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Orthofix Medical Inc (NASDAQ:OFIX)
Q2 2019 Earnings Call
Aug 5, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentleman, and welcome to the Orthofix Second Quarter 2019 Earnings Results Conference Call. [Operator Instructions] I would now like to turn the call over to your host, Mr. Mark Quick, Senior Director of Business Development and Investor Relations. Sir, please go ahead.

Mark Quick -- Senior Director of Business Development and Investor Relations

Thank you, operator. And good afternoon, everyone. Welcome to the Orthofix Second 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 statement and then pass it over to Brad. During this call, we'll be making forward-looking statements that involve risks and uncertainties. All statements other than those of historical fact are forward-looking statements, including any earnings guidance we provide and any statements about our plans, beliefs, strategies, expectations, goals or objectives. Investors are cautioned not to place undue reliance on such forward-looking statements, as there is no assurance that the matters 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, August 5, 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 and our Form 10-K for the year ended December 31, 2018, as well as additional SEC filings we make in the future. If you need copies of these documents, please contact my office at Orthofix in Lewisville, Texas. In addition, on today's call, we 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 second 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.

Brad Mason -- Director, President, and Chief Executive Officer

Thanks, Mark, and good afternoon, everyone. As you may have already seen in our press release a short time ago, I'm very pleased to announce that Jon Serbousek will be joining Orthofix, effective immediately to become the President and CEO of Orthofix on November 1 of this year. Between now and then, Jon has agreed to take on the vacant role of President of Global Spine.

A seasoned executive with more than 30 years' experience in the medical device and biotech industries, Jon served in several leadership positions at Biomet Inc., including Worldwide President of Biomet Biologics, Worldwide Group President of Orthopedics and President of U.S. Orthopedics. Prior to joining Biomet, he held various several management positions within Medtronic Inc., including Worldwide Division President of Spine, Worldwide Vice President and General Manager of Biologics for their Spine and Biologics business. Additionally, Jon spent 13 years with DePuy Orthopedics, a Johnson & Johnson company, where he served in numerous roles of increasing responsibility, including the Vice President of Marketing and Product Development and as Vice President of Spinal Operations.

Jon's expertise and proven track record are perfectly aligned with our business composition and make him an exceptional choice to lead the company as President and CEO. With the recent leadership change in our Spine business, I'm pleased that Jon has agreed to serve as the President of Global Spine on an interim basis. This will give him time to focus on our needs and opportunities in that business, before he takes on the broader CEO role, which should help ensure a seamless leadership transition for the benefit of all of Orthofix stakeholders. Moving onto the quarter results.

As usual, I'll start by giving you a summary of our second quarter 2019 sales performance, 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 second quarter, we reported net sales of $115.9 million, representing a year-over-year increase of 3.9% or 5% in constant currency. These results were generally in line with our expectations other than in our Biologics portfolio, which exceeded our plan for the second consecutive quarter. With these results and the cadence of the M6-C cervical disc rollout in the U.S., that I will discuss in a moment, we feel confident about the sequential quarterly sales acceleration that we expect in the back half of the year, which is reflected in our full year guidance.

Orthofix Spine, which includes our Bone Growth Therapy, Spinal Implants and Biologics product lines generated $90.1 million in sales in the second quarter, which represents a 3.8% increase in reported sales over prior year or 4% in constant currency. Beginning with the Bone Growth Therapy's product line, net sales increased 3.9% in the second quarter versus prior year. This met our expectations for the period, and we continue to expect this business to grow in the 3% to 4% range for the full year. In Spinal Implants, which includes both Spine Fixation and motion preservation products, we reported a net sales decreased of 2.7% or 2% in constant currency compared to prior year. These reported results were driven by a 6.7% decrease in Spine Fixation products, primarily due to the abnormally high ASP pressure, offset by a 33.5% increase from our motion preservation products.

As I mentioned on our last call, in selective, strategic, major markets, we are upgrading our U.S. spine implants legacy sales force with new, high-potential sales partners that are attracted to our unique portfolio of motion preservation, fixation and Biologics products. These new sales partners are coming up to speed nicely, and we expect the pace of sales in our Spine Fixation product line to improve in the third and fourth quarters as the -- as these new distributors continue to gain traction. We also expect a higher than usual ASP pressure that we saw on the period to return to more normal levels in the upcoming quarters. U.S. sales of our M6 cervical disc are going very well. My training program is continuing to ramp up, and we have trained over 50 surgeons to date.

It's important to note that there can be a lag between when a surgeon is trained and when they start performing cases, due to case timing and hospital approvals. By year-end, we expect to have over 150 surgeons trained. To provide a little more visibility on our progress to date, 17 surgeons have implanted over $550,000 in U.S. M6-C cervical disk to date. This is ahead of our launch plan and gives us confidence that we will achieve or exceed our $3 million to $4 million full year revenue target, although, the majority of that will come in the -- in Q4. Overall, we expect these Spinal Implants will grow high single to low double digits for the full year. Our Biologics product lines had another outstanding quarter, reporting a sales increase of 14.2% compared to prior year. This performance continues to be driven by the contribution from new distribution added in the last year and a return to solid results in each of the 3 U.S. sales regions.

Also, we are pleased to report that based on recent SmartTRAK data, we believe that we have now achieved the #1 position in the cellular allograft market, with over $100 million of sales to hospitals in the last 12 months. Based on our first half performance, we now expect our full year sales growth expectations to be in the high single digits for this business. Lastly, in our Orthofix Extremities business, reported net sales in the second quarter were $25.8 million, an increase of 4% or 8.5% in constant currency over the prior year. Given the quarter variability in this business, we believe the best way to assess its performance is to look at the constant currency trailing 12 months year-over-year growth. On this basis, Orthofix Extremities business grew 3.7% in constant currency. On a reported basis, given the currency headwinds of $3.5 million to $4 million for the year, our current expectations for this business are for growth to be flat or low single digits for the full year. In summary, second quarter sales were generally in line with our expectations in most areas with the exception of Biologics, which outperformed against our plan for the second consecutive quarter. Additionally, the launch of the M6-C cervical disc in the U.S. is going very well and gives us confidence in our expectations for the remainder of the year.

Doug will now take you through the key financial metrics in the quarter. Doug?

Douglas C. Rice -- Chief Financial Officer (Principal Financial and Accounting Officer)

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 $115.9 million, up 3.9% on a reported basis and 5% on a constant-currency basis when compared to the second quarter of 2018. The extremities experienced the majority of the $1.3 million currency headwind during the quarter, where we saw an outperformance from Biologics and modestly weaker than expected Spinal Implants performance.

Gross margin in the second quarter was some 77.7% compared to 79.5% in the prior-year period. Gross margin was impacted by higher than normal noncash charges related to the buildup of Spinal Implant inventory to support sales growth from our new sales partners in key geographies. However, for the full year 2019, we continue to expect gross margins to be between 78% and 79% of net sales. Sales and marketing expenses were 49.1% of net sales in the second quarter of 2019, an increase of -- over 46.2% in the second quarter of 2018. As with Q1 of this year, the increase was primarily due to the investments and our expense for training and education programs to support the M6-C U.S. commercial launch. We continued our performance in Biologics has also increased our commission expenses.

With expected outperformance in Biologics continuing into the back half of the year, we now project sales and marketing expense in 2019 to be approximately 47% of revenues for the full year. GAAP G&A expenses were 18.9% of net sales in the second quarter of 2019, which were down from 19.7% in the prior year period. This decrease was due primarily to lower compensation expenses related to the realignment of Global Spine last year partially offset by increased executive succession charges. We expect that these continued decreases in G&A will offset our increased sales and marketing investments during 2019. In line with our expectations, R&D expenses for the second quarter were 7.8% of net sales, up from 7% in the prior-year period due to increased clinical research in Bone Growth Therapies and motion preservation as well as cost specific to comply with the recent medical device regulations in the European Union. R&D spending will increase modestly in the second half of the year.

And for the full year 2019, we continue to expect R&D expenses to be at approximately 8% of revenues. Adjusted EBITDA decreased to $17.3 million or 14.9% of revenue, down from $22 million or 19.7% of revenue in the second quarter of 2018. This decrease was primarily driven by costs related to the investment in the M6-C commercial launch, that are reflected in sales and marketing as well as the gross margin decrease, that I mentioned. We expected adjusted EBITDA for the year to be $86 million to $89 million, implying margins of over 20% in the second half of the year, with significantly higher flow through in Q4. Now turning to tax, we had GAAP income tax expense for the quarter of $1.2 million or about 181% of income before income taxes as compared to income tax expense of $1.1 million or 53.8% of income before income taxes in the same period of 2018. While this year-over-year quarter tax provision was flat, the increase in the effective tax rate was driven by increases in certain nondeductible, acquisition-related and other financial expenses.

For the second quarter 2019, we reported a GAAP loss of $0.03 per diluted share as compared to net income of $0.05 per share for the second quarter of 2018. As adjusting for certain items and when normalizing for tax, using a non-GAAP long-term effective tax rate, adjusted EPS for the second quarter 2019 was $0.28 compared to $0.42 in the second quarter of 2018. The majority of this decrease was due to the investments in motion preservation. Moving on to the balance sheet highlights. Day sales outstanding, or DSOs, were 63 days at the end of the second quarter of 2019, up modestly from 61 days at the end of the second quarter 2018 and down sequentially from 66 days at the end of the first quarter of 2019. As noted on the last call, this year-over-year increase was due to the timing of collections from Bone Growth Therapy payers as well as stocking distributors in our OUS extremities business.

Our inventory turns, at the end of the second quarter 2019, improved modestly to 1.3x versus 1.2x in the second quarter 2018, due primarily to our inventory management initiatives. Cash, cash equivalents and restricted cash, at the end of the second quarter, totaled $52.1 million compared to $45.7 million at the end of the second quarter in 2018. Cash flow from operations for the quarter was $9.4 million, down from $16.6 million in the second quarter 2018, due primarily to increases in accounts receivable, inventory and other working capital investments to support our top line growth. Capital expenditures were up in the quarter to $5.4 million from $3.2 million in the prior year, due primarily to investments in our global IT infrastructure and manufacturing capacity expansion for the M6-C artificial cervical discs. Based on recent enhancements to our manufacturing outsourcing strategies, we now expect 2019 capital expenditures of $22 million to $24 million, a decrease from our prior guidance of $24 million to $26 million. Free cash flow, which we calculate by taking cash flow from operations and some tracking capex was $4 million during the quarter compared to $13.4 million in the prior year. Consistent with prior years, we expect our free cash flow to improve as our sales ramp for the remainder of the year.

With that, I will now turn it back to Brad.

Brad Mason -- Director, President, and Chief Executive Officer

Thanks, Doug. Regarding guidance for 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% or approximately 5% to 6% in constant currency. We also continue to expect the reported sale cadence for the year to be heavily weighted toward the last half of the year with mid-single-digits growth for Q3 and high single-digits growth in the fourth quarter.

As I mentioned on our last earnings call, this sales cadence has been driven by a number of factors, including the ramp-up of sales in the last third of the year of the M6-C disc in the U.S.; the ongoing conversion of the U.S. spine implants legacy sales force in selective major markets as our new high potential sales partners that are now attracted to our motion preservation, fixation in Biologics portfolio continue to ramp up sales; and lastly, currency headwinds weighted toward the first half of the year. Primarily due to this sales ramp, we expect our adjusted EBITDA to be heavily weighted toward the end of the year as well. I continue to believe that for the full year 2019, adjusted EBITDA, including Spinal Kinetics, will be in a range of $86 million to $89 million and adjusted earnings per share will be $1.75 to $1.82 using a non-GAAP, long-term tax rate of 27%.

With that, operator, we're now ready to open up the lines for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Craig Bijou from Cantor Fitzgerald.

Craig Bijou -- Cantor Fitzgerald -- Analyst

Good afternoon, guys. Thanks for taking the questions.

Brad Mason -- Director, President, and Chief Executive Officer

Hey, great. How are you today

Craig Bijou -- Cantor Fitzgerald -- Analyst

Okay. Good, good. Thanks for that. Well, let me start with Jon as the new CEO. So obviously, years of experience in ortho and spine. Brad, you had a very -- or you had a specific strategy for the business and what you saw going forward. So when looking at candidates for the new CEO role, how important was it to find someone that kind of -- that shared your vision for the future of the company? And then maybe just some other thoughts around why Jon is the right person to succeed you.

Brad Mason -- Director, President, and Chief Executive Officer

Sure. I think, Craig, it was actually very important. I think what Jon shared with the board and myself in terms of the vision is to continue to accelerate our top line growth through organic and inorganic opportunities. And that is where we have been -- what we've been talking about for the last, probably 4, 5 quarters and what we've been delivering on now and -- or will be delivering on even more in that back half of the year. So Jon is very much in step with that strategy. And I think he brings some things to the table. He certainly brings some things to the table that I did not have in terms of his experiences in Spine and Biologics and other places in our industry.

And with the people he knows, the companies he knows that are out there, the distribution and those sorts of things, I think he will be an incredible asset to the company. And as I said in my prepared remarks, his experiences is right out of central casting in terms of our business and how is that aligned. So that's number one. Second part of your question, I'm sorry, Craig, I lost track of it.

Craig Bijou -- Cantor Fitzgerald -- Analyst

No. It was just any other thoughts on why he's the right person to succeed you. But I think you pretty much answered it, Brad.

Brad Mason -- Director, President, and Chief Executive Officer

Yes. No, I couldn't be happier that -- I mean this is -- I think having Jon come in and be willing to take on the Spine role for a period of time, I think it's a very elegant solution to the situation we're in today, with my retirement pending and the recent loss of one of our leaders in Spine. So I think it's set up perfectly for success. And I think it will be as -- a very, very smooth transition.

Craig Bijou -- Cantor Fitzgerald -- Analyst

Great. That's helpful. And then I wanted to talk about the Spinal Implants business. Obviously, you're seeing some disruption there, but on a sequential basis, it looks like the loss was a little bit better than what you saw in Q1. I know you do have some nonorganic revenue from Spinal Kinetics, so I just wanted to see if you could call that out. And then when you think about the improvement that you expect in Q3 and Q4, maybe just -- are there anecdotal -- or is there anecdotal feedback that you can provide? Or what gives you the confidence? Are you seeing it in the later part of Q2? What gives you the confidence that, that spinal -- or that the disruption that you saw or seeing is going to rebound in the second half?

Brad Mason -- Director, President, and Chief Executive Officer

So in answer to your first question, I don't have the numbers off the top of head. I've got some guys in the room who can figure that out for me and give it -- and get it to you or we can give it to you on a follow-up call, exactly. But in terms of the confidence, I'm -- obviously, the growth in the second half of the year is for spine implants, which includes motion preservation and fixation, it's going to be driven by M6. And I think that's -- adoption of the M6 is what will get us to the high single digit, low single digits for -- or low double digits for the full year in our spine implant business. But the pull through of the M6, we expect to have a positive impact. We also expect now to have some of these larger distributors who we signed up 60, 90 days ago to start -- to begin to have an impact as well. And that should ramp as we get toward the end of the year. So we feel very good about it from where we are starting. And I think if I step back and look at it, the primary driver is going to be the M6 and the pull through from that in addition to those distributors. So at this point, I think we're in good shape.

Craig Bijou -- Cantor Fitzgerald -- Analyst

Got it. And if I can squeeze one more in. Doug, maybe on EBITDA, I appreciate Brad's comments on -- in the script about the -- more revenue in the second half. Obviously, it leads to more EBITDA. But if you -- the implied percentage of sales is still significantly higher. So I was just hoping, maybe a little bit color -- little bit of color on what steps up from a EBITDA margin perspective in the second half? And how you meet your guidance?

Douglas C. Rice -- Chief Financial Officer (Principal Financial and Accounting Officer)

No, it's a fair question. I think we'd expect contribution really from all components of our P&L. You'd expect gross margins to normalize. I think Q2 was an outlier, for the reasons I mentioned in my script. I think you'll see commissions and sales and marketing cost start to normalize in the back half of the year and improve as our sales ramp as we incurred a lot of costs, as you know, around the launch of our M6 in the United States ahead of the sales. So as the sales start to ramp in the fourth quarter, I think you'll start to see our flow-through normalize. Those are probably the 2 biggest drivers.

Craig Bijou -- Cantor Fitzgerald -- Analyst

Great, thanks for taking the questions guys.

Douglas C. Rice -- Chief Financial Officer (Principal Financial and Accounting Officer)

Okay. Thank You. Greg.

Operator

Thank you. Our next question comes from the line of Ryan Zimmerman from BTIG.

Ryan Zimmerman -- BTIG -- Analyst

Great, thank you. Just want to follow up on a few of Craig's questions. Brad, based on the revenue achieved thus far with M6, I wonder if you could just speak to the surgeon base already implanting it. It certainly suggests a very high number. And so as we think about it kind of rolling in the Q3 and then the Q4, I mean, is this early leg? Should we think of these as the early adopters and then maybe some of that revenue per surgeon maybe moderates a little bit? How -- maybe you can help us understand kind of whose implanting today versus who you expect to implant over Q3 and into Q4? And then I have another question as well.

Brad Mason -- Director, President, and Chief Executive Officer

Sure. Good question, Ryan. So I think what you're seeing is actually maybe even a little bit less than what we expect per surgeon, believe it or not. I think that the surgeons that we went to first were surgeons that were part of the IDE, and we restricted our activities to those surgeons to make sure that they were taking care of their needs, we're taking care of -- for their participation in the study. And they had already been trained, so we -- the retraining was less significant than with surgeons who had not used the M6 in the past. That said, in recent weeks, we opened up that funnel a bit and are now going to additional surgeons around the country. We have instrument sets available. We have implants available. We have 6 people dedicated full-time to training, we're adding 3 more.

So we think that the ramp will be very good. With -- there is a delay between when a surgeon decides to use the M6 and gets trained, and when -- and typically, when they do their first cases or when -- as their -- or their cases ramp up. Some can be just cases that we're already set, and they've already made a decision on the implants, some can be the hospital registration or approval, those sorts of things. So as we go through the year, we -- I said we expect to have over 150 surgeons trained by year-end. Certainly, not all of those surgeons will then be up and in -- at full swing, but I would expect over a 100 would be at that point. So I think the case volume we're seeing from the first 17 that have done cases is probably less than what we'll see overall, but it's just -- it's still very early in the process.

Ryan Zimmerman -- BTIG -- Analyst

Okay. That's fair. And then I just -- I might have missed this, but the pricing pressure in the quarter that you called out is abnormally high. I think you mentioned about 6.7% decrease in your core Spine Fixation product relative to the 33.5% increase in motion preservation. What are you seeing on the pricing dynamic? And why does that get better through the rest of the year?

Brad Mason -- Director, President, and Chief Executive Officer

Yes, really good question, Ryan. So overall, the industry -- if you listen to some of our competitors, they had some, I would say, unusually high pricing pressure as well in the spine implant business. We saw a bit of that. So that's probably, let's say, 2/3 of what we called out. So the other third is just -- internally, some of our recently launched -- recently meaning of the last 18 months, launched products are coming off of some of the premium pricing that we were able to get in the early days, and so that affected our ASP as well. So with those ramping off or rolling off, the better ASPs, we don't expect that to continue to happen as we go through the year. So hopefully, the market, in general, will decrease -- the pricing pressure will decrease in the market, in general, but certainly, internally, we expect to see a decrease as well.

Ryan Zimmerman -- BTIG -- Analyst

Okay. And last one for me and I'll hop back in queue. On the guidance, you took a nice step up, I think about $0.20 on strategic investments for the year. Just can you give us a little more color on what that is, Doug? I think about $4 million from what it formally was previously.

Brad Mason -- Director, President, and Chief Executive Officer

Yes, I'll take it, Ryan. Yes. So if you look historically, it's not too far off of what we've spent last year. We -- as we said all along, we're going to remain very active. We have been active, and we're going to continue to look for opportunities that can really generate accelerating growth in the areas that we play. So it's just us being active and pretty similar to what we had historically last year.

Ryan Zimmerman -- BTIG -- Analyst

Okay, understood. Thank you for taking the questions.

Brad Mason -- Director, President, and Chief Executive Officer

You are welcome.

Ryan Zimmerman -- BTIG -- Analyst

Right. Thanks.

Operator

Our next question comes from the line of Jeffrey Cohen from Ladenburg Thalmann.

Jeffrey Cohen -- Ladenburg Thalmann -- Analyst

Well, Hi Brad, Good morning, How are you ?

Brad Mason -- Director, President, and Chief Executive Officer

Hey, Jeff, good you?

Douglas C. Rice -- Chief Financial Officer (Principal Financial and Accounting Officer)

Hey, Jeff.

Jeffrey Cohen -- Ladenburg Thalmann -- Analyst

Just fine, So two areas. First, I want to kind of follow up on some of Ryan's questions as far as the training goes. And could you talk about where the training's taking place? And what's typical on average number of cases in the case of the physicians that have not been involved with the IDEs -- the IDE?

Brad Mason -- Director, President, and Chief Executive Officer

So the first part first -- first part of the question first. So the training is taking place in Lewisville and also in the field. This is not cadaver training, this is training with models. We have developed a proprietary model for training that the physicians are very excited about. Actually, it's one of the best training tools they -- the comments back in -- one of the best training tools they've ever used. And so we can do that out in the field, and we are doing that out in the field. But we also have pretty large groups of surgeons come in at least monthly in the -- Lewisville as well. I mean that's our preference. We can expose them to our other products as well while they're here and those sorts of things. But typically, they're going to be in some training sessions and then we're going to be with them in surgeries for a number of surgeries until they are launched and ready to go. The second part of the question was? Sorry.

Jeffrey Cohen -- Ladenburg Thalmann -- Analyst

Okay. No, I think you answered the question. I guess as a follow on to that is, is your backlog -- is your list of surgeons waiting for training that you're catching up with as far as bringing them in or going to their facilities at this point?

Brad Mason -- Director, President, and Chief Executive Officer

Absolutely. Absolutely, yes. There's -- there is a lot of demand for the M6 disc.

Jeffrey Cohen -- Ladenburg Thalmann -- Analyst

Great. And then secondly, could you talk a little bit about the Biologics segment? I'm just trying to get an understanding. It looks like you had a solid quarter. But is that coming from Trinity? Is it coming from better ASPs? Is it coming from more products and a more diverse selling platform?

Brad Mason -- Director, President, and Chief Executive Officer

It's more volume of Trinity, that's what's driving it. We -- a little bit more volume in some of our other Biologics. But remember, our ancillary products are only -- are well less than 10% of our total Biologics sales. So it's really Trinity volume that we're seeing. And we -- the distribution we've added in the last year is kicking in, and that's the primary driver of that increase.

Jeffrey Cohen -- Ladenburg Thalmann -- Analyst

Okay. But I guess bigger picture, you're still seeing strength at the higher end of Biologics, kind of from the macro standpoint?

Brad Mason -- Director, President, and Chief Executive Officer

Absolutely. Yes. We are.

Jeffrey Cohen -- Ladenburg Thalmann -- Analyst

Got it, OK. That does it for me. Thanks for taking my questions.

Brad Mason -- Director, President, and Chief Executive Officer

Okay, thanks, Jeff.

Operator

Our last question comes from the line of Jim Sidoti from Sidoti & Company.

Jim Sidoti -- Sidoti & Company -- Analyst

Good afternoon. Can you hear me?

Brad Mason -- Director, President, and Chief Executive Officer

Yeah, we can. Jim, how are you?

Douglas C. Rice -- Chief Financial Officer (Principal Financial and Accounting Officer)

Hey, Jim.

Jim Sidoti -- Sidoti & Company -- Analyst

I'm well.

Brad Mason -- Director, President, and Chief Executive Officer

Good.

Jim Sidoti -- Sidoti & Company -- Analyst

Couple of questions. The decline on the spinal fixation, I assume that was almost entirely the U.S., is that correct?

Brad Mason -- Director, President, and Chief Executive Officer

The callout on -- I'm sorry. Say again.

Jim Sidoti -- Sidoti & Company -- Analyst

On the spinal hardware, the weakness in spinal hardware, that was all U.S. business, right?

Brad Mason -- Director, President, and Chief Executive Officer

Yes. Basically -- it's basically U.S. There's a little bit of international but basically U.S., yes.

Jim Sidoti -- Sidoti & Company -- Analyst

And what you're saying is once you get the new distribution worked out, you think that those results improve in the back half of the year and into 2020?

Brad Mason -- Director, President, and Chief Executive Officer

Correct. That's correct.

Jim Sidoti -- Sidoti & Company -- Analyst

Okay. And then the $4.8 million charge for strategic investments, I just want to be clear, is that for acquisitions you completed? Or is that for acquisitions that you're looking at now?

Douglas C. Rice -- Chief Financial Officer (Principal Financial and Accounting Officer)

Jim, our strategic spend of $4.8 million for the quarter is roughly flat with what it was last year, and it represents some spending as we finish up the integration on a Spinal Kinetics. And it also reflects what Brad mentioned a few minutes ago with regards to us continually looking for ways to grow the company and grow our top line.

Jim Sidoti -- Sidoti & Company -- Analyst

Okay. And at this point in the curve, how many cases do you think the surgeon needs to do with the Spinal Kinetics disc before he can go solo?

Brad Mason -- Director, President, and Chief Executive Officer

So typically, if they've used the disc before, it's probably 3 or 4 cases. If they have not used the disc and they were not part of the IDE, it's probably 5 to 7 cases, something along those lines, after they've received the initial model training.

Jim Sidoti -- Sidoti & Company -- Analyst

Okay. And has that number changed in the last 3 months? Or has that been pretty consistent?

Brad Mason -- Director, President, and Chief Executive Officer

No. That's consistent.

Jim Sidoti -- Sidoti & Company -- Analyst

Okay, all right. That was it from me. Thank you.

Brad Mason -- Director, President, and Chief Executive Officer

All right. Thanks, Jim.

Douglas C. Rice -- Chief Financial Officer (Principal Financial and Accounting Officer)

Thanks, Jim.

Operator

We have no further question at this time. I will now turn the call over back to Brad.

Brad Mason -- Director, President, and Chief Executive Officer

Thank you, operator, and thank you, everyone, for calling in today. We appreciate the time and look forward to talking to you again soon. Take care.

Operator

[Operator Closing Remarks]

Duration: 34 minutes

Call participants:

Mark Quick -- Senior Director of Business Development and Investor Relations

Brad Mason -- Director, President, and Chief Executive Officer

Douglas C. Rice -- Chief Financial Officer (Principal Financial and Accounting Officer)

Craig Bijou -- Cantor Fitzgerald -- Analyst

Ryan Zimmerman -- BTIG -- Analyst

Jeffrey Cohen -- Ladenburg Thalmann -- Analyst

Jim Sidoti -- Sidoti & Company -- Analyst

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