Orthofix, Inc. Q3 2008 Earnings Call Transcript

Nov.24.08 | About: Orthofix International (OFIX)

Orthofix, Inc. (NASDAQ:OFIX)

Q3 2008 Earnings Call Transcript

November 6, 2008, 4:30 pm ET

Executives

Dan Yarbrough – VP, IR

Alan Milinazzo – President and CEO

Bob Vaters – EVP and CFO

Brad Mason – Group President, North America and President, Blackstone Medical, Inc.

Tom Hein – EVP, Finance

Analysts

Vincent Ritchie [ph] – Wachovia

Raj Denhoy – Thomas Weisel Partners

Peter Bye – Jefferies and Company

Spencer Nam – Summer Street Research

James Sidoti – Sidoti and Company

Stan Manny [ph] – Manny and Family [ph]

Operator

Good afternoon. My name is Vanessa and I will be your conference operator today. At this time, I would like to welcome everyone to the Orthofix International Third Quarter 2008 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer period. (Operator instructions) As a reminder, ladies and gentlemen, this conference is being recorded today November 6, 2008. Thank you.

I would now like to introduce Mr. Dan Yarbrough, Vice President of Investor Relations of Orthofix. Mr. Yarbrough, you may begin your conference.

Dan Yarbrough

Thanks, Vanessa. Good afternoon, everybody, and thank you for joining us today to discuss Orthofix International’s financial results for the third quarter of 2008.

During this call, we will be making forward looking statements that involve risks and uncertainties. All statements other than statements of historical fact are forward looking statements, including any earnings guidance we provide and any statements about our plans, beliefs, strategies, intentions, expectations, objectives, goals or prospects. Factors that could cause actual results to differ materially from these forward looking statements made by us on this call include the risks disclosed under the heading “Risk Factors” in our 2007 Form 10-K and subsequent then you Form 10-Qs filed with the SEC.

With me today on our call is our President and Chief Executive Officer, Alan Milinazzo, our new Executive Vice President and Chief Financial Officer Bob Vaters, our Group President North America and President of Orthofix Spine, Brad Mason, and our Executive Vice President of Finance, Tom Hein. And with that, I’ll turn the call over to Alan.

Alan Milinazzo

Thanks, Dan, and good afternoon, everyone. There’s a lot to cover on this afternoon’s call, but the key aspects of our discussion will fall into four distinct categories

number one, revenue growth; number two, operating costs reductions; number three, balance sheet valuation adjustments; and number four, cash generation and liquidity management. We will review each of these in detail and describe the steps we have already implemented or that we are about to implement to address these critical elements of our business.

Before we go any further, I’d like to remind everyone about a couple of important leadership announcements we made during the third quarter. At the end of August, we named Brad Mason as the President of our Spine Division in order to focus his extensive product development and distribution experience on our spine implant and biologic business. Brad has more than 25 years of experience in the medical device industry with proven leadership capabilities that we believe will be very important as we work to maximize the value of the Blackstone business. He has been with Orthofix since the 2003 acquisition and integration of our sports medicine subsidiary, BREG, which he started after previously co-founding dj Orthopedics. Brad will outline the progress we have made to date at Blackstone as well as outline the elements of the restructuring of our operations that we announced earlier today.

During September, we also announced that Bob Vaters has joined Orthofix as our Executive Vice President and Chief Financial Officer. For the past two years, Bob has been in the private equity business investing in healthcare companies. Prior to that, he was a senior executive at Inamed Corporation having been Executive Vice President, CFO and Head of Strategy during their extremely successful run and ultimate sale to Allergan in March of 2006. I am pleased to have Brad and Bob along with Tom Hein on the call today to not only go through the third quarter results, but to also talk about how we expect some of our recent activities and initiatives to benefit us as we move into 2009 and beyond.

Let’s move to third quarter results starting with the top line where total revenue was up 7% over the prior year. Sales of our orthopedic products grew an impressive 29% reflecting broad based growth across various products categories as we continue to successfully execute our current U.S. and international growth strategies. In the U.S., we are focusing on our long bone stimulation business and the expanded use of biologics in the orthopedic setting. We also continue to narrow our focus on fixation platforms and products that we believe will provide us with the best margin and growth opportunities within the construction market segment.

In the third quarter, long bone stimulation sales grew 8% and orthopedic revenue from biologics which were immaterial a year ago totaled approximately $900,000. These revenue results in the U.S. are all the more impressive considering that we have taken steps to rationalize our infrastructure and expect 2008 operating expenses in our U.S. orthopedic business to be 5% lower than 2007 after excluding certain non operating costs incurred earlier this year in connection with the central divestiture of our fixation products.

Outside the U.S., our orthopedic strategy includes focusing on fewer but key high value geographic markets where we can pull through internal fixation devices within our broad external fixation distribution channels and established surgeon customer base. External fixation sales were up 29% outside the U.S. reflecting a revenue increase of more than 130% increase in Brazil as well as 23% growth from our important Italian entity which also distributes products in a number of our Latin American, European, Asian and emerging markets.

Meanwhile internal fixation revenues rose more than 150% outside the U.S. as Brazil almost tripled and revenue at our Italian entity almost doubled compared to the prior year. These exceptional results include some orders from our distributors in Brazil, Spain and Greece that we do not expect to recur every quarter. So while we do not expect to report growth rates every quarter at the same exceptional level as Q3, we are very encouraged by the recent success we’ve had in executing our orthopedic growth initiatives and believe this success will carry over into 2009 and beyond.

Looking at our sports medicine business, sales grew 7% in total. However, remember that during the first quarter of this year, we sold our infusion pump line. Adjusting for this sale, our total sports medicine revenue was up 10% year over year. This was primarily driven by U.S. knee bracing sales growth of 8% and an 18% increase in cold therapy revenue. The successful improvements in our distribution strategy have brought increased sales focus to these two important product lines. Additionally, as we continue to renew and expand our product lines, as we’ve recently seen with the success of the Kodiak Cold Therapy product launch. We expect to drive above market growth into 2009 as we expand our product portfolio into larger, faster growing segments of the sports medicine market such as soft goods and back bracing.

Moving on to our spine segment, which includes both stimulation devices and implants, total revenue was flat year over year. Spine stimulation sales grew a robust 12% while Blackstone’s implant and biologic sales decreased 13%. We believe we continue to capture additional spine stimulation market share in the third quarter with growth in excess of the overall market. Two important metrics that we track are the number of surgeons prescribing our stimulators and the average number of prescriptions per surgeon, and both of those numbers continued to increase year over year in Q3.

With regard to Blackstone, implant and biologic product sales were 13% lower during the third quarter compared to prior year as we continued to stabilize our distribution network. However, we had a strong September and the feedback we received about our new products during the recent North American Spine Society Meeting in Toronto is very encouraging. Brad will talk more about the progress we’ve made at Blackstone over recent weeks and he will provide some detail on the restructuring and consolidation plan we announced today which is designed to improve the performance of our implant and biologic business. This important initiative was approved by the Orthofix Board of Directors in Boston one week ago after detailed discussions with Brad and a number of other team members of senior management.

Third quarter revenue from non-core vascular and other distribution businesses was down about 8% year over year. This was below our expectations, partially because our U.S. distribution partners Covidien continued to work through the process of resetting the inventory level for the vascular products. So to summarize the third quarter revenue picture, our orthopedics spine stimulation and sports medicine businesses continued to deliver strong growth. We are successfully executing our strategy to improve the performance of our orthopedic segment, while distribution enhancement and ongoing product launches are benefiting our sports medicine business. And we increased our leadership position in the spine stimulation segment yet again.

In summary, as a result of the strong sales performance in these legacy businesses, we have delivered approximately 16% revenue growth on 73% of our total year to date revenue. This strong revenue growth however was offset by Blackstone’s year to date performance which while improving was still below our expectations.

Moving on to earnings, there were a number of different items that impacted our third quarter EPS. And though we reported a net loss on a GAAP basis after excluding certain items, our adjusted net income was $5.8 million or $0.34 per share. This was $0.02 above the high end of the range of guidance we gave for third quarter adjusted net income and reflects our underlying earnings from operations for the quarter. These underlying earnings are bolstered by the strong revenue growth from our stimulation, orthopedic and sports medicine businesses, as well as the immediate positive impact we are getting from the orthopedic and international profit improvement actions we started in Q1. Bob will go through each of these items in detail in a few minutes, but I’d like to discuss them briefly, and as I do it, it may be helpful to look at the earnings reconciliation table we provided in this afternoon’s press release.

As we previously communicated to you, we felt it was possible that during the second half of this year, we would have a noncash impairment charge related to certain intangible assets originally recorded in connection with the Blackstone acquisition. During the third quarter, we determined that this was in fact the case and we recorded a noncash charge of $13.48 per share to reflect our revised valuation. We also previously indicated to you it was possible we would need to record an inventory reserve during the second half of this year and we determined that that would be the case during the third quarter as well. This charge of $0.42 per share was the result of two factors. The first was a revision of the method we used to calculate our Blackstone inventory reserves and the second was the impact of new products planned for launch over the next few quarters. As we move forward with these new product launches, we’ll be very focused on maintaining appropriate inventory levels as part of a comprehensive, rigorous approach to the management of our working capital.

As we previously announced during the third quarter, we also completed an amendment to our existing credit facility which among other things gave us improved flexibility related to our leverage covenants. Bob will talk more about the costs associated with this amendment which impacted third quarter earnings by about $0.21per share. We also incurred expenses totaling $0.09 per share in connection with some corporate reorganization initiatives during the third quarter. We had previously forecasted these expenses as part of the revised full year guidance we discussed in our second quarter earnings call, but we accelerated the execution of a number of these initiatives, which we had originally planned to implement in the fourth quarter of this year. The restructuring activities undertaken during Q3, during the third quarter were focused on strengthening the leadership of our spine division and international operations. These moves reflect an ongoing profitability improvement plan that originated in our orthopedic division earlier this year. We have already expanded the scope of this plan to include portions of our international business as well as certain corporate functions.

Lastly and perhaps most significantly, the announcement we made today regarding Blackstone’s restructuring and consolidation will positively impact our implant biologic business as Brad will discuss in a few minutes. Finally, we recognized $0.02 of R&D costs associated with our new collaboration with the Musculoskeletal Transplant Foundation or MTF. This partnership is initially focused on the final development and commercialization of new stem cell based allograft that we expect to introduce during the second quarter of 2009. MTF is the largest and most prestigious tissue bank in the United States with unrivaled technical and R&D competence in the tissue field, and a track record of working with orthopedic companies on the development and commercialization of new products.

During the third quarter, we made an initial $6 million payment upon executing the agreement and we expect to pay two milestone payments totaling up to an additional $4 million between now and the middle of next year. We believe the MTF collaboration will be one important element in accelerating growth in our spine implant and biologic division.

At this point, I’d like to turn the call over to Bob Vaters for some additional detail on our earnings results. Bob?

Bob Vaters

Thanks, Alan, and good afternoon everyone.

Although I’ve only been here for just seven weeks, it’s been an extremely busy time, and I also have a lot to cover today. I will start out by providing some additional detail on specific items highlighted in the earnings reconciliation, which is included in today’s press release. Additionally, I’ll discuss the unfavorable impact of foreign currency fluctuations as well as the R&D costs incurred in connection with our collaboration with MTF. I’ll then talk about our expected fourth quarter interest expense and restructuring costs. Finally I will wrap up with a discussion of items impacting our cash position, its related availability and our plans to manage expected working capital needs.

Starting with the impairments at Blackstone, there were two components to the charge. First a $289.5 million pretax noncash charge which includes amortizing intangible assets, trademarks and goodwill. Second, an increased inventory reserve of approximately $11.5 million. First I’ll take a few minutes to discuss the accounting for the Blackstone payment. When we provided new projections for our lenders as part of our debt refinancing, the projections related to Blackstone differed from the original projections used in our purchase accounting and triggered an impairment assessment of the goodwill and intangibles. Testing involves a two step process to determine whether an impairment charge to goodwill and intangible assets is required. The first step test determines if the fair value of the business is greater or less than the book value. We used a valuation firm who determined Blackstone’s fair value using a methodology heavily weighted on expected discounted cash flows versus market comparables.

The valuation determined that the fair value of the business was less than the book value. As a result, a second step was required which involved valuing the assets and liabilities. This process causes to write off our trademark and substantially reduce the value of the amortizing assets as well as substantially reduce the goodwill. Now that’s a summary of the accounting. Now although the impairment is unfortunate, the reality is the entire charges is noncash and it does not affect our financial covenants. Looking next at the increase in inventory reserves, it is a result of lower revenue forecasted at Blackstone and a change in methodology. Essentially our excess and obsolescence calculation will now encompass inventory held at our facility, as well as devices in the field that were not previously included. This does not necessarily mean we won’t be able to sell this inventory, rather it is a reflection of the application of our corporate account policies to the increased inventory of products at Blackstone.

Moving on to the third quarter interest expenses and the amendment to the credit agreement, total interest expense in the third quarter was approximately $4.4 million, which was $1.3 million less than our interest expense in the third quarter last year. The decrease was the result of a lower interest rate as well as lower debt. Additionally, we incurred a $5.7 million charge associated with the completion of the amendment. $2 million of that was fees paid in connection with the transaction and $3.7 million was a noncash write off of the unamortized costs incurred in connection with the original credit facility. As we previously disclosed, the interest rate spread in our agreement increased from 175 basis points to 450 basis points over LIBOR.

In June, the company executed a three year interest rate swap for a notional amount of $150 million. This swap limits the interest rate on roughly half of our outstanding long term debt to approximately 8.2%. This agreement along with additional steps we have taken to lock in interest expense through the end of 2000 provide us with improved stability. We expect total interest expense in the fourth quarter to be approximately $6.5 million. We also incurred corporate reorganization costs totaling $2.4 million pretax. As Alan indicated, these costs were included in our revised earnings estimates for the second half of this year. We originally estimated these costs would be incurred in the fourth quarter. However, certain initiatives were accelerated which moved their related costs into the third quarter.

The last item included on the table in this afternoon’s press release relates to the $6 million payment we made during this third quarter upon the execution of the agreement with MTF. As we previously disclosed, we expect to pay up to $10 million in connection with the completion of the development and commercialization of the new product. These payments will initially be capitalized and subsequently expensed on the R&D line of the income statement as MTF incurs expenses in connection with this project. The reported third quarter results also included the impact of $2.2 million pretax foreign exchange loss resulting principally from a rapid strengthening of the U.S. dollar against various foreign currencies, including the Euro, the pound, the peso, and real. Several of our foreign subsidiaries hold trade accounts in currencies other than local currency, usually the U.S. dollar, which results in foreign exchange gains or losses, when there is a relative movement between those currencies. In October, the U.S. dollar continued to strengthen relative to the currencies noted about, which could result in further foreign exchange losses during the fourth quarter.

Finally, the third quarter loss also included the $1.5 million pretax noncash write off of our investment in a startup spine company that was determined to be permanently impaired and this is reflected in the other expense line on the income statement. Having just completed our analytical work a short time ago, it was impossible to incorporate the impact of the intangible asset impairment, the inventory reserve and the changes to foreign currency valuations into our third quarter earnings guidance. Although the company did previously mention the possibility of a potential impairment in inventory reserve increase during the second half of this year, our third quarter estimates did include a substantial increase in R&D related to our new collaboration with MTF as well as development costs associated with our previously reported acquisition of IP from Intelligent Implants Systems. While we had originally estimated that the third quarter impact to R&D from these two projects would be as much as $6.5 million, it turned out to be only about $500,000. The third quarter R&D expense was lower than we originally expected primarily due to the timing of capital investments being made at MTF and our receipt of documentation supporting these purchases, which drives our recognition of R&D expense. The timing of MTF’s capital purchases and our subsequent recognition of these expenses are not directly correlated with the status of the project. So despite these timing defining differences, as Alan mentioned, we are still very much on schedule for commercialization of the new allograft during the second half of next year.

Moving on to the balance sheet, the total cash balance at $27 million at September 30, 2008, compares with $28.6 million at June 30, and $41.5 million at December 31, 2007. The reduction of $1.5 million in cash during the third quarter compares to a reduction of $13 million during the first six months of 2008. The lower cash usage in the third quarter resulted from reduced investments in inventory and capital expenditures principally at Blackstone. It is important to remember that there were a number of unique cash outflows during the first nine months of 2008. More significantly, $8.5 million for MTF and IIS, $7 million purchasing of Trinity inventory, and $5 million for the terminated fixation divestiture.

The company continues to have a $45 million unused revolving credit facility and importantly at the end of the third quarter we are also in compliance with all the financial covenants contained in our amended credit agreement. And important part of our cash and earnings picture going forward are the profitability plans that Alan referred to earlier. The orthopedic division is already in the process of executing a strategy that focuses the fixation operation on specific areas such as foot and ankle, pediatrics, and deformity correction while also leveraging our long bone stimulation franchise and a rapidly growing biologics business. This renewed focus has allowed us to better prioritize spending while reducing our U.S. fixation inventory by 10% during the first nine months of this year.

Additionally, steps have been taken to reduce spending that have already improved the operating margins through the first three quarters of this year. Meanwhile the third quarter restructuring initiatives in the international portion of our business are expected to reduce operating expenses in the unit by 1% in the fourth quarter and 11% on an annual basis starting in 2009. Additional reorganizations in our corporate offices are expected to reduce annual operating expenses thereby over a $1 million annually. Finally we have also developed a comprehensive reorganization and consolidation plan for the Blackstone operations. During the initial stages of the plan, we expect to incur net costs of approximately $900,000 in the fourth quarter of this year and approximately $3.3 million in 2009 before achieving a net operating costs reduction of approximately $2 million in 2010 and $5 million thereafter.

Looking at our estimates for the fourth quarter, we expect to generate between $130 million and $135 million of revenue and expect reported earnings to the $0.28 to $0.32 per share. Adjusted net income is expected to be $0.35 to $0.39 per share which excludes $0.13 per share associated with strategic investments and $0.03 per share related to corporate reorganizations, while also excluding a benefit of $0.09 per share related to an expected tax adjustment. Adjusted net income excluding specific noncash items is expected to be $0.49 to $0.53 per share.

At this point, I’d like to turn the call over to Brad Mason for an update of our strategy at Blackstone, including additional details on his restructuring and consolidation plans. Brad?

Brad Mason

Thanks, Bob, and good afternoon, everyone.

As Alan mentioned, the sports medicine stimulation and orthopedic division in North America continues to perform beyond expectations and well above the growth rates in their respective market segments. The transition of leadership in the sports medicine business for me, to Bradley, has been well received by the employees, distributors and customers. I expect the strong momentum at BREG to continue. The ongoing success of these businesses in North America is a top priority for me. Not surprisingly, however, since our Investor Day two months ago in New York, most of my attention in North America has been on the Blackstone business. Initially, I was focused on the assessment and reorganization of the senior leadership team in Blackstone’s facilities in Massachusetts and New Jersey and also in the field. I’ve been very impressed with the talent and passion for the business that I found. It is a strong group that we can definitely leverage and build upon.

I made several organizational changes that have already had a very positive effect and the team is now reenergized and focused on our key priorities. My next area of focus and where I had spent much of my time was with our customers and distributors that have been impacted by significant changes in leadership and priorities over the last eighteen months. I am extremely pleased that they have remained loyal and are once again excited about the future prospects for Blackstone and our ongoing relationship with the company. My third priority is the release of the new products in the pipeline and focusing the new product development team on our management portfolio going forward.

During the third quarter we continued to move forward with a number of new product related initiatives. We obtained FDA approval for two new devices, Pillar SA, which is a unique standalone interbody spacer and vertebral body replacement, and Firebird which is the next generation pedicle screw platform for Blackstone. Firebird is a comprehensive system for use in posterior lumbar surgical procedures, including degenerative diseases, deformity connection and minimally invasive surgeries using our ProView minimal access system. We also have a number of other important products that will be released in 2009 and of course we are excited about our collaboration with MTF and continue to be very pleased with the progress of our next generation stem cell product that as Bob and Alan have said is expected to be released in the second half of 2009.

There is no question that Blackstone’s has had had a number of business challenges. There’s also no question based on what I have seen that Blackstone has a tremendous potential that is realizable by implementing operational and business process improvements. To begin that process, I have initiated significant operations improvement and consolidation initiatives. This initiative will include several key elements. Under this plan, we will first be relocating our Springfield, Massachusetts operations into the McKinney facility in Texas, and migrating Blackstone onto Orthofix Oracle ERP system. This phase should be completed by midsummer of 2009. Next we will move into our new facility in the Dallas area to accommodate the consolidation of the Blackstone operation into our Texas operations. This move should be completed in Q1 of 2010 followed within 60 days by the closure of the Wayne, New Jersey facility and the consolidation of those operations into our new Texas facility. These changes are expected to eliminate costs and efficiency inherent in the current model by leveraging the existing Texas infrastructure in areas such as manufacturing operations, finance, marketing communications and IT. This will enable improve our ability to manage inventory and reduce potential write-offs while also lowering our facility lease expenses. The new facility will also include a new world class national training center as well as the state of the art innovation and custom surgical instrument shop for use by both the spine and orthopedic engineering and marketing teams.

This consolidation initiative is designed to enhance our opportunities to ramp up revenue while reduce operating costs, to plan about the significant reduction in our workforce along with the operational synergies and process improvement.

That wraps of my part. Alan, I’ll hand it back to you.

Alan Milinazzo

Thanks, Brad.

I’ll ask the operator to open the phone lines for some questions in just a minute, but before we do, I want to give you a brief update on the MTF project for the development of a new stem cell based allograft. I’m happy to report that we continue to be extremely pleased with the status of the project and that we are on schedule relative to the key milestones embedded in the critical path for completion and commercialization of the allograft. Importantly, during the transition to our new product, we believe we will have adequate supplies of our current stem cell based allograft to meet the growing demand through the end of June next year when our distribution rights expire. And we’re also confident that we have reduced the risk of having a material amount of excess inventory of our current product at that point in time.

At this point, operator, I think we’re ready to open the line up for some questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Vincent Ritchie [ph] from Wachovia.

Vincent Ritchie – Wachovia

Gentleman, thanks for taking the question. Bob, welcome. First question is on Blackstone, can you guys kind of give us where your gross margin are there, and then with this move where you think those are going?

Alan Milinazzo

How’re you doing, Vincent? It’s Alan. Obviously gross margins at Blackstone this year have been lower largely for a couple of reasons. One was the mix. So obviously we sold more biologic products and we sold more products internationally than we sold domestically. So the gross margins have been well below the normal that we would expect for Blackstone. So our overall company margins in fact have been impacted by those margin reductions. So we are sub 70% margins overall given the blend of the biologics and the international business. As I think Brad begins to move some of the business back into the traditionally strong metal area, we’ll see an improvement in the gross margins. Brad, I don’t know if you want to comment at all as well?

Brad Mason

No, I think that’s exactly right, Alan. I think particularly the mix and as we transition on the biologic side, that is going to have a significant improvement particularly in the latter half of 2009.

Bob Vaters

And this is Bob. I’d just add one thing, when you look at the overall gross margins of the company, you really have to keep in mind the increased inventory reserve of $11.5 million is affecting this quarter’s cost of sales. So going forward, you probably have to make some adjustments.

Vincent Ritchie – Wachovia

Okay, great. And then just kind of piggy backing on that, Brad can you kind of give us just an outline of what your strategy is going to be? With Blackstone clearly moving into Texas now, this sounds like the distribution platform is a little bit more stable than it has been, where do we go from here?

Brad Mason

What I’ve got to tell you, Vincent, I am now a spine guy, not to say anything against the sports medicine because that is my first love. But in the last few weeks, the last few months, I have really gotten involved with the customers, with the employees, and with the distribution. And there is a very, very strong business here going forward. I’m very excited about it. I think the key is, there’s some operational things that we need to know. We need to get off of the Epicor system, we need to get on to Oracle, that was a driving factor. I would like to see it – it’s an important strategy for me is the national training center, where we can bring the surgeons through. I’d like to have that world class model shop in the same building with that training center, with our engineers, with our marketing folks right there, so we can touch those customers. My progress has been on the customers, it’s been on our distribution. I’m also extremely pleased about what I’ve seen in the distribution system. We have some very strong distributors with very good relationships. So combining these operations down and with the McKinney facility, that really mean uses our core strength. The group down there really knows how to take care of the operations part of this business and that is where I wanted to do is use them for this part of the initiative, and they’ve done a tremendous job so far and we’ll continue to as we move down there.

Alan Milinazzo

It’s Alan. One further point I’d add to that is, you’ll know when you get a chance to read the release, but obviously McKinney is where we have our spine stimulation business base as well. So as I think Brad begins to executive on that plan of bringing the stimulation customer base alongside of the Blackstone customer base to some of those synergies. This will be just another opportunity to create a dialog between the two groups.

Vincent Ritchie – Wachovia

Okay, great. And just a further question on, last question on Blackstone, with writing down the trademark, are you going to keep the Blackstone name?

Brad Mason

My preference over the next few years is probably diminish the name, and we will be focusing on Orthofix spine which is who we are.

Vincent Ritchie – Wachovia

Okay. And I have one last question for you guys, your other businesses have been doing pretty well, orthopedics has been phenomenal, sports medicine after seeing some double digit growth starting to come back a little bit towards what we see with the market rates, what are you seeing in those markets and how do you think you can exploit them, maybe exploit is not the best word, but execute and grow the business accordingly?

Alan Milinazzo

Vincent, let me just correct you because we noted that the growth rate actually when you take out the pain management and the infusion pump business, it is actually more like 10%. So we’re actually growing well north of the market growth rates in sports medicine for the lines that we compete in. So we’re very proud of what’s going on at BREG, and again we do consider ourselves taking share every quarter there. I think Brad, certainly when he was responsible for the business, I’ll let him common in a second, was enhancing the distribution strategy, which was already good. I think it is moving towards great. And then the addition of those products, fusion of course, Kodiak another one, but then we’ve added a couple of new products, back bracing products et cetera that really should help us continue to have double digit growth may be low double digit growth for the sports medicine business. Brad, do you want to conclude that?

Brad Mason

Yes, absolutely. I think that’s right. We added the back bracing line this year. We are about to introduce a complete line of walkers, which is really a market that we have not capitalized on, and it is a large market opportunity, as well as the sockets we introduced over the summer. So we have a lot of momentum going into 2009 and I think you will see the growth rates that you’ve seen in the past, over the past several quarters continue.

Vincent Ritchie – Wachovia

Great. Thanks for taking my questions, guys.

Alan Milinazzo

Thanks, Vincent.

Operator

Your next question comes from the line of Raj Denhoy from Thomas Weisel Partners.

Alan Milinazzo

Hi, Raj.

Raj Denhoy – Thomas Weisel Partners

Just wondering if I could ask (inaudible) on Blackstone as well, can you talk about the distributor turnovers? Are they continuing, have you stabilized your distribution base at this point?

Alan Milinazzo

Actually we’re very stable at this point, Raj. The only turnovers we have are by our choice, and there are very few of those. I’m very, very pleased with the distribution system we have out there. Perhaps a little bit of a change from what you’ve heard in the past is my focus is on the independent distributors. We are really not – it is not the right move to date to move more toward a hybrid. Our independent distributors have the relationships already in place and as we expand into geographies that we don’t currently play in, we want to get those relationships out of the shoe as opposed to waiting for them. So I’m very happy with the distribution as it stands.

Raj Denhoy – Thomas Weisel Partners

But you mention that you’re still saying some but it is by choice. Are you still in this quarter, for instance, did you turn over any distributors or take them in and make them more direct?

Alan Milinazzo

Nobody went more direct. I think there might have been one in the quarter – one or two in the quarter, and again that is by our choice. That’s a small percentage.

Raj Denhoy – Thomas Weisel Partners

What I’m trying to get at is, this is the second quarter where we’ve seen implant, spine implant growth was negative in the quarter again and I’m trying to get a sense of when we might see that turn? Do you have a sense of when we might start to see positive results coming out of spinal implants and biologics?

Alan Milinazzo

Yes, Raj, I think – it’s Brad’s plan, one is still stabilizing distribution was critical for us. I think we can say we’ve done a good job there especially in the past four to eight weeks there. I would look for revenue to continue to be soft through this year. I would expect that we’ll start to see some improvement early next year as some of the product launches take hold because the distribution piece seems to be settled. As we said, now we’ve got the new products to layer into that. Additionally, we have sufficient inventory of Trinity, so there is no longer a question from some of our distributors who hadn’t sold the product to go ahead and get started opening up new accounts. So all of the elements are there for us to begin to level off and grow. But recall we had a good year last year until Q4 so you might see some favorable comps for example in December. But I would say over the next – look for sustainable growth early in 2009 and look for improvement to that as we go through 2009.

Raj Denhoy – Thomas Weisel Partners

Okay, fair enough. And then just kind of a broader question, there was some – you had written in the release about how you conserve cash in the quarter by reducing investments in inventory and CapEx, primarily at Blackstone, and just kind of a broader question, because obviously you’ve seen your company’s share price get hit pretty hard and the value of the company deteriorated quite a bit on what’s basically 20% of your business, the spinal implant site of it. Orthopedics, sports medicine everything else seems to be doing quite well. And I am curious if – maybe I’m reading too much into it, but is there a move on the part of the company which may be diminished your exposure to Spine for some time here and maybe redouble your efforts in some other parts of the business that are doing better?

Alan Milinazzo

Raj, absolutely not. We I think from our standpoint, we’ve gotten hurt this year by a couple of things from a timing standpoint. Certainly some decisions we made to build inventory with an expectation and we’ve talked about this in the past, an expectation that we would see an improvement in the back half of the year. So, the Osiris announcement in May, again recalling that we were on plan and actually slightly ahead of plan for our spine business, implant business in Q1. At the end of Q1, we were ahead of plan. So it really kind of hit us hard and fast, we’ve already build a lot of inventory. We already made a lot of investments in infrastructure. So as rapidly as we’ve fallen, I think Brad is beginning to see the pieces come back together again to stabilize the business. So a lot of those extraordinary investments had already been made. So the fact that we actually started to normalize the spend really just reflects that that investment was over to set us up for expansion. So in my mind not at all would say we are at all discounting our opportunity in spine, we feel very good about it, but those investments really have already been made.

Raj Denhoy – Thomas Weisel Partners

Okay, fair enough. That’s all I’ve got, thank you.

Alan Milinazzo

Thanks, Raj.

Operator

Your next question comes from the line of Peter Bye from Jefferies and Company.

Peter Bye – Jefferies and Company

Hi, guys. Thanks. You went through some of the cost savings that some of the initiatives would give you, could you give us a sense of what the charges for those are going to be, that you’re going to incur, and what percentage or our how much is going to be cash versus noncash and maybe how that will spread out as you execute them?

Bob Vaters

Yes, probably the best thing Peter is to look at the table that we’ve attached in the press release, but essentially…

Peter Bye – Jefferies and Company

So there is not going to be charges going through in 2009 for these, the McKinney facility move, I think that is done through mid 2009. I mean I am just looking – trying to – I know you are not giving 2009 guidance, but you did give us some sense about what about 2009 cost savings would be, so…

Bob Vaters

Sure, I didn’t realize you’re talking specifically about Blackstone. What I said in the script is that in fourth quarter we’re going to have a $900,000 expense. In 2009, we’re going to have $3.3 million expense, and then in 2010 we’re going to have a net operating cost reduction of approximately $2 million, and then after that we’re going to save $5 million annually thereafter.

Peter Bye – Jefferies and Company

Was there one or two others too that you mentioned?

Bob Vaters

Yes, we had a restructuring internationally that will save approximately $1.2 million in 2009 and obviously form a reduction that we’re making.

Alan Milinazzo

Those expenses though, Peter, were really material to us in the numbers we gave you. So the operating pickup for next year is what Bob just gave you but the expenses are not – we’ve really passed through that at this point in time. Additionally, we talked about, I think maybe the third thing you’re thinking of is the orthopedic improvements we have made, and those were really captured in that $5 million expense that we talked about earlier. We called it out earlier in the discussion. So that’s $5 million we spent actually earlier in the year, so at this point in time, nearly all you’re talking about are the expenses that Bob alluded to for Q4 with Blackstone at $900,000 and then nothing material for the international that’s already been done and absorbed.

Peter Bye – Jefferies and Company

Okay. Then you are talking about a re-pickup maybe in Blackstone in the first half of 2009 and then acceleration, I understand some of the products you have on the come line that are internal. But I mean I guess just may be looking at objectively with your acquisition of Blackstone, you wrote down 95% of the cost almost, I mean it’s a lot of noncash, and internal development program, you just junk, what if one was just going to say, hey, MTF, I am going to call it upside, can Blackstone still grow next year without replacement for Osiris?

Alan Milinazzo

Yes, let me just go back for a second, Peter, just make sure I’m clear. So relative to the overall Blackstone performance, we look at the market opportunity here and I think there is several of us, several who are new to the game here, look at this market. We think this is a really, really good market for us given the strength of our stimulation business which grows every quarter well in excess of the market, you know the fact that we have got 1,200 spine customers there that we can leverage. We are at 1% market share on the metal and implant business, so we think the upside for us to grow the business is really big. Will MTF be an important part of that, certainly it is an important part of that. Having a biologic product, we’ve said all along we thought it was important to us, but it isn’t the only trick that we’ve got in our bag. Again the stimulation product and I think a key part of this, Peter, goes back to what attracts these distributors. And Brad said it well, these independent distributors are the guys that have the relationships. So provided we have a good product portfolio, the simulation attracts those folks over tremendously, some of the new metal products, the Firebird line, the minimally invasive line, the ProView system, these all attract distributors over. So from our standpoint, yes, MTF is very important and we look forward to that product, but we have other things that we can bring to the market.

Peter Bye – Jefferies and Company

Okay, thanks. I’ll jump back in queue.

Alan Milinazzo

Thanks, Peter.

Operator

Your next question comes from the line of Spencer Nam from Summer Street Research.

Spencer Nam – Summer Street Research

Thank you for taking my questions. Just couple of questions, first of all, on this MTF partnership, clearly based on your statement that programs are moving forward, but in terms of more specific aspects, what sort of – I mean what could we – if we want to imagine kind of where the process in terms of development of a new product, I mean where – can you guys us a little more clarity on the way exactly the situation is right now, I mean do we have a prototype or do we have a signs down, I mean how should we think about that?

Alan Milinazzo

Spencer, there are only two phases to this project, there is a development phase, which is what we are in the middle of, and then there’s a commercialization phase. And so we’re right on track with regard to where we thought we would be at this point in the development phase. It doesn’t make sense to go into a lot more detail other than to tell you, we are in this first phase which is development and we are on track. Second phase, commercialization phase, will happen likely early next year and we will continue to do launch in the second half of the year. So from where we sit, we feel very good about that project.

Spencer Nam – Summer Street Research

And do you guys have sort of a – two questions related to that, do you have sort of a deadline for development phase kind of like when you think it is going to end, or is there something that you can share with us, number one? And number two, is there something more of an internal clock that you guys are working towards but probably don’t want to talk about openly?

Alan Milinazzo

Yes, we really don’t want to go into a whole lot of detail expense rather than tell you we were excited when we entered into this relationship with them MTF and we are even more excited having had the opportunity to work with them. They’re very energized about this project, they are on track, their people are engaged. We had a debrief from the MTF organization to the full Board Of Directors at Orthofix because the full Board is very involved in the business and will participate and update some projects like that. And so from where we sit, we’re in the middle of the development process, we are on track. There are certain milestones that we’re monitoring internally, and all I can reinforce is that we are on track in all those milestones.

Spencer Nam – Summer Street Research

Great. And then one related question, is the – have you guys done the work on IP side to feel comfortable that the IP may not be an issue once the product hits the market or is there something that we should be still watching for?

Alan Milinazzo

No, it is a great question. We have taken what we feel are the appropriate steps on the intellectual property side, and we don’t feel we’ll run into any IP issue related to this new allograft.

Spencer Nam – Summer Street Research

Great. And then final question is on Blackstone restructuring, and this obviously is a big announcement in my view. And clearly if the execution turns out positively or successfully, you could potentially see a lot of benefits from this, but in terms of actually executing these, could you provide us some timeline in terms of milestones next year, milestones the following year, what kind of – you know how should we think of that as – is that a sort of the middle of the line kind of a timeline, are we talking aggressive timeline, how do you guys put together those kind of milestones and can we expect you to deliver the deadline?

Brad Mason

Spencer, this is Brad. Yes, I will say that the timelines are approximate at this point. We have them in mind as we develop this project and the Gantt chart for this project. However there are some things that are still a little bit unknown, we have a new building to build and there can be some variance with that. But as we sit here today, our expectation is that, and this is somewhat dependent on how quickly we can migrate to the Oracle system, but we expect that July 1 date of 2009 plus or minus a little bit, but let’s talk about that date for the Springfield plant to move into the McKinney facility. Meanwhile the new building in the Dallas area will be under construction and is expected to be completed approximately the middle to the end of the first quarter of 2010. That could vary depending on the circumstances, but that is our expectation. Once that building is completed, we will move the McKinney facility into that. And then subsequently within approximately 60 days, meaning may be April 1 or so of 2010, we will move the Wayne group into that facility.

Spencer Nam – Summer Street Research

Great, thank you very much.

Alan Milinazzo

Okay, thank you.

Operator

Your next question comes from the line of James Sidoti from Sidoti and Company.

James Sidoti – Sidoti and Company

Good afternoon, can you hear me?

Alan Milinazzo

Hey, Jim. We got you.

James Sidoti – Sidoti and Company

Hi. I’ve got a bunch of questions. First one, I want to continue about the charges at MTF. You said on the last call, it’s going to be about $5 million this quarter and $5 million next quarter, but based on the results and the guidance, it sounds like those costs are going to be pushed out, so do you expect to incur most of those costs in 2009?

Bob Vaters

No, we expect to incur some in Q4 and then the balance in early 2009. It is just a matter of timing, Jim, of when their capital purchases come in et cetera.

James Sidoti – Sidoti and Company

So, if you would incur $500,000 in the fourth quarter, $500,000, you said total was around $10 million, would that mean it’s $9 million that will come into 2009?

Bob Vaters

The cost associated with the development, Jim, versus some of the milestone payments, they’re two separate things. Some of those payments go directly for the development activities and some of them are just cash milestone payments for MTF. So, don’t think of $10 million as just pure R&D expense.

James Sidoti – Sidoti and Company

Okay, all right. And then on amortization, now that you have written this down, I went back to my model, back before you acquired Blackstone, you were running around between $6 million and $7 million a year for amortization costs, should we assume you’re going to go back to that now?

Bob Vaters

Essentially after the effect of the impairment, we will reduce operating expenses from amortization to the tune of about $14 million next year.

James Sidoti – Sidoti and Company

So there will be a $14 million reduction?

Bob Vaters

Yes.

James Sidoti – Sidoti and Company

From your 2008 number, so is that a good number, so $67 million?

Bob Vaters

Well, it is not necessarily from the 2008 number because don’t forget we already start to have a reduction in the fourth quarter.

James Sidoti – Sidoti and Company

Okay, so…

Bob Vaters

But it is from – it is an annual number from what the annual number was before the impairment.

James Sidoti – Sidoti and Company

Let me try it this way, what would the amortization charge be in the fourth quarter?

Bob Vaters

Jim, the amortization charge – Tom, why don’t you – do you have that number?

Tom Hein

Yes.

Bob Vaters

And Jim I just think essentially for your model purposes, yes, the answer is yes to your question.

Tom Hein

And it will drop about $3.3 million from the current run rate the first three quarter, so fourth quarter will be down about $2.3 million, or it will be in the range of $3.7 million.

James Sidoti – Sidoti and Company

$3.7 million, so if it is $3.7 million in the quarter, and then you assume – you annualize that, you run them in, so you’re still running around $15 million a year on that line?

Bob Vaters

No. It might make sense for us Jim if we can, maybe we could just call you back after the call, we will go through it.

James Sidoti – Sidoti and Company

Great, that’d be good. Then just a couple more questions on the debt, with the restructured agreement, when is the first payment due, first large payment?

Bob Vaters

Well, we have regular payments, but there has been no change in the amortization schedule. The current amortization schedule is $825,000 of principal paid per quarter.

James Sidoti – Sidoti and Company

Okay, so it is straight at $825,000 per quarter?

Bob Vaters

Correct, unless Jim we make a discretionary prepayment. So for example, this year, we made $8.6 million is discretionary prepayments in the first nine months of the year.

James Sidoti – Sidoti and Company

Okay. But there is no balloon payment or anything we’d do?

Bob Vaters

Not anytime soon.

James Sidoti – Sidoti and Company

So, when is the first one due, is that out four, five years?

Bob Vaters

The first balloon payment is literally at the last quarter of the agreement, that is five years out.

James Sidoti – Sidoti and Company

Okay, so five years. And what is the covenant that you are closest to now with the re-negotiated agreement.

Bob Vaters

We are in good shape on all the covenants right now.

James Sidoti – Sidoti and Company

Which one is the one that we should be watching?

Bob Vaters

I mean one of the benefits of renegotiating the covenants in the third quarter was not only did we liberalize, if you will, the EBITDA definition, but we also upped the leverage covenants. So at this point, we have good run rate on all our covenants.

James Sidoti – Sidoti and Company

Okay, all right.

Bob Vaters

Obviously, the more EBITDA and the less debt you have, the better it is.

James Sidoti – Sidoti and Company

Right, so what is it now, the debt to EBITDA?

Bob Vaters

I am sorry, what is the covenant?

James Sidoti – Sidoti and Company

Right.

Bob Vaters

Four to one.

James Sidoti – Sidoti and Company

Four to one, that’s right.

Bob Vaters

We are obviously operating below that right now.

James Sidoti – Sidoti and Company

Okay. And then on the staff at the facility in Wayne, New Jersey, you know a lot of the engineering people, a lot of marketing people there, how many of those do you think you’re going to bring to Texas?

Alan Milinazzo

Well that remains to be seen Jim. We are obviously offering relocation packages to a number of individuals. The key senior management, we don’t think there will be any issue with. I assure we are concerned about the ingenious engineers and they are important to the group, and our expectation is that we will get as many of them as possible in the Texas area, and I’m hopeful of that, and we’re doing everything we can to see that that happens.

James Sidoti – Sidoti and Company

And how does that impact any R&D projects you’re doing now or most of the ones that you had complete?

Alan Milinazzo

There is really no impact at this point. If you think about this, this is seventeen months out before this would be in effect, before we would ask anybody to move. So no…

James Sidoti – Sidoti and Company

Okay, so that facility is going to be open for the next year and a half.

Alan Milinazzo

That is correct.

James Sidoti – Sidoti and Company

Okay. And then how about the direct sales people that you had hired at the beginning of the year? Are they still – where are they working on, are they regional or are they still on staff?

Alan Milinazzo

We still have a couple on staff and some have moved into different positions, but they are spread around the country in different regions at this point.

James Sidoti – Sidoti and Company

Okay, so it sounds like you’ve migrated away then from putting those people in place?

Alan Milinazzo

I have Jim. It is a significant expense upfront that for us right now doesn’t make sense. So my experiences with the independent distributors and I know those guys inside out, I know how to work with them, and I think right now they are our best opportunity.

James Sidoti – Sidoti and Company

Okay, and then …

Alan Milinazzo

Jim let me go back for just a second if I can, because on Brad’s comments about the consolidation, this is a very well thought out plan. I think Brad and the team have done a great job (inaudible) Blackstone management of putting together a good plan to minimize the risk. We are moving this business into arguably our most solid business and most synergistic business in Texas. However, the seventeen months Brad talked about, along the way, there are going to be phases that we described earlier. So marketing, communications for example where we can get some synergies, we have redundancies between two groups, we now have a lot of common group. That will move very quickly. Importantly the IP area which for us we have been flying the plane blind to an extent here with this Epicor system and so as we migrate over to Oracle, that can be done much faster and will give us much better visibility to the business. So some of these functions, finances and another ones can be done relatively quickly, and we won’t disrupt up a lot. Again we’ve retained the people who were necessary for the transition, as well as receiving – in Texas, we have got a highly qualified group. So I just want to make sure I circle back because at seventeen months, that is the end of the process, but along the way, Brad was alluding to a number of different activities and functions that would move at various points in time.

James Sidoti – Sidoti and Company

Okay, so it is seventeen months to complete it?

Alan Milinazzo

Completion, correct.

James Sidoti – Sidoti and Company

Okay. And what do you expect for the tax rate in the fourth quarter?

Bob Vaters

Fourth quarter, roughly the same range as the full year, Jim.

James Sidoti – Sidoti and Company

Okay.

Bob Vaters

Full year guidance, excuse me.

James Sidoti – Sidoti and Company

All right. If you could just get back on those amortization charges, so I can –why would it just go back to where it was before you acquired Blackstone? What else is in there now?

Alan Milinazzo

Let’s come back to you, Jim. Let us come back to you, that’d be great.

James Sidoti – Sidoti and Company

Okay.

Alan Milinazzo

Okay, thank you.

James Sidoti – Sidoti and Company

Thank you.

Operator

Your next question comes from the line of Stan Manny [ph] from Manny and Family [ph].

Stan Manny – Manny and Family

Hi, gentlemen.

Alan Milinazzo

Hi, Stan.

Stan Manny – Manny and Family

I’ve tried going through the statement, but I think I’m going to have to have my lawyer to look over, there are so many footnotes. I guess I’ve got a simple question, I don’t know if you can address it, but I think it needs to be addressed, and that is improved cash generation and debt pay down, debt that you’ve got when I look at other companies, the covenants and everything, it seems to be a really egregious tough agreement that you’ve got. So what I would like to kind of get some feedback on is cash generation debt pay down and then possibly getting another bank that doesn’t have restrictive cash and et cetera and high rates on the agreement relative to where we are going into 2009. So I think I’d like you to talk to that if it’s possible?

Alan Milinazzo

Well as to the last point, I’d certainly welcome an introduction to the bank that doesn’t have restricted covenants, if you would like to introduce them to me. But realistically, Stan, what we did in the third quarter is we’ve liberalized our covenants. We increased the leverage covenants, we broadened the definition of EBITDA. We excluded certain things like the impairment from that definition, and we got ourselves more room, if you will. In addition to that, most of our outflows were in the first nine months of the year, so we substantially reduced the cash outflow in the beginning of the year to the point where we’re getting very close to breakeven. And since the end of the third quarter, we’ve actually had somewhat of a cash build up. Obviously, the more EBITDA we generate, the more debt capacity we have. But the interesting thing about your point is, our credit agreement today is actually much more lenient than it was in the initial credit agreement we did when we bought Blackstone.

Stan Manny – Manny and Family

Well, that doesn’t tell me anything, that just means that the debt agreement that was negotiated was not a great negotiation. So let’s not go back, I’m looking at agreements in companies that I cover that are much, much better and lenient than that, and the conditions are probably maybe not as bad, but I mean the agreement you’ve got is a really expensive, difficult agreement, which I hope you’re able to get, and that is why I’ve asked cash generation improvement and debt pay down, which gets you to the point where you can get the noose from around our neck.

Bob Vaters

And I appreciate that, and I’ll remind you that we have paid down $8.6 million as a voluntary prepayment?

Stan Manny – Manny and Family

And when does that occur, is that a recent?

Bob Vaters

That happens throughout the first nine months of the year.

Stan Manny – Manny and Family

I’m talking about the recent events, we haven’t paid down anything in the last quarter, right? Correct?

Bob Vaters

Stay tuned now, because what we have done is we’ve rolled over all our debt through the end of the year. So at the moment, we are locked in our debt towards the end of the year. But there’s no reason we can’t pay down debt in the fourth quarter with our excess cash balances.

Stan Manny – Manny and Family

And are there any covenants in there that has ratios improve or you pay down that the rate, the LIBOR plus 4.5% decreases? And is there a chance in January that you can – half of the loan can be renegotiated downwards?

Bob Vaters

Stan, obviously, as we pay down debt, we benefit in terms of to dealing less EBITDA, so look at it this way. We have for every $4.00 of debt, we have to have $1.00 of EBITDA. So, the more EBITDA, the more debt capacity we have.

Alan Milinazzo

Okay. Stan, let me also just throw in here, recall that earlier this year or so, Bob alluded to the pay down, recall that we’ve also had $8.5 million dollars for MTF, $7 million for Trinity inventory, which is critically important to us to maintain that relationship through the middle of next year. So we’ve had a number of extraordinary cash outlays his year that have compromised our debt repayment. But I also want to remind you, we brought this business two years ago, we had a $330 million term B loan, we brought that down to $290 million over the past eight quarters, and we have still absorbed some of these extraordinary cash items. I know you’re very familiar with this, so we do believe that we are returning to a point where cash flow generation will allow us to make debt repayments on our schedule. So from our standpoint, we’re very focused on cash generation and debt repayment to put us in a better position should we want to renegotiate a credit agreement down the road.

Stan Manny – Manny and Family

You could.

Alan Milinazzo

Should we want to, that’s right. We could if we are in a better position, which again I think what we’ve tried to describe today is that the sort on the cash requirements of the business that we laid out which were extraordinary this year, we have cleaned out most of them, or have called out all of them. So from our standpoint, as we generate cash from operations, or if we are able to pick up some cash from other areas, it will go towards debt repayment. We do feel that the noose as you say from an interest burden here. Having said that, we are very pleased that we’ve got this thing done when we got it done and we’re very mindful of maintaining that ratio, but also with an eye towards buying down the debt. And that is something that we will look to do every quarter we can. We just can’t commit that we can do it every quarter.

Stan Manny – Manny and Family

At this point?

Alan Milinazzo

At this point. Having said that, we expect as we move through this phase, we will return to more of a normal cash flow business. So the extraordinary items I just listed and we listed earlier, there won’t be another MTF agreement next year. We won’t have to buy – remember, Trinity inventory, this process for us of moving from Osiris to Trinity, we no longer have to buy inventory for the new stem cell based product.

Stan Manny – Manny and Family

So that will generate cash, and you can use it up?

Alan Milinazzo

Exactly. And then of course you know the announcement that we did earlier this year about the orthopedic divestiture, those were extraordinary expenses. So we do feel as though the normal cash flow that you have experienced in your time with Orthofix will start to return to that. As I said, our intent is to buy down debt when we can.

Stan Manny – Manny and Family

Okay. Question, if you back in the $11 million plus into your cost of sales, put it back into your gross margin, the margin still comes three, three and a half points lower than normal. Can someone kind of tell us when we can return to normal since in listening to the call it seems like you have done things that will improve cost structures, especially around the company. So I would have expected that gross profit margins when they are normalize should come back to where we are plus some into 2009. So can you explain the difference and obviously there are things we don’t see that are in there, will now disappear?

Alan Milinazzo

Yes, you are exactly right, Stan. A lot of the things we talk about today really go at operating expenses, items that – things that we’re doing to go at the gross margin. So for example we have talked about moving some of our high cost manufacturing out of the UK and into Mexico. So those things will continue to be done. I think as Brad gets his arms around the Blackstone business, the opportunity for looking at the manufacturing plan which is all currently outsourced, maybe you could bring some of that in-house to our Texas facility, those could exist. But the delta to answer your question specifically, the delta once you …

Stan Manny – Manny and Family

– this quarter, yes.

Alan Milinazzo

Yes, the delta really is – it is mixed. It is a combination of – it is the negative mix that we feel from the international sales. We had some business that we talked about in the orthopedic side to some of our distributors. So even though the top line numbers were very strong, some of that business wasn’t at a normal gross margin rate for us. And then the Trinity sales, which had re-accelerated are coming in at nearly almost below 50% margin. So in 2009 that will actually go to virtually 100% gross margin. So that doesn’t explain all of it, Stan, but it probably gets you most of the way there.

Stan Manny – Manny and Family

So without committing we should in 2009 expect a dramatic reduction in footnotes and odd items and more return to our more normal excellent gross margin in 2009, one should expect that?

Bob Vaters

Stan, this is Bob. As the new CFO, that’s my number one goal.

Stan Manny – Manny and Family

Okay, gentlemen. Thanks.

Alan Milinazzo

Thank you, Stan.

Operator

We have reached the allotted time for question. I will now turn the call over to Mr. Milinazzo for closing remarks.

Alan Milinazzo

Thank you, operator, and thanks everyone for dialing in today.

Despite some of the challenges that we’ve had this year, I think in Q3 we were able to put to rest some of the issues that have been outstanding for us. Although we are disappointed to report the impairment charges, we now feel as though we could move forward encumbered with the business. I am optimistic that the core businesses of the company, the sports medicine, orthopedic and stimulation businesses are outperforming our plans, and certainly outperforming the market growth rates. And some of the things that we’ve outlined today would put the company in a much better position in the very near term relative to cash flows. So thanks for dialing in, and we look forward to talking to you again after this call. Thank you.

Operator

This concludes today’s conference call. Thank you for your participation. You may now disconnect.

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