Orthofix Medical Inc. (OFIX) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Orthofix 2014 Fourth Quarter Earnings Call. At this time, all participants have been placed on a listen-only mode and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Director of Investor Relations, Mark Quick. Sir, the floor is yours.

Thanks, operator and good afternoon, everyone. I would like to welcome you to the Orthofix fourth quarter and full fiscal 2014 earnings call. Joining me on the call today is our President and Chief Executive Officer, Brad Mason; our Chief Financial Officer, Doug Rice; and our Chief Strategy Officer, Mike Finegan. I will start with our Safe Harbor statements and then pass it over to Brad. During this call, we will 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, April 29, 2015. 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 2014 Form 10-K as well as additional SEC filings we make in the future. If you need copies, please contact my office at Orthofix in Lewisville, Texas. In addition, note that on today’s call we will refer to certain non-GAAP financial measures in which we exclude certain items from our U.S. GAAP financial results. 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 our financial performance measures determined in accordance with U.S. GAAP. Please refer to today’s press release announcing our fourth quarter 2014 and full year fiscal 2014 results available on our website for reconciliation of these non-GAAP performance measures to our U.S. GAAP financial results. At this point, I will now turn the call over to Brad.

Thanks, Mark and good afternoon, everyone. We have a lot to cover today, so we may run a little longer than usual on our prepared remarks. I will start by giving you an update on what’s been happening behind the scenes at Orthofix over the last few quarters, after which Doug will walk you through the financial results that we reported today. I will then follow-up with my thoughts about our priorities and expectations going forward before opening it up for Q&A. After all of these months, I am excited to have the restatement behind us, the current in our SEC filings and again have the opportunity to share with you what’s been happening at Orthofix. First of all, as noted in our earnings press release, effective April 24, Doug Rice was named the Orthofix Chief Financial Officer. Doug has been our Interim CFO since last September. Since he took the reigns, he has not only driven the restatement process to a conclusion, but also recruited and brought on board a new finance leadership team that has already proven to be exceptional. His tireless efforts and uncompromising commitment to the quality of the work is what got us through this critical undertaking. I know now firsthand Doug’s dedication, integrity, knowledge and leadership skills. He is the partner I need to help us drive our company forward in the years ahead and want to personally thank him for what he has already done for Orthofix. In 2014, we made good progress in positioning our business for future success. Despite the significant time and resources we devoted to completing the restatement of our financials and getting current with our SEC filings, we have also made significant strides in many financial and operating facets of our business. Since rejoining Orthofix 2 years ago,…

Thanks, Brad and good afternoon everyone. As Brad mentioned, we are pleased to be in a position to speak with the investment community again. I would like to start off by saying how excited I am to be CFO at Orthofix and join this great leadership team. We have a solid foundation and I look forward to helping us grow. The recent restatement was a significant effort over a long period of time by an extremely talented team. I am very proud of this team and what they have accomplished. We are focused on improving our financial control environment and have already implemented numerous enhancements. We started on the people side and have hired several high caliber individuals in key leadership positions. We will also continue to invest in our processes and system upgrades as part of our project Bluecore that Brad will discuss shortly. We have an ambitious plan and a lot of work left to do, but I am confident that we will emerge a much stronger finance and accounting organization. With that, let’s move on to the fourth quarter financial results. Total net sales in the quarter were $100.3 million, a decrease of 5.3% compared to the fourth quarter of 2013 total net sales of $105.9 million. On a constant currency basis, net sales decreased by 3.4% as the impact of foreign currency decreased net sales by $2 million in the quarter. Net sales in three of our four strategic business units increased on a constant currency basis. However, our Spine Fixation SBU continues to have challenges. Now, I will talk about each strategic business unit in more detail. Starting with our BioStim SBU, 2014 fourth quarter BioStim net sales were $39.7 million, up 1.2% versus the same period in the prior year. The increase was primarily…

Thanks Doug. I will now share our expectations of how our operational accomplishments in 2014 will translate into improving performance and shareholder value in the future. I will start by talking about our three main objectives for 2015 and how each of them will drive performance improvement. Our first objective is to continue to optimize our sales channels. Our initial step to accomplish this, as I mentioned a few minutes ago was to add many new talented regional sales leaders or field generals both in the U.S. and abroad. The next step is to leverage these new sales leaders to find more and better sales representatives and distributors to fill gaps in our coverage and in many cases reduce the size existing territories to make room for additional sales people. This process is well underway. Another critical factor in optimizing our sales channels is field education and training. While we have exceptional training facilities in Lewisville, Texas and Verona, Italy, both of which are utilized extensively. We also have a need for field based training and education personnel. These three members will support our expanded sales force, assist with new product introductions and help drive growth. We are adding these resources in each of our strategic business units. We believe these steps will help drive the top line at each of our SBUs and in fact we are already seeing good initial results in BioStim, Biologics and Extremity Fixation. Our second objective is to improve our infrastructure. Over the years, our investment in infrastructure improvements has not kept up with our growth nor have we utilized the current best in class technologies, systems, processes and controls. As I mentioned, earlier, to address this, in 2014 we initiated project Bluecore, a multi-year worldwide process and system improvement initiative. The strategic objective…

Thank you. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] And I am showing we have no questions in queue at this time.

Operator, we will wait a couple of minutes to see if anybody has any questions.

I am showing we do have a question coming from Imron Zafar from Jefferies. Please announce your affiliation and pose your question.

Hey, good afternoon. Thank you for taking my question. I am wondering if you can provide us some sort of a bridge between – in your 2015 guidance between revenue and adjusted EBITDA, just trying to understand the level of OpEx versus gross margin trends. So, any color there would be helpful for modeling purposes? Thanks.

Right, Imron, thank you. Good question. This is Doug Rice. I would answer that by saying that we expect margins – gross margins to stay relatively consistent to ‘14 in the mid to upper 70s. We expect our sales and marketing expenses to be up slightly and our G&A expenses will be up on unadjusted basis, but on an adjusted basis will be down slight year-over-year.

Okay. And then – thank you for that. And then Brad, you talked strategically about both about investing in the business and expanding the sales force and increasing clinical work on product validation and development, but also talked about improved operating profitability. Am I correct in surmising that the latter part of that the operating margin improvement is more of a 2017 and beyond story rather than a near-term target?

Hey, Imron. How are you? Good to hear from you.

My pleasure.

I would say we should see improvement before 2017, but I would think by 2017, the middle of the late – end of 2017, we should be firing on all cylinders by that point, but it doesn’t mean we won’t see improvement in the meantime. I think as we get into 2016, we get some of these phases behind us. It will help as an example getting up on R12 on Oracle. We will go live on R12 right now. Plan is to go live January 1, 2016 and then we will be live worldwide by the end of 2016. So, in some of these order to cash and other things that we are doing should come in a little bit – should be done earlier than that and we should start to see the benefits of that as well as some of the spending we are doing now to optimize our sales force. And typically, it takes about 12 months to get – to really kind of move the needle commercially when you are talking about adding sales management and sales forces and getting trained and that sort of thing. So, yes, I think that’s a pretty fair statement, but I think hopefully we can do a little bit better than that between now and then.

Okay. And then just lastly if you could just sort of give us some more thoughts around use of your very healthy balance sheet and access to capital in terms of M&A, size, multiple dilution, how we should think about that as an area of potential growth long-term?

Hey, Imron, Mike Finegan here. So, on the M&A side, we are going to continue to be, I would say, conservative but opportunistic. So, we continue to look for opportunities to add to each of our businesses. In terms of larger picture of capital allocation, I will let Doug Rice comment on that, but we have got thoughts there as well.

Yes, this is Doug. It’s a good question. It’s clear that we have got an underutilized balance sheet today at the end of the year. We have $70 million – $71 million of cash and restricted cash on our balance sheet and borrowing capacity. And we have repaid all of our debt. I think in the coming weeks we will be looking very closely at our capital structure in trying to determine the right balance between dry powder and what we want to deploy in activities like share repurchases.

Okay. But in terms of assets you are looking at are they focused more on the established company competencies or sort of adjacent – market adjacencies like the TMS partnership, for example. Are you looking for scale, diversity, what are the priorities on that M&A strategy?

Yes, Mike Finegan again. So, on the priorities, we will look to support each of our businesses with investments outside the company. You mentioned the investment in eNeura and that’s clearly part of our strategy to invest in what is financially one of our really strong businesses from a profitability standpoint. So, we talk a lot about expanding, we are using our platform there to inside and outside the company to pursue new opportunities. We will continue to do that. But we will in addition to that look for opportunities to support the other businesses in Spine and Extremity Fixation and in Biologics and we continue to look at all the opportunities that are out there.

Okay. Do you have a sense of how much the sales run-rate is for the eTMS product?

So, that’s a better question for eNeura, but what I will tell you is that they are in a phase where they are really just becoming commercial. So, just to give you a couple of points there, they achieved their FDA approval last year. As a priority for the U.S. market, they are doing a post-market study and that’s important, because it goes to label expansion and also goes to getting the runway paid for reimbursement in the U.S. That said they are going to be really doing commercial sometime mid-year. In the UK, they are commercial. They received their NICE recommendation earlier in the year. And once you receive that, that kind of tees up reimbursement for the regional payers in the UK. So, that’s a process that you have to go through. That processes takes some time, because they have to go regional kind of regional payer to regional payer, but they are commercial there. And as they get further reimbursement from the UK health system, they will make good progress there.

Okay. If I am not mistaken, the labeling currently is for migraine with aura, what do you mean by label expansion, what other indications are potentially available in the future?

Yes. So for label expansion, what their data shows is that in their UK experience post-market, while they have a current indication for the acute treatment of migraine with aura, there is a strong suggestion that, that in addition to migraine with aura that the device works, the therapy works in migraines with and without aura. Further, there is a good suggestion of another claim for prevention that they would be going after. People who used this device on a regular basis seemed to show a pretty strong preventive effect, not only an acute effect. So, that would be another opportunity for a different label. So, as they unveiled more of their clinical data throughout the year and they will be doing at the international headache meeting and then the American Headache Society meeting in June, they have a lot of different data sets they are working on. And I think some of the opportunity from a label expansion standpoint will be clear once that data is available.

Okay, great. Thank you very much and congratulations on getting through the ongoing stuff and thank you for taking my questions.

Thanks, Imron. Thank you.

I am still showing we have no questions in queue. [Operator Instructions] And I am showing no questions in queue at this time.

We may be having a problem with the queue, operator. Okay, well with that then, I will – I would like to thank everybody for being on the call today and I look forward to updating you on the first quarter results in the next few weeks. And we will talk to you soon. Thanks for your time. Bye.

Thank you. Ladies and gentlemen, this does conclude today’s conference call. You may now disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.