Good afternoon, ladies and gentlemen, and welcome to the Orthofix First Quarter 2019 Earnings Results 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 is call is being recorded. I would now like to turn the call over to your host, Mr. Mark Quick, Senior Director of Business Development and Investor Relations. Please go ahead.

Thank you, operator, and good afternoon, everyone. Welcome to the Orthofix first quarter 2019 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 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 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’s 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, May 6, 2019. 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, 2018, as well as additional SEC filings that 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 first quarter 2019 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. Today, I'll start by giving you a summary of our first quarter 2019 performance and highlights, after which Doug will discuss the financial results in more depth. I will then follow up with our outlook for the remainder of 2019 before taking questions. For the first quarter, we reported net sales of $109.1 million, representing a year-over-year increase of 0.4% or 0.19% in constant currency. These results were slightly better than anticipated and set us up well to achieve the sequential quarterly sales acceleration that we guided to for this year. Orthofix Spine, which includes over Bone Growth Therapies, spinal implants, Biologics and Spinal Kinetics product lines generated $85.9 million in sales in the first quarter, which represents a 5.8% increase in reported sales over prior year or 6.1% in constant currency. Beginning with the Bone Growth Therapies product line, net sales increased 2.4% in the first quarter versus prior year. This was in line with our expectations for the period. Order volume's increased 5.4%, partially offset by constant product mix changes. We still expect this business to grow in the 3% to 4% range for the full year, and have already seen a strong start to the second quarter. In Spinal Implants, which includes, both spine fixation and motion preservation products, we reported a net sales increase of 10.6% or 11.6% in constant currency compared to prior year. This increase was driven by a $3.1 million contribution from our Spinal Kinetics motion preservation products, offset by a decrease in sales of our spine fixation products in the U.S., resulting from our ongoing selective disruption of our legacy sales force in preparation for bringing our largest sales partners in key geographies. We now have several new sales partners under contract and ready to go.…

Thanks Brad and good afternoon everyone. I'll start by providing some additional details into our net sales and earnings results and then discuss some of our other financial measures. As Brad noted, total net sales in the quarter were $109.1 million, up 0.4% on a reported basis and 1.9% on a constant currency basis when compared to the first quarter of 2018. When adjusting for Spinal Kinetics sales and the MTF Biologics contractual fee change, our organic growth was approximately flat over prior year in constant currency, with strong performance in our Biologics business and low single-digit growth in Bone Growth Therapies, which was offset by year-over-year decline in both Extremities and Spinal Implants. Gross margins in the first quarter 2019 was 78.3% compared to 77.8% in the prior-year period. The increase was due primarily to favorable product mix, offset slightly by the dilutive impact from Spinal Kinetics. For the full year 2019, we continue to expect gross margins to be between 78% and 79%. Sales and marketing expenses were 49.2% of net sales in the first quarter of 2019, an increase over 46.2% in the first quarter of 2018. The increase was primarily due to the investments in our expensive training and education programs to support the M6 U.S. commercial launch. We continue to expect sales and marketing in 2019 to tick-up approximately 100 basis points over 2018. G&A expenses were 18.8% of net sales in the first quarter of 2019, which were slightly up from 17.9% in the prior-year period. This increase was due primarily to CEO succession charges, which were offset by decreases in strategic investments during the quarter. R&D expenses for the first quarter were 8.5% of net sales up from 6.4% in the prior-year period, driven primarily by additional spending from the successful M6-C artificial…

Thanks, Doug. Regarding guidance for the full year 2019, our outlook remains unchanged. The company continues to expect to report net sales in the range of $472 million to $477 million, including a $4 million currency headwind, representing a reported year-over-year increase of 4.2% to 5.3%. We also continue to expect reported sales cadence for the year to be heavily weighted towards the lack of the year with low single digit sales growth in Q2, ramping to mid-single digits for Q3 and high single digits in the fourth quarter. This sales cadence is being driven by a number of factors, including currency headwinds weighted towards the first half of the year, the planned disruption of our U.S. Spinal Implants legacy sales force in selective major markets in order to convert to hypertension sales partners that are now attracted to our motion preservation, fixation and Biologics portfolio. And lastly, the ramp up of sales in the last part of the year of the M6-C disc in the U.S. This sales cadence will also disproportionately affect our flow through to the bottom line as we saw in the first quarter. As for sales, we expect of adjusted EBITDA to be heavily weighted towards the end of the year, but continue to expect for the full year 2019, adjusted EBITDA including Spinal Kinetics, to be in the range of $86 million to $89 million. In adjusted earnings per share, to be $1.75 to $1.82, using a non-GAAP long-term tax rate of 27%. Lastly, the search for our next CEO is going well with a strong pool of outstanding candidates included in the process. The Board of Directors, and I remain committed to finding the exceptional individual to lead the company into its next chapter. With that operator, we're now ready to open up the lines for questions.

[Operator Instructions] The first question comes from the line of Craig Bijou from Cantor Fitzgerald. Your line is open.

Great. Good afternoon, guys. Thanks for taking the questions.

Hi, Craig.

Want to start with Biologics. Obviously, large frank there. You call it out and you did, I think also mention that you saw some traction with distributors and there might have been some of the driver of the growth, so just wanted to understand, what really drove that growth? Were there any stocking orders or one-time items in there? And I think on the last call you said low single digits for the year and is that still what you guys expect?

Yeah. Good question, Craig. No. Exactly as I said in my prepared remarks, it was really driven by -- primarily by distributions that was added in the last six to nine months as well as getting our underperforming region back up to speed. There is no stocking orders in that business at all that impacted it. And as a matter of fact, based on what we've seen year-to-date, I think I'm a little more optimistic about the range that I gave you for the year. And everything is going very, very well in that business and continues to even in this quarter. So nothing that's a one time. It's just solid business that we're bringing in.

Great. And then maybe on the sales disruption or the disruption that you're seeing as you're realigning the sales force. Just let me get a sense for, would you be able to, or would you be willing to, I guess, is the question to quantify that impact in Q1? And then maybe kind of layout, how the impact will affect the upcoming quarters?

Yes. So without getting into too much detail about Q1, these are geographies where we have enormous potential. They're large MSAs where we've been under performing. So long-term outlook for these geographies is very, very solid. We expect probably second quarter to be similar to first quarter. Well we expect that to reverse probably by Q3 get into growth again and Q4 even more so. So I think mid-year we feel start to see a reversal of what you've seen as we bring on these new distributors. A number of them just started in April and May and it'll take them a little bit of while to -- a little while to ramp up. So -- and cover the business that we lost in this process. So by year-end, we should be on a great trajectory with our expectation implants and obviously also with M6-C, of course.

Great. Thanks for taking the questions.

You bet, Craig. Thank you.

Our next question comes from the line of Raj Denhoy from Jefferies. Your line is open.

Hi, good afternoon.

Hi Raj.

What are -- how are you doing, Brad? May be I could start a little bit with the extremities of business. You mentioned -- there are couple of stocking orders that you missed at the end of the quarter. Maybe you could just provide a little more detail around that? And sort of confidence that those orders will appear in the second quarter? Or really when you expect to get those back?

Sure. Yeah, we had a couple of large orders that are choppy that -- and it's less about the orders, it's more about the geopolitical situation in a number of cases. But we do expect those back. In fact, we have started the quarter very strongly in that business and we expect that we're going to do very well from here on. Now that said, given the guidance of low single-digits growth for the year, we still have more work to do in that business in the U.S. in particular. That's more opportunity, I should say. And I don't -- with the changes in things we're making there expect to see that next year, but probably not as much this year. So we are -- we don't have high expectations for that business this year. But I do as we get -- go forward into 2020 and beyond, particularly because that is the fastest-growing segment of orthopedics and it's also a very good, I would say, landscape for us to look for inorganic opportunities as well.

Okay. That's fair. Maybe I could just ask a couple of spine as well. I know you gave broad spine guidance at the beginning of the year, but as you look at how Biologics has been -- how it came in, in the first quarter, which I think was quite a bit stronger than most were expecting. Have you changed anything in terms of the complexion in terms of what will contribute in spine over the course of the year? I know you kept guidance everything roughly the same, but is there been any change in thinking about whether the Biologics might get back and maybe the core spine business takes a bit longer to come back together for you guys?

I personally have -- and more optimistic about the Biologics business. It's very strong. It's still a little early in the year for me to update any guidance on that. But if we see this through Q2, we'll certainly be willing to take another look at that. But no change in our Bone Growth Therapies business as we look at that they are 3% to 4% for the year. And in our spinal implants as I mentioned, we should see a nice turn around in the business particularly in the last third of the year. The fixation portion and then so -- and then we're keeping our thoughts the same on the M6-C between the $3 million and $4 million, the vast majority of which will be in Q4.

So something maybe just the confidence overall is perhaps a bit higher we are not raising over yet?

Exactly.

Great. This may be -- and one last one. You mentioned M6, you did mention you had some of the first implants in United States in the quarter. Maybe you can share in terms of demand or interest in getting trained with that product, is there anything in terms of the early days on M6 in the United States will be helpful?

Oh, absolutely. So several things. First of all, demand is not – it is not is the least of our problems right now. We -- in that product category, we want to make sure that every surgeon, every patient has a good outcome, so we are really focusing on training and education with the surgeons. And along that line, we had 13 top surgeons in the country in here over the weekend, training and have a phenomenal experience. And so we're very, very excited about that. And as are the surgeons that we've trained to-date 16 surgeons – trained and certified 16 surgeons. So everything is going very, very well from our perspective. Again, patience is a virtue here. We want to make sure we do it well, and we do it right. And for the long term help with that business and that's exactly what we're doing, and I couldn't be more pleased with how that project – how that whole launch and rollout is going.

Great. Sorry, just one last housekeeping one, looks like it took a ride-off in spine, in the quarter as well, is there any detail in terms of what that was related to?

I'm looking at Doug and he has a product look on his face.

What you're referring to, Raj?

Just as acquisition related fair value adjustment of $5.9 million in the quarter?

Yeah. Got you. Yeah, I wouldn't call that a write-off as much as just increasing our expected liability on some of the milestone payments that relates to our acquisition of Spinal Kinetics as we except.

It's actually a good thing then? It’s actually…

It’s a good thing. Yeah. Exactly.

Sorry about that. Yeah. Got it.

That's all right.

Okay. Perfect. Helpful.

Thanks, Raj.

Our next question comes from the line of Bruce Nudell from SunTrust Robinson. Your line is open.

Thank you for taking the question. Good afternoon. Brad, when you just think about the ramp in the year, clearly the strategy of the company has been to kind of get more mind share of existing distribution you want to keep as well as you acquired new distributors that are better footprint and targeted geographies. And so when you think about the ramp, what is it about the kind of new distributors that kind of – I suspect that's fitting into your belief that you will be able to show significant acceleration as the year progresses. Do they just have a certain amount of capital share for instance that you know you're going to get?

So it's a really good question, Bruce. So let me make sure that I'm clear about my answer on a couple of fronts here. One is, specifically around spine fixation implants. The growth this year – if we think about acceleration, a lot of is going to come from just the launch of the M6-C disc. So we know that going to pick up $3 million to $4 million. In term of the kind of the reversal of the Spine Fixation products implants that has to do with the distributors that you're talking out. Now the distributors that we're bringing on, these distributors, in the past, has a history of doing multiple of times of the business that we have – that we're doing or are capable of doing with our former distribution in these geographies. And in a lot of cases, these are large distributors in areas where we have no coverage. So as distributors come on, that will be a good portion of our ramp for the year. But also, if you think about it, our bone growth stimulation business is a solid 3% to 4% for the year. So that's going to tick-up from where he spent to get to that point. And also, our Biologics business now contributing at such a high level is another driver of it as well. But if the combination of those things, the new distribution Biologics is with the new distribution that they have and also coming-off of what, I would say as, a disappointing quarter in terms of the extremities because of those stocking orders. We expect a nice recovery in that business as well, which will also be a quite of a hockey stick at year end.

And just thinking about Biologics, is the complexion of that business changed fundamentally? Or is distribution going to be planned on outside – outsize contributory's effect for Biologics? Is there anything really fundamentally changed from, I think, despite it is a low single-digit kind of market?

I think the things that are changing fundamentally for that business are number one, just the distribution that is now attracted to Orthofix, based on what they've seen over the last couple of years and what they anticipate in the opportunity they will have with Orthofix, when you consider all of the things in the – in our spine business. That certainly contributed to this. And also, I think to a large degree, Trinity ELITE has become the standard of care. And that's been recognized, I think, more and more out there that it's just a great tissue. And now also with fiberFUSE coming on, that gives us even another leg on the stool in Biologics. So fundamentally, the tissue hasn't changed, but the market dynamics have changed a little bit, and we're taking advantage of that.

And I guess my last question is -- and my knowledge of disc space is all, how -- do you have a feel of how the M6 stacks up against the other cervical discs? The opioid number that you cited or percentage versus ACDF sounded impressive, but is that kind of a class effect? Or is this unique in that dimension? Thanks so much.

Well, probably the best way to frame that, Bruce, is virtually every market that the M6 disc has going into has taken a leading market share outside the U.S. There are significant advantages with the disc in terms of its natural design, much more similar to human cervical disc that is recognized by surgeons and appreciated by surgeons and patients alike. I think there are a number of reasons, including the data that I've talked about that in virtually every cases, superior to the other discs that have gone through this path that are driving demand for this disc. There's 300 patients a year in the U.S. that fly over to Europe to get the M6 disc put in. It is very well known by patients. There's a lot of demand already built up in the U.S. And it has -- now this is me speaking from what I understand, it has a -- the best disc -- it's very close to the best reputation than any disc in the world. And so, it is differentiated. There's no other disc like it in the U.S. They're all ball-and-socket designs other than the M6-C. And the market recognizes that. That the demand is there. It's very much there.

Thanks so much for that. Have a good day.

Good day, Bruce, to you too.

The next question comes from the line of Ryan Zimmerman from BTIG. Your line is open.

Hi. It's Sam on for Ryan Zimmerman.

Hi, Sam. How are you? Is it Sam or Stan?

Sam, Sam. So getting into the -- a little more into Biologics, on the -- with fiberFUSE on the market now. Can you give us a little insight on that? How is that going to impact your stem cell business going forward?

Yes. So when you think about the Biologics business. The Trinity ELITE product, the stem cell allograft products are a premium cost and premium priced tissue form. In some cases, there are hospital systems that just will not pay that price. In the past, we have just forgone that business. So fiberFUSE is positioned, so that we don't have to walk away from that business. It is not positioned as replacement for Trinity ELITE. Trinity ELITE is a very unique tissue form that has a lot of advantages, including live stem cells. By both fiberFUSE and Trinity ELITE are both partnership with MTF Biologics, which makes it another -- it's another advantage in terms of the relation -- excuse me, the repetition that MTF has. And so it's positioned as a lower cost alternative, where Trinity ELITE will not be paid for. And that's the situation and we have no intention of leading with fiberFUSE. It is a -- it is the backup to Trinity ELITE.

Great. And then turning to M6. In the lead up to the more full scale launch here in the back of the year, are there any metrics that we can look at? Or that you may be divulging, whether it be the certain training or things along that line to help us gauge performance of the rollout there…

Yes. Good question.

…you're looking at internally.

Yes. Good question, Sam. We will be getting a metric. We are contemplating whether that surgeon trained or not. By the end of -- when we do our Q2 call, we'll have a metric for you to use. We haven't decided on the best one, but we know that it's going to be valuable to you for us to share something other than just sales, so that you can get an indication of the future of the rollout of the disc.

Thanks. Appreciate that. Thanks.

All right.

The next question comes from the line of Jeffrey Cohan from Ladenburg Thalmann. Your line is open.

Hi, guys. How are you?

Good, Jeff. How are you too?

Awesome. Just a few follow-ups. Excuse me, [indiscernible] so Q2 that might be certain training look like for the quarter, would you expect any kind of double or triple the current number that you stated?

We probably won't get into that -- those numbers at this point. We are -- I will tell you as we are focusing on the key sites where the IDE's, the study sites were done and the surgeons in those facilities and that's where our focus is and will be for quite some time for a number of reasons. So, but -- without getting into numbers specifically, we’ll have a better handle on that and give you something at the end of Q2.

Okay. Got it. And then I start to drill down on new biologics input. But just fiberFUSE, you think that the two products that give you a pretty wide breath as far as the landscape in biologics? And can you give us a more color on frame cost and ASPs out there as compared to competitors as well as training?

Yes. I think it gives us another arrow in the quiver. I don't -- I wouldn't say that we have a full and complete line of biologics, but where we have products, we have very, very strong product for tissues, I should say. So if you think about kind of the ASPs in that business, you're really starting with InFUSE at the top, and you think about this is dollars per CC in terms of the ASP. It start with InFUSE, then it goes to sense of allograft, then it goes down kind of the super DBMs like this, like fiberFUSE will be and then DBMs and synthetics and things like that, so better cascade. So we're playing, towards the upper end at Trinity ELITE and then more toward the middle of the back with fiberFUSE.

Okay. And then lastly on the data from as far as some of the follow-up to M6 as far as opioid is in other therapies, should we expect more data?

No. If you go back and you look at the press release, we put out probably a month ago or so that will give you a lot of data, Jeff, on what came on the IDE. I just kind of highlighted a few other things.

Yes. You would expect some further data to be disclosed, it sounds…?

No.

No.

Well, we did disclose the data that was in the IDE, if that's what you mean?

Yes. No, I was just talking about general market data for it, but I got it. Okay. That's it from me. Thanks a lot.

You bet.

Our next question comes from the line of Jim Sidoti from Sidoti & Company. Your line is open.

Hi. Good afternoon. Can you hear me?

Hi Jim. Yes, we can hear you.

Great. Can you just give me a little more color on the distribution changes? It's primarily U.S. issue, I assume?

Yes, it is. Yes, that's exactly right, Jim. I should have been more specific about that, primarily U.S.

And why is it -- why did it impact the hardware more than the biologics?

In many case, it's different distributors, different agents. So we have -- as you recall about five years ago, we only use -- we only sold biologics through our medals agents out there. And that we separated that and kind of let Biologics find their own agents in addition to the agent that were selling our Spinal Implants. So roughly, let's say, a 50-50 split on the distributor that sell or metals also seller biologics. So they have their own other distribution as well. That's answer it?

Okay. And so and I guess the plan is to continue that strategy to have some agents to sell biologics and others that just sell the metal?

That's really about -- it's less about the strategy, in a more broad sense, it's a do what's best in a local geography and local territory. There is no national strategy per say, which is going to a territory and say what's the best opportunity here to sell our metals, to sell our biologics, to sell our bone graft simulators and the disc. And in some cases, that will be one distributor that sells all of those. That's a little bit more rare, but that happens in some cases. In other cases, although, they’ll sell one portion of the portfolio, depending on how their position image in the territory and what other distributors we have in that territory. So it's all -- case by case basis based on that -- the market dynamics in an area.

Okay. All right. And then, sorry, I missed the guidance you gave regarding gross margin, where do expect that to end up for the year?

Jim, this is Doug. We're guiding 78% to 79% for margins this year.

Okay. And then any update on the CEO search, Brad? And how much longer you want to work?

No. Other than to say that the process -- it's in process, it's going well. We have some very, very good candidates. And that's why all that we want to speak about this point.

Okay, got it. Thank you.

Thanks, Jim.

Thank you.

Take care.

Our next question comes from the line of Dave Turkaly from JMP Securities. Your line is open.

Thank you. Just a couple of quick follow-ups. You mentioned these new distributors in some of the new bigger territories and signed them up, I think, primarily because of the M6, but I would love to get some color on these distributors selling other competitive disc, and you're stealing them away? Or do they not have a disc in their bag today?

I think it could be -- well, I would never use the term that we're stealing anybody away. Let's start with that. Secondly, they may had a disc at one time. But they are -- we honor non-competes in territories. So if they are coming on and starting with us, that means they are no longer obligated by -- under contact with anybody else. So they could have -- they might have sold disc in the past or perhaps not. It could be either one. It just depends on which distributor we're talking about.

Got it. You mentioned market leading share OUS. I'm just curious if you put a number around that, even it's just a ballpark. Does it have 30% or 40% share in some countries? And I guess the follow-up to that will be, do you anticipate it might get to that level here in the U.S.?

It actually in many, many markets adds over 50% share. As I sit back and I look at this, and I dream about the opportunity that the M6 creates, this is a roughly $250 million, $275 million market in the U.S. today, growing double digits, becoming more and more accepted, more and more pushed by patients, not just surgeons. And based on what happened in other market, based on the differentiation of M6 disc, not only in its design, in it’s function, but also in it’s -- how the procedure to put it in, the training that we do, all of these things, it should have every opportunity to do what it's done in other markets from my perspective. And that's what gives us a lot of confidence about -- this year is a year that I think, is going to be a good year, 2020 will be a great year from my perspective. And the M6 disc is a big part of that. And it leads to a lot of other things. It's kind of a link to other opportunities. But in terms of the U.S. market opportunity, growing market, and I expect that we will have an opportunity to get a significant portion of markets in the next three, five years.

Got it. Last one, you mentioned some of the features and some of the benefits that came out in the study. From an ASP standpoint, is the M6-C is a premium price device versus the other disc around the market?

It is. That's where – that’s how we have positioned it as a premium product, and we'll position it with a premium price.

Thank you.

All right. Thanks, Dave.

I'm showing no further questions at this time. I would now like to turn the conference back to Mr. Brad Mason.

Thank you, operator, and thanks, everyone, for joining the call today. We appreciate the time and attention. And we look forward to seeing you, hopefully, in the near future. Have a nice evening.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.