Q1 2024 Orthofix Medical Inc Earnings Call

Participants

Louisa Smith; Investor Relations; Orthofix Medical Inc

Massimo Calafiore; President, Chief Executive Officer; Orthofix Medical Inc

Julie Andrews; Chief Financial Officer; Orthofix Medical Inc

Mathew Blackman; Analyst; Stifel

Ryan Zimmerman; Analyst; BTIG

Jason Wittes; Analyst; Roth MKM

Jeff Cohen; Analyst; Ladenburg Thalmann & Co

Presentation

Operator

Thank you for standing by. My name is Kayla, and I will be your conference operator today. At this time, I would like to welcome everyone to the Orthofix Q1 2020 for earnings call. (Operator Instructions) Again, I would now like to turn the conference over to Louisa Smith, you may begin.

Louisa Smith

Good morning, everyone. Welcome to the Orthofix first quarter 2024 our earnings call. Joining me on the call today are President and Chief Executive Officer of Massimo Calafiore and Chief Financial Officer, Julie Andrews.
During this call, we will 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. There is no assurance that the matters contained in such statements will occur. Forward-looking statements we will make on today's call are based on our beliefs and expectations as of today, May seventh, 2024. We do not undertake any obligation to revise or update such forward-looking statements and some factors that could cause actual results to materially differ 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, May seventh, 2024, as well as on 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 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 press release announcing our first quarter 2024 results for reconciliations of these non-GAAP financial measures to our US GAAP financial results.
At this point I will turn the call over to Massimo Calafiore.

Massimo Calafiore

Thank you, everyone, for joining us this morning for our first quarter earnings call. I'll spend some time providing insight into our higher labor strategy as well as updates on some key priorities and initiatives.
Before I turn it over to Julie for further details on our quarterly performance and financial results.
I'm pleased to report another strong quarter for ours to fix, driven by our solid business fundamentals and exceptional operating performance of our teams. We continue to gain momentum and leveraging strategic initiatives to grow Orthofix across all our business segments.
Net revenue for the first quarter was 139 million, representing a 7.5% year over year increase in constant currency led primarily by 10% growth across our USA businesses. The strength in USA performance was driven by 10% growth in BGT. 16% growth in Spine Fixation and 23% growth in orthopedics. We are clearly outpacing market growth in all of these segments. We are delivering innovative products and outstanding service while executing to plan and taking advantage of emerging opportunities. I remain very confident in our future and the prospects to deliver value moving forward.
To reiterate some of the 2024 priorities as we laid out in our fourth quarter call, we are diligently focused on one profitable growth to emphasizing the synergistic and balanced approach to our portfolio platforms and three strategic innovation. We remain committed to delivering across all three in the near term and are already seeing pull through in our results. Our first priority is to grow the business and grow it profitably. Julie will discuss the specific metrics later, and I'm happy to report that in the first quarter, we saw we saw an improvement on more than 200 basis points in our adjusted EBITDA margin.
As a result of strong top-line growth and the realization of synergies. We will sustain this momentum by expanding existing customers and distributor relationships, optimizing our product portfolio and improving our working capital manage. In the first quarter, revenues benefited from continued b g t cross selling within this buying Chalmette in USA Spine Fixation, we saw increases in average price per procedure as we broaden the use of interbody and thoracolumbar product set across our surgeon customer base as well as through significant contribution from new distributor partnership.
We are penetrating deeper into existing accounts with our procedural solutions while expanding our distribution network. In addition, we are maximizing the robust portfolio of the combined company by focusing on our higher margin products and rationalizing any overlaps. This product lifecycle management will not only reduce cost by simplifying our supply chain, but enable us to direct resources and investment towards the expansion of new and innovative product lines.
Furthermore, this strategy improves our working capital by lowering the number of product and SKUs we carry. We are efficiently allocating the recent investment in spinal implant instruments that to our larger more dedicated distributors, which will improve with inventory and instrument utilization. And finally, we see further opportunities to improve cash flow by focusing on DSO efficiencies and accelerating cash collections as a result of these initiatives, we expect to be cash flow positive in the fourth quarter of 2024.
Moving now to our second priority, which is to leverage our technologies and sales channels across all product segments. Our products work together to create a best-in-class offering at each improving the performance of the other and enabling growth through cross-selling opportunities. We are seeing traction across our commercial infrastructure with increasing interest in what we are building, allowing us the opportunity to be selective in our choice of distribution partners.
Additionally, the team is aligned on driving pull-through revenue across spine, orthopedics, biologics and BG. team. We are seeing market share gains in complementary areas of the portfolio where our offerings are able to support the outcomes of the more complex product lines in orthopedics and spine, for example, we just completed the 100,000 implementation, our trained family of demineralized bone fibers. The trend fibers are designed to enable maximum bond forming capacity and future potential alignment of BGT. enabling technology biologic cross-selling opportunities highlights the complementary nature of our offering as a whole, a key part of our strategic success and our strong performance to date and the committed employees and leadership team that we have in place.
Since beginning my role of the company, we have made a few changes to set the new roles, expanded others and finalize some key hires that will set us up for the future with an eye towards efficiently managing our product portfolios. For example, I would like to highlight the recent promotion of Dr. Paul Standish to chief Enabling Technology Officer. In this expanded role, Ball will oversee strategy development, the implementation of software and corresponding hardware across all our product portfolio, reinforcing our commitment to drive synergies throughout the business, enabling technology has been a key differentiator for Orthofix.
Our investments in this segment, the fresh navigation have established also fixed as the partner of choice for surgeons seeking innovative and data-driven intra-operative solution with improved workflow with this new role will be the average of our combined intellectual capital, a comprehensive suite of software and hardware products to support both spine and orthopedic surgeons throughout the continuum of care. This begins with Breo operative planning using our COPD explaining transform ourself for 10 years where BLA time operating room and navigation and guidance from 70 flash navigation and extend to post-operative care with our bone growth stimulator devices. Our award-winning patient engagement App steam on track to support patient compliance and tracks patient reported outcome by expanding the capabilities of our existing technology platforms across all our businesses, we will accelerate growth in high-value procedures and drive significant gains in market share.
This investment in enabling technologies are also consistent with our third priority, our commitment to our fixed innovation engine, we have several promising products in development and our robust pipeline of upcoming launches. We are investing in markets with a higher return potential, especially where Orthofix has the opportunity to establish itself as a leading player. Always, there remains significant untapped needs. For example, we are just beginning to expand into the USA orthopedics market, which presents incredible growth opportunities given our unique and innovative product lines.
Our focus in orthopedics, providing highly specialized solutions for underserved markets is underscored by two recent filed 10 K clearances for the Rodeo telescopic intramedullary nail and for the mono on transport and lengthening maintenance. It is the only commercially available mail capable of transporting lengthening and the only bond transport mail available in the US. We will be launching both of these products through limited US same market releases in the coming months.
These achievements demonstrate our ability to deliver innovative products in the United States or so visits market, and we project that our current focus on strategic innovation across complex leaves reconstruction and deformity correction. In our spine portfolio, we are continuing to validate our MIS. and theater ladder portfolio, integrating Nobel access solutions with our differentiated hardware and biologics. This is just one of many procedural integration in the works to advance patient care and improve the surgeon experience with state of the art enabling technology in 17.
Our goal is to be the trusted partner for surgeons in spine and orthopedics, providing solutions for the most complex cases through our unique complementary product platform. All in all, I'm very pleased with our performance during my first quarter of this job. I remain encouraged by the prospects for Orthofix and inspired by our team is embracing our relentless focus on execution and the Novacea as a result of big confidence, we are narrowing our full year 2024 revenue guidance by raising the bottom end of the range by $5 billion.
We now expect 2024 revenues to be between $790 million to $795 million as compared to the prior guidance of $735 million to $795 million and 5% to 7% growth. The merger thesis and the fundamental strategy across spine, orthopedics, biologic and BGP. remains competitive. We are growing the Company in a major strategic manner to reach profitability, and we are creating value for our customers, patients and shareholders. I truly believe that the best is yet to come.
With that, I'll now turn the call over to Julie to review our first quarter financial results.

Julie Andrews

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 revenue percentage changes discussed will be on a constant currency year-over-year basis. As of this quarter, we have annualized the impact of the merger and will no longer be referring to pro forma growth. In addition, all results of operations that I referred to in my prepared comments will be on a non-GAAP as adjusted basis. As Martin noted, Orthofix had a strong first quarter, delivering 7.5% constant currency top-line growth and EBITDA margin expansion of approximately 220 basis points.
From my commentary, I'll go through each of our business units and review financial results on the quarter as well as provide an update to our guidance for the full year 2024.
Total company net sales were $188.6 million for the first quarter of 2024, up 7.5% over prior year Bone Growth Therapies revenue grew 10% to 52.5 million in Q. one and marks the fifth consecutive quarter of double-digit growth for the BGT. franchise. This growth was driven by above market performance in both the spine and fracture channel and in spine market where we hold the number one market share position, we continued to take share with more than 50% of the growth coming from new customer acquisition. In addition, investments in the fracture market sales channel drove 16.8% growth in fracture with Accel them continuing to outperform the market. As a reminder, the fracture market represents an opportunity of more than 200 million. And we are just beginning to scratch the surface of our potential in that market.
Global final implants, biologics and enabling technologies. First quarter revenue was $108.8 million with year-over-year growth of 7.2%. Us Spine Fixation revenue grew 16.1%, well above market growth rate, driven by contributions from new distributor partners where we saw revenue nearly double from Q4 2023 and deeper penetration of existing accounts with increases to the average revenue per procedure. Additionally, in the 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 3.8% in the first quarter, led by 22.9% growth in the US as a result of strong performance across our portfolio as well as distributor expansion and sales channel investments. The international business declined 2.7% versus prior year due to timing of orders from our stocking distributors. Due to the nature of this business, we expect to see variability from quarter to quarter in the growth rate.
Moving on to some detail below the sales line. Starting with our Q1 non-GAAP adjusted gross margins, we achieved a 70.3% rate for this quarter, a decrease of approximately 40 basis points compared to Q1 2023. This reduction is primarily due to an overlap in vendors as we phase out our legacy partner and move to a new vendor that will result in cost savings.
Starting in Q2, non-GAAP sales and marketing expenses were 51.8% of net sales for the first quarter compared to 52.3% of net sales for Q1 2023. The decrease as a percent of sales was primarily driven by the realization of cost synergy and a lower effective commission rate due to product mix.
Non-gaap general and administrative expenses were 13.7% of net sales for Q1 2024, down from 17.8% in the same quarter prior year. The decrease as a percent of sales was primarily driven by the impact of cost synergies and a reduction in stock-based compensation. Non-gaap R&D expenses were 10.2% for the quarter compared to 10.5% for the prior year quarter. It decreased as a percent of sales opportunity by reductions in product development spend due to project rationalization, partially offset by increased clinical spending related to HEUMDR. cost, which are no longer adjusted from operating results and the M6 two-level study below the operating income line, interest expense and other was $4.5 million for the quarter. Altogether, this resulted in non-GAAP adjusted EBITDA of 7.7 million or 4.1% of net sales for the quarter, a 220 basis point expansion over Q1 2023 due to the capture of merger-related synergies and driving leverage on sales growth. This represented a 34% drop through on incremental revenue. We remain encouraged by these results, and we are seeing the impact of merger-related synergies and our ability to drive leverage on sales growth materialize.
From a cash standpoint, our total cash balance, including restricted cash at the end of Q1 was approximately 29 million. During the first quarter of 2024, we exercised our borrowing rate and Ron for your $150 million financing arrangement to the delayed draw term loan of 25 million, which has ended as of March 2024 expiration date and repaid the outstanding revolver of $15 million. This brings the total borrowings to 125 million. Our free cash flow usage was $29 million in the quarter, primarily as a result of the annual incentive and one-time merger-related retention payments Q1 will be the highest quarter of cash burn for the year. As Martin mentioned, we are focusing on improving our working capital management, specifically our inventory and instrument utilization and DSO deficiency. With these efforts as well as continued execution of merger related cost synergies, we expect to be cash flow positive in Q4 2024.
Overall, we are pleased with our first quarter result, and we continue to be confident in our ability to drive profitable revenue growth moving forward.
Moving on to 2024 full year guidance. As Massimo stated, we are narrowing our guidance for full year net sales to range between 790 and $795 million, representing an implied growth of 67% year over year on a constant currency basis. This is in comparison to the guidance issued during our fourth quarter call of 785 to $795 million, a 5% to 7% growth. Please note, our expectations are based on current foreign exchange rates do not account for rate changes that may occur throughout 2024. Our outlook for full year 2020 for non-GAAP adjusted EBITDA remains at 62 to $67 million.
And finally, we expect to be cash flow positive in the fourth quarter of 2024. While we do not provide quarterly guidance, I will give some directional commentary on the expected cadence of our business assist you in modeling our quarterly performance fees comments remain in line with the directional remarks provided on our fourth quarter call in March, we expect Q2 revenue to be slightly below our full year growth guidance range due to the timing of stocking orders in 2023.
Additionally, we expect Q3 to reflect the highest year-over-year growth due to this reduction in the prior year, and we closed the quarter and the impact of one additional selling day in 2024 versus 2023. This extra day results in approximately 1.5% of additional growth for the quarter for gross margin, we continue to expect 2024 full year gross margins to be in the 71% range in line with 2023. We also expect operating expenses to decrease approximately 200 to 300 basis points through leverage on incremental sales and additional cost synergies to assist you with modeling EBITDA, we reiterate our outlook for depreciation expense, which for the full year 2024 is in the range of approximately $36 million to $37 million as compared to $33 million in 2023.
Stock-based compensation expense is expected to be in the range of $30 million to $32 million below the operating income line. Our expectation for interest and other is approximately $5 million per quarter. We expect adjusted EBITDA margin improvement of 200 basis points for the full year to be fairly consistent over the course of the year with margin expansion in the first half of the year to be slightly higher over prior year as we annualized synergies. And finally, for cash, we still anticipate an improvement in net cash outflows in Q2 relative to Q1 due to the payment of the annual bonus and merger-related costs that occurred in the first quarter. The second half of the year will progress toward breakeven with positive cash flow for the fourth quarter as we ramp up revenue leverage our fixed expense base and improved inventory and DSO efficiencies.
I'll now turn the call over to Massimo for some closing comments.

Massimo Calafiore

I'll close today's call by emphasizing my confidence in the business and reiterating my enthusiasm to be part of the Orthofix team. We have solid fundamentals, exceptional employees and a best-in-class portfolio that is driving that above-market performance throughout 2024, we will keep delivering on our commitments to patients, customers and shareholders driving the Company to new heights before we sign off, I would also like to thank all of our employees worldwide for their dedication to Orthofix and its mission. I'm very excited for the next chapter ahead of us.
At this point, we will open the line for questions.

Question and Answer Session

Operator

(Operator Instructions) Mathew Blackman, Stifel.

Mathew Blackman

From maybe the first question and I hate to nitpick here. But dumb guidance for the year is up about $2 million to $3 million midpoint to midpoint versus the four to $5 million 1Q be. I appreciate it's early in the year. I sense conservatism, but just want to make sure you're not seeing anything different here in 2Q and maybe you tempered your momentum?

Julie Andrews

No, we wouldn't we're not seeing anything that would temper our momentum. We're you know, again, it's early in the year. We want to our new management team in place and we are confident in what we're delivering. But nothing that tempering our enthusiasm.

Mathew Blackman

Great. That's what I figured. And then just maybe a housekeeping question. Did you have one fewer day selling day in the first quarter versus 2023, some of your peers have. So I'm just curious to know your calendar now.

Julie Andrews

No.

Mathew Blackman

Okay. Okay. And then I guess my last question. And Julie, you sort of alluded to it. I was hoping maybe get some firmer numbers, but you gave a great metric in the fourth quarter that 8% of sales were from new distributors. You mentioned that continued. Any chance you can can update that number similar to last quarter higher. And I appreciate you may not have this at hand.
But also is there any way to give us any sort of same store sales kind of growth number for your accounts? And I'll leave it at that.

Julie Andrews

Okay. I'll say in the revenue from new distributors, I said in the prepared remarks that it nearly doubled and so you can interpret that from the 8% to nearly doubling and then I don't know, same-store sales at the ready in front of me, but I think we will think about really if we land release there.

Mathew Blackman

Fair enough. Thanks so much.

Operator

Ryan Zimmerman, BTIG.

Ryan Zimmerman

Hi, good morning, guys. This is Izzy on for Ryan. So just first off on the gross margins. It looks like you guys came in in line with our estimates this quarter. Were just wondering what you could see that could drive them higher over time?

Julie Andrews

Yes. So over. I mean, this year, we've said that our margins would be 71% in line with last year. I think as we look to the future, we haven't issued long-range guidance on it, but we do see opportunity in the gross margin line. I think there's synergies with supplier rationalization, leveraging our footprint and those types of things that work.

Ryan Zimmerman

Okay, great. Thank you. And then next on the bone stim, it looks like you guys are seeing some pretty strong growth here. Just wondering what you can do to maintain this growth in a market that's maybe growing not as fast?

Massimo Calafiore

Yes, it's an excellent question. Look, we see for the foreseeable future are great potential. Just given that from what we said during our remarks about now we are leveraging it as much as we can right now, all of the new surgeons coming from the SeaSpine acquisition. So as said, is true that the market growth or market rates. But if you confine that I can the business in our domain, we see strong potential, as I said, for the next for the next few quarters.
So on certain jobs. We've tried to maximize this potential as much as we can.

Ryan Zimmerman

Great. Thanks for taking the question.

Operator

Jason Wittes, Roth MKM.

Jason Wittes

Cai, thanks for taking the questions. Just on the growth rates we saw this quarter, especially I mean, you kind of mentioned for global orthopedics, it's going to vary on the spine growth has been or the with the spine growth been pretty nice. Is that something we should expect to continue for the rest of the year? Or could you comment on sort of what the trends are for the remaining other businesses?

Massimo Calafiore

Yes. Look, I we feel pretty confident about the growth rate that we're achieving right now. As we said earlier, we are clearly identify a couple of the grocery growth driver for us. One, yes, we are getting a lot of interest from a new distributor or a new surgeons, the amount of inbound calls that are coming, it has been pretty remarkable for us. And all of these allow us to really pick and choose the right partner for that because remember, we are fully focused on profitable growth. So and we can achieve these if we get the right partners.
On the same token with our investment in innovation, we are seeing further utilization of our product. So a very healthy increase on revenue per case. So yes, all of this to say that we see we see a very strong business fundamentals for the foreseeable future.

Jason Wittes

Okay. Thank you, sir. I'm sorry. And then you mentioned your big if it should go cash flow positive in Q4. I assume that's sustainable? And going forward, the quarters will be cash flow positive from there on our seasonality impact that or sort of what's the outlook for cash flow generation?

Julie Andrews

have we issued some formal guidance on that for 2025, and we'll do so later this year.

Jason Wittes

Okay. I'll jump back in queue. Thank you, sir.

Julie Andrews

Thanks, Dave.

Operator

Jeff Cohen, Ladenburg Thalmann.

Jeff Cohen

Hi, Massimo, and really how we do it, Jeff, how are you just hone so on I wondered if you could talk about Selsun the bit and fresh product, fresh fractures and talk a little bit about some of the channels and nine, could you recall the LP the fracture market and some of those channel, some of those auctions, are you still focused on the surgeons? Is there some focus on pain docs as well? Thank you.

Massimo Calafiore

And I right now I think that we are keep leveraging our network on probably on the surgeon side. So at the end of the we have two products that are helping us to address the continuum of care and fracture product structure and model union. So we are keep driving good on our product portfolio using existing distributors place even tried to find synergies with the with our liquor distributors that are working on the EBIT side. So our market is defined right now on the search on the search piece.

Jeff Cohen

Okay. Lynn, could you talk a little bit about deal to deal with the larger, more dedicated distributors. As far as aggregate numbers, you anticipate over the balance of this year that the actual number of distributors will decrease and if you could give us a sense of feet on the ground. Thank you.

Massimo Calafiore

Yes, no, I didn't give that. We gave the specific detail about, you know, like the amount distributor and in American. But in general, what I can tell you is that on the positive side, we are seeing that our top distributors are key for increasing the loyalty to us. So I mean that the more we are seeing it is on the issue, it's everything is shifting to have
But let's say, given the depth of our portfolios, especially in spine, our top distributors are becoming exclusive to us. So and I think this one is going to keep driving is going to help us to drive compliance going forward and focus with our product. So I said we don't give a specific number, but what that's what I can tell you that, that actually and the quality of revenue that we are seeing is pretty high right now.

Jeff Cohen

Okay. Personalize our future to your questions.

Operator

That concludes our Q&A session. And this concludes today's conference call. You may now disconnect.