Executives
Dr. Bill Petty - Chief Executive Officer
Jody Phillips - Chief Financial Officer
Analysts
Jeff Johnson - Robert W Baird
Jim Sidoti - Sidoti & Company
Mark Landy - Summer Street Research
Bill Plovanic - Canaccord Genuity
Exactech, Inc. (EXAC) Q2 2013 Results Earnings Call July 24, 2013 10:00 AM ET
Operator
Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Exactech Incorporated Second Quarter 2013 Conference Call. During today's presentation, all parties are in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions)
This conference is being recorded today, July 24, 2013. I would now like to turn the conference over to our host, Dr. Bill Petty, CEO. Please go ahead, sir.
Dr. Bill Petty
Good morning. And welcome to the Exactech conference call. We apologize that we’re couple minutes late. We had some phone problems, if you're suffering with repeat anywhere you are we are not but it’s the rainy reason here and we had lot of rain and lighting and whatever, in any event we hope our connection is good at this point and we will proceed.
I will start with the disclaimer, the release contains various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and 21E of the Act of 1934. They represent the company's expectations or beliefs concerning some future events of the company's financial performance.
The forward-looking statements are qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements. These factors include the effect of competitive pricing, the company's dependence on the ability of third-party manufacturers to produce components on a basis, which is cost-effective, market acceptance of the company's products, the effects of government regulation, and other potential effects. The result achieved may differ materially from the expected results included in the statements.
Now to move to our report on our second quarter of 2013, we have reported topline revenues of $60.6 million and that’s 10% increases over the $55.2 million in the second quarter of last year. Our net income was also up at $3.7 million or $0.27 per diluted share, compared to $3 million or $0.23 per diluted share in the second quarter in 2012.
Just briefly the second quarter segment performance, the knee implant sales were flat with $21 million, extremity implant sales up 36% to $16.3 million, hip implant sales up 3% to $10.6 million, biologic and spine sales up 15% to $6.8 million, and other sales decreased 2% to $5.9 million.
Now to go to the six months, first six months of 2013, our revenue was $119.9 million, an increase of 5% over the $113.8 million 2012. The net income for the first six months was $7.6 million, which is an increase of 20% or $0.56 per diluted share, compared to $6.3 million or $0.48 in the first six month of 2012.
The segment detail for the first six months includes knee implant revenue went down 2% to $41.5 million, extremity implant revenue was up 28% to $32 million, hip implant revenue was down 1% to $21 million, biologic and spine revenue up 6% to $12.9 million and other products revenue decreases 5% to $12.5 million.
Just a reminder on the other products, they included probably three main areas. One is our cement product. I can assure you those were not down. Our products that are non-Exactech products that we sell in one or two markets internationally and other thing is instrument set that we sell to our distributors which we usually sell across through our distributors, and those are kind of up and down because of distributors building their business, or we have a new distributor or whatever, those can be pretty choppy.
Just a couple of other comments, certainly we are pleased with our growth in revenue and with the 23% gain in net income for this past quarter. The overall revenue gain of 10% was led by the 36% growth in our shoulder sales and 15% increase in biologic and spine.
We are especially happy with the continued robust growth of the Equinoxe Shoulder. Though we are pleased we are not surprised. We are not surprised because that the clinical advantage is with the system and the strong team, both our internal team and excellent design and clinical value at our surgeon that we work with.
It is this kind of internal, external collaboration, it provides the improve results to patient and for business success. We believe we are poised for continued growth in extremity and renewed growth for our hip and knee systems as we continue to introduce and bring to the market recent new products in both the hip and knee lines.
I’m now going to turn it over to Jody Phillips, our Chief Financial Officer for the more specific comments related to our operational performance. Jody?
Jody Phillips
Thank you, Dr. Petty. Good morning, everyone. And thanks for joining us for the second quarter 2013 conference call. As Dr. Pretty outlined, the second quarter represented the strong quarter of financial performance for Exactech. I will review our 2Q 2013 operating performance by each of the operating line items from a percent of sales perspective and attempt to give you some insight that’s the trend that we are seeing.
The gross margin percentage decreased to 68.5% from 68.8% during the second quarter, was very close to our expectations as we experienced a rebound in the growth of OUS sales was slightly lower gross margin and we continue to experience the impact of the medical device excise tax during the quarter.
We continue to expect that on a quarter-over-quarter basis, we will be reflecting a 50 to 100-basis point reduction and gross margins to the balance of 2013 due to higher gross margin comparative and the continuing impact of the medical device excise tax.
The total operating expenses were close to our expectations for the quarter with an 8% increase and a reduction to 58.2% of sales versus 59.2% in the second quarter of last year.
The sales and marketing increase of 8% was primarily due to variable selling expenses and we expect sales and marketing expenses to range from 35% to 36% of sales for the balance of 2013.
General and administrative expenses increased 12% during the second quarter and remain roughly flat at 9% of sales. We expect G&A expenses to remain in the neighborhood of 9% to 10% of sales for the second half of the year.
R&D expenses rebounded during the second quarter with an 11% increase versus the second quarter of last year and reflected 8% of sales, which was more along the lines of our expectations than what we experienced in the first quarter where the actual R&D expenses decreased and I believe we were in the neighborhood of 6.5% of sale. We expect R&D expenses to remain in the range as they were in the third quarter at approximately 7.5% to 8% of sales for the third and fourth quarter of this year.
As a result of these operating items our second quarter operating profit increased 17%, $6.2 million and it was slightly above our expectations due to the sales performance in the extremity segment.
Our net non-operating expenses decreased to $385,000 for the second quarter of this year versus $445,000 in the second quarter of 2012, primarily due to lower interest expense.
Our second quarter effective tax rate was 36% versus 38% in the second quarter of last year due to higher profitability mix in the United States during the quarter. We are currently projecting our full year tax rate to be in the range of 33% to 34%.
In summary for the income statement, the resulting net income of $3.7 million and diluted EPS of $0.27 was head of our expectations for the quarter due to strong U.S. growth and our efforts to cost containment.
From a balance sheet perspective, our accounts receivable increased by $4.3 million during the second quarter and day sales outstanding for the six months of the year increased to 77 days versus 72 days in the first six months of 2012, primarily due to increases in the accounts receivable in our Spanish operations.
Similar to the first half of 2012, the Spanish Government has once again officially declare the supplier payment program and we expect the significant reduction in the total AR in the Spanish market before the end of 2013.
Our total inventories increased by $1.9 million during the second quarter and we now feel that we have reached an inflection point in the inventory growth, where the inventory level should remain steady or slightly decrease through the balance of 2013.
Looking at our guidance, we narrowed our full year revenue and EPS guidance revenue is updated to $237 million to $241 million, and diluted full year EPS has been updated to $1.05 to $1.09. This implies an acceleration in the topline revenue growth for the second half of 2013 as compared to the growth that we experienced in the first half of 2013.
Our third quarter revenue guidance of $54 million to $56 million represents a 5% to 9% increase and it is expected to result in 3Q diluted earnings per share ranging from $0.20 to $0.22.
In summary, we feel that the second quarter was another positive step forward for Exactech and look forward to continuing this performance in the second half of this year.
That is all of the prepared comments that I have at this time.
Dr. Bill Petty
Thank you, Jody, and we are ready for questions.
Question-and-Answer Session
Operator
Thank you, sir. (Operator Instructions) And our first question comes from the line of Jeff Johnson from Robert W. Baird. Please go ahead.
Jeff Johnson - Robert W Baird
Thank you. Good morning guys, can you hear me okay?
Dr. Bill Petty
Yes.
Jody Phillips
Yes.
Jeff Johnson - Robert W Baird
Dr. Petty, I thought maybe I will start with you just on a couple product lines, on the shoulder side or on the extremity side, obviously you’ve had a couple competitors launched some new products here in the last few months, but obviously your number is accelerated nicely, and it was very strong in the quarter, kind of maybe flush out for us what drove the acceleration for you guys and how you’re thinking about maybe the extremities business over the next few quarters?
And also would like to hear maybe on the spine and biologic side what drove some of that acceleration, maybe few more details there that was well above what we’re looking for in the quarter? Thanks.
Dr. Bill Petty
First of all on extremities in specifically first for the shoulder we have great respect for our competitors and the product lines they have introduced. We believe though that we continue to have a very competitive offering, as you know Jeff, we have continue since the inception with the Equinoxe Shoulder to you continue to introduce new products to that line that solve problems the surgeon tell us they still have in treating their patients with arthritis in their shoulders.
And as I may -- as I stated in my opening comments, I think our internal team combined our external surgeon team have done very good job in making that happen. And I think that’s the overall picture. Certainly, we have continued to introduce new products, one that I hear about from Exactech when I am talking to surgeons who do shoulder surgery is they did not have a good solution before to the deficient going on.
And our augmented glenoids have been very successful in that area. And our Cage Glenoid has been very helpful and we continue to add to that line and we will continue to do so. As I think you know, we are also in the process of developing a total ankle replacement which will be part of our extremities group. That design is coming along well and we anticipate that we will be in pilot with the design team in the first part of 2014.
From the standpoint of spine and biologics, we had good growth especially in spine in the last quarter. Frankly, it was just fairly low comp for us but still it was good growth. And we think that as a result of some of the new products that we have been working on for several years and now are bringing to the market place.
And I’d also say Jeff that because our numbers in spine are quite small and most surgeon who do spinal surgery have fairly robust practices, a swing of one or two customers can make a significant difference in our top-line revenue for spine.
Jeff Johnson - Robert W. Baird
Okay. That's helpful and with that swing in one or two customers as those maybe new customers that should be sticky going forward, I am just trying to think how I should be thinking about maybe the next few quarters in that segment?
Dr. Bill Petty
Well, I think so Jeff. And I think it goes along with the products that we have been working on and are now able to introduce. That's what has allowed us, provided a main thrust to bring on those new customers. So based on that, it is our belief, not a guarantee but our belief that we would be able to continue to do that.
Have to recognize though that because one or two customers can make a big difference, one way or another, sometimes it creates a little choppiness because of the relatively small amount of revenue and the impact of the customer that we can have.
Jeff Johnson - Robert W. Baird
All right, that's helpful. And Jody, I guess, I could just ask one question on guidance here, especially your third quarter guidance, I think third quarter, last year you had a million dollars return or so from some of your distributors. So that kind of normalize for that. It seems like you’re guiding kind of mid-single digit growth in the third quarter at the top-line. I’m just wondering, you know, may be, sequentially what makes the change from 10% or 11% this quarter to 4% or 5% next quarter, 4% to 6% next quarter. Is that -- how much is FX influencing that. How much is that maybe some operational issues, just wondering if you could clarify that?
Jody Phillips
Sure. It is pretty fair analysis, I think. The big issue there in terms of getting to the loss that that guidance may be lower is the impact of currency in Japan as you know that was roughly at 20% year-over-year delta. That had a meaningful impact on our reported GAAP numbers in terms of growth in the second quarter. And so, as we look at the third quarter, with where the currency stands that’s factored into that guidance.
So we still continue to perform very well in the Japanese market despite the currency. And so I think once you factor that into that million dollar return that we had in the third quarter of last year, you can get back in the neighborhood of apple-to-apples 6% to 10% type growth for the third quarter.
Jeff Johnson - Robert W. Baird
Okay. And how much did FX drag on maybe your EPS for the balance of the year, is it a few penny in or even bigger than that?
Jody Phillips
That’s not the exact number that I have in front of me, but it’s certainly a couple of pennies of the top of my head. I would guess between 2% to 5%. It is in the Japanese market primarily as you know, which is pretty good margins. And so there is -- it does have a significant profit impact.
Jeff Johnson - Robert W. Baird
That's helpful. Thanks guys.
Operator
Thank you. And our next question comes from the line of Jim Sidoti of Sidoti & Company. Please go ahead.
Jim Sidoti - Sidoti & Company
Good morning. Can you hear me?
Dr. Bill Petty
Yeah. Good morning, Jim.
Jim Sidoti - Sidoti & Company
Great. Just back to the shoulder business which has done extremely well. Can you have any -- can you give us any kind of sense on how many of those customers who were ordering your shoulders are also using your knees?
Dr. Bill Petty
That's a great question. There tend to be more and it is stated by the way, there tend to be more -- maybe more special as it tends to be more specialization in shoulders than necessary hip and knee where a lot of -- most of them who do knees, also do hip. However, there a good number of general orthopedics out there who do hips and knees and also do shoulders. And so absolutely, our teams are looking at the shoulder customer base with the surgeons who conduct through that shoulder business and obviously going after the hip and knee business to the extent that they are also hip and knee users. So, it’s a great opportunity for us to develop our hip and knee business.
Jim Sidoti - Sidoti & Company
And how many -- what percentage of those physicians who do both shoulders and knees are using it only now? Can you just give us a rough estimate?
Dr. Bill Petty
I don't know that, Jim. I’d be happy to get with our teams and look at the list. I just haven't personally done that. I know our knee people and our shoulder people are looking at.
Jim Sidoti - Sidoti & Company
Okay. And then just a follow up on the GPS system, I don’t think you had talked about that at all this morning. How -- what is the -- what is the timeline for that launch and do you think that will pull through knee systems towards backend of this year or do you think that is more a 2014 event?
Dr. Bill Petty
So, I will first answer where we are with it. We introduced it formally at the Computer Assisted Orthopedic Surgery meeting interestingly called CAOS for those who don’t know the name. But that meeting was held in Orlando in June. So it gave us an opportunity to introduce the system.
And subsequently, in Texas last weekend, we had a meeting with all of our sales agents in the United Sales. And we officially launched it to our sales leadership, last weekend. And the next step is to begin developing and training knowledge within the full sales force and we’ll do that over the next several months. And to answer your specific question, yeah, I mean our intention is that, that system will indeed help support knee growth in the second half of the year, but I hesitate to declare that what it might be for a couple of reasons.
One, this is a capital equipment sale. It's a little bit different sale than our sales work has done up to now. And so we need to help deliver that confident feel that sales organization -- the capital equipment sales team sometimes take longer -- the sales cycles are long. It depends on capital budgeting processes in hospitals and are different everywhere.
So, I feel that only to play out -- that we are getting started now. It's a longer sales cycle. It will take time to get the systems deployed. But in the meantime, we are already seeing interest in our knee system because we have this technology and that's exactly where our strategy is of introducing it.
Jim Sidoti - Sidoti & Company
Great. Thank you.
Operator
Our next question comes from the line of Mark Landy from Summer Street Research. Please go ahead.
Mark Landy - Summer Street Research
Good morning, folks. Can you hear me?
Dr. Bill Petty
Yeah. We can. Mark, go ahead. Good morning.
Mark Landy – Summer Street Research
Good morning. Maybe I am not sure you have given the detail on that, but I will ask it anyway. In terms of the shoulder drug, why is your growth within your existing surgeon base versus knee surgeon strategy in the quarter?
Dr. Bill Petty
That's an interesting question. I am going to suggest that it’s probably predominantly adding new customers. Though we look at the market and note that the market is growing in the high-single digit, so -- so in theory high-single digit contribution of that would be a market expansion of the existing customer base and the rest of the 36% would be us, taking market share from our competitors.
And I mentioned market share and will note that our -- the people on our extremities -- people running our extremities business call to my attention a report by Global Data, that is a analysis of the worldwide shoulder market. And they listed the analysis done by Global Data and applied our current performance and expectations in shoulders for the rest of the year in the United States market to the data in this particular research and arrived at a 14% market share number for Exactech in shoulders in the United States. So, that's -- I think that is pretty substantial progress over the last five or six years.
Mark Landy - Summer Street Research
That's really impressive. So I guess now kind of stressing that on Jim’s issue, if we look at these and you already say over and over again that you guys are just too small of the kind of market share to really the effect it has in the general environment. Is it that -- the pushback on -- obviously we have seen that in a little while the payout pushback. Is that expecting just even your search ability to add surgeon as the knee market kind of deteriorated to a point where it really is -- the guys have asked if there are really any means of getting them or is it something else perhaps staying on maybe you had a new surgeon there, changing offices or ask for the quarter, has that happened in the past?
Dr. Bill Petty
I think, obviously the growth, five years ago slowed from 5% or 6% down to flat in the market. And I could not agree with you more that at our market share level, we should be able to overcome something like a flat market simply by blocking and tackling in our sales and marketing processes and going on in getting customers. It doesn’t take a lot of customers even in our knee business to move the needle.
And so I think there is a irony around the sequence of your questions that has more to do with our knee performance at least in the U.S. than anything. And that is, when you are growing a shoulder at 36% and your sales force is highly engaged and excited and enthusiastic in delivering that kind of success, they can take their eye off the ball and some of the other things. There is also a great opportunities like our knee system with this GPS.
And so, so we recognized that about two of three quarters ago. And we put a huge effort and so we are focusing the sales organization on both our hip and knee business here in the United States. And we do expect to see results from that focus.
Dr. Bill Petty
This is Bill speaking. I do think your question about the general market did affect, considering our small size. I agree with David, we should be able to grow the knee, whatever is going on in the market. However, we do know that some of our steady loyal customers have seen their business deteriorate to some extent and that does affect us.
And that if we had a surgeon and he was doing 60 knees last year and this year he is doing 40, then we have to bring on more with the new customer to first make up that to be flat before we show any growth. So, you are correct. There has been some deterioration in the overall market. And it does have some affect on us.
Mark Landy - Summer Street Research
Okay, guys. I appreciate the insight. And then just Jody, looking on at R&D, I think you had mentioned that there was a little lack in the first quarter and that you would bump up in the second quarter. Should we think about a steady rate for the remainder of the year or R&D kind of be a little lumpy given some of the products that you expect that you got going on?
Jody Phillips
I think what you will see is that it increasing slightly from the pure dollar expenditure that we had in the second quarter. And it should come in at roughly at 7.5% to 8% of sales. So, I would look at it to increase kind of like it did on a quarter-over-quarter basis in the third and fourth and that, 8% to 14% quarter-over-quarter increase tight neighborhood.
Mark Landy - Summer Street Research
And then the last question, you had mentioned, I think, on the last quarter that you had seen some weakness in Latin America. How does Latin America did this quarter and you did discuss in last call on driving sequels at the moment?
Jody Phillips
We did not discuss it and what we reported remember we were a little bit kind of utter surprised in the first quarter, had some uncharacteristic order patterns from our -- couple of our big independent distributors in Latin America. And those resumed to more normal ordering patterns in the second quarter. And we had actually low-single digit growth in that region in the second quarter.
Mark Landy - Summer Street Research
Okay. Did you guys kind of figure out what that was, was it a one-time anomaly, is it something that we should think about going forward that perhaps maybe is a new seasonality or something else?
Dr. Bill Petty
In one market, it was more of the macro environment around health insurance system changes. And the other market was just choppy ordering maybe over ordering in the fourth quarter. And they didn’t need as much in the first quarter. We’re working with them to keep that more of streamline going forward.
Mark Landy - Summer Street Research
And last one, Jody, what was the mix Exactech number?
Jody Phillips
The expenditures for the medical device excise tax in the second quarter were around $400,000.
Mark Landy - Summer Street Research
Thanks very much guys. Congratulations on a really good quarter.
Jody Phillips
Thank you.
Dr. Bill Petty
Thank you.
Operator
(Operator Instructions) And our next question comes from the line of Bill Plovanic.
Dr. Bill Petty
Hi Bill.
Bill Plovanic - Canaccord Genuity
Good morning gentlemen. Congratulations on a good quarter. Couple of questions here, first on selling days in the quarter, what was the comp versus a year ago and what does Q3 and Q4 look like for U.S. selling days?
Jody Phillips
Bill, this is Jody. At one point, I said I didn’t believe in that math years ago but I guess that our GPS sales has convinced me. It does matter. I think there was one more selling day in the second quarter of this year and that kind of frankly, I think that was switched on the first quarter and is a little bit of the reason behind the growth rate in the two respective quarters. Relative to Q3 and Q4, I believe we have one more selling day in the third quarter. And it’s the same in Q4, but don’t hold me too much to that if you don’t mind.
Bill Plovanic - Canaccord Genuity
I’m holding yeah that Jody. Okay?
Dr. Bill Petty
Bill, this is Bill Petty speaking. You know that I am a little bit with Jody and I know some of the other companies made a big deal of this. And of course, it makes a difference. I think the other thing that can matter is where holidays fall, 4th July, Independence Day falls on a Monday, Tuesday, Wednesday, I think this year it was Thursday. But most surgeons like to do their major surgery, the first part of the week so their patients are out of the hospital before the weekend.
So I just used that as an example and that can happen with any of the holidays. So it’s another thing that kind of think about that can affect what happens.
Bill Plovanic - Canaccord Genuity
Got you. Understood. And then just kind of a question clarification, so in the year-ago quarter, in Q3, we had -- I'm sorry -- Yeah, in Q3, we had a million dollar return in Spain. Just as I think about that and I think about the impact on your knee business, I would assume that a lot of the lion share of the revenues in Spain are on the knee. And so as we look at Q3 kind and I think the knee year-over-year growth, you should actually see some good growth out of that if you’ve got a very easy comp due to that stocking shift and then just due to also the launch of your GPS product. Is there anything wrong with my thought process there?
Dr. Bill Petty
I’ll clarify one thing and then let David add color specific to the Spanish market related to that $1 million return last year. More than half of that was related to instrumentation which was reported in the other categories. So it’s maybe not as much of a layup in terms of the comp as it may sound for knees. And also our Spanish team does a good job of selling the entire portfolio while knees are very, probably the largest percentage of our revenues in that market. We are selling all of our products in that market as well.
Dr. Bill Petty
Yeah. I think that’s a great point. That was the primary driver of our change in channel to our own operation with control ability to sell the whole bag. And so in fact, yeah, I’d even further say that the knee business is the bigger part of the business in that particular market. But the knee business is under a lot of pressure with respect to pricing.
So we’re trying to deal with that and just looking at all the other parts of the line because they’re coming from a smaller base. They are all growing nicely and the overall growth there is really remarkably good. And certainly we expect a big third quarter out of our Spanish team.
But to get to your other point, the bigger picture and the potential for GPS to help grow knee sales predominantly in the U.S. in the second half of the year, absolutely is part of our thinking about how to improve the knee’s performance overall.
Bill Plovanic - Canaccord Genuity
And then can you just leverage on that question, if I think back at one point your knees were a huge grower for you, big driver, it’s a big percentage of the company. And international slowdown and went negative for a while and the U.S. slowdown, I don’t know if it went negative or not.
But I guess my question is where are we in the international turning around and being positive, where we’re in that curve. And then the same question on the U.S. So I think the reason I ask here is I mean with knees being overall over a third of the company, I mean that would be a pretty significant impact going forward so that knee business actually start being a contributor.
Dr. Bill Petty
We are well aware that and extremely focused on making what we said happen. And the difficult thing about answering the international question is the volatility and uncertainty in Europe specifically. And so let’s just say, let’s presume we can be stable in Europe in knees. Then the focus that we’re working on in the U.S. market and continuing what we we’re doing in Latin America and noting that we have double-digit growth in Asia. And by the way, we don’t sell shoulders in Asia. That’s coming from hip and knees that we pull all those levers then we would be in really good shape. You’re absolutely right.
Bill Plovanic - Canaccord Genuity
But where are we in that curve on the turnaround? Have you bottomed internationally and we’re bumping on the bottom, are you starting to lift up off of it. I mean how would you characterize that?
Dr. Bill Petty
Yeah. It’s volatile. I mean I don’t. We’re not expecting any major all in the side of the above with our knee sales in Europe. But having said that, it’s just hard when we don’t know what’s going to happen, it would be have to say absolutely. But so if you want to call it bump and along the bottom, I’ll go with you in that. We are not expecting to go backward. We’re expecting to grow it second half of this year. And obviously when we do that in the U.S. around GPS that has been you should start to go.
Bill Plovanic - Canaccord Genuity
And would you, and so again the same question on the U.S. are you bumping along the bottom, are you already to starting to list up, well, GPS be what listed up, is that how I should take this?
Dr. Bill Petty
I believe so that (inaudible) Yeah. But, therefore, I mentioned when Mark Landy asked a question, this -- the reality about it any sales force when something is hard they put a lot of their effort into it and so we’ve put a big effort ourselves into refocusing and say, okay, great, keep doing the 36% on the shoulder, but remember over here, we’ve got this and there is a lot of energy around the GPS technology I can tell you that is by itself giving the sales organization excited about selling knees and that is the first step in changing result.
Bill Plovanic - Canaccord Genuity
Okay. And then a question for Jody, so it doesn’t feel left out and I am done. Your D&A in the quarter came down a couple hundred thousand sequentially is this kind of the new best level we should think about?
Jody Phillips
It’s really more of a function of how much surgical instrumentation we put into service in any given quarter. Frankly, what I will do is look at the year-to-date total and kind of take that as an average and think about that is a quarterly base line running forward. So a little bit, probably higher than what we experienced in the second but maybe a little bit lower than what we had in the first.
Bill Plovanic - Canaccord Genuity
Great. Thank you very much.
Jody Phillips
Thanks Bill.
Operator
Thank you. (Operator Instruction) And it looks like we have a follow-up question, Mr. Plovanic from Canaccord. Please go ahead.
Bill Plovanic - Canaccord Genuity
Thanks. Here I want to hard to call here as I went through a bunch of question. So but since his back, I just actually had one more is. As you look at the sales and marketing actually just overall operating expenses. I think now four quarters in a row you’ve beat on the operating line. This quarters as I look at it just on worst my expectation is the positive drop through on the incremental revenues on the beat, it was close to 50%? I mean what is that is that because we’re starting to see this growth rate that’s clicking above 8%, 9%, 10%, and is that kind of how we should expect it further or do you think there is investments it will be need to be made that the operating margin improvement will be more measured?
Dr. Bill Petty
I think we’re comfortable with year-over-year improvement in that operating margin due to the cost containment efforts that we’ve been able to achieve. It is pretty critical that we get north of 7% growth to be able to deliver that. We were able to deliver in the first quarter despite that due to somewhat one time lower expenses.
But I think the second quarter and really looking at it on our year-to-date basis is more representative of what we expect for the full year. We can hang out in the 7% type growth neighborhood. We can definitely deliver the leverage on the operating margin line that we’re targeting and that’s frankly what all of our guidance is predicated thought.
Bill Plovanic - Canaccord Genuity
Is that more of a U.S. growth rate of 7% or is that a global growth?
Dr. Bill Petty
It takes a steady mix. It cannot be -- it can’t come from 7%, getting there with no growth in the U.S. and 15% growth outside of the U.S. that will not quite deliver the margins. So it takes a pretty good balance of the two.
Bill Plovanic - Canaccord Genuity
Okay. And then, since I have the time here, just what new product as we talk about outs we have GPS in knee, any major products that you would like to highlight for hip or spine biologics that is really driving in the back half of '13 and '14?
Dr. Bill Petty
Sure. I think we’ve mentioned the large hip inline is with the Crown Cup, we also have this new [port] material acetabular system InteGrip with augment -- acetabular augments and that is 1.4 billion launch right now and we have a net preserving short stem that we are just in pilot launch with now and expecting to get into broader use of that product as we go through the rest of this year.
There were some major projects in development in hip that are more 2014, 2015 is that like a flat (inaudible) style primary hip design and a [just for fix] provision hip down to curve with the antigrowth and our revision acetabular systems currently on the market. So there is a lot going in hip and we should have a steady stem of new products in hip over the next two years.
Bill Plovanic - Canaccord Genuity
Excellent. All right. Great. Thanks. I appreciate you’re taking my follow-up questions.
Dr. Bill Petty
Thanks, Bill.
Jody Phillips
Thanks, Bill.
Operator
And at this time there are no further questions in queue. I’d like to turn it back to management.
Bill Petty
Thank you. And thank you to all of you for your interest in and confidence in Exactech. And we hope to continue to reward that confidence. Have a great rest of the week and thanks. Bye-bye.
Operator
Ladies and gentlemen, that does conclude the Exactech Incorporated Second Quarter 2013 Conference Call. We appreciate your participation and you may now disconnect.
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