OFIX
#Thanks <UNK>, and good afternoon everyone.
I will start by giving you an update on our fourth quarter and full year 2015 performance, after which <UNK> will walk you through the financial results that we reported today.
I will then follow up with a few thoughts about our expectations for 2016 before opening it up for Q&A.
Overall, we exceeded our expectations in the fourth quarter with a very strong finish to a transformational year at Orthofix.
Our Q4 results further validate our strategy, momentum, and the strength of our businesses.
Additionally, we believe there's significant opportunity to continue to improve our performance going forward, which I will discuss in a few minutes.
Now I'll give you a few financial highlights for the fourth quarter.
Net sales grew 7.6% for the quarter on a constant currency basis.
Excluding a benefit from a revenue recognition accounting change in Q3 of 2013, the fourth quarter was our highest quarterly year-over-year growth rate in the last six years.
The BioStim strategic business unit, or SBU, in particular had another exceptional quarter, growing net sales by 13.2% in constant currency over prior year.
The Biologics SBU continued to show consistent top line growth, with Q4 increasing net sales by 5.2% in constant currency.
The Extremity Fixation business net sales declined by 2.2% in constant currency in the quarter, but achieved a modest 1% growth for the full year in the face of continuing international challenges, particularly in Brazil.
And not to be overshadowed by the other SBUs, the Spine Fixation business achieved year-over-year growth in the fourth quarter of 11.9% in constant currency, which highlighted a notable turnaround of this business in 2015, as we had expected and communicated at the beginning of the year.
Adjusted EBITDA for the quarter was $19.3 million, or 18.4% of net sales, which demonstrates the fixed cost absorption and leverage achievable as a result of increasing net sales.
And as previously reported, in the fourth quarter of 2015, we initiated a $75 million, two-year stock repurchase plan that has resulted in stock purchases of approximately 294,000 shares for $11.6 million through December 31, 2015.
The repurchase plan remains in effect.
I'll now review a few of our key operating accomplishments for the full year.
As I just mentioned, in our Spine Fixation SBU we took the necessary steps to successfully turn around this business both organizationally, as well as financially.
This included a new leadership team, the expansion of our sales force by over 50%, the acceleration of our new product launches, and focus on profitability.
As a measure of that, the Spine Fixation business had the highest quarterly growth rate in almost four years and a positive operating income in Q4 of 2015 for the first time since 2010.
As in our Spine Fixation SBU, we continued to invest in our distribution channels in all of our businesses, increasing the size and quality of our footprint.
In 2015 we grew the total number of our US salespeople by approximately 20%.
We invested in clinical research and our products pipeline to drive organic growth in the years to come.
In 2015, we substantially completed several clinical studies, supporting the use of our regenerative products and continued to work on many other preclinical studies supporting all SBUs.
As an example of this, as we reported last week, the Spine Journal recently published online the results of a cellular study that indicate that PEMF therapy may reduce cellular inflammation and degradation associated with disc degeneration in human cells.
PEMF is the core technology product in our BioStim products, which we believe may have additional clinical applications beyond bone growth stimulation.
We also successfully launched six new products and four line extensions in our Extremity and Spine Fixation businesses in 2015.
And finally, we significantly improved our systems, internal controls, and accounting processes.
In addition to remediating our internal control deficiencies, we spent the last 18 months rebuilding the finance and accounting team, installing new commissions and consolidation software, streamlining our chart of accounts worldwide, significantly improving our internal reporting capabilities, and preparing for the reimplementation and upgrade of our Oracle ERP platform which is scheduled to go live on April 1.
While 2015 was a very good year overall for Orthofix, our expectations for 2016 and beyond are to capitalize on our building momentum and continue to drive performance improvement, which I'll discuss after <UNK> provides you with more detailed financial results.
<UNK>.
Thanks <UNK>, and good afternoon everyone.
I'll start with 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 $104.6 million, up 4.3% from the fourth quarter 2014 total net sales of $100.3 million.
On a constant currency basis, net sales increased by 7.6%.
Now I'll talk about each strategic business unit in more detail.
Starting with our BioStim SBU, 2015 fourth quarter net sales were $45 million, up 13.2% versus the same period in the prior year.
The increase was primarily due to our sales force expansion and an increase in the number of spine procedures.
I would also note that approximately $1.7 million of the growth was a result of a one-time program that accelerated backlogged orders.
Turning to our Biologics SBU, 2015 fourth quarter net sales were $16 million, an increase of 5.2% versus the same period in the prior year, primarily driven by our increased number of sales representatives and an increase in the number of spine procedures.
Moving on to our Extremity Fixation SBU, 2015 fourth quarter net sales were $23.9 million, a decrease of 13.5% in comparison to the same period in the prior year, largely due to an unfavorable foreign currency impact of $3.1 million.
On a constant currency basis, the SBU declined 2.2%, due primarily to continued international challenges, including weakness in Brazil and the timing of cash collections.
Since we recognize revenue from a large portion of our stocking distributors only on cash collections, we believe that constant currency trailing 12-month revenue growth gives our investors the best measure of the performance of this business.
At the end of the fourth quarter, the trailing 12-month growth rate in constant currency was 1%.
And lastly, our Spine Fixation SBU's 2015 fourth quarter net sales were $19.7 million, an increase of 11.5% in comparison to $17.7 million in the same period in the prior year.
On a constant currency basis, the SBU grew 11.9%.
The year-over-year growth was driven by the reorganization of the SBU and from additional distributors added in 2015 as a part of our sales force rebuilding and expansion initiatives that <UNK> mentioned.
Now I'll move on to the rest of the P&L.
Fourth quarter gross profit was $83.2 million, up $4.4 million from the fourth quarter 2014.
Gross margin in the fourth quarter 2015 was 79.5%, up 90 basis points compared to 78.6% in the prior-year period.
The increase in gross profit and gross margin is primarily due to the increased sales mix from our higher-margin regenerative solutions, which were 58% of net sales versus 55% in the prior-year period.
Sales and marketing expenses were $44.7 million or 42.7% of net sales in the fourth quarter of 2015, up $2.4 million from $42.4 million, or 42.2% of net sales in the fourth quarter of 2014.
The slight increase in these expenses as a percent of net sales was primarily due to the overall increase in the number of sales managers and field-based training personnel as part of the strategy to increase the size and improve the productivity of our sales organizations, as well as sales commission quota overachievement in certain territories.
Net margin, which we define as gross profit minus sales and marketing expenses, was $38.5 million, or 36.8% of net sales in the fourth quarter of 2015, up $2 million from $36.5 million, or 36.4% of net sales in the fourth quarter of 2014.
The improvement as a percent of net sales was due to the improvement in gross margins.
General and administrative expenses were $23.7 million, or 22.7% of net sales in the fourth quarter of 2015, which was flat on a dollar basis compared to the prior-year period.
When adjusting for legal settlements of $4.2 million and Bluecore expenses of $700,000, G&A was $18.8 million, or 18% of net sales compared to 21.3% in the prior year.
This improvement reflects a more normalized rate for the next few quarters as we continue to wind down our infrastructure improvement initiatives.
Research and development expenses were $7.6 million, or 7.2% of net sales in the fourth quarter, which was up from $6.2 million, or 6.2% of net sales in the prior year.
Adjusted EBITDA during the fourth quarter was $19.3 million, or 18.4% of net sales, compared to $16.3 million, or 16.3% of net sales in the prior year.
The significant year-over-year increase in adjusted EBITDA is primarily due to increased net income from continuing operations, which was a result of our G&A cost improvement and higher gross margins driven by product mix, partially offset by increased sales and marketing and R&D costs.
Income tax expense for the fourth quarter was $5 million, or 71% of income before income taxes, as compared to income tax expense of $6.9 million, or 373% of income before income taxes in the same period of 2014.
Our income tax expense was 128% of income before taxes for the full year 2015, as compared to 130% in 2014.
Our 2015 effective tax rate was inherently volatile because we had relatively low pretax income, and because we had losses in several tax jurisdictions in which we received little or no tax benefit.
As we increase our pretax income in 2016 and beyond, it will lower our effective tax rate to more normal levels.
Additionally, we believe there are opportunities to drive our long-term tax rate down, and are acutely focused on tax planning in order to accomplish this.
Accordingly, we currently believe that our long-term normalized tax rate will be 38%, and in order to improve comparability and to eliminate tax rate volatility in our quarterly non-GAAP reporting, we will apply this tax rate to derive adjusted net income prospectively.
For the fourth quarter 2015, we reported net income from continuing operations of $2.1 million, or $0.11 per diluted share, as compared to a net loss from continuing operations of $5.1 million, or $0.27 per diluted share for the fourth quarter 2014.
After adjusting for certain expenses, including foreign exchange impacts, strategic investments, restatement and related costs, legal settlements, and the Bluecore infrastructure investments, and net of tax, adjusted net income from continuing operations was $5.3 million, or $0.28 per diluted share compared to a net loss of $900,000, or $0.05 per diluted share during the fourth quarter of 2014.
Moving on to the balance sheet highlights, days sales outstanding or DSOs were 55 days at December 31, 2015, down from 56 days at December 31, 2014.
Our inventory turns at the end of Q4 2015 were 1.5 times, which was down from 1.7 times at the end of Q4 2014.
The decrease in turns was driven by the additional inventory needed for new product launches during the year.
Cash and cash equivalents at the end of 2015 were $63.7 million compared to $71.2 million, which included restricted cash as of December 31, 2014.
We continued to have no long-term debt on our books.
As <UNK> mentioned, as of December 31, 2015, the Company had repurchased approximately 294,000 shares of common stock for $11.6 million under the $75 million share repurchase program.
Additionally, the Company has purchased approximately 417,000 shares for $15.9 million for the period from January 1 through February 24, 2016.
In total, since the beginning of the program we have repurchased approximately $27.5 million of the $75 million authorized under the program.
Cash flow from operations for Q4 2015 was $17 million compared to $15 million during Q4 2014.
The increase is primarily reflective of the year-over-year increase in net income of $9.2 million, partially offset by an $8.1 million decrease in cash provided by changes in working capital.
Capital expenditures for Q4 2015 were $6.7 million versus $7 million in the prior year.
For the year, capital expenditures were approximately $28 million, which includes Bluecore investments of $16 million.
As I noted on the last call, we anticipate we will incur approximately $6 million of Bluecore expenditures in 2016 and would expect that the mix of these costs will be recognized as approximately 15% operating expenses versus 85% capital expenses.
Free cash flow, defined as cash flow from operations minus capital expenditures, was $10.3 million for the quarter, compared to $8 million for the prior-year period.
The year-over-year increase in free cash flow is primarily driven by the operating cash flow increase, as well as the slight decrease in capital expenditures.
In 2016 we expect to see our free cash flow generation improve as a result of both our margin expansion strategy and a significant reduction in capital spending relative to 2015.
I will now turn it back to <UNK>.
Thanks, <UNK>.
With 2015 now in the books, this is a great time to reflect on the successful transformation of Orthofix over the last several years.
In 2014 we created a vision to become a highly respected orthopedic and spine company that delivers exceptional value to our stakeholders.
This vision is beginning to be realized and we are on the right path to fully realize our potential in the next few years as we focus on business fundamentals, including our key 2016 objectives.
Our first objective for 2016 is to grow our sales in each of our businesses faster than the growth in our respective markets by expanding and optimizing our sales force, while launching new and innovative products.
Specifically, this year we expect to accelerate our new product cadence with 10 new product launches and seven line extensions.
The most important of these launches will be our next-generation bone growth stimulation products at year-end, a novel hip fracture system at Extremity Fixation, and in Spine Fixation, our FORZA PTC and PTC PILLAR line of proprietary interbody products, Firebird NXG, a significant upgrade and enhancement to our Pinnacle screw system, and Sentra, a new anterior cervical plate.
Our second key objective is to expand margins through improved operating leverage and SG&A expense reductions.
We expect to make good progress in 2016, and this will continue to be a focus area for us in the years ahead.
And lastly, our third objective is to continue to invest in meaningful clinical research, particularly for our regenerative technologies to ensure the long-term success of the Company.
In 2016 we will continue to work on a variety of clinical studies that are currently in progress, both to support the existing products as well as to investigate new indications for the use of our core PEMF technologies.
We are also evaluating and have planned to initiate new clinical studies throughout the year.
Regarding our expectations for 2016, we expect to achieve net sales at today's FX rates of $407 million to $412 million.
This represents a year-over-year growth rate of between 2.7% to 3.9% and we anticipate growth in each of our SBUs in the year.
We expect that the quarterly distribution of our net sales will generally reflect the same seasonal pattern that we saw in 2015.
We expect gross margins in 2016 to be generally flat year-over-year and our percentage of adjusted operating expenses overall to decline marginally for the full year.
More specifically, we expect sales and marketing expenses to be in the range of 44% to 45%, G&A expenses between 16% to 17%, and R&D expenses to be in the 7% to 8% range.
These ranges are averages for the full year and are expected to vary from quarter to quarter due to the seasonality of our net sales, which will impact our operating income margin disproportionately in the various quarters due to fixed cost absorption and items such as sales and marketing expenses that are more front-loaded in the year.
We expect adjusted EBITDA for the full year to be between $67 million to $70 million.
This would produce an increase of 10.4% to 15.3% over 2015.
I previously stated that I expected to achieve a higher than 20% adjusted EBITDA percentage in the future.
While we currently don't expect to achieve that level for the full year in 2016, we do expect to achieve this for 2017.
We expect for the full year 2016 adjusted earnings per share to be in the range of $1.25 to $1.35 based on the diluted weighted average of 18.7 million shares.
We expect capital expenditures to be in the range of $15 million to $18 million for the year, of which approximately $5 million will be related to finalizing our Bluecore initiatives.
Lastly, turning to our 2016 capital deployment strategy, we intend to continue investing in research and development, tuck-in product and technology licenses, and acquisitions, while executing our stock repurchase plan.
Our focus on improving ROIC remains unchanged.
With that, operator, we can open up the lines for questions.
<UNK>, It's <UNK>.
How are you today.
Good.
We do expect to make some progress in our G&A this year.
Looking for a 2% to 3% decline in G&A spending for the year.
And we may make a slight amount of progress in our sales and marketing.
But actually, on the R&D side we're actually going up a bit, which is what we were trying to do last year.
We got a little behind in some of our studies and some of our enrollment.
So I'm a big believer in spending the R&D is for the future of our company.
So you're going to see some in G&A this year, we expect.
And sales and marketing roughly flat, maybe down slightly.
But that's generally how it's going to flow out.
The one thing that I would really speak to is the cadence of it for the year.
I think about our year in three pieces: our first quarter, then our second and third quarter, which are roughly equal, and then our fourth quarter.
Our first quarter has always dropped quite a bit over Q4 and then we lose a lot of absorption in Q1, so from a percentage basis it's going to be a little bit off from one quarter to the next, particularly in Q1.
And then probably in Q4 it will go the other way a bit.
But overall, we should see a decline, a marginal decline, for the year in our operating expenses.
That's a good question, <UNK>.
So I always think about things differentially between the different business units.
So <UNK> Niemann is the President of our BioStim business, got a little bit of a head start on expanding the sales force in 2014, a little bit before some of the other businesses.
That's partly why you saw the increase in Q3 and Q4 for our BioStim business, is it takes about a year for new salespeople who come on board to really contribute to the top line.
So you're seeing that in our BioStim business, you saw it in Q3 and Q4, and then also now you'll see more of that in 2016 for both our Biologics as well as our Spine Fixation business.
We've not added quite as many in the Extremity Fixation business yet, but it will roll out over a period of time.
So you saw part of it in 2015.
You'll see more of it in 2016 and even beyond, because we'll continue to expand our sales force.
But we've got some opportunity coming up.
I think you'd be thinking in the low to mid single digits for the year.
We would be happy if we get into the mid single digits.
We think we have great opportunity with leveraging both our TrueLok Hex, as well as our GALAXY product line outside the US.
But we also have some concerns still in Brazil and some other areas of the world.
We think the US will be a good market and a good business for us this year.
I think Brazil, we feel it's bottomed out and it's on its way back.
But there's still some uncertainty in the business so we're not as aggressive as we might otherwise be in our forecasting ---+ in our projections for the year.
The legal settlement had to do with going back to 2012 in the issue that we had in Mexico, and we settled all of that with the US and then Mexico wanted to get their piece of the pie as well.
We actually ---+ that's an interesting settlement, because there was some cash involved but it was also ---+ we had the opportunity to work directly with the government down there, which was a great experience for us.
And we're going to be getting some of that settlement in product and training, and we of course, for accounting purposes, we book that at the fair value of it, but our costs, when we do that, when we actually supply those materials and products, will be less than that.
So we have some opportunity to recover some of that.
But more importantly it really gives us a great relationship with the Mexican government where we can now deal directly and sell directly to IMSS there which is great for compliance and it's great for us all around.
And I think it's going to be a little bit of a model as to how other companies might work in Mexico so we're very excited about that.
<UNK>, this is <UNK>.
The adjustments will be the same adjustments that we've used around share-based compensation, FX, any strategic investments that we've traditionally done.
But there will be some Bluecore as I mentioned a few minutes ago.
We expect some OpEx impact that we will adjust for there.
So those are the primary items.
The OpEx impact of Bluecore will be less than $1 million for the year.
So the EPS impact based on roughly 18.7 million shares, I don't have that math in front of me but that's (multiple speakers).
It would be about $0.05.
Share-based compensation we expect to be roughly the same as we had in 2015.
So I'll leave it at that.
We'd have to do a little math on it, <UNK>.
You're welcome.
Thanks for calling.
Sure, <UNK>.
It's <UNK> again.
Couple things.
So the growth percentage is a little misleading.
We have some little bit lower comps, but overall we are very, very happy with that business.
And with ---+ we're getting some of the growth from just expansion of spine procedures.
We estimate that, our estimate, to be about 3% or so.
Of those procedures, we get a percentage of those procedures and so we're getting some growth from that.
We also are benefiting from the addition of the sales force that we put in in 2014 and really started to kick in in 2015 in the second half of the year.
So we'll see some of that continuing going forward.
We think overall that business is still a low to mid single digit growth business and we've had a couple good quarters.
We had one of the issues ---+ not issues, one of the things that we did in Q4 that we spoke about a few minutes ago is we had a backlog of orders that were being held by some of our sales force that we gave them an incentive to bring those in and reduce that backlog, which we did.
That contributed about $1.7 million or so in the quarter, which was about 4% of that 13.2% growth.
So overall we are very, very pleased with the business.
We're still doing things in the business to streamline the processes so we can move the claims through faster, we get a higher percentage of claims paid, those sorts of things, and we're really excited about in the fourth quarter our limited market release of our whole new line of Physio-Stim, Cervical-Stim, and Spine-Stim products with some really, really good features.
So we're very, very happy with that business and expect it to do well this year.
Sure.
Brazil has declined over the last four years or so, four or five years.
So the exposure is between $10 million and $15 million is our top line down there, now.
We don't give it specifically, but I'll give you kind of a range on it.
And then for Puerto Rico, we did approximately $5 million in revenue there last year.
And this year we've got we're not counting on any because of the financial situation in Puerto Rico that concerns us.
So we're not guiding to anything in our budget for Puerto Rico this year.
That's all upside.
We do expect to get some, but we don't know how to quantify it.
It's just we're going to take a little more prudent approach with that.
So that's all upside for us in the guidance that we've been giving you so far.
Thanks operator, and thanks for everybody joining us on the call today.
I look forward to updating you on the progress as we go through the year.
We're excited about the year, and hopefully I'll see some of you down in Orlando later this week.
Take care and have a great rest of your day.
