Orthofix International NV (OFIX)

Q2 2010 Earnings Call

July 28, 2010 4:30 p.m. ET

Executives

Dan Yarbrough - VP, IR

Alan Milinazzo - CEO

Bob Vaters - EVP & CFO

Analysts

Raj Denhoy - Jefferies & Co

Michael Matson - Wells Fargo

Shawn Bevec - SIG

Patrick Clingan - Lazard Capital Management

Bill Plovanic - Canaccord

Stan Manny - Manny Family Investment

Presentation

Operator

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» Orthofix International N.V. Q1 2010 Earnings Call Transcript
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Good afternoon, ladies and gentlemen, and welcome to the Orthofix International Second Quarter Earnings Release Conference Call. At this time, all participants have been placed on a listen-only mode. The floor will be opened for your questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Dan Yarbrough. Sir, the floor is yours.

Dan Yarbrough

Thanks, Mandy. Good afternoon, everybody, and thanks for joining us to discuss Orthofix International's financial results for the second quarter of 2010.

During this call, we will be making forward-looking statements that involve risks and uncertainties. All statements other than statements of historical fact are forward-looking statements, including any earnings guidance we provide, and any statements about our plans, beliefs, strategies, expectations, objectives, or goals. Factors that could cause actual results to differ materially from the forward-looking statements made by us on this call include the risks that we disclosed under the risk heading Risk Factors in our 2009 Form 10-K, and our subsequent Form 10-Qs filed with the SEC.

With me on today's call are Orthofix's President and Chief Executive Officer, Alan Milinazzo; our Executive Vice President and Chief Financial Officer, Bob Vaters, and Brian McCollum our Senior Vice President of Corporate Finance.

And at this point I will turn the call over to Alan.

Alan Milinazzo

Thanks, Dan, and good afternoon, everyone. On today's call we'll cover three main areas. First, I'll start with a summary of our strong second quarter results. Next, Bob Vaters will then just provide some additional financial details on the second quarter including the key elements of our earnings, balance sheet and our cash flow, and an update of our expectations for the remainder of 2010.

Third, I'll then make some comments about how Orthofix is successfully navigating through the current healthcare environment. Starting of with our second quarter results, we reported solid revenue growth in our Spine Stimulation, Spine Implants and biologics and orthopedic businesses which represent 81% of our total revenue in the quarter. These revenues collectively grew 11% over prior year and continued to outpace the growth rates of their respective overall markets.

Sports Medicine, which represented about 16% of our business, was soft as we expected due to lingering effects of weak economy impacting some of our products used primarily in elective procedures.

We expect improvement over the coming months as we continue to launch new products into this market. With regard to the performance of our spine business we believe we continue to take market share in our spine stimulation segment with another quarter of 12% sales growth from our broad customer base of more than 1500 surgeons around the country.

We continue to benefit from the fact that we have the only FDA approved stimulator for the cervical spine which is a significant competitive advantage in an environment where surgeons continue to look for safe clinically effective treatments for their patients.

We also believe our spine stimulation customer base represents a substantial growth opportunity for our spinal implants and biologic business and we are beginning to focus on increasing the penetration of our spine implant and biologic products into this important customer base.

We were very pleased with the continued improvement in operating results in our spine implant and biologic business in Q2 with sales growth of 10% as reported and 16% when adjusting for the differences in the way we recognize revenue from the first generation Osteocell Trinity to the next generation Trinity Evolution product we developed in corporation with the Musculoskeletal Transplant Foundation and was successful launched in the middle of 2009.

Sales growth was driven by the strong acceptance of several products we introduced last year including our Firebird pedicle screw system, the PILLAR SA interbody device, and the Ascent LE system and of course our unique Trinity Evaluation stem cell based Allograft.

We have yet to benefit from the more recent product introductions which both expand our offering in a minimally invasive segment of the market and also now enable us to compete in the highly profitable deformity correction market.

These products should begin to gain more traction in Q3 and in Q4 as we move through limited launch to full launch of these products.

Consistent with our plans for the spinal implant and biologic business, our profitability continue to improve as both our gross profit margin and our operating margin increase year-over-year.

This was due not only to the improved mix of higher margin products but also as a result of the reorganization and consolidation plan we began late in 2008.

Summarizing our spine business, we are on page to achieve roughly $300 million in combined sales growing at a better than 10% rate.

Our orthopedic business also reported another solid quarter with 12% growth as reported and 11% growth on a constant currency basis. We are pleased with the growth rates we achieved in certain targeted geographic areas including growth of more than 40% in our Asia-Pacific markets and more than 50% growth in our Latin-American markets which included the benefit of our recent distribution channel improvement in Brazil involving the move to a direct sales force.

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