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Executives

Bill Petty – CEO and Chairman

Jody Phillips – CFO

David Petty – President and Director

Analysts

Jeff Johnson – Robert W. Baird

Raj Denhoy – Thomas Weisel

Julie Hoggatt – Noble Financial

Anup – Canaccord Adams

James Sidoti – Sidoti

Bill Plovanic – Canaccord Adams

Exactech Earnings Conference Call, (EXAC) Q3 2008 Earnings Conference Call October 29, 2008 10:00 AM ET

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Exactech, Inc., Third Quarter 2008 earnings conference call.

(Operator Instructions) This conference is being recorded today, Wednesday, October 29, 2008. I would now like to turn the conference over to our host, Dr. Bill Petty, CEO and President. Please go ahead, sir.

Bill Petty

This is Bill Petty, and welcome to the call. And first, I apologize that we're late getting with you. We actually called in 20 minutes ago, and I don't know what the problem was at the conference center. But in any event, welcome to the Exactech conference call. And I will begin with the disclaimer statement and then move into some comments, and then Jody will make some comments, and then David, Jody and I will respond to your questions.

The release contains various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and 21E of the Securities Act of 1934. They represent the Company's expectations or beliefs concerning future events of the Company's performance.

These forward-looking statements are further 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 to the Company, market acceptance of the Company's products, the effects of government regulation, and others. Results actually achieved may differ materially from expected results included in these statements.

For the third quarter of 2008, Exactech's revenue was $37.9 million compared to $30 million in the third quarter of 2007. This represents an increase of 27%. Our net income was $2.1 million, resulting in diluted earnings per share of $0.16. In quarter three of 2007, our net income was $2.5 million or $0.21 diluted earnings per share. So this year we had a drop of $0.05. The primary cause of this comparative decrease in net income was the $1.2 million legal expense associated with the Department of Justice inquiry.

Now, to go to a little more of the specifics, our knee implant revenue increased 16% to $16.6 million. Our organic hip implant revenue increased 8% to $5.5 million, and the reason we put the organic there, as you remember last year, we had the Link distribution agreement when those revenues were included, mostly in our hip revenue.

Our biologic services revenue increased 12% to $4.7 million. Shoulder implant revenue was up 73% to $4.2 million. Our other revenue category of $6.9 million did include $1.4 million for spine products and also included the revenue from our acquired French distributor.

Overall, our revenue growth, excluding acquisitions and the distribution of Link product termination, was 21%. Excluding the DOJ inquiry legal expenses, net income increased 15% to $2.9 million.

Now to go to the first nine months of 2008. Our revenue for the first nine months was $121.4 million, and this compares to $91.1 million for the first nine months of 2007. This is an increase of 33% for the first nine months. Net income for the first nine months of 2008 was $8 million compared to $5.8 million in 2007, an increase of 38%. This comparison does include all DOJ-related legal expenses year-to-date. Our diluted earnings per share for the first nine months was $0.63 compared to $0.49 in the same period of 2007. Our US sales (audio gap)

Our international business continued its strong performance with the third-quarter sales increasing 116% to $11.6 million from $5.4 million in the third quarter of 2007. Excluding the impact of the French distributor acquisition, the international sales increase was 70% for the third quarter. For the third quarter, international sales represent 31% of our total sales.

Obviously, our bottom-line was impacted negatively by our high legal expenses. Overall, the growth of our business continues to be quite healthy. We feel positive about the future because of market acceptance of our growing line of products and because of the strong pipeline of new products that we have.

Now I am going to turn it over to Jody, and he will give a little more detail on the financial picture. Jody?

Jody Phillips

Good morning, everyone, and thank you for joining us for our third-quarter conference call.

As we outlined in the release and in Dr. Petty's comments, the DOJ-inquiry related expenses, during the quarter, were substantially higher than we incurred in previous quarters, and higher than our expectations. While we feel there were elements of these costs that will not continue in future quarters, we cannot project that with certainty, and therefore, we have adjusted our forward-looking guidance to exclude the impact of these expenses.

From an operational standpoint, we experienced the reduction in gross margin percentage from 66% to 64% that we have been expecting as a result of the greater mix of international business. This was attributable to the impact of the French distributor acquisition as well as a higher overall international sales mix.

Our internal manufacturing efforts and reduced machining expenses continue to allow us to offset increases in raw material costs. Therefore, we have been able to maintain relatively steady unit costs, and we are currently manufacturing about 65% of our implant components internally. Excluding the DOJ expenses of $1.2 million, our operating expenses increased 21% to $19.1 million for the quarter or approximately 50.3% of sales. This 21% increase was consistent with our ex-acquisition revenue growth rate.

Our net interest expense for the quarter was $204,000. That was based on total outstanding debt of $22 million as of the end of the quarter. $12.4 million of the total outstanding debt is on our recently renewed $40 million credit facility.

We are pleased that we were able to renew and extend that facility for a five-year term earlier this year and upon favorable terms in light of -- relative to the current financial environment. Our current cash flow budgeting projects that we will increase the total amount outstanding over the next two quarters, but there will continue to be significant availability on that credit facility.

As a result of our operating activity, the 3Q GAAP net income decreased 14% to $2.1 million, but increased 15% to $2.9 million when we exclude the DOJ-related expenses.

Looking forward, we have released our fourth quarter '08 and 2009 revenue guidance of $37 million to $40 million, and $184 million to $194 million, respectively. These estimates are based on recent currency exchange rates and therefore are both reduced from our earlier expectations and subject to future variability.

Our fourth quarter 2008 earnings expectations range from $2.75 million to $3.0 million, or roughly $0.23 to $0.25 diluted EPS, and again, these are excluding DOJ-related expenses. Our initial guidance for 2009 earnings is roughly $14 million to $15 million, which translates to diluted earnings per share of $1.06 to $1.14, again excluding DOJ-related expenses.

Thanks again for joining us, and we look forward to your questions.

Bill Petty

Okay. We can open up to questions now.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions)

Our first question comes from the line of Jeff Johnson with Robert Baird. Please go ahead.

Jeff Johnson – Robert W. Baird

Good morning, guys. How are you?

Jody Phillips

Hi, Jeff.

Jeff Johnson – Robert W. Baird

A couple of quick questions here, if I could. Jody, obviously a number of moving parts with France Medica, with the Link deal and what have you, or getting out of the Link deal. As I look at your guidance for '09 and try to back some of the anniversarying of those issues out and what have you, is it fair to be thinking that your organic growth guidance right now for '09 is kind in that mid-teens range -- 13% to 15% or 14% to 16% range?

Jody Phillips

I think you are right on. If you look at it just on a purely reported basis, depending on where we end up in the fourth quarter, the range that we have given is 14% to 23% in total. As you know, in the first quarter we will have the French distribution, which we didn't have in the first quarter of 2008. So, if you look at it on an organic basis, it should be slightly below when I said, which sounds like where you were.

Jeff Johnson – Robert W. Baird

Yes. Fair enough. And then, I was pleasantly surprised by the '09 EPS guidance. I know that's ex-DOJ, but as I look at -- and forgive me, Dr. Petty, you may have mentioned this in your prepared remarks, but the DOJ impact year-to-date, if I try to back that out, somewhere in the $0.09 to $0.10 range; is that accurate, Jody?

And then, if it is, it seems to me you are implying EPS growth next year of 20% upwards of almost 30% at the high end. So would love to hear maybe where some of that leverage off a mid-teens organic rate is now going to start to develop here. We have been waiting for that, and it sounds like it could be coming now in '09?

Jody Phillips

Yes. I don't want to dissect it too much, because we are still not breaking out the DOJ expenses for the first half of the year. They were material. They were not nearly as substantial as they were in the third quarter. And so I will just kind of give some general comments.

We have been saying for quite a while we are projecting 50 to 100 basis points of operating leverage through a combination of reduction in G&A expenses as well as hopefully improvements at the gross margin level, and that is taken into our guidance for 2009.

Jeff Johnson – Robert W. Baird

All right. If I could push on that I guess a little bit, Jody, is there a reason not to break out the first half? And I am hoping -- and assuming, I guess, that on a go-forward basis, you will kind of give us the EPS with and without the DOJ expenses, because I think that is a much better way, especially for a company of your size, to kind of be able to look at a normalized EPS rate.

Bill Petty

Well, Jeff, first of all, going forward we will do that. And obviously we did it in the quarter we are reporting now, and you can see the difference there. Everything we have reported from the first and second quarter, all those expenses were in there. And so that's why we have not elected to bring them out. But once we -- let's just say, got surprised, on the negative side in the third quarter, it was such a difficult situation for us trying to predict it, that we decided we would start doing it separately and breaking them out as you see. I will just say that I will be disappointed if in the fourth quarter the expenses are as high as they were in the third quarter. But I am not going to say that I know they won't be.

Jeff Johnson – Robert W. Baird

Well, I think we all agree it's tough to predict what the government will do, and I know from some of your peers, even similar-sized peers are incurring expenses in that $1 million plus a quarter range just to comply with the DOJ investigation. So not outside the realm of what's needed.

But Dr. Petty, going forward in '09 then, let's say there would be a resolution -- and I know this is all speculation. But if there were a resolution, if a monitor were put in place, would you continue to break out kind of those costs so we could see the underlying EPS growth, ex kind of the industry-wide issue that we are all dealing with?

Bill Petty

First of all, we don't want to talk about what the resolution might be. Yes, we are working very hard on a resolution. We do have -- the reason we said that we are going to leave it separate is because we just don't know how to predict. So, I think we're just going to have to leave it at that for now.

Jeff Johnson – Robert W. Baird

All right. Fair enough. And then just last question, I have -- Jody, obviously some LIBOR exposure on your debt. Going from memory, here, I think it's $5 million or $6 million of your debt is LIBOR exposed. Was that a drag in Q3, and does that go away a bit in Q4? Or how should we be thinking about that?

Jody Phillips

Quite frankly, more of it is LIBOR exposed, and the part that is LIBOR exposed has been more stable than the part which was not LIBOR exposed. Basically, 90% of our debt as of the end of the third quarter was LIBOR based. The other 10% was relative to our industrial revenue bond, which was subject to really wild swings during the quarter. So 90% of it is LIBOR based. I think our effective rate as of the end of the quarter was 4.8%, and even though the markets have been jumping around, those numbers have been relatively manageable and not a surprise to us so far.

Jeff Johnson – Robert W. Baird

Okay. And I am sorry. You said your line of credit -- and I didn't realize that it must be your line of credit that is also LIBOR based?

Jody Phillips

That is correct.

Jeff Johnson – Robert W. Baird

Okay. I knew the other stuff was. Okay, fair enough. Thanks guys.

Jody Phillips

Thank you, Jeff.

Operator

Thank you. Our next question is from the line of Raj Denhoy with Thomas Weisel. Please go ahead.

Raj Denhoy – Thomas Weisel

Hi, good morning guys.

Bill Petty

Hi, Raj.

David Petty

Hi.

Raj Denhoy – Thomas Weisel

I wonder if I could ask a little bit about the OUS sales, the 70% growth outside of the acquisition. Obviously, you have expanded there and are adding distributors. How much of that 70% was those distributors stocking in the quarter?

David Petty

We actually had a couple of -- this is David, by the way, Raj -- a couple of things going on in the quarter. There were -- there was meaningful contribution by two new distributors that were actually new in the third quarter. And so,that was all stocking activity, one in our Asia-Pacific region and one in the European region.

We also have a couple of recently added distributors that we are till ramping up, and so there was a little bit more effect there. And probably in total, that adds up to somewhere around 25% to 30% of the growth. And beyond that, it's just continued growth with the existing distribution network.

Raj Denhoy – Thomas Weisel

As we think about the business going forward, do you expect to continue to add distribution at the rate that you have been internationally? And is this going to continue to be a big push for the Company over the next couple of quarters?

David Petty

Certainly, it's our interest to enter more markets, but I think this year has been sort of unique in that we've -- of course have the acquisition of the French distributor. We started a direct operation in Japan, and we also started with two new distributors in previously existing markets. But these new distributors were substantially more capable, and so those were not new markets to us but added a lot of contribution in terms of both stocking and also real growth rate in sales.

And in addition to that, we -- well, I think that actually covers most of it. So what I would say about that is that we don't expect to have that level of impact of adding distribution internationally in -- let's say in 2009.

Raj Denhoy – Thomas Weisel

Okay, okay. You know, domestically – I am not sure if you provided this last quarter, but how many salespeople did you have in the quarter?

Jody Phillips

We actually -- it's roughly the same. I will just give you the number now. It's 42 agencies domestically, and within those agencies, 214 sales reps, which is not appreciably different from what we reported at the end of the second quarter.

Raj Denhoy – Thomas Weisel

Was there any, though, changes though? Because I know part of it has been that you have been sort of swapping people in and out. Did you -- was there any appreciable changes in the focus this quarter?

Jody Phillips

In the – I am sorry, in the focus?

Raj Denhoy – Thomas Weisel

No. In the people that are actually in those positions?

Jody Phillips

Yes. Well look, that's an ongoing effort for Exactech, may be worth making a couple of comments, that we understand the implication of the numbers in the -- of salespeople as it relates to sales growth over time, and that's very much in our plan to methodically grow the number of feet on the street, if you will.

But as you have alluded to, the qualitative improvement in the sales organization -- as we go, in our mind it's far more important to get the production per rep up, and certainly that's helped by launches of new products. But we are after qualitative improvements, and we believe that we can sustain the growth rates that are in our plan with qualitative improvements and product launches. And then we can accelerate that by having meaningful quantitative improvement, but that will be a modest improvement over time.

Raj Denhoy – Thomas Weisel

Okay. Just one last one on this spine business. I think it's still running below trend of what -- how I think it was doing as a private company last year. What do you expect that's going to turn here and maybe get back up to what they were doing last year? What are the plans there at this point?

Jody Phillips

Well there's a -- we have done a lot there. And I think really, regarding the revenue piece, remember we have reported that we were aware at the time of the acquisition that there was some erosion in that customer base, which continued in the first half of the year. And we believe that we have sort of hit the bottom as far as the revenue erosion goes. So, on a go-forward basis, we are certainly hopeful that we can start to look for consecutive-quarter increases in revenue from the spine unit.

The other thing I will point out is that we have worked very hard and very quickly to integrate the operations of the spine into the Exactech operations, which has allowed us to take advantage of some the support functions within the Company. And under the leadership of Bruce Thompson, who also runs our Biologics division, we have done a very good job getting the expenses under control without compromising the operational goals, meaning that we are very, very focused on product development and on the sales and marketing efforts, but doing that with better managed expenses.

And in the near term, in terms of opportunities there, in product development are the imminent launch of a lumbar fusion system as well as a cervical plate system. And then we have four other projects in the pipeline that are -- what we will focus on for product launches on a go-forward basis.

So taking all of that together, here -- sitting here in the fourth quarter, we feel the best we've felt about the Spine business since the acquisition.

Raj Denhoy – Thomas Weisel

Great. Thank you.

Operator

Our next question is from the line of Julie Hoggatt with Noble Financial. Please go ahead.

Julie Hoggatt – Noble Financial

Hi, guys. Thanks for taking the question. First, on the hip line, can you give me what the growth rate would've been excluding the Link?

Bill Petty

I think that was in the press release (inaudible) 8%.

Jody Phillips

Its 8%, Julie.

Raj Denhoy – Thomas Weisel

For just hip?

Jody Phillips

That's correct.

Bill Petty

The organic hip growth excluding the Link deal was 8%.

Julie Hoggatt – Noble Financial

Okay. And in terms of the market environment that you areseeing, are you feeling -- are you seeing any slower growth rate or declines in terms of the number of procedures with clients?

Bill Petty

David Petty has actually spent a fair amount of time looking into that, and I will let him respond to your question, on that specific question. But just let me say -- this is Bill Petty talking, that it's very difficult for us to understand what the current macroeconomic situation may mean for a business like ours. We certainly know that in economic downturns, healthcare is generally expected to perform relatively better than many other industries.

On the other hand, if you read about this, you get a mixed picture. For example, some will say the people concerned about losing their jobs and therefore their insurance might move ahead, getting with, getting an elective procedure. Others say that if you are concerned that you might lose your job, you sure don't want to take six or eight weeks off to go have an operation and increase that risk.

Some will say that the seniors should not be affected, meaning retired people maybe on Medicare. But on the other hand, those people tend to be very cautious, and in a situation of anxiety and fear they may put off an operation as well.

So on balance, it is very difficult for us to know what it will be, though we certainly will be disappointed if we don't perform a whole lot better than let's say some of the other industries -- retail, maybe some like that, that are more likely to be affected in a economic downturn.

Now I am going to ask David to comment a little bit on some specifics he has looked at as for Exactech.

David Petty

I have looked at our customer base recently, in the last two months, and specifically the hip, knee, and shoulder business, and can say definitively that our customer base -- first of all, we haven't lost any customers. Secondly, definitively, we're adding customers, and yet we note that our growth rate domestically slowed in the third quarter as compared to the first half of the year. So certainly a reasonable explanation of that is the macroeconomic environment.

But I think the most important point to take away from what I've just said is that, A, we don't know for sure that that's the dynamic, but more importantly, we are adding customers in each of those areas of our business, and that fundamentally we feel like our business is very sound and very healthy. And we are hopeful that as we continue to add customers, in spite of the macroeconomic environment, we can still achieve our objectives as we have just guided you.

Julie Hoggatt – Noble Financial

Okay. And the last thing is, can you go over the timing of near-term product launches. I think you had mentioned before shoulder plate and there are some knees in the pipeline. Can you give us more detail on those?

David Petty

Sure. Okay. You mentioned shoulders. Certainly, the reverse -- we've announced that we've launched, but I think it's important to point out that that product is still in launch phase and that we continue to add additional systems and reach more and more customers.

And you mentioned the fracture plate. In the second quarter of next year, we are still on schedule to launch a fracture plate for the proximal humerus, as well as a new glenoid to complement our existing total shoulder line. On the knee, in the current quarter we are launching a new product for cruciate retaining knees. It's a tibial insert that goes with our existing Optetrak line that we call CR Slope. So you may hear that label again in the future. That product is being launched now, which should give us access to new surgeons doing cruciate retaining knees.

We are modestly increasing the number of navigation systems we make available for use with our knee program. We, in the first half of next year, will be launching the low-profile instruments or instruments for so-called minimal or reduced incision in total knee replacement. These are instruments for the tibial and patellar component to complement the already existing femoral LPI instruments that we have launched a couple of years ago. There is another version, an evolving version of our traditional Optetrak posterior stabilized knee that will be launched next year, as well as a less invasive partial knee replacement under the trade name ArthroFocus, which will be launched in the second half of the year.

Currently, we are launching under the Novation trade name in the hip line a flat wedge style of femoral press-fit hip stem that is very friendly for the use of a direct anterior approach to total hip surgery, which is becoming more popular. And we are hopeful that, that will help on an uplift with our domestic hip business. And then we have an additional fracture system that is scheduled for launch next year in the hip line, and we have another iteration of the Optecure, what we call phasic version of our DBM bone paste in Biologics business unit, as well as a bone marrow aspirate concentrate system, which should launch in the second half of next year.

And I have already mentioned the two projects that are being launched in the spine business unit.

Julie Hoggatt – Noble Financial

Right. Thanks so much.

David Petty

You are welcome. Thanks for your question.

Operator

Thank you. Our next question is from the line of Bill Plovanic with Canaccord Adams. Please go ahead.

Anup – Canaccord Adams

Good morning everybody. This is [Anup] for Bill. I just wanted -- one question that hasn't been asked. Any reason that you can point out as to why the US growth was a little bit slower this quarter compared to the past? Anything that could be causing that slowdown?

Bill Petty

I think all the things that David and I both just mentioned are potential explanations for that. And one is neither of us have mentioned is, first of all, you know that in the industry in general, but this seems to be especially true or Exactech, third-quarter tends to be a considerably slower quarter for us than the other three quarters, especially the first two quarters of the year.

And a Company our size -- frankly, if surgeons elect to take a little more vacation than I normally do can have that kind of impact on us, and we frankly find it more difficult to estimate the third quarter than any other.

So to sum that up, it could be nothing more than an aberration at a normally slower quarter, an aberration a little more on the down side. It could be related to the macroeconomic environment.

I think the positive thing for us is the one that David stated, and that is that we know we have not lost customers. We know that we have added customers, and we believe that, hopefully in the short term, but in the intermediate term, long term, this is very positive for our continued growth.

One thing about elective procedures, if you need a total hip or total knee or total shoulder, it's not like you just decide not to have it. You may put it off. You may delay it a little bit for a given reason or your surgeon may be out of town, but unless something catastrophic happens to you, you still need to have it. So for us, we think that's positive.

Anup – Canaccord Adams

Okay. And then the last question I have -- just in terms of the Q4 guidance, I just want to make sure I understood that clearly. The primary reason that you'd brought the guidance down was because of foreign currency expectations for the fourth quarter?

Jody Phillips

Well basically, we did not have any specific revenue guidance out for the fourth quarter, but you translated what we have out there now through our pre-existing full-year guidance, it's probably $1 million below that range. And that's roughly the number that we are facing in terms of our Euro and pound-denominated sale that -- and the impact on a roughly 10% to 15% currency devaluation over the last few months.

Bill Petty

Well, it's interesting for Exactech -- it just occurred to me last evening, that when all of our competitors over the last five years were reporting positive results as it related to currency exchange, Exactech really had very little exposure -- exposure on a positive side, then, but now that we have more direct operations, and especially the euro and the pound have gone the other way, well, we do have a little bit of exposure there.

Anup – Canaccord Adams

Okay. If I can ask one more question. Your shortfall in the revenues this quarter. And I know you've given a lot of explanations, but was there any price discounting or were volumes pretty much where you expected them to be?

Jody Phillips

When we looked at our ASPs, Anup, they were relatively consistent with what we had, both on a sequential and a prior year basis. So we think it was primarily a unit issue.

Anup – Canaccord Adams

Okay. I will jump back in the queue. Thank you.

Jody Phillips

Okay.

Operator

Thank you. (Operator Instructions) Our next question is from the line of James Sidoti with Sidoti & Company. Please go ahead.

James Sidoti – Sidoti & Company

Good morning, Jody. Good morning, Betty.

Bill Petty

Good morning, Jim.

Jody Phillips

Good morning, Jim.

James Sidoti – Sidoti & Company

Actually question for David. You talked about adding new customers. Has it become easier to add new customers since the larger orthopeadic companies have settled with the DOJ or have you seen any change? Has the playing field been leveled that all?

David Petty

You know, I would say not necessarily. I believe, as we have discussed -- you and I have discussed and others have discussed, that the whole scrutiny on this part of our industry, to the extent that any company was doing anything with any impropriety, has leveled the playing field or will level the playing field over time, which I believe is good for Exactech, though I would not suggest that definitively we have added specific customers because XYZ other companies have come through an investigation.

I think that the reason that we have added customers is quite simple. It is effective sales management and qualitative improvements to our domestic sales organization, and the launch of some very interesting products that really do improve outcomes for patients, like our shoulder and some things in our knee line that I have mentioned and our hip line. So, I think it's blocking and tackling for Exactech. We are doing our job and the fundamentals are in place, and that's what's working for us.

James Sidoti – Sidoti & Company

And then, Dr. Petty, you probably have more experience with knee replacements, patients who need knee replacements, most people on the call. I -- is this something you can typically put off indefinitely or when the pain gets to the point where you have decided to go for the surgery, how much time do you think you can put that off?

Bill Petty

Well of course, it depends on the level of disability, Jim, which I know you being an engineer you understand that. And it also depends on how stoic the patient is and a whole lot of other things. But my comments earlier that let's say there is a little slowdown in people having elective procedures because of the macroeconomic environment, we don't know if that's true or not, but most of the thing for a moment is that is true. The vast majority of those people will still need those, and they will come back to have those.

Even if the macroeconomic environment stays down and lasts -- I read somebody yesterday -- six quarters. Once people kind of get accustomed to that and it settles down a little bit, I don't think they necessarily wait until the stock market's zooming up and the unemployment rates down to 3%, I think they get comfortable with where things are, and then their knee is really hurting them and they come back to have it.

So, I suspect those delays, frankly, would be relatively short-lived based on that, but that's kind of my estimate more as a surgeon than as a business person.

James Sidoti – Sidoti & Company

Okay. Thank you.

Operator

Thank you. Our next question is a follow-up question from the line of Bill Plovanic with Canaccord Adams. Please go ahead.

Bill Plovanic – Canaccord Adams

Good morning. Sorry, one more question. Any update on in terms of bringing the DSO number down going forward, and are you planning on doing that?

Jody Phillips

It spiked a little bit on us during the third quarter. Obviously, with the financial environment, we are paying a lot of attention to that. And I do think we can get it down by two or three days from where it ended at the end of the third quarter. And we are both focused on it.

Bill Plovanic – Canaccord Adams

Okay. And then last thing. In terms of your international payment distributors outside of the US, is there any significant difference in terms of your payment contracts growth in the distributors within the US?

David Petty

Sure. First of all, the business model is different in the US, so what we would be comparing is our payment terms for the hospitals, hospital customers in the US to our payment terms with our contracted, independent stocking and resale distributors internationally. And yes, we do have payment terms that are a little bit better for these distributors who are buying all the instrumentation and implants and making these capital investments in a very capital-intensive business, and so there's a little bit of a difference there.

Bill Plovanic – Canaccord Adams

All right. Let’s go ahead. Thanks very much.

Operator

Thank you. (Operator Instructions) I am sure there are no further questions at this time. I would like to turn it back to Dr. Petty. Please continue.

Bill Petty

Thank you. Thanks to all of you for joining us. We appreciate your questions. There were some excellent questions. We appreciate your interest and confidence in Exactech, and we hope to continue to reward that interest and confidence.

Have a great day and a great week. Bye-bye.

Operator

Ladies and gentlemen, this concludes the Exactech, Inc., third quarter 2008 earnings conference call. Thank you for your participation. You may now disconnect.

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