Ladies and gentlemen, thank you for standing by and welcome to the Orthofix third quarter 2020 earnings conference call. I will now turn the conference call over to Alexa.

Thank you operator and good morning everyone. Welcome to the Orthofix third 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 will start with the safe harbor statement and then pass it over to John. 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, as there is no assurance that the matters contained in such statements will occur. The forward-looking statements we make on today's call are based on our beliefs and expectations as of today, November 5, 2020. We do not undertake any obligation to revise or update such forward-looking statements. Some factors that can cause actual results to be materially different 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-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 my 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 the financial measures determined in accordance with U.S. GAAP. Please refer to today's press release announcing our third quarter 2020 results for reconciliations of these non-GAAP financial measures to our U.S. GAAP financial results. At this point, I will turn the call over to Jon.

Thank you Alexa. Welcome everyone and thank you for joining our third quarter 2010 results conference call. On today's call, I will provide an update on the third quarter performance. I will then review the progress we have made within each of our strategic initiatives before handing the call over to Doug, who will provide financial update. I will close with our perspective on the business going forward before opening the line for questions. Shifting to the third quarter performance. Total revenue for the quarter was down 2% on a reported basis and 3% on a constant currency basis compared to the prior year quarterly, largely driven by a decline in elective procedure volumes during the third quarter. Despite the year-over-year decline, we are very encouraged by our performance during the quarter, which reflects continued strong execution and leadership as we navigate uncertainty of COVID-19 and begin to carry out our strategic plan with the new team. Month-to-month performance was generally flat throughout the quarter, which we view as a positive indicator that we are returning to some level of normalcy. On a sequential basis, revenue increased 52% over Q2 and we saw a positive trend across the businesses with procedure volumes rebounding and restrictions continuing to be lifted across geographies we operate in. Now let's turn to the performance within each of our business units. Starting with bone growth therapies. Sales were down 4% versus prior year, which is in line with the trends we observed in elective procedure volumes. Bone growth therapies continue to be impacted by COVID-19, driven by year-over-year declines in procedure volumes. On a sequential basis BGT was up 66% over the second quarter. The sequential growth of this business demonstrates our ability to work with our physician customers to identify the patients in need…

Thanks Jon and good morning everyone. 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 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 were $111 million, down 2% on a reported basis and 3% on a constant currency basis when compared to the third quarter of 2019. Sales in the U.S., despite a decrease in the elective surgery market, were up slightly during the third quarter. International sales were not as strong in the quarter, down 15% to prior year at constant currency. Gross margin in the third quarter of 2020 was 76%, compared to 78% in the prior year period. The primary driver of this decrease was the increased non-cash inventory reserves on certain products due to lower procedure volumes, mainly resulting from the COVID impact. As mentioned last quarter and as demonstrated in the third quarter of 2020, we expect gross margins to trend back to historical levels as volumes rebound and revenue increases. Sales and marketing expenses in the third quarter 2020 were 48% of net sales, which was flat to the third quarter of 2019. This was in line with our expectation as we saw our sales rebound sequentially over the second quarter. We expect total sales and marketing expenses to normalize to prior year levels as revenue increases. GAAP G&A expenses in the third quarter of 2020 were 15% of net sales, down from 19% in the prior year period. This decrease as a percentage of net sales was due to lower succession and transition related expenses in the third quarter as a…

Thanks Doug. Shifting to our outlook for the remainder of the year, we have seen a strong rebound in elective procedure volumes and the associated revenues in the third quarter. There's still great uncertainty about how the balance of the year will play out. In Q3, we saw trends moved in the right direction with elective procedures being performed at volumes approaching those of 2019. But there still is a great deal of unknown regarding market procedure volumes within this COVID environment. Orthofix will continue to execute and drive our commercial execution with innovation and differentiation to be ready for the rebound in procedure volumes, in which a key factor to this is the patient's willingness to schedule a procedure and head to the hospital or ASC to have that procedure performed. We have seen some stability in U.S. volumes, but our OUS business continues to have more variability. We will continue to adapt, drive new business and take advantage of opportunities when they present themselves within the fourth quarter and beyond. With that said, because of the scope and duration of the COVID-19 pandemic and the timing of the global recovery remaining uncertain, we will not provide forward-looking guidance at this time. It is important to note, Q4 of last year included some large stocking orders that we would not expect to reoccur in the fourth quarter of 2020. Despite the challenging environment, we have made tremendous strides throughout the year and put ourselves in a great position to build success for many years to come. While the macro environment remains uncertain, Orthofix will continue to be ready to help patients improve their lives and help surgeons meet their patients' needs. Thank you to everyone at Orthofix and all the healthcare providers around the world working through this challenging environment to continue to provide patient care. With that, I would like to now open the line for questions.

[Operator Instructions] And your first question comes from the line of Mathew Blackman with Stifel.

Good morning everyone. Can you hear me okay?

Yes, Matthew. Good to be with you this morning.

Good. Well, first of all, really impressive 3Q result. So congratulations to the team. Maybe if I could start, Jon, just a couple of recovery questions. And I know this is tough to tease out. But as we look at the strong results across all the franchises, is there a way to think about how much of 3Q was working through backlog versus a return of new patients to the funnel? And then sort of a follow-on to that is, when I think about U.S. recovery from a regional standpoint, I assume it was broad-based across the country? Or are there still pockets of weakness? And then I have a couple of follow-ups.

Yes. Thanks, Matt, for the question. As we look at the market trends coming back, it is still pocketed in certain areas. Let's discuss specific care as far as the U.S. versus outside., the OUS. In the U.S., it's relatively harmonized, but there still are some pockets. And we are still seeing some reluctance for channel checks with surgeons for patients to come back in and have procedures done. But that's becoming narrow, basically be smaller. But outside the U.S., there are certain regions such as the U.K. and other countries that have been locked down for a period time. So those procedures have still been locked down. And we are also starting to see some early signs of additional countries starting to basically restrict activities, including Germany, Italy and Spain. And so we are monitoring that closely to watch flow. But on the baseline in the U.S., we have come back to near 2019 levels with the exception of those reluctant patients.

I appreciate that. And this is probably not a fair question, but I am going to give it a shot anyway. But if COVID isn't an incremental headwind in 4Q, do you think the business could be flat to up? Or are there stocking headwinds? And could you just remind us of the stocking headwinds you called out, the magnitude of the potential drag in the fourth quarter?

That's a hard one to do. We are in a rebuilding mode as far as the number of our channels and activities. And so on the whole, we are seeing consistent months within a quarter. And we are just monitoring the elective procedures. And those are the real drivers as far as performance will be, the elective procedures being available.

And then the stocking headwinds, could someone just remind me what that drag is year-over-year, the magnitude?

Matt, this is Doug. Last year, we had about $1.5 million of what I would call lumpy or choppy stocking orders that we don't expect to recur this year in our extremities business.

Okay. Thanks. I appreciate it. I will get back on the queue.

Thank you.

Thanks Matt.

And your next question comes from the line of Raj Denhoy with Jefferies.

Hi. This is Zach, on for Raj. Just a few for us. Can you talk about procedure volumes coming out of the quarter? And what you have seen through October? And how the resurgence of COVID has played in that procedure volumes?

And here again, we need to basically break it between the U.S. and OUS. The procedure volumes in the U.S. were relatively consistent month-to-month throughout the third quarter. And then basically in the OUS, procedure volumes were choppy, where we had some areas that accelerated in Italy in the third quarter, but we had other markets in the U.K. that basically were still locked down or restricted. So you have to handle it by region-by-region, country-by-country. But in the U.S., it was fairly consistent month-to-month on procedure volumes, as I stated. And we are monitoring any effects as far as further lockdowns in regions of the U.S. as we go forward.

Okay. Great. And then on bone growth stimulators, do you anticipate any additional competition entering the market now that it has been down-classified to Class II?

Thanks Zach. We have not seen any competitors in the market or new entrants into the market as we speak today. The re-class, as we have highlighted in our prepared remarks, is still a good period away from being finalized and published. But we are monitoring closely. But even then, we are still very bullish on this product line and market space. We have all of the features as far as a very robust sales channel. We have all of our order cash. We have all of our contracts with payors. And we also have decades of clinical results, which we will basically continue to work on. And we are continuing to invest in additional IDEs and clinical trials to basically bolster this business. So we will be prepared. If there is a competitor coming forward, we have not seen one as of yet.

Perfect. Thanks.

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

Hi. Thank you for taking our questions. I would like to go back to the Neo Medical agreement. Can you just remind us where development is today? And if there are any kind of near term development milestones we should be aware of?

Thank you for the question. It doesn't sound like Jeffrey. So, I guess, who do we have?

Yes. It's Destiny. Nice to talk to you, guys.

Thank you. Yes. Neo Medical is a very sophisticated disposable based company as far as preparing instruments and technologies. They already have an existing system that we are co-marketing and bringing into the ASC environment in a very limited co-marketing relationship, so we can learn about these markets going forward. So we have those activities. We did not do this as a revenue accelerator. We did this as a learning activity. And so we will be monitoring that activity in real-time in clinics and ASCs around the U.S. On the co-development side, we have initiated developments already shortly after we closed the deal and those are ongoing and we will keep you apprised of those as we go forward in out quarters.

Okay. Thank you. I am clear now. I love to talk about timing. So could you also give us an idea of when a full launch of some of these newly launched products like FITBONE, O-GENESIS and AlloQuent could occur? And what kind of headwinds or tailwinds are you seeing that could either slow the timing of those launches or maybe accelerate that?

Thank you. So O-GENESIS and AlloQuent are available now. They are being introduced into the market as we speak. Regarding FITBONE, we are currently commercial in that area in the U.S. and in Europe. And we are working through an integration plan right now and we are basically building capacity. And that, actually, you might imagine, has been a unique situation working through COVID as you are doing integration of an acquisition. But we are on target in the integration activities and we look forward to having those products in the markets in 2021.

Okay. I appreciate it. I will jump back in queue.

Thank you Destiny.

Your next question comes from the line of Jim Sidoti with Sidoti & Company.

Hi. Good morning. Can you hear me?

Good morning, Jim. We can hear you loud and clear. Hello Jim.

All right. It's me, for me, just so you know.

Sounds like you.

All right. In the press release you called out M6 sales were $5.2 million in the U.S. Do you have a global number for that you can give me?

Jim, this is Doug. We generally run just under $1 million a month or $3 million a quarter in OUS, is the way I would think about it.

Okay. And then in your comments, you said sales were flat month-to-month. I am confused. Does that mean month-to-month relative to last year? Or were sales pretty level in the quarter, July, August, September?

I would say that during the third quarter, they were fairly consistent. On our second quarter call, we called out each month's performance as we recovered. But as we hit that threshold in July, August and September, we saw our performance become fairly consistent.

Consistent with the year ago?

Yes. Year-over-year, that's.

Right. Okay. All right. I just wanted to be clear on that. And then, I am sorry, I didn't hear the answer to the previous question. What is your timeline for the approval and the launch of the Neo Medical products? Is that something that's in the next couple of years? Or are those still going through trials and is that more three or four or five years out type thing?

So the Neo Medical relationship has multiple parts. It's an investment, but also it's a co-marketing, where we are bringing their existing product into an ASC environment that is already FDA cleared. And then we also have a co-development where we are basically developing our cervical platform, which we have already initiated development and we will bring back dates as far as when they are going to come to market in the future calls.

Okay. So there will be some products available in the near term?

Yes. In the future, yes. We haven't set those dates on the development side yet, but they will come in the future quarters.

Okay. All right. And then a last one from me. It sounds like you are pretty much complete with the reorganization of the sales management or top level managers in the organization. How do you feel about the number of direct salespeople and the number of reps you have? Is that still an area where you are going to focus on expanding?

So in our BGT area, we have a combination of distributors and direct reps. And that channel is very, very strong and we are very pleased with how it's structured. On the other side, on the spine side and the extremity side, we are still working in those areas. And we have a number of high-quality distributors and we are also creating more strategic distributors as we go forward. And so we will report back to you on our progress there. But we are now moving to our channel development since we have the sales leadership in place.

Okay. So that's going to be the area of focus then for 2021, it sounds like?

Yes and beyond.

Okay. All right. Thank you.

Thank you Jim.

Thanks Jim.

Thank you. I will now turn the call back over to Mr. Serbousek.

Thanks, operator. We appreciate everyone taking the time this morning and we look forward to updating you on our progress on our next quarterly call. Thank you, everyone. Have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participating. You may now all disconnect.