Orthofix Medical Inc.

Thanks, operator, and good morning, everyone. I'd like to welcome you to be Orthofix Fourth Quarter and Full Year 2013 Earnings Call.

Joining me on the call today is our President and Chief Executive Officer, Brad Mason; and our Chief Financial Officer, Emily Buxton. 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 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, March 27, 2014. 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 2012 Form 10-K/A, 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 GAAP financial results. We believe that in order to properly understand our short-term and long-term financial trends, investors may wish to consider the impact of these items as a supplement to our financial performance measures determined in accordance with GAAP.

Please refer to today's press release announcing our fourth quarter and full year 2013 results available on our website for a reconciliation of these non-GAAP performance measures to our GAAP financial results.

At this point, I'll turn the call over to Brad.

Thanks, Mark, and good morning, everyone. As you can imagine, we have a lot to cover today.

On today's call, our CFO, Emily Buxton, will give you an update on the restatement and our 2013 financial results. After Emily's comments, I will share with you a more detailed look at where Orthofix is in this transition phase, and then a few closing thoughts before we take questions.

I'll now turn it over to Emily.

Thank you, Brad. This restatement marks an important milestone for Orthofix, and I'm glad to once again be able to speak with you today.

I will summarize the restatement process and findings, but please refer to our recent SEC filings and our restatement press release for further details on these items.

Monday, we filed our restated financial results through the first quarter of 2013, which were issued on an amended 10-K for 2012, and an amended 10-Q for the first quarter 2013. In addition, we filed our 10-Q for the second quarter of 2013.

On Tuesday morning, we filed our 10-Q for the third quarter of 2013. The documents we filed described the scope of the independent review conducted by the Audit Committee, the accounting adjustments made in the restatement and the restatement's impact on our historical financial statements.

Also in these documents, we discussed weaknesses we identified in internal control over financial reporting and our actions to correct these weaknesses. This morning, we're also reporting our Q4 and full year 2013 unaudited results.

We expect to finalize and file our 2013 10-K by the end of the month.

To give you a quick summary of the work that has been going on, we began an independent review last summer as a result of information that raised questions about whether the company had properly recognized revenue under GAAP in connection with distributor sales recorded in 2012 and 2011, as well as a significant return of some products that had been processed during the second quarter of 2013. The review, which was conducted with the assistance of outside professionals and gauged by the Audit Committee, focused primarily on revenue recognition related to distributor arrangements and inventory reserves.

The restatement adjustments reflected in our amended filings are based on management's assessment of information obtained from the Audit Committee review, and all of the adjustments are consistent with the findings of the independent review. In addition separate from the Audit Committee review, management determined that certain adjustments related to inventory reserves were appropriate.

These adjustments are also reflected in the restated financials.

The restatement includes adjustments principally relating to transactions with distributors in 2011 and 2012, where revenue was recorded before all revenue recognition criteria were met. As part of the restatement, we have now transitioned to only recognize revenue from distributor customers when we receive the payment.

The timing differs by entity as disclosed in our 2012 amended Form 10-K, but to put these changes into context, prior to the restatement, distributor revenue was approximately 11% to 13% of our total sales in 2011 and 2012. And these changes resulted in reductions to net sales of approximately 3% in 2012 and 6% in 2011.

Some of the revenue we recognized in prior periods has not yet met the criteria for revenue recognition under our new cash-based recognition policy. As a result, previously booked revenue for these transactions has been deferred, though we have recorded a portion of this revenue in 2013 for payments received that year, and we expect to record the remainder of this revenue in future periods when we receive the payments from our customers.

In cases where we are not assured of collectability from distributors, we have recorded the cost of sales upon shipment of the products, which results in the cost of those products being recognized prior to the associated revenue being recorded. Of the previously recorded revenue that was not included in our restated financial results, approximately $7.4 million of that will be permanent revenue reversals due to specific situations, such as products being returned to us from distributors.

The next area of adjustments in the restated financials related to inventory reserves, primarily within our Spine Fixation business, principally for the years 2011 and 2012 that we made some smaller adjustments in the prior periods. These adjustments increased cost of sales in 2011 and 2012 by $3.5 million and $4.3 million, respectively.

Finally in the restatement, we have reclassified our royalty expense of $7.7 million and $8.2 million from sales and marketing expense to cost-of-sales in 2011 and 2012, respectively.

In summary, the adjustments that were recorded, including the impact of the retroactive changes to the more conservative accounting method that we have adopted, decreased revenue in 2011 by $28.2 million, and in 2012, by $14.7 million. Also the total impact of all adjustments decreased operating income by $25.4 million in 2011 and $12.4 million in 2012.

Now I'll turn to the results for the full year 2013. I have a lot of numbers to cover in today's call, so I will highlight only certain financial measures for 2013.

For full details of our financial results, please refer to the press release filed this morning in our 2013 10-K when it's available. For clarity, all sales numbers will be provided on a constant-currency basis.

Net sales in the fourth quarter were $106.1 million, down 10% year-over-year. Net sales for 2013 were $400.5 million which was down 11% from the prior year.

In our Q3 10-Q filing, you will see for the first time -- the presentation -- our results in our 4 recently created strategic business units, or SBUs. These are BioStim, Biologics, Extremity Fixation and Spine Fixation.

Brad will speak more about this in a few minutes, but I want to provide you with some detail regarding the performance of each SBU.

Today and in the future, communications I will provide you with the top line number for each of these SBUs, as well as their respective net margins, which we define as gross profit less sales and marketing expenses, and which we believe is the measure that best reflects each segment's contribution to the overall business.

On our website under the Investors section, you will find the recasted revenue and net margin of these SBUs by quarter in 2012 and 2013, and you should read this information in connection with our earnings release. BioStim, our largest business, designs, manufactures and sells noninvasive regenerative stimulation products used to enhance bone growth for spine, cervical and long bones.

Almost 100% of our sales come from the U.S. market.

We are the market leader in spine and cervical spine stimulation products, and we have the only FDA-approved product for cervical spine indications. As our most profitable SBU, the company's consolidated results are greatly impacted by the performance in this business.

And in 2013, total sales were $147.9 million, down $34.1 million or 20% from the prior year. The decline in stimulation revenues in 2013 was caused by a number of issues, but I will highlight 2 in particular that were significant.

First, we suffered from disruption caused by the changes we made in our spine stimulation sales force in 2012. As a result of those changes, we lost both physician coverage and relationships that impacted our sales.

Concurrently, we were converting our combined U.S. Physio-Stim and Extremity Fixation sales forces from an office call point to an OR call point to enhance our Extremity Fixation and Biologics sales.

This adversely impacted our Physio-Stim sales significantly since the Physio-Stim call point is in the physician's office. In 2013 after resegmenting our SBUs, we began to transition to separate sales force focused only on Physio-Stim.

The disruptions caused by these changes are diminishing and we believe that we have now -- have the right sales leadership, strategy and focus to recoup our spine, cervical and Physio-Stim businesses.

Second, we made some important process changes to ensure that our representative submit all documents necessary to ensure that our third-party billing process is more efficient and timely. We call this our billable packets initiative, which moves the date that we recognize revenue from receipt of the assignment of benefits to when the sales rep has submitted all documents required for third-party billing.

This change has benefited us by making us more efficient and has reduced our DSOs. This process change resulted in a deferral of revenue of $6.3 million beginning in Q2 of 2013.

Finally, BioStim's net margin for 2013 was 44% of sales compared to 48% of sales in 2012, which again by definition of net margin, includes the impact of sales and marketing expenses in this business unit.

Moving to our next SBU, Biologics, primarily comprises our human, cellular and tissue-based business, including revenue from our long-term partnership with Musculoskeletal Transplant Foundation or MTF. MTF processes and distributes these tissues and Orthofix markets them for spine and orthopedic surgeries.

These MTF tissue forms account for approximately 90% of the Biologics' business revenues of which almost all are sold in the U.S.

Our Trinity stem cell tissues are market leaders and significant growth driver for Orthofix. Biologics sales increased slightly year-over-year to $53.8 million despite the fact that our marketing service fee for Trinity from MTF was lowered in Q2 of 2013 from 70% to 65%.

This decrease in the fee was commensurate with the late-stage development milestone for our newest tissue form, Trinity Elite, and was offset by a 5% increase in total Trinity tissue usage during the year.

We fully launched Trinity Elite in June of last year, and we finished 2013 with more than 50% of the Trinity revenues converted to Trinity Elite from Trinity Evolution. Surgeon feedback on the new technology has been overwhelmingly positive and driven greater usage of Trinity per surgeon.

Biologics' net margin for 2013 increased from 44% of sales in 2012 to 46% of sales in 2013. This increase was due to the very positive surgeon adoption rates of Trinity Elite.

Looking next at the Extremity Fixation SBU, this designs, manufacturers and sales external and internal fixation devices, which are used in fracture repair, deformity correction and bone reconstruction. Approximately 80% of our products are sold outside the U.S.

Our External Fixation products have, we believe, a reputation as being the best-in-class worldwide. Extremity Fixation sales were $103.4 million, down 7% or $8.6 million versus prior year.

This was driven primarily by 2 factors. The first was a deterioration of sales in Brazil that accounted for 1/3 of our total sales decline.

And the second related to the impact of the prospective change made on April 1, 2013, which deferred revenue until cash is collected from the distributor transactions within this SBU, except distributors in Brazil, which were transitioned earlier to this method of accounting. This change, which we also refer to as sell-through accounting, resulted in a deferral corresponding to a 4.8% decline in sales.

This change in accounting methodology for international distributors will continue to defer sales in 2014 and beyond, but the year-to-year comparative affects will normalize as we receive cash payments for orders shipped in prior periods.

The Extremity Fixation net margin for 2013 was 26% of revenue compared to 31% of revenue in 2012. This decrease was primarily due to lower sales, an increase in inventory reserves, as well as the impact of certain distributor situations where we are recording the cost of sales upon shipment of product and deferring the revenue until payment is received from the distributor.

As included in our 2012 Form 10-K/A filing, we are investigating allegations of potential and proper payments involving the Brazil Extremity Fixation subsidiary, and have hired outside council to conduct a review. At this time, we cannot comment further about this matter other than to reinforce that compliance is a top priority for Orthofix.

We'll provide more updates in the future as this matter progresses.

Lastly, moving on to our Spine Fixation SBU, this business includes the spine implant products that we design, manufacture and market inside and outside of the U.S. Approximately 80% of our sales come from the U.S.

market and 20% from outside of the U.S. With our anticipated introduction of the state-of-the-art posterior, cervical and lateral fusion systems in 2014, our Spine Fixation franchise, with a few niche exceptions, will then have the full breadth of spine implant products to market to spine surgeons.

Spine Fixation sales were $95.5 million in 2013, down 2% or $4.4 million versus 2012. This includes the impact of a 6% decline in average selling price, or ASP due to discounting, which was partially offset by double-digit growth in our International business.

We are implementing new processes that we expect will help us better monitor and control discounting going forward. Additionally, we expect to launch several new important products during the course of this year.

The Spine Fixation net margin for 2013 was 8% of revenue compared to 19% of revenue in 2012. This decrease was primarily due to the ASP decline and an increase in inventory reserves.

Now I'll discuss a few financial measures on a consolidated company basis. Our aggregate gross margins for 2013 were 74.5%, which was down 350 basis points from the prior year.

The primary drivers for the decrease were the unfavorable sales mix related to the decrease in higher-margin BioStim sales, the lower ASPs in U.S. Spine Fixation and most notably, by an increase in our inventory reserves of $8.8 million.

G&A expenses for the year 2013 were $65.1 million or 16.3% of sales compared to $53.4 million or 11.9% in the prior year.

G&A expense in 2013 included $4.6 million related to senior management succession charges. Net of these expenses, 2013 G&A was $60.5 million or 15.1% of sales.

The increase is partly related to investments we made last year in people, processes and infrastructure, as we began to identify steps, which we believe will be essential in making us a stronger and more efficient company moving forward. Our expectation is that company-wide G&A expenses will be flat on a dollar basis in 2014, and then decline in 2015 and '16 as we begin to reap the benefits of these commitments to more efficient and effective business processes.

For the full year 2013, reported operating income from continuing operations was a loss of $5.1 million compared to a gain of $76.6 million in 2012. When eliminating the specified items included in the reconciliation tables in today's press release, adjusted operating income from continuing operations was $34.2 million or 8.5% compared to $84 million or 18.8% in 2012.

Net income from continuing operations for the full year was a loss of $15.7 million or $0.83 per diluted share, compared to a gain of $45.1 million or $2.32 per diluted share. Eliminating the specified items included in the reconciliation tables in today's press release, our 2013 adjusted net income was $14.2 million or $0.76 per diluted share compared to $49.7 million or $2.56 per diluted share in 2012.

Finally, looking at the balance sheet, our total cash position as of December 31, 2013, was $52.5 million, up slightly from $52.4 million at year end 2012. This was the result of strong adjusted free cash flow generation of $37.2 million in 2013 compared to $23.1 million in 2012.

DSOs were down substantially at the end of the fourth quarter to 65 days as compared with 84 days in the fourth quarter of 2012. This improvement is another one of the benefits of the transition to the new revenue recognition for the distributors and third-party BioStim that I discussed earlier.

Finally, our long-term debt as of December 31, 2013, remains unchanged from our December 31, 2012, at $20 million.

As you can see from our strong cash position, healthy cash generation, low debt balance and decrease in DSOs, we ended the year with a very strong balance sheet. With that, I'll turn the call back over to Brad.

Thanks, Emily. While I'm encouraged by the progress we made in strengthening our procedures and internal controls of our financial reporting, I'm certainly disappointed about the events that have led us to this point, and about our performance last year.

The financial performance you have seen in 2013 is not reflective of where the company should be operating and is not a benchmark, it's a low watermark. We expect stronger financial results in 2014 and are laying the foundation for further growth and stronger profitability in the years to come.

Orthofix is clearly a company in transition. Since we last hosted a conference call almost 10 months ago, behind the scenes, we made a lot of headway in many areas.

I will give you an overview of our progress regarding people, business processes and growth strategies. Let's start with people.

We've identified, retained and built a new management team that includes highly talented people from within Orthofix, as well as from outside the company.

Over the past 12 months, we have prudently added or replaced the vast majority of our leadership positions at the director level and above at Orthofix Worldwide. Additionally, over the last several months, we added 3 new directors to our board, broadening our collective base of knowledge and expertise while providing a fresh perspective.

Last week, we announced that Ron Matricaria has joined the board and has been appointed Chairman. His experience and track record in leading companies as both a CEO and Chairman has been exemplary.

Ron and I are very well aligned on the future direction and opportunities for Orthofix, and both agree that we are at the beginning of a new era at the company.

We also announced that Kathy Regan who served as interim chair of the board since January is remaining on the board and sharing the nominating and governance committee. Kathy's unwavering personal commitment to Orthofix has been critical during the last several months of intense activity.

Now I'll talk about business processes. While I won't go into depth about our process improvement initiatives, other than to let you that we have begun an overhaul of many of our key business processes including IT, product development, supply chain, finance and insurance administration.

Our objective is not only to achieve more effective and efficient business processes and controls throughout the company, but also a number of our initiatives are intended to reduce our DSOs and inventories to further improve our financial strength.

In terms of growth strategies, to achieve our goal of long-term profitable growth, we must invest in areas that will be critical to developing and selling our products in the new health care environment, where proof of clinical efficacy and the cost justification of technologies and products are essential.

At a corporate level, we are investing an additional $5 million in R&D in 2014. This is a 20% increase over prior year, and demonstrates our commitment to our technologies and top line growth.

In the U.S., we are also investing in a proactive reimbursement strategy, a team dedicated to addressing the requirements of the third-party payers. This team will be supported with evidence-based clinical research and cost-effectiveness studies coordinated by our research team led by Dr.

James Reilly, our Chief Scientific Officer, a recently added position. Also supporting our sales efforts in the U.S.

will be our expanded commercial contracting group. This team will proactively help drive sales through IDN, GPO and regional Hospital systems.

In BioStim, we are investing in clinical, evidence-based and cost-effectiveness research in addition to basic science and clinical research to support broader indications for our stimulation products.

We're restructuring our Physio-Stim distribution model in the U.S. and we're expanding our distribution coverage for spine and cervical stem.

For Biologics, we are continuing to convert Trinity Evolution users to Trinity Elite. We're expanding our distribution coverage beyond our spine and Extremity Fixation sales channels into orthopedic markets such as trauma and joint revision cases, and we're increasing our feet on the street into our existing markets.

In our Extremity Fixation business, we are consolidating our U.S. and Verona operations for efficiency and have reorganized our subsidiary and go-to-market strategy in Brazil under new leadership.

We're increasing penetration in existing OUS markets and expanding into additional high potential countries. We're developing and will acquire premium products for temporary fixation, deformity correction and pediatrics rather than generic fixation products.

And introducing several innovative new products in the next 18 months.

One, significantly cutting our sales and marketing expenses; second, achieving higher ASPs though discount sharing and new contracting team and strategy; third, improving our new product development productivity; fourth, reducing depreciation and inventory ENO costs with new supply-chain processes; and finally, by launching a number of unique new products in 2014.

In closing, Orthofix has some distinct advantages that we intend to capitalize on. We are the clear market leader in spine stimulation, maintain a diversified portfolio of well-respected and in many cases, market-leading stimulation, biologics and implant products within the orthopedic device space, and have deep payer and customer relationships.

Additionally, Orthofix continues to generate cash and with little debt, the company's balance sheet remains strong, which will support our significant growth opportunities on both the top and bottom lines.

Regarding our sales expectations, we are confident that our overall sales are now on an upward trajectory. We believe this because of our sales trends over the last several months.

And additionally, in BioStim our order volume and number of prescribers stabilized and began to grow in the second half of 2013.

As mentioned earlier, our Trinity volume was up 5% in 2013 over prior year, and our new Trinity Elite tissue has had excellent acceptance and feedback from the surgeons. In Extremity Fixation, we are already seeing positive signs of growth over the last 2 quarters in many of our key markets such as Italy, Brazil and the U.K.

And for our Spine Fixation business, because of the transition to recognize international distributor revenue based on payment, we won't be comparing apples-to-apples in 2014 versus 2013.

We expect to show a decline in sales dollars year-over-year in 2014 for this segment and Spine Fixation overall. That said, we do expect in the U.S.

and in our international subsidiaries where we recognize revenues as in the past, we will have reasonable growth and we expect to improve profitability in this business as a result of the changes that I've already discussed.

Concerning capital management and deployment going forward, we believe that we have an excessive amount of working capital invested in inventory and accounts receivable. As mentioned, we have begun initiatives to address both areas and expect to see meaningful improvement within the next 12 months.

Particularly in our Spine Fixation inventories and BioStim receivables.

For capital deployment we have a number of guidelines that we expect to follow. First, use our balance sheet strength to make investments that help protect existing business and accelerate profitable sales growth.

Second, invest our capital prudently to upgrade our core business processes and information technology. Third, prioritize our investments on the highest ROI and near-term cash accretion.

And fourth, continue to look for complementary technologies and products that support our strategy and leverage our distribution channels.

We covered a lot of ground this morning. The important takeaway for investors is that we are beginning a new chapter.

That chapter starts with integrity in everything we do, a new team of board members, executives, business leaders and management. A strong commitment to compliance and financial controls, 4 solid businesses, a strong balance sheet and a sound strategy for long-term profitable growth.

While I will not be providing earnings guidance at this time, other than to say that we believe we will have modest top line growth in 2014 and an improving bottom line. As the year unfolds, we expect to be able to provide you with a better look forward.

As previously reported, we requested from NASDAQ a hearings panel, which is scheduled for today. Given that we have already made our delinquent filings and expect to file our 2013 10-K by the end of the month, we believe that we can demonstrate to the panel our compliance with NASDAQ's listing rules.

I want to take this opportunity to thank our investors, employees and customers for your patience and understanding during this process. I also want to thank the Audit Committee, Ernst & Young, and the Orthofix accounting staff, who all collectively and individually worked tirelessly and literally day and night to get this work completed, and for the diligence demonstrated by all involved.

Lastly, I want to underscore how committed our board and leadership team are to the future growth of this business in achieving and maintaining the highest standards of compliance in internal controls. We are fostering a culture of integrity and performance that will benefit us now and in the future.

All of us are excited to now have the opportunity to dedicate 100% of our time on delivering exceptional value to our customers and shareholders. So with that, I'd like to turn the call over to the operator for questions.

So there's a lot of questions, I'm sure as you know, but I'll focus on just a couple here to start. First, I guess one of the things taking the margin -- turning the margin -- taking the margin information you provided, it seems like the spread between spine stem and Spine Fixation profitability was quite a bit wider than we thought.

And you've mentioned there were some reserves taken in there. I guess how much of that delta is explained by those reserves?

Maybe how much of that delta and profitability is possibly explained by the way you were accounting for instrument sets or other costs and cost of goods? That kind of color would be very helpful, and then I have a couple of quick follow-ups.

Sure, Matt. There's no question we have a significant margin differential between the 2 businesses.

Our spine stimulation business -- excuse me, our stimulation business, BioStim, is our largest margin business, and our Spine Fixation business is our lowest margin business. And that was affected somewhat in 2013 by a heavier discounting.

And -- but we have some things in place going forward that we think will change that picture a little bit. In terms of the inventory reserves, Emily, you want to take that?

Sure, so we took some additional inventory reserves. When our sales went down we had to reserve more of our inventory on the Spine Fixation side.

And so that's about $6 million there.

One other thing, Matt. One of the reasons that we separated these businesses was specifically for this purpose so we could see the margin difference and really have visibility into these businesses and apply the proper corrections where we need to.

Okay. That's helpful.

And I guess one of the other sort of changes that we saw, and you touched on this in your prepared remarks about the transition in orthopedics more to an OR sales force and sort of rolling up maybe the specialty. It sounds like more of a specialty field for [indiscernible] across the board.

I guess it'll be helpful as we kind of pick through the numbers and understand sort of what the historicals are, and where everything used to be reported. I guess how much of BioStim -- or how much of orthopedics was Physio-Stim before?

And if you can give us some sense of the proportion of BioStim that's orthopedics. I apologize if I missed that, we were kind of juggling a couple of calls here this morning.

No problem, Matt. The percentage of Physio-Stim within the BioStim business is a little above 10%.

Okay. So just -- so we're clear, that was previously reported in orthopedics, right?

When you had spine stem and then you had a bucket reporting line called orthopedics.

Yes, that's right.

Okay. And then I guess one of the questions that comes up when you realign your reporting structure like that, and you sort of have talked a lot about that realigning into SBUs for greater transparency and I guess focus operationally.

Given the challenges that you're presented within spine, given the market there, you talked about a pipeline of products for this year. But is this portfolio -- the portfolio you expect to go with?

Or are you going to continue to kind of evaluate pluses and minuses -- you're potentially pruning some of the lines that may just make less strategic sense over time.

Yes, in the Spine Fixation business, that's what you're talking about, correct, Matt? Just to be clear?

Well, I guess I'm asking the question broadly across all the lines. I mean it's Stems, is obviously a big part, big important part of your business in driving a great deal of your profitability and cash flows.

But I guess in the other product lines, I'm wondering how you're thinking about the portfolio?

Sure. And I'll be happy to talk about that.

So let's start with Spine Fixation. We are -- we're close to having a full line of Spine Fixation products that will give our distributors more of an advantage.

And some of our distributors also carry other lines, because we don't have all the products. So this year in 2014 will be one of our best years ever actually for new product launches.

You may have seen that we launched our SAMBA SI Screw, which is a new and upcoming market, which we are very, very excited about, and that's out in the market now in a limited market release. We also have our Centurion Posterior Cervical System coming out, and this is a complete posterior cervical system that's really state of the art.

And this was in development for probably close to 4 years, because there's so many components to it, but it really completes our cervical line very well. With one other addition, our LoneStar which is a standalone cervical system with our [indiscernible] titanium coating on it, which is a great technology as well.

And then later in the year, in a limited market release, we'll be introducing Skyhawk which is our lateral system. That's -- as you know, that's the fastest growing area of spine.

We have not had a product there that really took hold at all. And the retractor is really the difference in that product, and we have a very unique retractor.

So when I look at this business, with these 4 new products coming online, that's a significant driver for us. The other thing it does is that it fills out our entire portfolio with just a few minor niches that we don't cover standalone DVRs [ph] and things like that.

But it's -- that will be a very full line and a very good line of top-quality products going forward, so I'm happy where that's going. With Extremity Fixation, our TrueLok Hex, which our computer-guided external fixation system.

We've released the first version of that in Europe, and it's doing extremely well. The feedback has been phenomenal.

And we'll be releasing the second generation of that in the U.S. in 2015.

We're also releasing a Galaxy Wrist, which is our pin the bar wrist product in 2014, and a new technology that I don't know enough about yet to tell you the truth, it's mono-cortical screw, but they tell me it really is a game changer in external fixation. And so I'm looking forward to learning a little bit more about that one as well.

So that's -- those products are going to be big drivers for us in that business, but also just the other part of our strategy there is really to expand into territories and into high potential countries, so we can expand our geographic footprint where we haven't. And we've got 7 world region managers now that will be driving those sales.

So that business is moving along very well. Trinity Elite has been phenomenal.

The feedback has been terrific. We have converted well over 50% of our customers from Trinity Evolution to Trinity Elite and that's -- we expect that to continue.

So that will kind of give you maybe a little more depth than you wanted but it'll give you an overview.

I wonder if you could just provide a little bit more clarity on how we should think about operating profitability over the next couple of years? Or I guess put another way, how do you balance the necessary investments into the business such as fee in some of the operating investments you talked about with the contacting group, et cetera?

And then kind of getting the profit margins to where they should be on a normalized basis? I just want to know how -- should we think about margins contracting over the next couple of years based on these investments or just some more color on how we should think about the model would be helpful.

This is Brad. Yes, I think there's a couple of things to think about here.

Definitely, we have made a lot of cuts in a lot of areas, but we've also -- now that we have more refined and better strategies for each business unit, we've got certain investments that we want to make. As an example, in our BioStim business, we really haven't put in -- we haven't put -- we've done a lot of basic science research, but we haven't done the clinical cost of efficacy and that sort of thing that we need to do, and we need to build on that scientific research, basic science research, I should say, and look for new indications with new investments there.

We're going to be investing in our infrastructure, there's no question about that. I think you're going to see that our G&A, while quite a bit higher than I would like to see it in 2013 will be flat -- should be flat in 2014.

However, there's a reason for that. Right now, we have some gaps in our processes in our IT and other areas where instead of world-class processes, we have to use a little more brute force and put more people to get the job done.

So as we bring these new systems and things online, and improve our processes, I expect over as we get into 2015 and '16 that our G&A percentage will drop significantly. The other area that I mentioned that we're investing in this year is increasing our R&D spending.

We still have tremendous growth opportunities in all of our businesses, and we are adding additional $5 million in research and development to push that business along. So as we go forward to your point there's one other factor that affects your question directly and that's our ASPs.

So if I think about this business by business, our BioStim business has been stable for many, many years. We saw a slight decline in 2013, about 1.5%, but nothing major.

Our Biologics, actually our ASPs have gone up. Extremity Fixation, we're holding our own.

And then in Spine Fixation, we took a pretty big hit in 2013, I think a number of people did, but part of that was a little bit self-inflicted. We did quite a bit of discounting that we didn't control, as well as we should.

And we've got some initiatives going to help control that better going forward. So as we get into '15 and '16 to kind of wrap that all up, we expect our overhead costs, and our sales and marketing costs, our R&D costs and our G&A, sales and marketing and G&A to go down and R&D to go up, and we'll get back where we belong on our operating margins as we move forward in the next couple of years.

Okay, so putting it all together, just to be clear. The mix benefit on gross margin coupled with the higher OpEx, so the net result in 2014, 2015, then the net result should be lower operating margin and then better profitability there after?

Is that fair to say?

No. No, I would say as we said in our very limited guidances that we expect to improve our bottom line in 2014, and we expect to probably improve it, a little bit accelerate that improvement as we get into '15 and '16.

Okay. And then in terms of the balance sheet and potential uses of cash.

I just wonder what levels of opportunities are you considering in terms of asset -- assets, tolerance for dilution in terms of doing any deals?

Yes. Good question, Imron, I'm sure it's one that quite a few people have.

At this point, we have a lot of work to do on our foundation. And so I don't want to put more weight on that than we already have.

We want to get our -- everything aligned and moving the right direction and all of our processes in place. With the IT structure we have right now, it would not be a good idea to add any significant acquisitions to that.

That said, we're certainly going to be looking at tuck-in technologies and products that can contribute to our current distribution channels on a smaller level. And as we come out of the -- make this transition through improving our -- the foundation of this business and our processes, then we'll take a different look at a lot of -- a number of things.

Anything that's going to be return to good shareholder value with near-term cash accretion, we're going to be interested in.

Okay. And then just lastly in terms of the Spine Stim sales force.

It sounds like there hasn't been any meaningful attrition or churn there. Is that fair to say in terms of the stability of that business?

That's fair to say, absolutely.

Yes, I want to again thank all of our stakeholders for your patience during the last 10 months while we've been preparing Orthofix for the next chapter. We've turned the page and are a different company today.

Starting with our people, processes and growth strategies, all supported by a culture of integrity and performance. I look forward to talking to you all personally in the weeks ahead and early in May on our Q1 earnings call.

Thanks so much, and everybody have a good day.