Conference Transcript - OFIX 2025-11-12

Tom Steffen, Analyst — Stiefel MedTech

Okay, great. Good morning, everyone. Tom Steffen with Stiefel MedTech. Really excited to have OrthoFix here with us today. Massimo, Julie, Julie, thanks for joining. Maybe I'll just kick things off and if you can sort of level set the audience, Massimo or Julie, start by quickly recapping the recent third quarter print and kind of what you view as some of the key highlights.

Julie Dewey, Analyst — Other

Yeah, so, I mean, I'll let Mossimo follow up, but I'll start. You know, good Q3, our top line, we beat revenue, beat consensus on revenue EBITDA, and we're free cash flow positive in the quarter, $2.5 million. Had an accelerating revenue growth rate. Our revenue growth was 6% for Q3 and around 230 basis points of EBITDA margin expansion, which was our seventh consecutive quarter of the EBITDA margin expansion. So all around solid performance that we saw within the quarter.

Massimo Calafiore, Board Member

Yeah, and from the commitment that we made since the beginning, in all of the areas, all of the focus areas for us, we beat the market in a very significant way. So you saw the growth that we had in the United States in Spine, which is actually speaking highly about all of the new strategies that we are developing, implementing about distribution, great growth in the orthopedic side in the United States. BGT keep growing above market, even if we are proudly the leader in the specific category. So I was very pleased about how the company performed.

Tom Steffen, Analyst — Stiefel MedTech

That's great. Great recap. And we'll certainly dive into some of those dynamics deeper. I want to jump into kind of revenue and some near-term questions. And Julie, I went down this road in Q&A on the call, I believe. But I wanted to revisit it and dig a little deeper. I think you mentioned it. You beat 3Q revs by about $3 million, but didn't raise the midpoint of the guys. So, Julie, maybe if you can talk about some of the factors that may have played into that sort of cadence and dynamic.

Julie Dewey, Analyst — Other

Yeah, I mean, the primary driver of our beat in Q3 was some stocking orders in international. And so just from a timing perspective, they came in a bit earlier. um from q you know we expected them in q4 they came in in q3 and so really that's why we're not raising you know raising guidance it was timing of stocking orders all of our um you know u.s businesses are accelerating either maintaining growth rate or accelerating growth rate into the fourth quarter and it was really just that timing of international stocking orders and then in addition that was u.s our international spine on the international ortho side last year had some stocking orders that will not repeat this Q4. So there's some comparability there, too. But it's really all around the timing of international stocking orders.

Tom Steffen, Analyst — Stiefel MedTech

Got it. So timing of stocking orders in 3Q25 for OUS Spine, and then 4Q25 you face a difficult OUS orthopedics comp. Is that correct?

Operator

Okay, perfect.

Tom Steffen, Analyst — Stiefel MedTech

Super helpful. And Massimo, you mentioned U.S. Spine, so I want to spend some time there. procedure growth really strong at plus 10 percent momentum seems to be accelerating you know what do you kind of view as durable u.s spine procedure volume growth moving forward

Massimo Calafiore, Board Member

yeah our goal is to keep growing above market and i see that you know that the floor that we have right now is something that we can achieve given that we need to remember that if you just see our spinal hardware we still subscale compared to many there is a confusion between the size of the organization per se and our biggest our spine hardware businesses and we see each other as a market taker in the space for many years to come the dislocation that is coming that in the marketplace is taking is is a positive sign for us we are we are commercializing a product line it is very competitive is very fresh we talk about our innovation how we are investing in innovation would be rather to really close the circle and put about put a ball on a product line that has led us to attract the surgeon and commercial talent out there. But all of this is still with in mind our philosophy of profitable growth. So at the end for us to create value we need to connect the dots between our customer on one side and the shareholder community on the other side. So EBITDA, positive free cash flow, is going to be always our north star to drive growth.

Tom Steffen, Analyst — Stiefel MedTech

That's great. Super, super helpful. So maybe floor on U.S. spine procedure growth. Think above market. And Julie, maybe for you, just the other side of that U.S. spine growth equation being price. What about U.S. price? You'll lap the ongoing price headwinds, I think, fairly soon. So how do we think about price contribution to U.S. buying growth moving forward?

Julie Dewey, Analyst — Other

So, I mean, overall, I think if you look at our long-range guidance, we assume about a 1% to 2% price erosion. I think really the reality is, though, I mean, our pricing's really been flat if you exclude the one account that we're in the process of annualizing now. So it's been pretty flat as we've looked at it. But long-range guidance, we kind of assume a 1% to 2%.

Tom Steffen, Analyst — Stiefel MedTech

Got it. Super helpful. And then, Massimo, you mentioned this earlier on the distributors, but the targeted distributor transition seemed to be, I'd say, already having a positive impact on the business. What inning are we in with these changes? Or I guess asked another way, how long can this remain as an incremental growth driver for US Buy?

Massimo Calafiore, Board Member

Yeah, we are still in the middle of the road. The situation that we found when we started with Orsofix was a commercial organization that very highly fragmented and has been a mandate for us to start to consolidate, creating, start to invest in distributors that actually can scale. It's going to be always an ongoing work that we have to do in the foreseeable future. I see this strategy divided the lights in three pieces. In one piece in areas where it is very highly fragmented we consolidate. We are looking at geographic areas where we are not present to go and attract the talent that fits our profile, and we are very diligent on making sure that we don't rush on decision. On the other side, now it's going to be our goal to make sure that within this top 30 we're going to keep bringing them up, help them to actually scale and to create a stronger partnership and loyalty with us. I'm very excited. You know, we're bringing the 20 plus experience in the space in order to leverage the relationship that we have. And as you said, it's paying off. Got it. That's great. And then

Tom Steffen, Analyst — Stiefel MedTech

maybe to pivot a bit within U.S. spine, just to capital. Massimo, can you talk a bit about 7D placement demand trends and notably kind of what the capital equipment purchasing environment

Massimo Calafiore, Board Member

looks like in the U.S. sort of from your perspective. Yeah, we had a pretty good quarter. We didn't give any numbers, but we just said that we were up compared to last year. So are good results there for us what we are doing in order to be a little bit less let's say less sensitive from overall change of the capital environment since Julie and I started we focus really on creating earn-outs agreement with our hospital we call Voyager program so pretty much there is not a capital outlay up front for the enabling technologies, but the enabling technologies are getting paid over time with the utilization of implants or biologics. It's very important to us for multiple reasons. A, because we saw that historically the companies that were able to leverage the capital equipment for earn-out has been very successful in both in orthopedics and the spine so hardware utilization is important we believe you know in the quality of our product so we start to see that if the 7d when when we close an earn-out contract the the overall utilization of our implants in the account increase I I see that we said that in aggregate all of the accounts that have 7D available they are 50% up from what their commitment purchase. So a great indication of the quality of both of the 7D of our implants. And lastly is a good indicator for all of you because if there now goes well for implants always means that it is a new account for us. And now with biologic, if we have a strong presence in the account, we can add the biologic together as a pull-through. So 70 strategies, I think that we can clearly say that is paying off.

Tom Steffen, Analyst — Stiefel MedTech

Got it. Makes sense. And then last one here, just on capital equipment. Are hospitals kind of shifting their purchasing mindset to sort of those types of selling programs, maybe more with earnouts? Are you hearing that from customers, that that's sort of preferred relative to outright purchase?

Massimo Calafiore, Board Member

I think that it really depends. It's twofold. It depends on the account. Of course, some of them, it depends from the account and the experience that they had in the past. within the Voyager program of what we offer for instance that is different from others we have a free software updates we are very responsive and we don't charge for maintenance that we need to do on the machine other competitors actually do creating a some kind of sour taste on this on some of the sometimes in the on the account where we try to go so I think that is highly depend on the previous experience that they have and, of course, of their financial situation. But what we have in our favor is what I just said, that knowing the experience that they had in the past, we are not just competing with the technology, but also we are competing with our ability to create a very smooth experience with our program for all the accounts. So between the surgeon support and the fact that we are making, we are thinking also not just for the, with the surgeon also, we're thinking also about the administrators that they need to manage their programs. We're seeing a very good reception of it.

Tom Steffen, Analyst — Stiefel MedTech

Got it. That's great. Super helpful. Wanted to spend some time on Verata. And Massimo, maybe I'll stick with you. Just to kick things off here, maybe if you can briefly explain to us the value proposition of Virata and its key points of differentiation. So first of all,

Massimo Calafiore, Board Member

Virata is the first product that we are launching that was fully designed with the experience with 7D in mind. So as every enabling technology platform, 7D is an open platform, but when And with Virata in mind, we design the system in a way to create a much smoother user experience in the OR. From the technical perspective, besides the differentiation in the screw design, Virata is like the sum of multiple areas of experience in the space on designing this kind of system. And it's been interesting to me to see that during the alpha launch, we targeted just new account. And we did that for obvious reasons. A, to start to make sure that we increase our surgeon pool. But from the alpha perspective, we want to make sure that surgeons with different experience had a better experience with Virata. And again, the results so far have been fairly positive. From the operational side, from the clinical side, during the merger between C-spine and Orthofix, Orthofix had a specific patent, a specific IP around the screw heads and the pop-on mechanism of the screw heads with the shank, and what it brings on one side in the OR let the surgeon to be to give the surgeon the ability to change and gang plan during the case which kind of tool it to use but from the company perspective from the hospital perspective we shrunk the amount of screw and so the volume of of sets that we need to say in the OR so I'm very excited because for this three reason a the the fact that is going to keep validating the quality of the of 70 B the differentiation that is going to give in the sort of in the OR to the surgeon to game plan and make real-time decision for that are the best for the patient and see for the for them for the decrease of cost to serve that we're going to bring with an item that is the most widely used device in the OR. Every time you have a fusion, a lumbar fusion, you always have a pedicle screw.

Tom Steffen, Analyst — Stiefel MedTech

Got it. Super, super helpful there. And just in terms of the launch roadmap. So currently in the alpha launch, what does that entail? And then, you know, kind of where do you go from there to ultimately get you to the targeted 2H-26 full launch?

Massimo Calafiore, Board Member

Yeah, I think that the vast majority of the time is going to be just the waiting time to receive the instrument set. So we're going to close the Alpha end of this year, 30, 45 days to redesign, and now it's going to be the time to place the order. So it's going to be just a waiting time to make sure that we have the inventory available in-house.

Tom Steffen, Analyst — Stiefel MedTech

Got it. Okay. And so I guess with that in mind, do we think about Virata as more of a 2027 incremental driver or can it maybe start to help drive growth incrementally in the second half of 26? Maybe for you, Julie?

Julie Dewey, Analyst — Other

Yeah. So it will definitely drive growth in the second half of 26, but 27 will have the full year impact. And so I think it will accelerate into 2027. Got it.

Massimo Calafiore, Board Member

Also, to think about Virata, it's a multi-year development program. Right now, what we are launching, the alpha launch, it just focuses on the open market, which is the lion's share of the overall spine market. In the beginning of 2016, while we are going to start manufacturing the sets for Virata open we're going to start alpha for the MIS version which is going to be launched you can infer in 2027 in 2027 we're going to start the alpha for the for the deformity version that is going to be launched in the following years so it's a big is a big program for us it's a great investment that is going to bring a sequential growth a sequential catalyst for us in the spine on the spine side multiple years yeah that's great maybe to pivot

Tom Steffen, Analyst — Stiefel MedTech

to kind of 2026 or I guess sort of stick with 2026 Julie know you're not guiding but maybe if you can talk about just kind of key puts and takes as we think

Julie Dewey, Analyst — Other

about revenue next year yeah so I think you know we see you know we're setting ourselves up you know for to have a positive year next year I think you know The Verrata launch mid-year, it'll be our first full year of Trulock Elevate in our foot bone nail. And then, of course, the distributor transitions that we did this year, you know, we'll have a full year impact from those as well. So we, you know, see that we have a lot of tailwinds going into the year. I think, you know, it takes, I'm going to say, you know, I think we've done as much as we can to do risk the number. If there's external factors, it's price or something like that. but, but, but beyond and, you know, timing of product launches, but we feel good about going

Tom Steffen, Analyst — Stiefel MedTech

into next year. Got it. That's great. And, and wanted to kind of drill in deeper on one sort of new dynamic where we're getting more familiar with, but for bone growth therapy, believe there were some CMS changes that potentially could have an early impact, an impact early next year. Julie, can you explain what this is and maybe how we should be thinking about that in the context of BGT revenue next year, notably in the first quarter? So this, Julie, we'll take that. Julie Dewey.

Operator

So CMS is implementing a pilot program in January in certain episode of care categories, BGT being one of them. We expect, though, the annual impact for us will be immaterial based on what we've seen. And we don't, importantly, I think we don't expect it to change physician prescribing behavior at all, which would be a real impact for us. So no impact on physician prescribing behavior. And hospitals will just manage the timing. CMS occasionally does these programs. Hospitals have had to deal with this before. So immaterial impact on an annual basis for us next year.

Tom Steffen, Analyst — Stiefel MedTech

Okay, great. Super helpful. And then I want to move to kind of margins and profitability, and I'll start on gross margin. The 2027 financial targets included the goal of, I think, 300 bps of GM expansion. To kick things off here, talk about kind of key drivers of that.

Julie Dewey, Analyst — Other

Yeah, so there's three primary key drivers that we've talked about. one of those is supplier and they're primarily targeted towards our spine margins as that's where we're below industry you know industry norms and so from a spine perspective supplier consolidation as the organization has grown has not necessarily been strategic in its supply base and so we're working through that it's been very transactional just PO based so working through narrowing our supply base going through contracting getting volume commitments and volume discounts the second thing is insourcing our warehousing and distribution which has been outsourced for the spine business and really not the ability to leverage economies of scale there so we're insourcing that and consolidating that with our facilities in in Dallas Texas area and then the third is insourcing some screw manufacturing to our manufacturing facility that we have for our orthopedics business in Verona, Italy, and seeing some economies of scale and some reduced cost there. And then really kind of underlying all of that is some mixed benefit we expect to see as well from growing the U.S. business, and particularly the international U.S. business much faster than the OUS business.

Tom Steffen, Analyst — Stiefel MedTech

Is there, as a follow-up to that, between U.S. and OUS, is there a rough way to think about kind of the gross margin differential there?

Julie Dewey, Analyst — Other

I mean, we don't necessarily break that out. But I would just say, generally speaking, you're probably going to have a 15 plus percent margin difference between the two.

Tom Steffen, Analyst — Stiefel MedTech

Got it. OK, great.

Massimo Calafiore, Board Member

But given how we go to market, the cost to serve is still comparable.

Tom Steffen, Analyst — Stiefel MedTech

Got it. OK. OK. Makes sense. Maybe working my way down the P&L. Midpoint of 2025, adjusted EBITDA guidance, hopefully I have some numbers correct, I think implies 10.5% for full year 25. You're targeting mid-teens by 2027. So let's say that's 15% on the low end, or at least 200 bps per annum. That's above this year tracking toward, I think, 100 bps on a pro forma basis year over So we just discussed gross margin, I think a lot of levers, but broadly speaking, talk about your level of confidence in achieving this 2027 target.

Julie Dewey, Analyst — Other

Yes, I mean, one, on a pro forma basis, yes, 100, but I think, you know, we took action and part of the discontinuation of M6 was to improve at our EBITDA profile. So if you look at it kind of from that perspective and where we started, it's going to be around 200, a little over 200 basis point EBITDA margin expansion. And so I think, again, we're going to see the flow through from the gross margin expansion. We'll be a little less than 100 bps on that this year, so that's going to be contributing as we go into the 26, 27, a little above what we've seen this year. We're exiting at 72%, so 100 basis point improvement on our exit, but not for the full year print. And then, you know, we really believe that from a leverage perspective on our, you know, SG&A, excluding commissions, marketing costs, those types of things, that we really have the organization that we need to be able to scale to a much larger revenue number. So we expect that leverage to pull through as well.

Tom Steffen, Analyst — Stiefel MedTech

That's great. And as a follow-up to that, Massimo, you know, we talked about the distributor transitions. I think there's a lot of top-line benefits there, and we've seen the top 30 distributors really performing strongly. Talk about the margin impact from the consolidation from your actions with the U.S. kind of commercial footprint.

Massimo Calafiore, Board Member

I don't think that we're going to talk about this.

Julie Dewey, Analyst — Other

Yeah, I mean, I would say it's generally less of a margin impact and more of where you'll see efficiencies is on working capital and set deployment because they're much more efficient typically with your assets than having a lot of small, non-scale distributors. So that's where you see the impact is more on the working capital and set utilization side.

Massimo Calafiore, Board Member

Yeah, because while I made the comparison with what we do internationally, while internationally they buy the instrumentation, the instrument set and the implants, our distributors in the United States, the instrument set is our asset that we give to our distributors to perform the procedure. This is why I think that the real benefit for us, and I keep talking about scale, is because now you can do a higher amount of surgeries with less asset that you pretty much mobilize just for the specific distributor. So what we like of the strategy that, again, is connect the dots, not just on growth, but also on profitability. Got it. That's great. And then maybe last one

Tom Steffen, Analyst — Stiefel MedTech

on margin. So the 2027 Adjust the EBITDA margin goal. Julie, how do we think about the path to getting there between 2026 and 2027. Is linear a reasonable assumption? Is it weighted more toward a certain year? Just curious, you know, as we kind of figure all these inputs, what's kind of timing of that pathway?

Julie Dewey, Analyst — Other

Yeah, I mean, we expect it to be weighted a little bit more towards 27. We've said that kind of since the beginning, just because some of the gross margin initiatives are a longer tail. you know think about the supplier consolidation that'll be you know mid to late next year when we get that fully implemented and so again that'll be a 2027 impact so a little bit you know kind of

Tom Steffen, Analyst — Stiefel MedTech

back and loaded in the timing got it makes sense maybe to pivot in the last couple minutes I'll try to try to squeeze one or two more in orthopedics we haven't talked too much about Massimo, your outlook for that business, and I'll drill in with a more specific question. Do you believe a growth acceleration next year on the top line is within the range of outcomes? As we think about Trulock being more incremental, other new products, what's kind of, let's call it the intermediate to long-term outlook for the orthopedics business?

Massimo Calafiore, Board Member

Look, I see that for sure the business is not decelerating, that's what I can tell you wholeheartedly. And mostly because of what you just said. I'm very bullish about what we're doing there, given that we identified a specific segment of trauma where we can actually have a meaningful product differentiation. We are the only company with internal-external system to address all of these complex cases. We identified within these 2.6 billion dollar opportunities this segment of curing diabetic food with our TL Elevate. So between the investment we are doing on Fitbone, between all of the work that we are doing around market creation around Elevate, and all of the work that also we're doing there commercially. We are building up a team of leaders that actually manage a multi-billion dollar franchise in the past. I think that we have a great opportunity there.

Tom Steffen, Analyst — Stiefel MedTech

That's great. That's great. This might be a good segue into the last question I have in about a minute, but Massimo, just to wrap things up, what do you think is the most underappreciated part of the ortho-fix story, or parts, if there are many in your view?

Massimo Calafiore, Board Member

I think that the main, I think what we are facing right now is this under appreciation of a company that coming out from pretty difficult years was able to really change the foundation of the business. The improvement that we did on free cash flow is remarkable. all of the seven, you know, they continue beating our expectation on EBITDA in that it's seven quarters that we keep delivering it. The fact that our portfolio is built in a way that can let us go in the account from a multiple point of access. And the fact that we can grow a bull market without a big depletion of our capital is kind of something that I think that is highly underappreciated. But again, I think that I believe that we have everything in our disposal, everything available to show the market that our technology can win our focus strategy can win and that we can do everything with in mind this profitable growth mantra

Tom Steffen, Analyst — Stiefel MedTech

Massimo, Julie thanks so much

Operator

thank you