Good morning, ladies and gentlemen, and welcome to the Orthofix Second Quarter 2020 Earnings Results Conference Call. [Operator Instructions] Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I would now like to turn the conference over to your host Alexa Huerta, Senior Director of Investor Relations and Finance. Please go ahead.

Thank you, operator and good morning, everyone. Welcome to the Orthofix second quarter 2020 earnings call. Joining me on the call today are, our President and Chief Executive Officer, Jon Serbousek; and Chief Financial Officer, Doug Rice. I’ll start with our safe harbor statements and then pass it over to Jon. During this call, we’ll be making forward-looking statements that involve risks and uncertainties. All statements other than those of historical facts are forward-looking statements, including any earnings guidance that we provide and any statements about our plans, beliefs, strategies, expectations, goals or objectives. Investors are cautioned not to place undue reliance on such forward-looking statements as there is no assurance that the matters contained in such statements will occur. The forward-looking statements we will make on today’s call are based on our beliefs and expectations as of today, August 6, 2020. We do not undertake any obligation to revise or update such forward-looking statements. Some factors that could cause actual results to be materially different from the forward-looking statements made by us on the call include the risks disclosed under the heading Risk Factors in our Form 10-K for the year ended December 31, 2019, and our Form 10-Q, expected to be filed later today, as well as additional SEC filings we make in the future. If you need copies of these documents, please contact our office at Orthofix in Louisville, Texas. In addition, on today’s call, we will refer to various non-GAAP financial measures. We believe that in order to properly understand our short-term and long-term financial trends, investors may wish to review these matters as a supplement to financial measures determined in accordance with US GAAP. Please refer to today’s press release announcing our second quarter 2020 results for reconciliations of these non-GAAP financial measures to our US GAAP financial results. At this point, I’ll turn the call over to Jon.

Thank you, Alexa. Welcome, everyone and thank you for joining us for our second quarter 2020 results conference call. Before getting into my prepared remarks, I’d like to introduce you to Alexa Huerta, who will be taking over as our Head of Investor Relations. Alexa has been with our finance group for over eight years, and we are excited to now have her in this role. Mark quick, who most of you have interacted with over the past, has taken a leadership role in our business development group. Mark will be transitioning IR responsibilities to Alexa over the coming quarters. On today’s call, I’ll start by discussing the impact of COVID-19 as it had on our business, after which I’ll provide an update on our second quarter performance. I will then review the progress we’ve made in each of our strategic initiatives before handing the call over to Doug, who will provide financial updates. I will close with our perspective on the business going forward, including an update on the trends we are seeing through July, before opening the line for questions. Starting with the COVID-19 update. I’d like to start by saying on behalf of everyone at Orthofix how thankful we are for the tireless work being done by everyone in the global healthcare community to address this crisis. I’d also like to thank each and every one of our employees who have executed incredibly well during this challenging times. The magnitude of this pandemic and the challenges presented for patient care created an unprecedented environment, and I’m truly proud of the resolve and adaptability of our team. With that in mind, we continue to actively monitor the situation with a focus on safely and effectively supplying our customers while taking care of their patient needs. On our last…

Thanks, John. I will provide additional details into our net sales and earnings results and then discuss some of our other financial measures. Many of the financial measures covered in today’s call are on a non-GAAP basis. Please also refer to today’s earnings release for further information regarding our non-GAAP reconciliations and disclosures. As Jon noted, total net sales for the quarter was $73.1 million, down 37% on a reported basis and constant currency basis when compared to the second quarter of 2019. Gross margin in the second quarter 2020 was 68% compared to 78% in the prior year period. The primary driver of this decrease was lower fixed cost absorption as well as the recognition of non-cash, inventory reserves, both due to lower revenue from the COVID impact. As procedure volumes rebound and revenue increases, we expect gross margins to approach historical levels. Sales and marketing expenses were 59% of net sales in the second quarter 2020, up from 49% in the second quarter of 2019. This increase was primarily a result of the loss of leverage from lower revenue in the quarter and commission support for our direct sales reps. As we noted last quarter, this deleverage was partially offset by our near-term expense savings initiatives. G&A expenses were 21% of net sales in the second quarter of 2020, up from 19% in the prior year period. This increase as a percentage of net sales was due to deleverage from lower revenue in the quarter. This was offset by a step down in strategic initiative spending and lower succession and transition related expenses in the quarter, as well as our short-term expense savings actions, which included salary reductions, travel restrictions and a significant slowdown in hiring. On a sequential dollar basis, G&A decreased by $2.8 million or approximately…

Thanks, Doug. Before discussing our outlook on the remainder of the year, I want to comment on the upcoming FDA Orthopedic and Rehabilitation Device Panel advisory committee meeting, which has been rescheduled for September 8, 2020. Our position on this has not changed and we believe along with the other manufacturers of BGS devices, that maintaining Class III status is in the best interest of patients, prescribing physicians and payers and insurers that continued safety and efficacy of the device therapy. We believe our best-in-class Bone Growth Therapy products will continue to remain a Class III device. Should this get downgraded to a Class II with special conditions, we believe based on our experience that peers and surgeons would require any new entrant to the marketplace to provide robust, safety and efficacy clinical data, proven technology and device efficacy, a clear reimbursement plan and exceptional service and support. As we shift our outlook to the remainder of 2020, the scope and duration of COVID-19 pandemic and the timing of the global recovery remains uncertain and as a result, we will not be providing forward-looking guidance at this time. Despite the uncertainty of the situation, we continue to believe that the second quarter will be our worst quarter of the year. We are seeing positive trends in the July business, as we noted, which points to a recovery in elective procedures. While we are optimistic about the pace in general timing of the recovery, we are aware that it is too early to confidently predict our business in the near term. However, the global recovery plays out, we are operationally and commercially ready to meet the needs of our hospitals and surgeon customers and we will continue to monitor the situation closely. During the COVID-19 disruption, we have maximized strategic and structural improvements have continued to execute operationally to set up our organization to emerge more successfully and ready for the future. Our long-term view on the underlying dynamics of the Spine and Extremity markets remain bullish and unchanged as a result of pandemic. While there’ll be volatility and uncertainty in the near term, patients will continue to require surgical intervention to improve their lives, and we will be there to help surgeons meet those patient needs. Thanks to everyone at Orthofix and all the healthcare providers around the world working to solve this challenge. With that, I would now like to open the line for questions.

[Operator Instructions] Your first question comes from Raj Denhoy with Jefferies.

Hi. This is Zach on for Raj. Just a few for us. You mentioned sequential recovery on a procedural basis through July. How much of this recovery is into the backlog. And then how much is newly scheduled procedures?

Yeah. Thanks for the question. That is a difficult one to answer at this point in time. Clearly, there is a backlog, but we saw business continuity through those periods of time, and we did clear good backlog during the period of time. We don’t know if there is X percent of that left right out in the marketplace. But we will tell over the next months, what’s left there, but we’re on the continuity now procedures more so than backlog we believe.

Okay, helpful. And then, how have your sales reps been interacting with surgeons and through the COVID pandemic and how do you think that interaction works moving forward as we get to some semblance of normalcy here?

Yeah. As we mentioned in the prepared remarks, we flipped very quickly to virtual interactions, not only in training, official training but also and how we ran sales calls and such. The good news is that surgeons when they’re not operating or not seeing patients they have time to talk to you and so we took a significant advantage of that. We will continue to use those measures going forward, but nothing replaces the interaction of face to face as far as detailing the attributes of the positive nature of your products and also building those relationships, but we’ll get back to the traditional methods in many locations. But we’ll continue to be used virtual technologies as well.

Okay. Great. And then one last one just on margins. Gross margin as you mentioned came in a bit light, and you said that it should recover to historical levels. Do you have any more detail on the timeline of that recovery. If it’s fluid, but just curious, if you can provide more detail there.

It’s hard to say when the recovery will happen. It’s a fair question, but as we approach those historical rates, our COGS and margins should return to our historical levels. We hope sooner obviously like everybody else. And just as a reminder, until that happens, on our last call, we did guide or at least provide some insight into what our fixed variable mix was on some of the line items like COGS and sales and marketing. So happy to help in that way as well.

Perfect. Thank you.

Thank you.

And your next question comes from Jeffrey Cohen with Ladenburg Thalmann.

Hi. How are you?

Good. How are you?

Doing great. So just a couple of quick ones from me. So it looks like you had some good velocity coming out of the quarter. And your commentary for July is again that continues. So is there good confidence into August or at this point you’re still kind of somewhat at the mercy of the hospitals as far as openings and access?

Yes, Jeff. That’s the volatility in the marketplace is regionally, you never know when a territory is going to open up or have a flare up. We’ve actually through, Florida, Texas and California continue to see elective cases go on even as you see heightened cases there. So we’re really at the mercy of the elective procedures that you want to say. But yeah, at the end of the day, we continue to operate and execute this and we’re seeing good lift and patients want their surgeries. End even though sometimes they call them elective procedures, spine cases are not always elective and surgeons are treating those patients when they need care.

Okay. Got it. And then just one other quick question for me on the cash and debt. So subsequent to Q2, take the $50 million off $123 million-ish on the cash side because you repaid $50 million and then $50 million on the TED and then you’ve got the $13 million in Medicare that should come off in the third quarter -- peeled off in the third quarter. Is that right?

Yeah. That’s the right way to look at it, Jeff, except it will peel off in Q3 and Q4, but by the end of the year, we expect it to be down to zero.

Okay. Perfect. That’s it for me. Looking forward to some of the NASH data. Thanks, again.

Thank you.

And your next question comes from Ryan Zimmerman with BTIG.

Hi. This is actually Max [indiscernible] on for Ryan this morning. Just wanted to follow up on cash flow little bit, I was impressed by the positive cash flow in the quarter and it seems like based on your decision to repay half of that $100 million revolving credit facility that if you’re feeling a pretty good about your ability to generate some positive cash flow consistently moving forward, but just given the positive cash flow are looking at maybe accelerating some investments in R&D and are being a bit more aggressive in terms of higher into new sales reps and maybe you would have expected to be a few months ago.

Yeah. It’s a good question, Matt. With regard, I’ll answer some of the numbers questions and then turn it over to Jon in terms of outlook, but with regards to operating cash flow, we did count the CARES Act money roughly $18 million as income that it positively impacted our operating cash flow that we expect to have a negative burn. As I said a second ago, as we repay as Medicare recoups roughly $14 million of advanced payments that we got in April. So that will put negative pressure on our cash flow in Q3 and Q4. And I’d say overall that we continue to be cautiously optimistic and we’ll sort of take our foot off the break and invest in the areas where we feel like we need to grow and invest in our top line. So with that said, I’ll let Jon.

Yeah. Matt, we are continue to be incredibly disciplined. As we told you in February, we’re transitioning the business and we have a key focus areas of investment. R&D being one of them, but we’ve not taken our foot off of that investment, where we need to come out of this market this COVID activity and be poised to accelerate the marketplace and we’re doing that. You’ll see that as far as with the Firebird SI, JuniOrtho and then as we come into NASH, you’ll see more results of that activity and we’re looking forward to that. But we continue to invest in a very disciplined way and we think it’s a good time to be doing that as we work through this transition.

Got it. It’s really helpful. Thank you for that commentary. And then just a couple follow-ups here. So obviously you put up another nice quarter with the M6 desk and I know you previously guided that $15 million to $17 million in 2020 pre-COVID, but I think you already -- by my math about $7 million for the first half of the year. Just trying to get a sense of where you think this thing can go in the back half of the year. It feels like the $15 million to $17 million range might -- still might actually be in play. And then can you just help us think through the potential market for the product and where that -- where revenue from M6 this might go over the next couple of years? I know it’s hard to say right now with COVID, but any commentary there would be appreciated.

So as you heard the commentary, we’re very bullish on the M6. And the challenge is just the dynamics of the marketplace and if we get slowed month and it takes off that FX long haul, but we are positive about where we’re going. We’ve seen that continue to grow through COVID, and we continue to invest. We train as we talked about 75 additional surgeons and they brought an incremental approximately $1 million in that quarter. And so we continue to execute on that. What the overall market is, there’s different fault points out there, but it’s right now, it’s over $200 million market and we will get our portion of that share and that’s our focus to go out and get short share in this market space.

Got it. Thank you. And then, last one for me is, in regard to FITBONE. And just kind of going back to your first quarter earnings transcript and then more recently during some investor conferences in May and June. I think you are more optimistic at those investor conferences in May and June following it on the primary growth drivers of over the next six months to 12 months, whereas on the first quarter earnings call. You made some comments around not expecting the product to materially contribute to extremities near term. I’m just trying to reconcile those two comments a little bit. Is there something specific that you saw that maybe made you, where you think the near-term potential for FITBONE or as it always kind of been in the case that you viewed it as a main growth driver over the next six months to 12 months?

Yes. FITBONE was an asset that we wanted in our portfolio product that basically we’ve not only got FITBONE, but FITSPINE. And so it was a key strategic acquisition for us. We knew there were going to be activities to transition that business into the US, the product in the US for FITBONE. And so as we are making those transitions I highlighted in my prepared remarks, we’re continuing invest, we’re on track and we’re seeing traction, especially in Europe as far as that goes, but we were very modest in our projections for the first year of FITBONE as we do that transition, but the integration is on track.

Your next question comes from Jim Sidoti of Sidoti.

Good morning. Glad to hear your safe and found in Dallas. A couple of quick ones. For the M6 sales you reported that the US only number, correct?

M6, that’s correct.

The 3.6 million?

Correct. Yes. That’s right, Jim.

Okay. I just wanted to make sure I heard you correctly September typically is a down sequentially from the June quarter, but this year is hardly a typical year. So you’re saying September sales -- you think likely to be up sequentially?

We think that Q3 based on what we’ve seen so far in July will trend above Q2, if trends hold.

Yes. Jim the hard part about -- Jim the hard part about this year, is that typically there is vacations and activities that go on in July and August. And we don’t see those when we’re talking to the physicians that are the surgeons we’re talking to. So it’s a hard one to predict year-on-year direction that but we see Q3 and Q4 being ahead of Q2.

Okay. And then the tax charge in the quarter, can you just tell me again what that was for and is that over now at this point that reconciliation process?

Right. Well, overall for the year, we’re going to have a GAAP tax benefit just based on the significance of the tax reserves that we were able to release as Fact Sheets expired. But with regards to the quarter itself, in expired. But with regards to the quarter itself in Q2, what we saw was the reversal of some of the items that we would anticipated from some of the congressional relief in -- at the end of the first quarter was reversed with regards to the loss carrybacks and so we had to take a different position and catch the books up on a year-to-date basis for that change.

Okay. All right. And then Jon, you talked a little bit about classification for the stimulation products. Did you say, when you expected FDA decision to happen?

Well, the panel meeting is on September 8th. And typically the process there is that the panel will make a recommendation to the FDA and then they take it back and make that final decision. So we don’t know the exact timeframe. We know the panel will make a decision on September 8, but what the FDA does with that is unclear. It’s in their hands at that point in time.

And let’s say that the, the device does get down classified, how long do you think it would take new players to conduct studies and get products into the marketplace?

On this particular panel, it’s different because oftentimes, people are asking for a reclassification. There is a company that comes in and wants it down classification. This is purely FDA administrative activity. There is no one actually no company out there asking for this. And the BGS coalition is asking for them to maintain Class III because of all the reasons we’ve highlighted. So we don’t know, if there’s even anybody out there would take advantage of it right now.

Okay. Yeah. Even if theoretically it was down classified, it sounds like it would be months if not years before any new players got into this space?

Yeah. Someone would have to run clinical trials, set up their contract, set up their reimbursement and all. And so there is, even if the 510-K with special controls or special considerations, those typically now require clinical data. Everyone I’ve seen so far has required clinical data. So someone would have to come, petition the FDA and then run a clinical study and then basically present that to FDA. So it would be more like years in that regard then shorter period of time.

Okay. And last one for me. You do have a significant business in Europe. Can you just characterize how you see the recovery there relative to recovery here in the US. Are things -- several months ahead, do you think than they are here in the US?

Jim, you have to look at it country by country. I mean if you look at areas that the Scandinavian and the Nordic countries they’re ahead. Italy is doing well. Germany is doing well. And what it comes down to is that the UK is not and the UK is still very slow, because they’ve had a -- they are slower to have the COVID impact them. And so if you look at country by country, but by and large they are heading back to business and heading back to a lifestyle that they -- they adapting to COVID of course but they’re back to their daily lives.

All right. Thank you.

Thanks, Jim.

Thank you, Jim.

And I’m showing no further questions at this time, I would now like to turn the conference back to Jon Serbousek.

Thanks, operator. We appreciate everyone’s time and taking your time this morning. We look forward to updating you on our progress at our next quarterly call. Have a great day.

Ladies and gentlemen, this concludes today’s conference. Thank you for your participating and have a wonderful day. You may all disconnect.