Good morning, everyone, and thank you for joining us at this year's Canaccord Genuity Growth Conference. My name is Kaitlin Roberts, and I'm one of the medical device analysts here at Canaccord Genuity. I'm pleased to be joined this morning by Orthofix, a global medical device company specializing in differentiated orthopedic and spinal solutions. With me today are Massimo Calafiore CEO, Julie Andrews, CFO. Thank you for joining us. And before we begin, I want to remind everyone of any relevant disclosures, which can be found on our conference and our firm website. We'll begin with the fireside chat, and I'll try to leave a couple minutes at the end for any questions from the audience. Let's start off with Q2. So you guys raised guidance on the Q2 call, and this comes after having lowered expectations and removing your long-range targets inter-quarter post the CMS bone growth stimulation reimbursement changes, which have since been reversed. So, you know, guidance while raised was lower than it was prior to the bone growth stim noise. So maybe if you could walk us through the pieces of the updated guidance, including, you know, the CMS impact and some newer pieces of that guidance change.

Yeah, thank you, Catherine, and happy to be here again. You know, before I let Julie answer the question, I want to step back and remind everybody, you know, the progress that we made in just two years. You know, since the beginning, we more than doubled our EBITDA since the inception. We moved from more than $100 million use of cash almost breakeven last year. And we arrived today after we made the very deliberate choice about how to strengthen our business, how to make our commercial organization more predictable, and with a very clear path of innovation moving forward.

And all of this drive the decision that we just made. and i'll answer your question regarding guidance so our updated guidance reflects several moving pieces on the positive side is the reimbursement restoration as well as a european mdr related inventory purchase in the back half of the year and strengthening that we're seeing in both our biologics and limb reconstruction business that's partially offset what we've talked about in the spine business on the smaller U.S. spine distributors where we're seeing a steeper decline than we had originally anticipated for that business. So that kind of makes up, you know, kind of the pieces behind the guidance reset.

And then how are you thinking about the cadence of growth and profitability through the remainder of the year, just given that updated guidance?

Yeah. So on our call last week, you know, kind of our comments around that was Q3, we expect to be really in the same range as Q2 from a revenue perspective. Profitability will kind of follow that. We expect a little bit of expansion versus prior year EBITDA margin. And then Q4 is where we expect the majority of the European MDR inventory purchase will be in Q4.

And anything to call out here from a procedural volume demand standpoint?

No, I mean, I would say we see procedural volumes being relatively consistent. You know, we were encouraged by what we saw with in our therapeutic solutions business with really showing resilience there in spite of kind of the reimbursement noise in the quarter, but overall pretty consistent procedural volumes.

Yes, and then the 80% of the distributors now, our top 40 distributors, they kept growing about market. So no noise from this point of view.

And turning to therapeutic solutions, maybe a little bit more color on this segment. I think there's been a lot of noise the past few months, as you guys mentioned, with the down classification of the products by the FDA to the CMS pricing decrease and reversal of that decision. Can you speak to what really drove the reversal of that initial decision?

Yeah, I think it was a very concerted effort that we spear being the market leader in the space. So a lot of work that we did internally with our team driving a very positive interaction with CMS. And, you know, we were able also to connect with MDM and some of our competitors in the space to create a unified voice about the decision that was made so if you think about there was a lot of skepticism but what we did was pretty unprecedented for CMS so very pleased that we rectify a decision that clearly was made let's say a little more abruptly from the from the government And then anything in that about a month where that pricing change had occurred that there was an impact in the Q2 or nothing that you really saw?

Yeah, so we saw about a million dollar impact over that six week period. So we will actually be able to recoup that revenue in Q3 as well as, you know, the proceeds from the billing.

And, you know, the FDA down classification remains in place. You know, how does this down classification change the market dynamics or your own approach to the segment going forward?

Actually, if we step back, thinking about the down classification, it was there for a while. So we're pretty ready on what to do next. So for any newcomer, it's not going to be, let's say, so linear to get the same indication. is to go through specific requests from the FDA and from our point of view now is opening up the opportunity to leverage our commercial organization to go to other markets being a class 3 device there was a lot of constraint for us in order to make any changes at every level so now we can start to really think about how we can innovate in the space, something that we couldn't do before.

And then moving to spine, last year you implemented efforts to concentrate the business in larger and higher quality distributor partners, which I think you noted you'd done about 80% of revenues now really concentrated in these partners. But on the Q2 call you also noted that the, you know, remaining 20%, the smaller distributors, have been performing under your expectations for a few quarters. And then these impacts really indicated in your revised guidance. How are you approaching management of these smaller distributors and when do you expect to see this headwind ease?

Look, we're going to keep being deliberate on our choices. Within the 20%, there are, let's say, we're going to identify the group that we want to keep participating with And we're going to keep moving resources from the 20 to the 80 in order to keep driven the profitable growth that we promised our investors since the inception, our leadership. So we stay the course. It's very, let's say, transformational and non-linear, so I believe that we're still going to have some noise moving forward, but I'm very optimistic about what we can achieve now with this concentrated effort that we are making.

And Julie, you called out the EU dynamic as one of your legacy distributors is planning to fund your EUMDR cost in the region. Can you speak to this year and then next year's kind of expected impacts and just why strategically it makes sense to remain in the region and supplying this distributor?

So I'll start with the impact. So we expect a $15 million stocking order from this distributor. Most of it we'll see, we believe, in Q4. And then next year, the headwind is $22 million. The reason it's more than the 15 is there was a base business right of about $7 million. The $15 million is really to bridge them until kind of the expected timeline of when all of the approvals would be back in place again. I think for us, you know, strategically staying in the market, you know, when the distributor came forward and offered to fund it, you know, and it gives us a pathway eventually to stay in the market, maybe to even expand in the market, it just seemed to make sense. I think on a, you know, us funding it, I think the decision was rightfully made to not fund it based on, again, really focusing on markets where we had, you know, higher growth opportunities as well as more profitable growth opportunities. But certainly if someone is willing to fund it, they were really they wanted to stay in the market. They saw our portfolio as something that they wanted to continue to carry. So it seems to be a win win for both of us.

Great. And then just from a cash flow perspective, what are your expectations for for that?

Yeah, so there will be a little bit of near-term headwind on cash flow in 2026 as we, you know, have to pay for the inventory purchase. And then most of the cash receipts will be into next year. So it's timing. It's not, you know, it's a profitable sale and it will generate cash, but just timing between quarters, which happened to be between years in this case.

And then just turning more broadly to spine leadership. I think you eliminated that leadership earlier in this year, and Mossimo, you're now more directly overseeing this business. How has that structure change been going, and any plans to add leadership back?

No, the idea is that, you know, first of all, I think that being more directly involved helped me to drive the strategy that we implemented, so I'm very pleased. But also, I have to recognize the fact that we have a lot of talent around the spine business. and i don't foresee to bring anyone from the outside but actually we are working i'm working personally with the person that right now is helping me to manage the business which i believe has a lot of potential to take over in the near future so great impact for me right now and i'm very optimistic of a smooth transition of leadership, given the talent that we have.

And, you know, Spine is always a competitive segment. Anything to call out from a competitive dynamic standpoint or maybe your place within the competitive landscape as you look to really shape your business going forward?

Yeah, look, for us, the thesis didn't change. Actually, we have a lot of requests from partners of our competitors that we really analyze on a weekly basis. I think that being very deliberate, especially with the 20%, is helping us to free up capital in the future to keep adding big shop. It's interesting that I still see the spine market very dynamic. I feel that we are very well positioned in the space because, A, the quality of our technology, B, the fact that we have access to 7D, and that, you know, give us a big differentiator out there. So the demand of the interest of a surgeon level and a distributor partner level is out there. It's, as usual, on us making sure that we make the right choices to keep managing our resources.

And then just touching on 7D quickly, could you update us on your installed base? And if any signs of Verrata helping out through, you know, some demand and helping pull through for 70.

Yeah. So from an installed based perspective, you know, we don't we don't give those numbers. We have been giving kind of metrics on what we're seeing in terms of performance. Last updated those, I think, at the end of the year. And that's kind of our cadence. But Mossmo can speak to Verrata. But we are seeing kind of some encouraging use with with Verrata's early days. Of course, we haven't fully launched Verrata yet, but certainly Verrata is the first system that's custom, you know, purpose-built, I would say, to be used with 7D, so we're seeing encouraging things there.

Yes, with Verrata, we are ready for commercial launch for open procedure, and the early feedback has been very, very encouraging, so a lot of excitement out there. And on the MIS side, we're going through Alpha right now. Even on the Alpha launch for the MIS system, a lot of great support. We actually recently did the first MIS case together with the new software update on 7D. That has been a great success. So I'm very optimistic about what we can do with the two systems combined. but what is also important now having a competitive pedicle screw system we can go back and start to really create proceduralized all of the different approach that we have so you're gonna start to see in the outer ear a very systematic approach of proceduralization with access to Virada or interbody 7D.

And then just turning to biologics I think they were somewhat impacted by the spine distribution challenges you made last year, changes you made last year. Maybe talk about why this business was impacted from the distribution changes and if there could be risk to further disrupted performance with, you know, the management of these smaller distributors.

No, I think we accelerated what we were doing in spine in Biologics. All of these two favor, you know, like our 80%. So the noises around, let's say, distribution, I believe that right now is much lower, if not gone. Very good, encouraging signs that we got from the business, you know, like the last two quarters were the best two quarters in a while. And now for us, we have pretty much a brand new commercial team, very strong leadership in the vertical investing. We are investing heavily in the business. During the last call, I reminded the market that we are clinically, start to create clear clinical evidence for the entire portfolio from our synthetic Osteocove to Virtuos to Strength Plus. So very optimistic about the space and very optimistic about a segment that is very important for us from value creation.

And you brought the business under limb reconstruction leadership. How important is driving usage of biologics in the limb recon portion of the business, you know, like vital to the overall success of biologics?

It's giving us two opportunities right now. Besides, if you focus just on biologic, of course a new channel, but also help us implement the similar strategy that we had in Spine into the limber reconstruction segment where we can engage a more, let's say, a larger distributor given our ability to offer a bigger bag combining the limber reconstruction bag with Biologics. So we are in the right track there. I'm very pleased.

And then what's your timeline for returning the business to market growth and then your confidence and your ability to execute within this time frame?

So, I mean, we're not guiding 2027 yet, but we feel like, you know, if you look at the underlying pieces in our business, we feel really good about where those are headed. Again, limb reconstruction, really strong quarter, biologics stabilizing, the therapeutic solution business, really, if you adjust for the million-dollar impact, really at market growth there. And so, really, the piece left that we're continuing to work on is U.S. Spine and working through kind of that smaller distributor, you know, network and feel good about our ability to execute in that area.

And then maybe just touching more on financials, Julie, with the free cash flow guidance for the year removed, how long could it be for the free cash flow inflection to occur?

Yeah, well, so just i guess to step back and remind everyone we've had quite an inflection already right from 108 million dollar use of cash in 2023 to uh near break even in 2025 um and this year i would say you know it's timing more than anything between 26 and 27 we don't see a change in fundamental underlying um you know cash generation of the business uh and you know when we had guidance earlier in the year we said we'd be positive excluding kind of the impact of settlements with our three former executives, we have made those payments now in Q2. So that's kind of that noise is out of the cash flow numbers. And so again, I see inflection just with some timing on working capital in the next few quarters.

Great. And with a lot of that progress, how are you thinking about your capital allocation priorities over the next several years?

Yeah, I mean, I think we'll continue to try to strengthen the balance sheet invest in organic r&d our organic r&d pipeline are kind of our two biggest priorities as we move forward and you also removed your lrp earlier this year how are you thinking about potentially reinstating this lrp and what needs to happen you know before that that occurs we don't have a timeline at this moment for reinstating the lrp i think we want to really be thoughtful and deliberate and intentional about the actions that we're going to take in the U.S. spying business before we do that to make sure that, you know, we have stability in that. And so as we work through that over the next couple of quarters, we'll be considering when's the appropriate time to reinstate our long-range guidance.

And then, you know, just with M&A, what are your thoughts on that and what a potential M&A candidate could be for you?

So I think right now our focus is on growing organically. You know, if we saw an opportunity for something that, you know, made sense in our bag, we would consider it. But at the moment, we're focused on organic execution of the business.

Any questions from the audience?

Yeah, so our growth really was organic volume-driven growth, not price growth. Generally speaking, you know, our guidance is that we have about a 1% to 2% price pressure annually kind of baked into our number, and that's generally what we're seeing. So our growth is really driven by volume and market acceptance of our products. We don't break down the international U.S. margin difference, but you can generally assume international is going to be a little lower than the U.S. depending on, and some markets in international were direct, so they're going to have a little higher than a stocking distributor. But generally, stocking distributors don't pay commissions. So you'd probably want to look at the contribution margin, which, you know, are relatively similar.

Awesome. In the last few minutes, anything you guys want to leave with the audience about the business and the trajectory going forward?

Yeah, look, just to reiterate what I said at beginning we are today with a much stronger business i believe that we have a clear strategy that we keep executing since day one and not deviating and we are entering in this next chapter of our leadership with a stronger commercial organization with an organization that can use resources much more wisely and a very clear path for innovating in all of the markets where we compete so very excited about the opportunities that we have in limber construction uh excited about the progress we made in biologic uh ots is grieving is which is our steam business is very resilient and this spine you know we have a clear path to be to create the real responsible growth that, given the scale that we have, is pretty dramatic, the progress that we're making. So very pleased with where we are and a big believer of what we can do in the future.

Great. We'll leave it at that. Thank you both.