Orthofix Medical Inc. (OFIX) Q1 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing-by. Welcome to the Orthofix First Quarter 2018 Earnings Results Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s presentation, Mr. Mark Quick, Director of Business Development and Investor Relations. Sir, please begin.

Thanks, operator, and good afternoon, everyone. Welcome to the Orthofix first quarter 2018 earnings call. Joining me on the call today are President and Chief Executive Officer, Brad Mason; and Chief Financial Officer, Doug Rice. I’ll start with our safe harbor statement 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 fact 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 containing such statements will occur. The forward-looking statements we make on today’s call are based on our beliefs and expectations as of today, April 30, 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’ll 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 first quarter 2018 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 first quarter 2018 performance, after which Doug will discuss the financial results that we reported today. I will then follow up with our outlook for the full year 2018 before taking questions. Overall, we had another solid quarter in both top and bottom line performance. Starting with the top line. In the first quarter, we reported net sales of $108.7 million compared to $102.7 million in Q1 of 2017, representing a year-over-year increase of 5.8% as reported and 3.3% in constant currency. This sales result were in line with our consolidated expectations for the period, but did include some strategic business unit or SBU variability to our plan, that I will now discuss. BioStim net sales grew 3.6% over a strong first quarter in the prior year. This performance was on plan for the period, driven by solid execution of our commercial strategies and the continued market acceptance of our newest lumbar and cervical products supported by our Stim onTrack mobile app. Additionally, in Q1, we released the next-generation of our Physio-Stim products and the Android version of Stim onTrack. These new products are already gaining traction in the market and complete the latest updates to our full BioStim portfolio that has been ongoing over the last few years. Extremity Fixation exceeded our expectation for the period with a reported net sales increase of 14.9% in constant currency growth of 4.3%. This growth resulted from the continued uptake of new products and good performance in all but a few of our global markets including the U.S, where we’ve seen good momentum for the last nine quarters. Our Spine Fixation SBU started 2018 with another solid quarter, delivering 7.5% in year-over-year growth, including a 9.6% increase in the U.S. This SBU performance was on plan despite a shortfall for the period in a couple of international markets. The sales increase continues to be driven by new products and sales force enhancements. I will speak more about the expected positive impact of our recently announced acquisition of Spinal Kinetics in a moment. And in our Biologics business, we reported a decrease compared to prior year of 4.4%. As previously mentioned, the sales in this SBU will be negatively impacted this year by the contractual reduction in the marketing service fee percentage Orthofix receives from MTF Biologics. When normalized for this change, which occurred in March, the year-over-year decrease was 2.5%, which was below our expectations. In addition to the fee change, the first quarter also was impacted by slightly higher – slightly more ASP pressure than previously anticipated and the underperformance in one of our three sales regions due to our recent management change. When combined, our Spine Fixation and Biologics businesses, including the impact of the Biologics fee change, increase sales over Q1 2017 by 2.3%. Moving on to our bottom line performance in nonsales key metrics in the quarter. Adjusted EBITDA margin came in above our expectations at 18.1% compared to 15.3% in Q1 2017, a 290 basis point increase. In a few minutes, Doug will run you through the P&L and discuss the drivers of this improvement. Adjusted earnings per share was $0.39 compared to $0.27 in Q1 of 2017 a 44% increase. Free cash flow was a negative $7 million for the period, which was $7.8 million improvement over prior year. Adjusted ROIC showed a 250 basis point improvement at 12.9% compared to 10.4% in 2017. And we had a cash balance of $77.1 million as of March 31, 2018. Operationally, our focus for the quarter centered around the acquisition of Spinal Kinetics and the efforts related to exploring a redomicile of the company to the U.S. In addition to our ongoing efforts in sales force enhancement, new products introductions and clinical studies supporting our existing products in new indications of use. On March 15, we announced the signing of a binding merger agreement with Spinal Kinetics Inc. Spinal Kinetics is a company located in Sunnyvale, California, that designs, manufactures and sells differentiated artificial lumbar and cervical discs. I’m very pleased to report that the acquisition closed today, and we’re excited to welcome to the Spinal Kinetics team to the Orthofix family. As we outlined on the call several weeks ago, there are numerous strategic and financial reasons why we decided to acquire this business. While we estimate the current artificial disc market growth rate to be approximately 10%, we believe the introduction of the M6, which is the first disc that truly mimics the anatomical motion of the natural disc, will help drive faster adoption and artificial disc market growth then the currently available ball and socket designs. Regarding their strategic rationale for doing this deal, we see numerous benefits to integrating Spinal Kinetics into our Orthofix Spine Fixation including the following. First and foremost, the M6 discs provide great benefit for patients and support our critical mission of improving patient’s lives. We believe the addition of the M6 disc in the Spinal Kinetics team will significantly contribute to our objective of accelerating the growth rate of Orthofix to the mid-to-high single digits. This deal also checks the boxes on other key objectives, another key objective of our business development strategy, which is to acquire properties that are in fast-growing markets. The disc replacement market meets that criteria. The technology has proven with over 54,000 discs implant since their launch in Europe in 2006, and are the preferred discs for many of leading surgeons outside the U.S. Adding the M6 discs will fill the most important product gap in the Orthofix Spine Fixation portfolio with no product or sales force duplication. Since we announced this deal, we’ve received very positive feedback from our sales force about the M6 discs and the strategic value this brings to the Orthofix. We’ve also received strong in-bound interest from distributors who currently do not carry our spine products. Lastly, we believe the M6 discs, once FDA approved and launched, will receive an enthusiastic reception from U.S. surgeons that will not only help to solidify our existing relationships, but also open doors to potential new physician customers. As Doug will discuss in a few minutes, in the quarter, we also spent considerable time and effort exploring a potential redomicile of Orthofix from Curacao to Delaware. This redomicile will require a shareholder approval, and we expect it will be considered at the upcoming Annual Meeting of Shareholders. In summary, the first quarter sales were solid and in line with our expectations, while our 290 basis point improvement in adjusted EBITDA margin versus prior year exceeded our expectations. Additionally, we successfully executed on signing a deal to acquire Spinal Kinetics. It was a very strong quarter and start the year. I’ll now turn the call over to Doug for the financial details. Doug?

Thanks, Brad, and good afternoon, everyone. Before I jump into the quarter, I’d like to echo Brad’s comments about welcoming Spinal Kinetics to our Orthofix team. I’m excited about the strategic value of the Spinal Kinetics brings to the Orthofix, and I’m looking forward to working with innovative people who have built this business. Now I’ll start discussing our results by providing details into our net sales and earnings results, and then discuss some of our other financial measures. First, I’d like to mention that you will notice that we implemented several new accounting standards this quarter that impacted our Q1 results were reported. Under the new revenue recognition standard beginning this year, we will generally book revenue on an invoiced basis and will no longer utilize the cash basis recognition. Since we will not restate prior period reported amounts, I will provide more analysis in my revenue comments for the balance of this year, and you can also refer to the footnote in the 10-Q for further details. Our adoption of the new statement of cash flow standard changed your presentation of restricted cash and the statement of cash flows resulting in a decrease of $14.4 million in cash from operating activities in Q1 2017. We also adopted the new financial instrument standard which requires us to recognize the fair value of certain of our investment that had been historically held at cost, resulting in a non-cash increase another income of $1.6 million in the quarter. Moving on to our revenue commentary, as Brad noted, total net sales in the quarter were $108.7 million, up 5.8% on a reported basis and 3.3% on a constant currency basis when compared to the first quarter 2017. As a result of our adoption of the revenue recognition accounting changes at the beginning of 2018 stands our large number of stocking distributors, we’re historically accounted for under the old sell-through cash basis standard in 2017, the year-over-year growth rates that we report this year can be confusing and variable from quarter-to-quarter. Our reported net sales growth compares sales under the new revenue recognition standard to the historical sales under the old standard. To give better clarity around the underlying sales performance compared to prior year, for the remainder of 2018, in addition to reported net sales growth, we will also give growth percentages that compare the 2018 and 2017 periods, using the new revenue recognition standard for both. For the full year, we expect the growth rates comparing the new standard to the old standard for prior year and the new standard to the new standard for prior year will be approximately the same with significant variability possible in the quarterly periods. When converting first quarter of 2017 consolidated revenue to the new standard, constant currency growth was 2.4% during the quarter. On an SBU level, Extremity Fixation is the business that has the vast majority of the stocking distributors who are on the sell-through revenue recognition standard in 2017. This SBU had year-over-year growth in 2018 of 3.6% in constant currency when converting the first quarter 2017 revenue to the new standard. Gross margin in the first quarter 2018 was 77.8%, compared to 78% in the prior-year period. While these margins were fairly consistent, we had some unfavorable impact from our sales mix this quarter. As we continue to make progress on our inventory and instrument set initiatives, we expect gross margin improvements for the remainder of the year for our business other than Spinal Kinetics. As we combine Spinal Kinetics with our business, we expect full year gross margins to be between 78% and 79%. Sales and marketing expenses were 46.2% of net sales in the first quarter of 2018, down from 47.2% of net sales in the first quarter of 2017. This decrease was primarily due to lower commission rates as well as spending reductions and marketing related expenses. As we combine Spinal Kinetics with our business, we do not expect any material change to our 2018 sales and marketing expenses as a percentage of net sales compared to the full year 2017. Non-GAAP net margin in the quarter was 31.5% of net sales, which was up from 30.8% of net sales in the first quarter of 2017. This improvement was primarily due to the decrease in sales and marketing spending as a percent of sales over prior year, that I just mentioned. GAAP, general and administrative expenses were 17.9% of net sales in the first quarter of 2018, which were up slightly from 17.8% in the prior-year period. This slight increase was primarily due to higher expenses associated with strategic investments such as the Spinal Kinetics acquisition and our redomicile initiative, offset by cost savings from core expense reductions and the benefits of our 2017 U.S. restructuring. Research and development expenses were 6.4% of net sales in the first quarter, which were down from 7.2% in the prior year due to the timing of certain projects and some cost savings from our 2017 U.S. restructuring initiatives. Adjusted EBITDA during the first quarter increased significantly to 18.1% of net sales from 15.3% of net sales in the prior year. The primary driver of this 290 basis point margin improvement in the quarter came from sales and marketing cost containment and general and administrative expense reductions due to our 2017 U.S. and OUS restructuring initiatives and lower professional fees. We continue to expect to Spinal Kinetics to decrease our adjusted EBITDA by $3 million to $3.5 million in 2018. However, we also continue to expect to achieve a minimum of 100 basis points of adjusted EBITDA margin expansion in 2018 in our legacy business. Now turning to tax. Our GAAP income tax expense for the quarter was $5.3 million for a 51% effective tax rate, compared to income tax expense of $3.9 million or 243% of effective tax rate in the same period of 2017. A lower rate this quarter was due primarily to higher pretax earnings compared to the same period last year as well as a lower U.S. tax rate enacted in late 2017. These positive impacts were offset somewhat by certain corporate costs incurred by our Curacao parent that provide very little tax benefit. We will continue to see this quarterly volatility in our GAAP tax rate following the acquisition of Spinal Kinetics. However, we believe using the long-term adjusted effective tax rate of 35% continues to be appropriate at this time. As we previously announced in February, we’ve been considering a redomicile from Curacao to Delaware. As a result to further analysis in the quarter, we have determined to pursue that redomicile in 2018. The matter is expected to be included on the agenda for this year’s annual meeting of shareholders as the redomicile would require shareholder approval. If approved, we expect a redomicile would be completed by the end of the year. For the first quarter 2018, we reported GAAP net income from continuing operations of $0.27 per share as compared to a loss of $0.13 per share for the first quarter of 2017. After adjusting for certain items, and when normalizing for tax using a long-term rate, adjusted net income from continuing operations was $0.39, up from $0.27 per share in the first quarter of 2017. This bottom line improvement primarily reflects the significant margin expansion achieved during the quarter. Moving on to the balance sheet highlights. Day sales outstanding or DSOs were 64 days at the end of the first quarter 2018, up from 52 days at the end of the first quarter 2017. As noted on the last call, this increase was due primarily to the increased receivables from our adoption of the new revenue recognition standard. Our inventory turns at the end of the first quarter 2018 were 1.2 times, which was lower than the prior year at 1.3 times reflect the new product introductions in Spine Fixation and Extremity Fixation. Cash and cash equivalents at the end of the first quarter were $77.1 million compared to $81.2 million at the end of 2017. Cash flow from operations for the quarter was an outflow of $3.6 million compared to an outflow of $10.9 million in the first quarter 2017. This improvement was due to the $14.4 million payment in the first quarter 2017 for our U.S. government resolutions, which depressed cash flow for that period, offset by increases in spending through strategic investments and other working capital items. Capital expenditures during the quarter were $3.4 million versus $3.9 million in the prior year. This spending during the quarter primarily reflected to our investments and instruments in inventory for new products and our sales force expansion. Free cash flow, defined as cash flow from operations minus capital expenditures, was an outflow of $7 million during the quarter compared to an outflow of $14.8 million in the prior year. This primarily reflects the operating cash flow items that I just noted, as well as the capital expenditure decrease. With that, I will now turn it back to Brad.

Thanks, Doug. As I mentioned on our last call, our three key evaluation strategies are: first, continue our organic growth momentum through salesforce enhancements, new product launches and now with the Spinal Kinetics acquisition closed, by actively supporting the efforts to obtain FDA approval to market the M6 artificial discs in the U.S. as soon as possible. Second, achieve margin expansion through better supply chain management and cost containment in SG&A. And third, actively pursue value accretive inorganic opportunities, such as Spinal Kinetics, to further accelerate growth. All Orthofix SBUs and shared service functions are keenly focused on the execution of these three strategies. We believe these efforts will continue to create shareholder value as we’ve demonstrated over the last several years. I will now discuss our expected 2018 performance for the remainder of the year, which includes the impact of Spinal Kinetics business. For the full year, the company reaffirms its full year guidance for the legacy business and the Spinal Kinetics impact as previously stated. Including Spinal Kinetics, we expect to report net sales of $458 million to $464 million based on current foreign exchange rates. This represents 5.6% to 7.0% year-over-year growth. Although, we have not traditionally given quarterly guidance, we believe with the added complexity resulting from the new revenue recognition standards and the acquisition of Spinal Kinetics. For the remainder of this year only, we will share our quarterly net sales and adjusted EPS expectations to help our investors better understand how we expect 2018 quarterly results to role in. For the second quarter, we expect net sales, including Spinal Kinetics, to be in the range of $113 million to $159 million. Looking at the growth contribution from each SBU. We expect for the full year the BioStim SBU to grow in the 4% to 5% range, Extremity Fixation from 7% to 9%, and Spine Fixation growth including Spinal Kinetics to be in the 15% to 18% range. We now expect Biologics sales to be flat or decreased low single digits for the full year due to the contractual decrease in the marketing service fee we will receive from MTF and the shortfall to plan in Q1. Including Spinal Kinetics, we now expect to achieve adjusted EBITDA in the range of $85.5 million to $88 million for the full year 2018, and adjusted earnings per share of $1.58 to $1.68, using weighted average shares of $18.9 million and a long-term tax rate of 35%. For the second quarter, we expect adjusted EPS to be in the range of $0.35 to $0.37. With that, operator, we’re now ready to open up the lines for questions.

[Operator Instructions] Our first question or comment comes from the line of Bruce Nudell from SunTrust. Your line is open.

Good afternoon, gentlemen. Thanks for taking the call. Brad, it sounds like the team is done added due diligence regarding the upside of redomiciling to U.S, the e-corporate rates 35% this year for you guys. Where might we expected to go post redomicile? I know there might be a broad range, but if you could just give us some guidance that will be super.

Yes, Bruce. How are today? Good.

Good. Thank you.

Good, good. Nice to hear from you. So we have – our 35% long-term tax rate that we’re using this year does not include any benefit or any impact from the redomicile. We have a lot of moving pieces to determine that number. When we get past – if we get past – but hopefully when we get past the approval by the shareholders, we will then give a rate that we can count on. In the meantime, where we have to get through that process first, and you can look to S4 to get as much information as we prepared to give today.

Okay. Super. And one other things that Striker mentioned on their earnings call was, they’re seeing horrible double-digit decreases in price in the kind of core more pedestrian elements of the Spine Fixation market in the United States. And what could you say to give investors confidence that you guys could be solid mid-single-digit plus, given your portfolio, your market share position, Spinal Kinetics distribution strategy, et cetera, et cetera. Thanks so much.

Sure. You bet Bruce. So we have not seen those sort of ASP issues in the spine business. We certainly haven’t seen them, but there are no different than we’ve seen in the past. They continue, but they’re not at a pace that’s increasing. First of all, we have a relatively small base to work from here. So $5 million and $10 million in sales for us is pretty significant. So from a growth percentage that helps us. However, I will say, the new products that we have that fill up the bag and the new distributors that we have are important and also the engagement of our legacy distributors. But with the M6 disc, it really sends a different message to the sales force and our physicians that we are absolutely committed to this market. And one of the things that’s interesting for us is, when people begin to look at it who’ve not looked at before, they make some assumptions about their business. And then we expose them to our products and the things that we have, they’re blown away with the quality of our products, the depth of our portfolio and we’re getting a lot of inbound interest because of the disk that started also because we get some inbound interest because for our Trinity portfolio, which is very differentiated. But that’s accelerating, and that will also contribute to our growth rate going forward. So I think the acquisition of Spinal Kinetics really sends a message – a strong message that we’re really in this for the long-term and to grow the business. And that’s really important to distributors.

Thanks so much.

Thank you. Our next question or comment comes from the line of Ryan Zimmerman from BTIG. Your line is open.

Great. Thanks for taking the question, guys. Just want to begin on the quarterly guidance that you gave. I appreciate the color. The Q2 guidance – on the bottom line, a little bit lower than I think where distributors were expecting. So just maybe help us understand the impact from the Spinal Kinetics acquisition? And what the impact of in terms of expenses that we should be thinking about maybe driving that adjusted EPS number a little lower than we initially expected?

Yes, it’s really about how the year rolls out. And if you look historically for us, Ryan, you’ll see that we’re really backend loaded. And so it’s not as significantly different as you might think because the Spinal Kinetics, it’s more about the sequencing of the year as much as anything. That’s one of the reasons we wanted to get a little more color around this. This also takes into consideration all the changes that we’ve had… [Audio Gap] Okay. So Ryan…

Hey, I think we lost you there. Maybe only one, but, we’ll have to connect offline. It cut my line cut out, though.

So the question was, why do we give the bottom line guidance for Q2? It’s really about the year falls out. We are back and weighted in the year. If you look at the total year guidance that we gave, if you add up the numbers that we gave you when we announced the Spinal Kinetics deal, it’s the same, and we’re not changing anything. It’s all we expect a roll up during the year. So that we wanted to give you that color.

Understood. Thank you. Apologies again about by the technical difficulties. Just the final question I have and then I’ll hop back in the queue is, is there any upside that you may have in your view related to the trial and the PMA approval of the M6 disc? And the timing you have expected in mid-2019?

We’re still looking at – our best guess is mid-2019. I would say we’re plus or minus six months from there to kind of bracket it, so we’re always hoping that it would be sooner, but we’re also realistic about the process. And it’s going along as exactly as we expected it to, so no change from that perspective. What is nice though, even between now and when the disk comes into the market, the pull through that we’re getting and the excitement that we’re getting from distributors coming on board and giving us more of their time and attention is valuable even in the meantime. But everything is on track to – again, our best guess is mid-2019.

Great. Thanks for taking question. Congrats on the solid quarter.

Thank you. Our next question or comment comes from the line of Jeffrey Cohen from Ladenburg Thalmann. Your line is open.

Hi, Brad. Can you hear me? Okay.

We can Jeff. Hello.

Wonderful. Nice quarter. So few questions comes to mind, so I guess firstly, maybe for Doug. Could you talk about the pickup in External Fixation for the quarter, and on the percentage basis how that relates to the revenue recognition? I think you made some commentary about 3.6% increase year-over-year. Can you just correlate that for us a little better?

Right, 3.6% growth rate for Extremity Fixation was on a – what we call from new-to-new basis. So when looking at 2017 revenue and recasting it under the new revenue recognition standard, which is more invoiced based, you get to 3.6% rate versus the 4.3% that we’ve got in earnings release, that relates to new method in 2018 versus the historical old method in 2017. Jeff, one thing to note on that is, that is the business in particular, what we expect significant volatility from quarter-to-quarter. So it’s hard to track comparing just apples-to-apples in individual quarters. We do expect to be in that 7% to 9% for the full year.

Okay. Got it. Okay. And then secondly, can you talk a little bit about the strategic investments for the quarter, strategic investment – $3.2 million for the quarter. How might have look for the year, how might have play out? Is this investment related just Spinal Kinetics? What percentage of that was completed during the first quarter, I guess, and 1% follow on would you have there? And then just could you correlate that a little bit moving forward as far as your third initiative, which is – what’s going on the M&A front?

Right. So with regards to $3.2 million that recorded in the first quarter of 2018. The majority of that relates to the cost that we incurred with our diligence in getting the Spinal Kinetics deal completed with the other significant piece of that, being the redomestication efforts that culminated in the filings of as our S4 last week. So that’s the majority of the current quarter spent you can see in our guidance that we expect strategic investments to range anywhere from $6 million to $7 million for the remainder of the year.

Okay. And $6 million to $7 million, you expect the majority of that to occur in the second quarter? Or do you expect cadence to kind of decrease primarily throughout the year or is it largely dependent also as well as any further M&A initiatives?

So, Jeff I’ll pick that one. It really depends on how things go during the year. That’s just a pretty rough estimate if – we’ve got a number of targets from an M&A standpoint that we’re looking at. So those can disappear or they can become more active. So it’s hard to say if that number is going to be particularly accurate and what the timing of it is, but that will – we just wanted to give you something that you could kind of build your models around.

I got it. Okay. One more if I may? The $77.1 million in cash into Q1, payment for Spinal Kinetics is what? And that occurred Q2, today?

It occurred today in Q1 and that’s $45 million today.

Okay. Perfect. That’s it from me. Thanks guys. I appreciate it.

Okay. Thanks Jeff.

Thank you. [Operator Instructions] Our next question or comment comes from the line of Jim Sidoti from Sidoti & Company. Your line is open.

Good afternoon. Can you hear me?

We can Jim.

Hello, Jim.

How are you?

Great. Good, good how are you guys?

Good. Thank you.

Can you just remind me what’s the distribution plan for the Spinal Kinetics products overseas? Are you going to keep the distributors they had in place? Or are you going to transfer that to your own network?

With a very few exceptions, none of them will be transferred to our network, so to speak. With their few exceptions all the distributors who are in place will stay in place. There’s a few in geographies where we have some, maybe, more compliance risk – that will accept, and we will change that situation. But other than that – that’s not material, but other than that, everybody will stay in place.

Okay. There will be an opportunity to put some of your other spinal products through the new distributors?

We hope so. Particularly in places like Germany or at least combine the management of both where we’re not particularly strong in Germany with other spine metal products. And Spinal Kinetics is very strong. I don’t want to dilute the effort of the sales forces that we have there now. We have seven people direct sales reps there. I don’t want to dilute their efforts. However, we have the opportunity to use the relationships they have and the management and those sort of things. So those are things that we are contemplating now. And actually there is a ongoing call as we’re speaking on this call on just that topic, Jim.

Okay. And then on the Biologics, it sounds like that was a little weaker than you thought it is going to be. Can you just repeat what that was?

Yes, it was. We have slightly more ASP pressure than we had anticipated. And then if you remember back to 2006, we had a management change in one of our three territories, geographic territories, that hit us a bit. And we have the same thing essentially in Q1. It won’t us as much, but it’s there. And that takes a little bit of time to recover from. But overall, we’re still optimistic about the rest of the year. And we still have all the advantages of the Trinity product line that we enjoy. So overall, we expect to be fine, but we just lowered our guidance a little bit from being flat for the year due to the MTF fee reduction to the contractual fee reduction to being flat to down single-digits.

Okay. And then last one for me. The accounts receivable is up quite a bit. Is that due to the change in accounting for the fixation products?

Two things, one is, largely driven as a result of our adoption of the new revenue recognition standard and all of the cash-based revenue that remains outstanding at the end of the year got recorded. So it’s about two-thirds and then the other third Jim, your right, the good quarter that Extremity Fixation had, and the receivables balance growth in Q1.

Okay. Thank you.

Thanks Jim.

Thank you. Our next question or comment comes from the line of Bruce Nudell from SunTrust. Your line is open.

Good. Thanks for taking the follow-up. Could you – first on the Biologics side. Do you feel that there’s a secular change in the complexion or the prospects for that business? And my second question is, pertaining to the initiatives and aspects, how is RIVAL being received clinically? And also maybe chat a bit about the Charcot output initiative that you’ve got going on?

Sure, Bruce. So talking about Biologics, we – I think the things that changed in that business is, when you have on your side the advantages that we have with Trinity, the relationship with MTF, the handy characteristics, the clinical data supporting it. You pound on those things. When you don’t have those things, you pound on price. So we have a lot of competitors out there who are pounding on price. So there’s – that is a factor that we live with. And it has increased, but modestly increased. But that’s the reality of it. Long-term for that business, we need additional products. We will get, we believe, an uplift from the coattail effect from the M6 disc and the added distribution and the excitement of the distribution and those sort of things as well. But no fundamental change to the business. I think the stem cell allograft market is doing very, very well. There are just far more competitors in it now than there was three years ago, and a little bit more pricing pressure. But other than that, it’s fine. In terms of RIVAL, we’re very controlled in our launch. We have some market feedback that we needed some improvement in certain areas. So we’ve pulled those projects back in and making the changes necessary. But we still think long-term that will be a very good product for us. It’s just rolling out a little bit slower than we had initially anticipated, and with a couple of problems that we had not anticipated, but we’ll overcome that. You see if you look at our Extremity Fixation business for the year, we’re still showing a 7% to 9% increase that we expect. Obviously, that’s the tailwind of the currency, but it’s still good growth for the business. Turning to Charcot foot. We estimate that to be about a little over $100 million market in the U.S. We just launched our G-Beam – let’s call it, Beaming Screw which is about a $20 million market in the U.S. We are very focused on diabetic foot and Charcot foot. Our external fixation is a big part of that. We have, what we believe to be the best, external fixation, which is an important part of limb salvage treatment. It’s a high-growth market. We are getting more and more interested in that market, and we think that we’ll find a very good niche for ourselves there.

Thanks so much.

You bet, Bruce.

Thank you. [Operator Instructions] I’m showing no additional audio questions at this time. I’d like to turn the conference back over to management for any closing remarks.

Thank you, operator. Thanks everyone for joining us today, and we look forward to speaking you again in the near future. Have a nice evening.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.