Negative Points

• Orthofix Medical Inc ( NASDAQ:OFIX ) experienced a steeper-than-expected decline among smaller U.S. spine distributors, whose productivity has been below expectations for several quarters.

• The company faces a $22 million net sales headwind in 2027 due to the timing of the European distributor MDR arrangement, which is a discrete benefit in 2026.

• Adjusted gross margin was negatively impacted by an unfavorable geographic mix during the quarter, coming in at 71.7%.

• Profitability was impacted by credit losses in certain international markets and continued investment in key launches, despite ongoing cost optimization initiatives.

• U.S. limb reconstruction growth was below expectations, as the company is still building the commercial infrastructure required to consistently convert clinical interest into revenue.

• The European distributor arrangement creates a temporary free cash flow timing headwind in 2026, as some cash receipts are projected to occur in 2027 while inventory-related cash outflows occur this year.

Q & A Highlights

Q: Can you provide more color on the updated guidance, specifically what has changed since the CMS reimbursement decision and the impact of the smaller spine distributor challenges? A: Julie Andrews (CFO): The updated outlook reflects a combination of underlying business trends and discrete factors. Positives include the restoration of Medicare reimbursement (approximately a $12 million benefit) and the European distributor arrangement (approximately $15 million of incremental net sales in 2026). We are also seeing stabilization in biologics and portions of limb reconstruction. These are offset by ongoing softness among smaller U.S. spine distributors, whose performance remains below expectations. We believed it was important to be transparent about both the progress and the execution risk that remains.

Q: Regarding the European MDR distributor order dynamic, is the $15 million of sales incremental to your previous outlook, and does that imply core growth of only 1-2% in the second half? A: Julie Andrews (CFO): Yes, you are in the range of a 2% to 3% core growth rate. The weakening among smaller U.S. spine distributors is beyond our expectations and is driving the slower back-half growth. We are being more discretionary about how we think about those distributors, potentially consolidating or exiting weaker ones that are not delivering sustainable growth. Massimo Calafiore (CEO) added that they are intentionally prioritizing commercial channel quality and long-term value creation over growth at all costs.

Q: Can you elaborate on why the smaller distributor performance is tracking weaker than expected and how you plan to address it? A: Massimo Calafiore (CEO): The headwind is mostly based on asset utilization. We are disciplined about how we allocate assets to produce revenue. If assets don't turn, it's not a good investment to keep feeding these smaller shops, as it would require increasing cash spending for bad revenue. We are picking and choosing partners to invest in, similar to our strategy in biologics where discipline is now bearing fruit. We expect these challenges to continue through the balance of the year.

Q: Can you quantify where 2026 free cash flow may land, given the timing dynamics around the European MDR order and inventory? A: Julie Andrews (CFO): The value of the order is approximately $15 million. You can estimate the impact by looking at our previous free cash flow guidance and taking those factors into consideration. The European distributor arrangement creates a temporary free cash flow timing headwind in 2026 as some cash receipts are projected to occur in 2027, while inventory-related cash outflows occur this year.

Q: With the Medicare reimbursement decision reversed and guidance increased, are you considering reinstating your long-range plan (LRP)? A: Julie Andrews (CFO): We are still assessing where we are and looking at our actions, particularly related to the smaller spine distributors and how that may impact our LRP over the next year or so.

Q: Can you provide more detail on the performance of the biologics business and the investment in clinical evidence? A: Massimo Calafiore (CEO): Biologics is recovering very well. We strongly believe in our products and are investing in clinical evidence for OsteoCov and Virtuos, and starting a registry for Strength+. We also see a great opportunity in diabetic foot ulcers, having just submitted our IDE to the FDA. This could open up a potentially very lucrative opportunity for the organization.

Q: What is driving the growth in the global limb reconstruction segment, and what are the expectations for the U.S. market? A: Massimo Calafiore (CEO): Global limb reconstruction grew 11% on a constant currency basis, led by TrueLock, Elevate, and FitBone, with strong international momentum. U.S. growth was below expectations, not due to lack of clinical interest, but because we are still building the commercial infrastructure required to consistently convert interest into revenue. Our focus is on improving distributor productivity and expanding market development activities.

Q: Can you elaborate on the strategic arrangement with the European distributor and the MDR certification process? A: Julie Andrews (CFO): C-SPINE exited the European spine market in 2022. One of our largest European distributors expressed strong interest in continuing to sell some spine products. We entered into a strategic arrangement where the distributor funds our MDR certification work. The distributor intends to purchase sufficient inventory in 2026 to maintain continuity of supply. This contributes approximately $15 million of incremental net sales in 2026, with the majority in Q4, and creates an approximately $22 million headwind in 2027 while MDR requirements are completed.

For the complete transcript of the earnings call, please refer to the full earnings call transcript .