Welcome to the Orthofix Fourth Quarter 2016 Earnings Call. Today's call is being recorded. At this time, I'd like to turn the conference over to today's host, Mr. Mark Quick, Director of Business Development and Investor Relations. Please go ahead, sir.

Thanks, operator. Good afternoon, everyone. Welcome to the Orthofix fourth quarter 2016 earnings call. Joining me on the call today are President And Chief Executive Officer, Brad Mason, Chief Financial Officer, Doug Rice, and Chief Strategy Officer, Mike Finegan. I'll start with our statements and pass over to Brad. During this call we'll be making forward-looking statements that involve risks and uncertainties. All statements other than those of historical fact are forward looking statements including any earnings guidance we provide or any statements about our plans, beliefs, strategies, expectations, goals or objectives. Investors are cautioned not to place undue reliance on forward-looking statements as there's no assurance 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 February 27, 2017. 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 risk disclosed under the heading risk factors in our 410-K for the Fiscal Year 2016 as well as additional SEC filings we make in the future. If you need copies, contact my office at Orthofix in Lewisville, Texas. In addition, on today’s call we'll refer to various non-GAAP financial measures. In order to understand our short-term and long term financial trends, investors may wish to review these measures as a supplement to financial measures determined in accordance with U.S. GAAP. Please refer to today’s press release announcing our fourth quarter 2016 results for reconciliations of these non-GAAP financial measures to our U.S. GAAP financial results. At this point, I'll turn the call over to Brad.

Thanks, Mark. Good afternoon, everyone. I will start by giving you a summary of our fourth quarter 2016 performance after which Doug will walk you through the financial results that we reported today. I will then follow up with a few thoughts about our expectations for 2017 and beyond before opening up it for Q&A. Our fourth quarter results were strong across all key financial metrics. Starting with the top line, our fourth quarter came in at $108.5 million which was an increase of 4.2% over prior year in constant currency terms. This increase was driven by both our BioStim and extremity fixations strategic business units or SBUs. Looking at each of these SBUs, BioStim grew 6.2% over the prior year quarter. These results exceeded our expectations and highlight the continued strong momentum we have in this market. But we believe we have over 50% market share in spinal and cervical stimulation. We also believe that we are well positioned to continue to grow faster than the market given the tailwinds from mass positive coverage recommendations and the launch of our next generation devices which I'll talk about in a bit. Moving on to Biologics, net sales declined 4.6% for the period which was inline with our expectations. As we have mentioned, this business has been impacted by both increased competition and the reorganization of one of our sales regions. Considering our three consecutive quarters of sequential growth, the completion of the sales region reorganization and the impending launch of our MIS delivery system, we expect to return to year over year within the next several quarters. In Extremity Fixation, net sales were up 14.3% in constant currency for the period and grew 9.6% on a constant currency trailing 12 month basis which minimizes the variability of cash collections worldwide…

Thanks, Brad and good afternoon, everyone. I will now provide details about our net sales and earnings results for the quarter and then discuss some of our other financial measures. Total net sales in the quarter were $108.5 million up 3.7% on a reported basis and 4.2% on a constant currency basis. As Brad mentioned, the increase during the quarter was primarily driven by strong performance from our BioStim and extremity fixation SBUs. Gross margin in 2016 was 78.5 %, a 100 basis point decrease from 79.5% in the prior year period. This reduction was primarily due to two factors. An increase in the mix of net sales from our extremity fixation SBU which had lower margins than our regenerative products and a 50 basis point decrease [indiscernible] charges related to our restructuring in Brazil and Puerto Rico. Sales to marketing expenses were $48.7 million or 44.9% of net sales in the fourth quarter of 2016 compared to 44.7 million or 42.7% of net sales in the prior year period. This year over year increase was primarily due to higher commission expenses from overachievement to quota in our BioStim SBU. The addition of new distributors in our spine fixation and Biologics SBUs and a higher proportion of U.S. generated revenue and our extremity fixation SBU. General and administrative expenses were $21.1 million or 19.4% of net sales in the fourth quarter of 2016, a decrease from $23.7 million or 22.7% compared to the prior year period. The change in reported G&A this quarter was due to a decrease in legal settlements and professional fees partially offset by an increase in share based compensation. A quick comment on our share based compensation for the full year of 2016 because that was not considered probable at the time, we did not recognize…

Thanks, Doug. Looking back at 2016, I am very proud of our many accomplishments and the significant value we created for our shareholders. I'd like to point out a few of these, from the top line perspective, for the full year, we grew BioStim, our largest and most profitable SBU had extremity fixation at rates significantly above market growth rates and are well-positioned going forward. We also made the necessary investments in Biologics and spine fixation to get those SBUs back on track and growing in 2017. From a margin perspective, adjusted EBITDA margins expanded 410 basis points to 19.4% in 2016 from 15.3% in 2015. With our current structure, we believe this adjusted EBITDA margin, in general is the appropriate level that balances top line and bottom line performance. From a capital allocation standpoint, we completed our $75 million share repurchase program at a price we believe is meaningful lower than intrinsic value of the company. We're evaluating all of our strategic opportunities going forward including another share purchase program, if the stock remains at current levels. Our adjusted ROIC year over year improvement of 216 basis points highlights the value of our discipline in capital deployment, and commitment to improving this important metric. From an infrastructure standpoint, our improvements were finished on schedule and below budget and with this overhaul complete, we expect only maintenance like investments will be needed for the foreseeable future. Finally, I want to discuss the strides we made in the future pulse electromagnetic field technology and clinical research to find new indications of new use and improve patient outcomes. We currently have two IDE studies underway to evaluate the safety and efficacy of our PEMF devices on the deltoid fractures and osteoarthritis of the knee. Additionally, we expect to receive our third IDE…

[Operator Instructions]. And we will take our first question from Anthony Petrone with Jefferies. Please go ahead.

Maybe to start out with extremities in terms of growth and maybe the divisional net margin posted in 4Q. So growth accelerated sequentially by quite a bit but I noticed the net margin dropped off, so I am just wondering the push and pull on volumes and pricing there and is this sort margin profile that we should expect into 2017 and then I have a few follow-ups.

With regards to the margin pressure, we saw one unusual item this quarter that I mentioned in my script around our restructuring charges as it relates to impacted inventory. We expect some mixed changes in Brazil as a result of our distribution strategies changing and so that's the most pressure on our margins for FY ’16.

Okay. And then, you know, just shifting over to -- so, there's looking ahead, so that should normalize out in other words, we should get back to the average for the first nine months or? A – Bradley Mason: Yes, we don't expect that to recur.

In terms of, you know, shifting over to BioStim, so the FDA clearance in early January, I'm just wondering what is baked in for those two products in 2017, and then what is the initial margin profile of those products, I guess specifically what level of sales in marketing investment will be put toward, what seems to be two launches both in Europe and the U.S. simultaneously and so how does that play out versus the BioStim net margin of 43% for 2016? A – Bradley Mason: The products launched in the first part of the year, they are essentially the same gross margin profile as our previous products, we do have some additional spending for the launches but it's not an extraordinary amount. So you should see generally the same sort of net margins in that business by year end. Our launches internationally will be very limited, very specific markets after we've already completed some very intensive research on where to launch and when and what, what that might look like, but that won't happen quickly. We are not baking a lot into our top line guidance for that. But, no, you should see the net margins in that business stay reasonably the same as they have in the past through 2017 and beyond.

And then, last from me, I'll hop back in. It's just, maybe just a little bit more on the NAAS coverage guidelines here announced late last year, how long do you think this takes to play out, I know it was October last year, so you had a little bit couple months in the back end of ‘16, that's certainly extended here into 2017. So what is the approach as it relates to the guidelines and at what point do you expect this to actually have an impact at BioStim? Thanks. A – Bradley Mason: I can tell you it had an impact from day one. We got calls from physicians who were not our customers at that point who were interested in the product because of the guidelines, but realistically, the benefit is long-term, it's not a spike that we expect and when you look at what that message is to the physicians out there who are not currently utilizing this technology is they are peer selling you should be. So it gives us another arrow in the quiver for utilization and it also gives us another arrow in the quiver for reimbursement. So if there's a long-term benefit to that that plays out over a multitude of years.

We will take our next question from John Gillings with JMP Securities. Please go ahead.

So I want to start out with one on spine and then probably follow up a little bit on the BioStim side as well. So in Spine Fixation, one of the things that I noticed this quarter is it looks like you're down significantly less than last quarter and I know you had some turnover of key customers and that sort of thing. And I guess I had assumed that it might take a little bit longer to turn that around. Make you can give us give us a little color how that started to bounce back maybe a little faster than we thought.

I think there's two things, John. One was Q3 was abnormal. We had lower cash collections in our international business that drove that down. I think as I recall, we talked about that business on a more normalized rate it was down probably 8% or 9% for the quarter. So the spike that you saw was not necessarily representative of the health of the business. Additionally, all the things that we've been working on, [indiscernible] who runs that business, really put in a lot of things to change the trajectory of that business including not only new products but reengaging the distributors, which is really the most important thing we can do and he's done a tremendous job of that and just getting those guys reengaged to bringing on even more importantly than bringing on new distributors is engaging the distributors we have, who are not exclusive to us so that they will pull our products out of the bag first. So that has gone very, very well. They're just seeing different things from Orthofix Spine than they've seen in the past, things that support them in the field, through education and the new product pipeline that really gets them energized. So I wasn't surprised at all by the fourth quarter performance and I also wouldn't be surprised if we return to growth, quickly. So, we exited the year with a lot of momentum and that's continued in to the first part of this year.

And then, just a couple of on the BioStim side. So Anthony asked about the impact of the NAAS recommendation and you guys have talked about that before as being a slow burn and you reiterated that. But again, that business was another one that came in a little bit ahead of what we expected this quarter. Was there anything sort of one time in the quarter, was that NAAS recommendation maybe giving you a little bit more of the tail wind than you thought? Just any color there would be great. A – Bradley Mason: Yes, there was no onetime benefit from the quarter. I'm happy to report with that kind of growth rate. As I said, that exceeded our expectations. Now, it's really hard to quantify what percentage of, let's say the overachievement from our expectations was attributable to the NAAS guidelines but certainly they are having an impact and we expect that to continue. It's also an exciting time for the distributors in that business with the two new products we just launched with the NAAS guidelines, there's just a lot of momentum in the culture and the enthusiasm that the business is enjoying right now, is really driving the business. They've done a great job in that business.

Okay. And then, turning to the trial, I appreciate the color you gave on the BioStim trials. But, maybe you could talk just a little bit about, you know, what you expect to be the factors that will impact enrolment in each of those three and specifically, if I remember, right, I think either last quarter or the quarter before we talked about the odontoid trial being a little challenging to enrol, so just any color there would be great and then just one more after that.

On the odontoid fracture study, that is challenging to enrol, we're making progress but it continues to be reasonably slow. It's also seasonal and so we deal with that. But we'll continue to press forward, it's a really good indication, it's an unmet clinical need and we view it as important for our customers. So we'll continue to make progress there. On knee OA we expect that to be different and to go much more quickly. We started rolling as you know, enrolment is going well and we would expect that to enrol reasonably quickly. So we think that by the end of the year, we should be pretty well through enrolment and then last but not least, with the rotator cuff, we think that will be more similar to knee osteoarthritis, not similar to OA, so easier to enrol and again that's also a huge unmet clinical need, it should be pretty good on the enrolment side.

And then, just the last one, looking at the regulatory pathway in Stim, that's, as far as I understand it, it has been and still at this point a PMA pathway. But there was noise back in December about some potential changes to that and the last time that came up, there was a lot of push back from physicians saying, this needs to be something with rigorous trials, the specific waveform matters, and if we don't get it right, we could actually end up doing more damage than good. Just wanted to see if there had been any commentary there, any color that you could give on that and that's it for me, thanks a lot . A – Bradley Mason: I'm going to go a little long on this answer, if that's all right. This is an important topic for us, it's an important business for us. And, you know, we feel strongly about it. So, I'll take a few minutes. So our BGS devices have been classified as class three all the way back to 1986 and just to give a little bit of background, John, I think you've got it but others may not. Down classification, the BGS devices, it's not a new issue. This came up in 2006 when the FDA was considering down classing on that time and the advisory committee recommend against down classification and the FDA agreed. To your point, we had a lot of good arguments then. We feel even better arguments today, but between then and 2015, this was just a dormant issue, it was gone. In April of 2015, the FDA published a list of 21 class three devices as candidates were possible down classification to class two. This was part of the effort by the FDA to just…

We will take our next question from Jim Sidoti with Sidoti and Company. Please go ahead.

I took some details on the quarter. The reconciliation table, you had $0.15 in the strategic investments between, you know, the GAAP number and the adjusted number. Can you just remind me what that is?

The strategic investments for 2016 includes primarily our investment in [indiscernible] and some accounting that we had in Q4 specifically, Jim, you know, based on an updated forecasted performance, we saw a decrease in the fair value of that investment, and so at that time also determined that we believe there's some credit risk and so you saw some charges run through our P&L related to the mark to mark on that investment. So, that's the primary nature.

Okay. And then when I look at the 2017 reconciliation, I see some additional charges there. Is that still, is that the same thing? A – Doug Rice: No, probably a little bit broader. I think that's just us being anticipatory in terms of evaluating inorganic opportunities and other strategic opportunities and anticipating some cost related to that.

Okay. And then, you did have some restatement costs I believe in 2017. At that point, when do you think that will be finished? A – Doug Rice: Right . So, as part of the restatement and the SEC resolution that we had last month we announced we will be getting an engaging compliance consultant for the next 12 months and so as a part of that, this estimate is to recognize the costs for that and any other legal and wrap up costs related to those initiatives.

So, do you think by 2018 you should be through all that? A – Doug Rice: We sure hope so.

The independent compliance consultant will be on board for a year and they should start within the next 45 to 60 days or so. So a bit of it could extend in to 2018 but the total, you know, if that's the only cost we're talking about at this point.

All right . But in general, it's good to see that that number approaching the adjusted number, much closer in 2017 than it was in 2016?

We like that too, absolutely.

And then my last question was going to be on potential data classification, but I think Brad did a good job of answering that already. I think that's it for me.

Thanks, Jim.

Thank you.

And our next question comes from Ryan Zimmerman with BTIG. Please go ahead.

So not to beat a dead horse on Anthony's question on the NAAS recommendation, but just curious to get your thoughts around whether the NAAS tailwinds are allowing you to take some share or if its new surgeons coming in the fold, just a little color between that dynamic there would be helpful.

You know, the NAAS guidelines were not equally beneficial to all companies in the bone growth stimulation market. So we certainly benefitted more than certain of our other competitors. So, you know, there might be an advantage from that perspective. Ryan, we really haven't done a huge marketing effort on those guidelines yet. We have money in the budget this year to do that in a way that’s the proper way in getting the word out. So, what we're seeing so far is not, it's not driven by the NAAS guidelines. NAAS guidelines are just, they're certainly contributing but it's a part of an overall culture and energy with that division. I tell you what you get sales reps energized and they just make it happen. You know, that's what's driving us more than anything else.

Okay. That's fair. And then just lastly for me, the [indiscernible] guidelines for next year with the combined $10 million impact, just a little bit on the cadence of that. You had some planned restriction restructuring, is there any seasonality or cadence we should be think about that for that business?

Ryan, let me get back to you on that one because there will be a little bit of a cadence, that's a question that I hadn't anticipated on the rollout of that restructuring. It's a really a question of when we transition from in-house sales reps in Brazil to stocking distributors and I would need to talk to [indiscernible] about how he sees the timing of that. So that one we can have offline.

Yes, we will take that offline, yes.

Yes.

Our next question comes from Jennie Tsai with Gabelli & Company. Please go ahead.

So in 2017, you're going to be introducing several new products in each of your SBUs and then you talked about spine and how you expect that to return to growth, maybe in second half of '18 by reengaging the distributors. What about Biologics? You know, what else can we do to improve the sales performance there?

So, there's a number of things in Biologics. So, first of all, Biologics is grown their distribution footprint significantly by adding a number of distributors in the last year and it does take a while for them to come up to speed to get the tissue approved in the hospital and all those sorts of things. So that will be an ongoing opportunity. We still have a tailwind from the published studies that we'll use as well. And then, you know, we have a delivery system that we will be putting out in the first half of the year that is unique and we think it will give us a strategic advantage as well. And additionally, we're also looking at other Orthomarkets. I think people are recognizing who have tried the competitive process that have come on to the markets they are recognizing the benefits that come with not only their partnership with Orthofix but equally as important frankly is their partnership with MTF. MTF is the gold standard and it really makes a big difference in how we go to market. So, we have a lot of really good exciting things happening in that business that feel really good. I just need to see them turn in to sales and I'm assured they will and I believe that they will.

And just, an update on your sales force, specifically is there any specific SBUs that may have some changes in '17? BioStim or anything that might have some additions or just changes you think?

I think in the U.S. market, certainly Biologics will be adding more distributors, or sales agents, frankly. It will be adding faster than the other SBUs. But we always look to not only augment our current sales force but to turn over the ones who are not performing. So it will always be some change but there is nothing unusual that we're forecasting for 2017 in answer to that question.

And we'll take a follow up question from John Gillings with JMP Securities. Please go ahead.

Just one quick follow up for me. And this maybe is something I should've looked in to ahead of the call. But you talked about the new products coming out with the Bluetooth technology.Is that sort of ubiquitous in the market now, is that something you guys will have as an advantage for awhile? Just seems like obviously something that's pretty critical for any device where compliance is so important to clinical outcomes?

No, it is unique in the market place, it's the only one we'll have the only products that have that technology. There are other products that you can get compliance information, but not real time compliance information like this will. The Stim On Track app is really, really slick when you look at it, both from a physician standpoint as well the patient standpoint. It reminds them that they need their treatment for that day, keeps track of it for them, sends that information back to the physician. It's a pretty significant differentiator, no question no nobody else in the market has anything like it.

It appears there are no further questions at this time. I will turn the conference call back over to Brad Mason, Chief Executive Officer for any additional or closing remarks.

Thank you, Operator. Appreciate the questions today and everybody joining us on the call and we're looking forward to starting the year strong and continuing throughout and talking to you again soon. Take care, thanks for joining us.

That does conclude today's presentation. Thank you for your participation. You may now disconnect.