what people are experiencing. And so I think all of that is positive. Great.

Ross Osborn, Analyst — Wells Fargo

And then how is, you know, time from initial training to kind of an average utilization rate trended? That's a good question.

Speaker 1

On valence? Yeah, I think, I mean, we're still, part of the stage what we're in is it's a limited launch, and so we're looking for surgeons who have PTP experience and competitive navigation experience. And so I would say that because we're targeting people who we think are going to be, you know, pretty capable, it's it's pretty quick with this group but it's probably not the right sample size to less indicative judge from but it's going pretty well it's but you know we have to go out there and train I think part of the virtue of the valence platform is we do think it's easier to adopt and administer than some of the competitive ultimately longer term because it's it's just a little bit simpler spine only focus system and so I think that is part of the virtue of it is it is a little bit easier to learn and it probably our current sample size is not the right judgment bar, but I think good so far.

Ross Osborn, Analyst — Wells Fargo

Fair enough. And then, what's the timeline to full commercial launch?

Speaker 3

Really, as we kind of exit this year and continue to see good traction and pickup, then I think we'll continue to see a linear improvement in opportunities and pipeline.

Ross Osborn, Analyst — Wells Fargo

And are there any steps you guys still need to take to be prepared for a full commercial launch, or just getting comfortable with initial use cases?

Speaker 3

I think the initial use cases have proven out that the designs are good and, you know, there's always going to be areas to improve and, you know, we'll continue to iterate. But I think at the end of the day, the substance of what we have seems to be proving out both clinically and economically.

Ross Osborn, Analyst — Wells Fargo

Great. Maybe switching to deformity. How are you feeling about that opportunity?

Speaker 3

Yeah, I think you look at deformity as defined by pediatric deformity, which we saw a reasonable step up last year and we saw some modest step up this year, kind of consistent with the incremental investment in sets and inventory for this year. Feels like that's doing what we would expect it to do. We have a more fulsome launch later on this year as our small stature products really become in full launch. But again, I think the differentiation around the patient positioner is good. We've launched an MEP modality through our neuromonitoring system, which allows surgeons to monitor the health of the cord, the spinal cord, which is important, especially in pediatric and AIS cases, as oftentimes those cases not only have a coronal deformity, but they have a rotational deformity. And when you derotate that spine, you also put that cord at risk because you're twisting the spine back into its proper shape. So you need to monitor the health, and the MEPs allow the surgeon to do that more advantageously. And then some of the innovation that we're applying to our EOS Insight platform also is specific to the peds and adolescent opportunities. So, you know, I think as we think about next year at this time, we think we'll be in a much, like in a, just a more advanced state of the launch and in a way that we can create and add more value to the surgeons who are treating this patient population.

Ross Osborn, Analyst — Wells Fargo

I was actually on EOS Insight next, so, you know, walk through some of the features that you're hearing good feedback on and, you know, anything that maybe need improvement and maybe product pipeline updates there.

Speaker 1

Yeah, so the EOS Insight platform is a software platform, and I think by nature, that allows you to iterate, you know, and so I think it's been, since we went live with that, geez, it's been almost two years ago, but the version you have today is just much more robust and workflow efficient than maybe even what we launched, well, certainly than what we launched in 24, but even more so than six months ago or nine months ago. So I think it's, and so it allows you today to have automated measurements of your spinal pelvic parameters, allows for an automated surgical plan that gets proposed to the surgeon, all which happens real time with the scan, and then it allows reconciliation to that plan in the surgery, as well as our patient-specific rods can be ordered and come as part of that platform. And the idea, as you know, is as we place these insight arrangements, we're getting data rights to de-identify data. So the idea is we're starting to build a database of information on patients, not just their image, but the other relevant data that would help assess what are their demographics or comorbidities coming into surgery and how do we track them longitudinally over time. So starting to build that database, and so there's a lot that's, I guess, built into EOS Insight, because that's kind of the whole vision. What we're seeing so far is a lot of utilization as we get those deployed. I think I mentioned a little bit ago, 30% six months out after go live of increased surgical pull through those accounts. So we're seeing people utilize it. I guess that's the important part, right? And there's a little bit of training required to get the staff up to speed on how to utilize the tool and work it into their workflow. But really excited about where it's going. I think the longer term view of how do we actually inform better decision making and spine and reduce revision rates, you can start envisioning that as you think about, okay, now we're collecting data, we're integrating that into things, and now we're going to be able to better inform the surgeon on what his or her choices are as they plan for a surgery. And that's really compelling as far as improving the outcome.

Ross Osborn, Analyst — Wells Fargo

Great. And then maybe looking further out, adaptive acquisition, BMP opportunity, walk through that and what made you guys excited about it.

Speaker 3

Yeah, I think, you know, biologics are clearly an area of interest for us. If you think about the biologics market, it's probably around $2 billion, Maybe $700 million of that is Medtronics Infuse, which is the only BMP out there today. Theradaptive is likely to be the second BMP available. And what made us excited about it, one, was the timing. Two, I think the team's got a pretty unique and novel way of applying the, let's say, the active ingredient to a delivery mechanism. And so, you know, one of the challenges with BMP is it's kind of a fluid. It has, I would say, imprecise application of the BMP in the wound. And so the safety profile, you know, is what it is. What we have seen and what ThirdAptive has seen with their early indications is that it's a favorable handling profile to the existing BMP and a favorable safety profile, probably largely due to the handling mechanism of it. And so you see, and I would tell you, those are the things that have excited us about that opportunity, which is we think that we can be number two to market with BMP. We'll obviously have a bigger sales force, more revenue than we do today, and can really put that to work straight away in a way that can be both top-line accretive and EBITDA accretive to us pretty quickly. And so really excited about really the clinical opportunity to provide that to our customers and ultimately what it means to the financial profile of the company.

Ross Osborn, Analyst — Wells Fargo

Good. And what milestone should we be looking out for between now and launch and what level of risk is there to launching it?

Speaker 3

Yeah, I think the next real milestone is the two-year follow-up, which is in about two years. and then there's about a year's worth of expected FDA approval timeline that really kind of gets you to the late 29 early 2030 approval deadline. So I think really the follow-up in two years is probably the next major milestone for us.

Ross Osborn, Analyst — Wells Fargo

Great and then stepping back at a high level is there you know anything about your story you think investors misunderstand or undervalue?

Speaker 3

I don't know that it's misunderstood. I mean, I think if you look at the company and you look at our growth rate and our ability to add, call it $120 to $130 million of revenue growth each year, being able to drop mid-30% of that down to the bottom line, I think that gives you a revenue or a EBITDA growth rate of, you know, 20% or so for the next number of years plus. And, you know, I think ultimately I'm not sure that that's fully valued or believed, I guess, is what I can conclude. But I think the ability for us to continue to grow at rates that we've been growing, drop incremental profitability in the way that we have been doing and demonstrating and doing that sustainably, I think is ultimately what we believe we can do. And I think as you begin to see that translate more into cash flow, you know, I guess at the end of the day, posting results is kind of the key to doing all that. And that starts with growing the top line and continuing to do that, which I think we've laid out the algorithm for that.

Ross Osborn, Analyst — Wells Fargo

Great. That sounds like a good place to end it. Thank you for being here.

Speaker 3

Thanks for having us.

Speaker 1

Thanks for the time.