Good day, ladies and gentlemen and welcome to the Orthofix Fourth Quarter and Full Year 2017 Earnings Results Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] As a reminder this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Mark Quick, Director of Business Development and Investor Relations. Sir, you may begin.

Thanks, operator and good afternoon, everyone. Welcome to the Orthofix fourth quarter and full year 2017 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 Safe Harbor statements and then pass it 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 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, February 26, 2018. 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 2017, 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 Lewisville, 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 U.S. GAAP. Please refer to today’s press release announcing our fourth quarter and full year 2017 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, and good afternoon, everyone. I will start by giving you a summary of our fourth quarter and full year 2017 performance, after which Doug will discuss the financial results that we reported today. I will then follow up with our key areas of focus and outlook for the full year 2018 before taking questions. In the fourth quarter, we saw our top line growth momentum continue with reported net sales of $116.9 million. This represents year-over-year increases of 7.7% as reported and 6.1% in constant currency. For the full year 2017, reported sales were $433.8 million, or 5.9% reported growth and 5.5% in constant currency growth over prior year. Now looking at each of our strategic business units or SBUs, and starting with BioStim. Net sales grew 4.1% over the fourth quarter of 2016 and 5.3% for the full year. This growth was in line with our Q4 and full year expectations, driven primarily by the market acceptance of our next generation bone growth stimulators and accompanying Stim onTrack mobile app. Extremity Fixation net sales increased 2.2% in constant currency for the period and was up 3% for the full year when normalized for restructuring and a discontinued non-core business. We exited 2017 with good momentum in our U.S. business and our pediatric and foot and ankle strategic product areas. This gives us confidence in our higher 2018 growth expectations for this SBU which I will speak about in a few minutes. Our Spine Fixation SBU continued to deliver strong top line performance with double digit constant currency growth for the quarter and full year of 13.2% and 12.7% respectively. New products are the primary driver of this business along with a growing and engaged sales force, particularly in the U.S. where we saw over 20% revenue growth…

Thanks, Brad, and good afternoon, everyone. I will start by providing details into our net sales and earnings results and then discuss some of our other financial measures. Total net sales in the quarter were $116.9 million, up 7.7% on a reported basis and 6.1% on a constant currency basis when compared to the fourth quarter 2016. Throughout 2017, we saw better-than-expected growth driven by our spine fixation and biologics SBUs. Gross margin in the fourth quarter 2017 was 79.8%, up from 78.5% in the prior year period. This result was driven primarily by our U.S. and o-U.S. restructuring initiatives during 2017, as well as the higher revenue from o-U.S. Extremity Fixation stocking distributors. Moving into 2018, we expect a minimum of 50 basis points of improvement from our full year 2017 gross margin of 78.6% due to our inventory and instrument set management initiatives. Sales and marketing expenses were 44.4% of net sales in the fourth quarter of 2017 compared to 44.9% of net sales in the fourth quarter of 2016. In line with our expectations, we were pleased to see this year-over-year decrease while maintaining our higher growth momentum. For 2018, we expect sales and marketing expenses as a percent of sales to stay roughly flat with 2017. Non-GAAP net margin in the quarter was 35.5% of net sales which was up from 33.6% of net sales in the fourth quarter of 2016. This improvement was due to the increase in gross margin and the decrease in sales and marketing spending as a percent of sales over the prior year that I just mentioned. General and administrative expenses were 16.7% of net sales in the fourth quarter of 2017, which were down from 19.4% compared to the prior year period. This year-over-year decrease was due primarily to lower…

Thanks, Doug. In 2017, our strategy was to accelerate our organic top line growth rate while maintaining adjusted EBITDA margins. This strategy proved very effective and resulted in us exceeding our growth expectations for the year. Now as we look forward to 2018 and beyond, we are focused on continuing our organic growth momentum, expanding margins, and actively pursuing value accretive inorganic opportunities to further accelerate growth. To maintain our organic sales momentum, we must continue our initiatives to further engage our legacy sales force and add new representation in underserved markets, while remaining committed to investing in R&D and a steady pace of new product and service introductions, such as our Stim onTrack mobile app and JuniOrtho pediatric care support tools. Additionally, we must continue to educate physicians and payers through published, peer reviewed research papers that demonstrate the safety, efficacy and cost effectiveness of our products. In 2018, we can now return our focus to adjusted EBITDA margin expansions. Our biggest opportunity is in gross margins, particularly around improving inventory and instrument set management in our spine and extremity fixation businesses. We also expect to begin to realize the cost benefits of our restructuring initiatives as well as benefit from leveraging our fixed cost and G&A. Orthofix is very well positioned to accelerate top line growth through the acquisitions of products, technologies, and companies. In addition to our strong balance sheet and free cash flow, we have an experienced and proven management team, a global footprint, and a reconstructed infrastructure on which to build. We have been and will remain very active in pursuing small to mid-sized opportunities that will drive shareholder value, particularly through top line growth acceleration. However, we will remain disciplined in our investment decisions, focusing on deals that are a good strategic fit with…

[Operator Instructions] Our first question comes from Bruce Nudell from SunTrust. Your line is now open.

On the re-domicile, like if we were to assume that in fact it's approved by the board, where would that drive the long-term tax rate.

This is Doug. It's a really good question. We are optimistic about the potential here but it's really too early to say in terms of exactly where that would land directionally. We are optimistic that we are moving in the right direction and we think that the project will have positive ROI but still just a little bit early to say. We will come out as soon as we can to let everybody know. In addition to that, you probably noticed that we lowered our effective long-term tax rate from 38% to 35%. As a result primarily of U.S. tax reform. So we are moving in the right direction and we think that re-dom could be a help as well.

And just to expand on that. Is there some issue with kind of mismatch of expenses and revenues that makes the exercise more complicated.

I think re-domiciling is complicated in general but in terms of the specific cost themselves, there are some costs that are incurred by our parent company which is Curacao based that we don’t get full benefit for. That could be beneficial to us under a U.S. domicile so that’s probably the biggest one that comes to mind.

Okay. Thanks so much. And Brad, my follow up is about the spine market. Everybody is reporting that it's under pressure, it is a point or two points below the historic recent averages. And I know you are taking advantage of the distributor segment not played in by the majors but given the kind of procedural bundling the majors were talking about inclusive of robotics and inclusive of navigation, is there a risk to the segment, the distributor segment that you are playing in where hospitals begin to consolidate to a much greater extent than they have in the past.

Yes. Bruce, good question. To date I think we have been turned away from one or two hospital groups. We are one of the largest players, we are the eighth largest spine company out there. We have great relationships and reputations with the hospitals, we also have a very very strong contracting group at Orthofix. And so while that’s -- if I am one of the larger companies, I would be talking about that as well, but we don’t see that impacting us. We didn’t see it impacting us in 2017 and we don’t see it as any sort of material impact in 2018. Certainly, there will be isolated cases here and there and over time it may be more pressure, but currently it's not a factor for us that we are concerned about.

And if I could just squeeze another one on stimulation, how impactful do you think that new study will be and maybe you could describe the top line results of that study. Thanks.

So, yes, the new study -- there will be a press release coming out on that in the next week or so. That will give some more details around it. I won't steal the thunder of the press release on that. But it just goes to -- it's one more log on the fire or it's one more tool on the bag I should say to help us sell the products and to get further adoption of the technology. So, it is one piece -- one published study is one thing but when you add that to the studies that we already have, it just becomes, it starts to become -- I wouldn’t say overwhelming but it's very very impactful and it will help. Now how to quantify that, it's in our guidance that we have given for the year, generally, but we haven't quantified that specifically.

Thank you. And our next question comes from Raj Denhoy from Jefferies. Your line is now open.

This is Catherine on for Raj. So, first, could you please talk about how the limited U.S. commercial launch of RIVAL is going? Your vision for 2018 and, if any, maybe give us a timeline of dates for the full commercial launch of the product line.

Sure. RIVAL is rolling out a little bit slower than we had hoped, to be very honest about it. We still are very confident in the product line and the products that we are putting out there. We are -- it is a measured rollout, Catherine, and we expect to have it completely rolled out by midyear and contributing pretty significantly to the U.S. extremity fixation business in 2018, which is baked into our 7% to 9% guidance for growth in the extremity fixation business.

Great. And also this is a very competitive market, can you expand on your plan to push its portfolio and its fueled growth? And where is your price point against competitors? If you could give any color on this, it would be very appreciated. Thank you.

Sure. I mean, you are talking about our foot and ankle -- let me clarify, Catherine, you are talking about our foot and ankle products in the U.S.

Yes.

So, we don’t get into price points. I just don’t discuss that but in terms of the opportunity in that market, one of the primary requirements to be a really strong foot and ankle company is external fixation. With our TrueLok HEX and that whole product line, we believe of course it's our opinion that it is the best product line out there. It has the features and benefits, it's very well regarded worldwide. So that as a starting point is really important in foot and ankle. We will be talking about a -- and probably a press release about another product coming out here also within the next month that will be an important addition to that product line. And then RIVAL is really the start of our internal fixation products for that category. RIVAL, well it's got almost 1,000 SKUs and it is differentiated particularly in the instruments since we have one instrument can serve up to 50 different indications and surgeries, so it is different. That’s a start but we will still add things, staples and bunionectomy sort of products and full line focusing on -- one of our focuses will be diabetic foot and Charcot, and we think it's a fast growing market, that’s where we want to play and we think we can do well there. We have a very good – very strong sales force very well focused on the podiatry market as well.

Thank you. And our next question comes from Jeffrey Cohen from Ladenburg Thalmann. Your line is now open.

So can I get a little more color on the deferred tax asset and if there is any further on that for 2018 as you currently anticipate.

We studied the U.S. tax reform as much as we could. Obviously, as of the end of the year, determined that the rate reduction from 35% to 21% caused us to revalue our net deferred tax assets. So they went down about $8.6 million which was reflected in our tax provision in the fourth quarter.

Got it. And while I have you, Doug, a little further on the AR, the one time of $9 million that you referenced on the call.

One time, with regards to revenue recognition, we adopted rev rec on the modified retrospective basis which means that you don’t restate prior years for the new method. And as a result there is an opening retained earnings adjustment in the following year and so that’s where they came from, is the deferred cash based revenue that we will never get to realize as a result of the new standard that was recognized or will be in our opening balance sheet in 2018.

Okay. Got it. And finally, Brad, if you could give us a little bit of commentary on the environment as you see it now, in particular you had -- in particular the M&A environment. You also had some commentary where you spoke about seeking M&A that would be accretive as opposed to instantaneously in the near to medium term. So could you give us a little further color on that, that would be helpful. Thank you.

Sure, Jeff. I think with all the work we have done over the past number of years, we are now at a position where we can be more acquisitive and we have been. You saw in some of our strategic investments last year that we have been busy, we have been active. We remain active and we expect to be. What we are looking for primarily are businesses that are synergistic with our core businesses that also get us into spaces that are faster growing then our existing businesses. We feel top line growth acceleration is still major shareholder value creator and now in addition to that our expectation is to be able to improve our margins at the same time as look for the sorts of acquisitions. It all depends on the strategic fit. I am looking at three to five years out for the company, I am not just looking for the next year. That said, we are also going to be very cognizant of our shareholders and the things that we invest in. But we could have deals that have a longer payback than others, we could have some that have a very short payback. But one of the things you have to think about in the market -- and the market is, we feel there is some very good assets out there. The market -- these assets, they are very proud of their businesses and for us to be competitive in this environment, it's tough to be accretive in the very short term. Or you are not going to get the deal, someone else will get the deal. But that said, we are still going to be disciplined about it and make sure it meets the criteria of being in our core or very adjacent to our core and hopefully accelerate, it moves us into markets that are growing faster than our existing markets.

Super helpful. And maybe, if I can touch further on, perhaps for you Brad also or for Doug, how do you feel about then use of capital for acquisitions in the case of stock and/or debt at current levels.

You know it depends on the deal. The sort of deals that are the most likely with our cash flow, our current position, our borrowing capacity, that’s how we would go. I wouldn’t see the need to use equity for any of the sorts of deals that we are looking at currently.

Thank you. And our next question comes from Jim Sidoti from Sidoti & Company. Your line is now open.

Just a couple of follow-ups. You took that $0.11 charge for strategic investments in the fourth quarter. Is that acquisition activity or what was that?

The strategic investments in the fourth quarter is really just our continued evaluation of opportunities externally. Yes.

Okay. So those are deals that you looked at and at some point you may or may not pull the trigger on.

Exactly.

Okay. And then the tax adjustment, the charge you took in the quarter, is that cash tax payment you made?

No. It's just a book revaluation of the deferred tax assets that we had existing that were impacted by the rate reduction from tax reforms.

Okay. So that $9 million is not a cash charge?

Correct.

Okay. And then I know you are hesitant to go into too much detail going further out in 2018 but I got to assume you wouldn’t make this change to domicile here in the U.S. if you didn’t think the tax rate was going to be lower than even that 35% going forward. Is that a good assumption?

Yes.

Thank you. And I am showing no further questions in the queue at this time. I would like to turn the call back over to Brad Mason, President and CEO, for any closing remarks.

Thank you, operator, and thanks everyone on the call today for joining us. We look forward to speaking with you again soon and have a very nice evening.

Ladies and gentlemen, this does conclude your call and you may all disconnect. Everyone have a great day.