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RTI Biologics Inc. (RTIX)

Q1 2009 Earnings Call Transcript

April 29, 2009 9:00 am ET

Executives

Wendy Crites Wacker – Director of Corporate Communications

Brian Hutchison – Chairman & CEO

Tom Rose – EVP & CFO

Analysts

Matt Dolan – Roth Capital

Keay Nakae – Collins Stewart

Bill Plovanic – Canaccord Adams

Greg Brash – Sidoti & Company

Matt Menze – PearlDiver Technologies

Jayson Bedford – Raymond James & Associates

Brooks West – Craig-Hallum Capital

Brian Gagnon – Gagnon Securities

Operator

Good day and welcome to the RTI Biologics Inc., first quarter 2009 results conference call. Today’s conference is being recorded. At this time I’d like to turn the conference over to Wendy Crites Wacker. Please go ahead.

Wendy Crites Wacker

Good morning and thank you for joining RTI Biologics for our first quarter 2009 conference call. Today, we will hear from Brian Hutchison, Chairman and CEO, who will discuss operational highlights and feature activities for the company, as well as Tom Rose, Executive Vice President and Chief Financial Officer who will provide an overview of our financial results.

Before we start, let me make the following disclosure about forward-looking statements. The earnings and other matters we will be discussing on this conference call will involve statements that are forward-looking. These statements are based on our management’s current expectations, but they are subject to various risks and uncertainties associated with our lines of business and with the economic environment in general.

Our actual results may vary from any statements concerning our expectations about future events that are made during the course of this meeting and we make no guarantees as to the accuracy of these statements. Accordingly, we urge you to consider all information about the company and not to place undue reliance on these forward-looking statements.

Now I will turn the call over to Brian Hutchison.

Brian Hutchison

Good morning everyone. As many of you saw in this morning's press release, we met our goals in revenue and earnings this quarter and exceeded The Streets Consensus on both revenues and net income. We achieved quarterly revenues of $38.6 million representing a 29% growth over the same period last year. As mentioned in our release revenues on a pro forma basis increased by 1% over 2008.

We continue to make progress, optimizing our merger with Tutogen that was completed about a year ago. Net income for the quarter of $1 million or $0.02 per diluted share met our expectations for the quarter. Let us drill down on each of four major lines of business are little further.

We saw a nice improvement and fine results for the first quarter, up almost 12% over the prior year, primarily due to new implants going to new distributors. In February, we signed a new development and distribution agreement with Aesculap Implant Systems for spinal implant. Initial shipments have gone up this month.

This agreement is the latest in the series of improvements we've made in diversifying our distribution model in the spinal area. This quarter, our largest spine distributor represented 85% of spine revenues compared to 92% in Q1 2008. Sports medicine revenues increased compared to the same period last year and were up more than 11% sequentially over last quarter.

These results were favorably impacted by the improving effectiveness of our direct Biologic representatives. We're comfortable with our staffing levels at this time and will add as necessary throughout the remainder of this year. We launched two new sports medicine implants in the first quarter.

Matrix HD heralds RTI’s entry into the augmentation graft market and is the first crossover implant opportunity from our merger with Tutogen. Matrix HD is a cellular human dermis sterilized through Tutoplast, using the same processing technology that has been clinically successful for membrane implants used in hernia, dental, and other surgical specialties for more than 30 years.

Additionally, Matrix HD (inaudible) in a number of other procedures including the large rapidly growing (inaudible). After the successful launch of our fresh OC graft (inaudible).

The fresh-stored OC talus enables surgeons to resurface cartilage defects in the ankle with mature hyaline cartilage and healthy subchondral bone in a single procedure.

We are encouraged by the opportunities in the orthopedic foot and ankle markets as this is an increasing area of focus for orthopedic surgeon. With the activities in this area over the last quarter, we are pleased to say that our sports medicine business is back on track. Dental revenues have been impacted as a result of continuing weakening of the global economy as many of these procedures are elective and not covered by insurance.

In the first quarter of 2009, we saw a 14% decrease in revenues in this area over the same period last year on a pro forma basis. The US business was down 13%, while international was down 17%. Our decline in this area is very similar to the decline mentioned by our exclusive distributor on their recent conference call.

However, what is not easily seen in our numbers is that nearly $1 million of end market value of our bone graft substitutes revenues, which by the way are at transfer price in our financials are representing putty used in dental cases. Therefore, combining these putty revenues with our dental segments shows that Biologics are actually flat year-over-year.

Surgical specialties continues to be a strong area for the company. Revenues were $4.8 million in the first quarter, which is a 30% increase over the same period last year on a pro forma basis, as well as a 35% increase sequentially over fourth quarter 2008. This significantly exceeds market growth rates for this very.

In the fourth quarter of 2008, we announced a new agreement with ENTrigue for ear, nose, and throat market, a new market for RTI’s sterilized membrane tissues. We launched the first implants within ENTrigue in the first quarter. On April 8, 2009 we received a letter from my Mentor notifying that that they will not be renewing our distribution agreement, which terminates on June 27, 2009.

This was not unexpected considering the recent acquisitions by J&J. We are currently reviewing other possible distribution arrangements for our breast reconstruction implants, which could include new distributors or even a direct distribution for us. RTI is one of few companies that serve this market and with the unmet clinical in this area, we believe we will be successful at meeting our distribution goal for the year.

Our bone graft substitutes revenues were down 19% compared to first quarter 2008, primarily due to a decline in international orders. Some of the decline may be a timing issue, but our international distributors said all four have been impacted by the strengthening dollar.

The ready to use BGS implant for spine, dental, and trauma was officially launched by our distributor at their national sales meetings in the first quarter 2009. We are pleased with the current run rate for the quarter and stemming from our recent discussions with the – an activity with our distributor, we are encouraged that the positive momentum will continue throughout the year.

On a final note on revenues, we are pleased to see our international revenues pick up in Q1 following a very slow second half of 2008. On a quarterly basis, international revenues increased 42% sequentially. On a pro forma basis for the first quarter, international revenues were down slightly, but were up 5% on a constant dollar basis.

We have significantly increased our tissue supplies in Q1, which is an investment that will allow us to meet the implant demands of each of our businesses. One of our strategies in the merger with Tutogen was to ramp up the tissue supplies across the board with the most significant increases in membrane tissues.

We have exceeded our expectations in this area, due to the unprecedented success in our donor services activity. This success puts us in position to serve the needs of our distributors and in general the procedural demands of the surgeons using our implants. We appreciate all the support of our donor recovery agencies provide us that we work together to honor the gifts of tissue donation.

At this point I will return, I will let Tom talk about the financial results.

Tom Rose

Thank you Brian. Revenues for the first quarter of 2009 were $38.6 million, compared to revenues of $29.9 million for the prior year. Revenues for the combined company were almost level compared to pro forma results in the first quarter of 2008.

First-quarter net income was $1 million or $0.02 per share, based on 54.5 million fully diluted shares, this compares to $645,000 or $0.02 per share in the prior year based on 38.7 million shares. Spine revenues were $9.8 million for the first quarter compared to $8.7 million in the prior year.

On a pro forma basis spine revenues were up 9% in the quarter. Unit volumes were up 15% as a result of higher distributions of cervical grafts to both current and new distributors. Average revenue per unit decreased 3% due to changes in product mix.

Sports medicine revenues were $9.4 million for the first quarter 2009 compared to $9.2 million for the prior year. Sports medicine revenues increased primarily as a result of favorable impact of distribution mix, and increases in average revenue per unit of 13% offset by a decrease in unit volumes of 10%.

Dental revenues were $7.3 million in the first quarter of 2009 compared to $3.5 million in the prior year period. As Brian mentioned on a pro forma basis dental revenues decreased 14% from the prior period. In addition to the general business slowdown, we are seeing an impact on dental revenues as surgeons begin using our new ready-to-use bone paste implant.

Surgical specialty revenues were $4.8 million in the first quarter of 2009, compared to $1.6 billion for the prior year period. On a pro forma basis, surgical specialty revenues increased 30% over the comparable period. The increases are substantially driven by higher market tissues available for distribution and greater confidence by our distributors and their ability to meet their end-market demand.

Although orders were lower in breast reconstruction, they were offset by growth in both neurology and hernia repair. We made a great deal of progress during the quarter ramping up our processing levels in this area to meet growing customer demand for almost all of our implants.

Revenues for bone graft substitutes were $3.9 million in the first quarter of 2009 compared to $4.8 million in the prior year period. Bone graft substitutes revenues decreased primarily due to lower international distribution and a non-favorable impact of distribution mix.

Average revenue per unit decreased 35%, due to changes in implant mix. This resulted from higher unit volumes of Zimmer Dental, which has lower per unit size in revenues per unit. Gross profit margins for the first quarter of 2009 were 47% compared to 46% in the prior year and 44% for Q1 2008 on a pro forma basis.

Gross margin percentages where impacted by inefficiencies as we ramped up processing of membrane tissues. We estimate this had about a 1% impact on the quarterly gross margin. In the first quarter, operating expenses totaled $16.8 million, an increase of $4.1 million over 2009.

The increase was primarily additional ongoing expenses from the former Tutogen, which was recognized for the entire quarter in 2009. During the quarter, fixed marketing general and administrative expenses totaled approximately $10.9 million. Variable incentive compensation was $300,000 during the quarter and variable distribution commission totaled $3.7 million.

In general, the only major expense category, which exceeded planned levels was in the legal area. These expenses exceeded prior year levels by $600,000, primarily due to ongoing panel litigation. We are pleased with the progress we have made on operating expenses, with fixed portion of MG&A this year should be approximately 26% of revenues, which is down from 28% on a pro forma basis in the prior year.

As I discussed during our previous conference call we have a number of expense saving initiatives that should bring MG&A expenses down further as the year continues. Research and development expenses totaled $1.8 million for the quarter and was 5% of revenue.

When we are viewing the balance sheet at the end of the quarter, compared to December 31, 2008 and cash flow for the first three months of 2009 please note the following, our cash position at the end of the quarter was $13.1 million compared to $20.1 million at December 31, 2008, a decrease of $7 million. The decline was primarily related to investments in accounts receivables and inventory.

Accounts receivable increased to $17.9 million as compared to the $14.7 million at December 31, 2008. The day sales outstanding were 42 at March 31, 2009. The increase in accounts receivable was due to timing of shipments during the quarter. Inventories increased to $82.7 million compared to $75.2 million at December 31, 2008. Inventory gains outstanding for the combined company was 316 at the end of the first quarter.

At March 31, 2009, on process donor tissue totaled $23.6 million. Tissue in process totaled $42.3 million and implantable donor tissue totaled $15 million. Inventories increased as a result of the successes of our donor services organization as they increased their activities to obtain higher levels of both musculoskeletal and membranes donated tissues.

Let me remind you that Q1 is historically the highest quarter for tissue donation. Although we anticipated and increases in inventories in the quarter, based on our annual recovery and processing plans the growth exceeded our expectations. A plan that is in place that will reduce inventories for the remainder of 2009.

Working capital at the end of the first quarter totaled $89.4 million, a decrease of $800,000 since December 31, 2008. Total debt is approximately $8.9 million and at March 31, 2009 we had approximately $6.5 million available under our line of credit. For the remainder of 2009 we will be cash flow positive from operations and we are confident that with current cash balances and available debt, we have adequate liquidity to support our future operations.

I will now turn the call back over to Brian.

Brian Hutchinson

Thanks Tom. I would like to reiterate that we are so confident in our outlook for 2009 revenues and EPS. We anticipate that full-year revenues for 2009 to be in the range of $166 million to $168 million with earnings per share expected to be in the range of $0.11 to $0.13. The EPS is based on 55.1 million fully diluted shares outstanding.

We are not adjusting our full-year expectations at this time. However, based on first-quarter results, we estimate that our dental business will be down for the year versus our previous estimates that business will be flat – our estimate that business will be flat compared to 2008. On the other hand, due to increased tissue inventories we are confident that additional growth in sports medicine and surgical specialties will offset potential shortfall in the dental area.

At the present times, we are very pleased with the rebound of our sports medicine group and increasing orders in surgical specialty. We are watching our dental business closely and working on mobile strategies with our distributor in that area to sustain revenue levels in this difficult economy.

The significant increase in tissue supply gives us the potential to achieve our estimated levels of growth in the coming years. It also allows us to be more focused on the needs of our customers since we are not tissue constraint at this time. As we look up to the rest of the year, we are confident that we will meet our goals, our cash increases will follow and we will maintain a comfortable position throughout the next several quarters and beyond.

While maintaining a conservative outlook given the macroeconomic environment, we continue to be optimistic that we will reach our performance goals for the remainder of the year. Let's open up to questions at this time. Lori?

Question-and-Answer-Session

Operator

(Operator instructions) We will go first to Matt Dolan with Roth Capital, please go ahead.

Matt Dolan – Roth Capital

Hi guys good morning thanks for taking the call.

Brian Hutchison

Good morning Matt.

Tom Rose

Good morning Matt.

Matt Dolan – Roth Capital

Question on sports medicine, may be a general comment, do you have any feedback on how volumes have tracking and your thoughts there relative to, you know broader concerns about elective surgeries etcetera and then depending on that I think you mentioned your plans for the sales force, well maybe just update us on the areas you back filled with respect to distributors and then going forward are there any ads planned this year?

Brian Hutchison

I will start with first the elective side. We are not seeing a slowdown at this time in cases. We're still watching that very closely, we've not experienced that to date. In terms of the group, the direct group out there is doing very, very well. In areas that we put in new territories or new people in the last six months, we've measured all of them and they are all on track either to already – they are either already recovered a 100% or will recover a 100% of the business that we had. So, we're very comfortable with that process. As we said in our script, we do plan to add reps this year, but it is sort of on an as needed basis. So it will kind of go all year long and if you recall, we indicated that we may add as many as ten during the year. At this time we are comfortable with that so I would say we are simply on track to that but it will be more backend loaded.

Matt Dolan – Roth Capital

Okay and today you are at 30 is that right?

Brian Hutchison

Near 30, yes.

Matt Dolan – Roth Capital

Okay. On the Mentor relationship can you give us an idea of how much surgical specialties have come from breast versus hernia, ENT, urology?

Brian Hutchison

We haven’t given an information, but in the past we've said publicly that this relationship was approximately 2% of our revenues overall.

Matt Dolan – Roth Capital

2%. And it sounds like the strength in hernia and the other applications is enough to not only offset that but any slowness in dental.

Brian Hutchison

That is correct.

Matt Dolan – Roth Capital

Okay and then finally Tom on the gross margin, how should we look at that playing out throughout the year, you had 47 here, which is consistent with last year, should we expect some improvement there, and just walk us through the rationale for what that might be?

Tom Rose

I mentioned in my comments that we did recognize some inefficiencies in the quarter as we ramped up our processing of the membrane tissues and just to give a feel for that ramp up, we increased the production capacity in the US fortify fold between the end of Q4 and during Q1. So with that type of an increase you recognize inefficiencies, but don't expect those to repeat. As always on our gross margin as our revenues grow, I think you will see a fairly linear increase each quarter in the gross margin percentage and we are still targeting as we exit this year to be in the 50% range or possibly exceed that.

Matt Dolan – Roth Capital

Great. Okay thanks a lot guys.

Brian Hutchison

Thanks Matt.

Operator

We will go next to Keay Nakae with Collins Stewart. Please go ahead.

Keay Nakae – Collins Stewart

Yes good morning.

Brian Hutchison

Morning Keay.

Tom Rose

Morning Keay

Keay Nakae – Collins Stewart

What was the absolute level of legal expense in the quarter and how should we think about that levels going forward for the next couple of quarters?

Tom Rose

Absolute expense was approximately a million dollars. I guess, we anticipate that coming down in Q2 again to more of our – in lines with our expectations as we said Q1 was 600,000 above our expectations. As we go towards the end of the year, again hopefully we will be able to continue on the Q2 pace, but it is hard to estimate.

Keay Nakae – Collins Stewart

Okay and then with respect to accounts receivable, has that normalized as you entered Q2, where does that stand versus where you ended the quarter?

Tom Rose

I think as revenues grow, we will see some increase in account receivable each quarter of the year. Again, I don’t think it will be anymore significant from quarter-to-quarter than we saw in Q1. So, there is – to some extent that fairly closed co-relation of the – you know our last 45 days revenues in the quarter to where our accounts receivable balances are.

Keay Nakae – Collins Stewart

Okay, with respect to the inventory, you know normally we are happy to see you increase inventory, I guess of the right types of material, you talked about maybe a tighter management of that going forward, should we think about that as you will continue to take like more valuable stuff like large surface scan and bone tendon bone and be a little more judicious about some of the other stuff.

Tom Rose

That is correct. I think as we move forward and at least for the next year, you know we will be more focused on the tissues that we will be acquiring to day add to the inventory, but we are at a point where the ramp up, the tissue recovery groups was excellent. Q1 is obviously very large, but now as we go forward it allows us to be more specific and more precise in our recovery activities.

Keay Nakae – Collins Stewart

And then finally for Spine, what are your thoughts there, obviously still a big party of revenue and a big determinant of whether you hit your number of shares, so what is your outlook there?

Brian Hutchison

We feel real comfortable with our internal goals and projections on spine and it’s supported by really good dialogue with all of our partners in that space. So, we feel very comfortable with it for the full-year.

Tom Rose

And we are not getting any feedback from any of our customers in that area that they are seeing slow downs in their procedure of volumes.

Keay Nakae – Collins Stewart

Okay and as far as traction in some of your newer customers is that meeting planned?

Brian Hutchison

Yes overall it is. Seeing ups and downs within them, but yes overall they are doing what we thought they would do.

Keay Nakae – Collins Stewart

Okay very good thanks.

Operator

We will go to Bill Plovanic with Canaccord Adams. Please go ahead.

Bill Plovanic – Canaccord Adams

Great thank you good morning.

Brian Hutchison

Good morning Bill

Tom Rose

Good morning Bill.

Bill Plovanic – Canaccord Adams

Couple of questions here, I will set out with the house-keeping your tax rate was a bit lower at 28% versus 38% expectation, any specific reason for that?

Tom Rose

It was impacted on a comparative basis by, as we mentioned the success of the international activities and the profitability in Germany where our tax rate is in the mid-20s. Probably as we continue throughout the year, you know you are going to see the tax rate increase quarter-to-quarter, but I think it will still for the year come in below our 37%, 38% level of last year.

Bill Plovanic – Canaccord Adams

Okay, do you have, I guess they can be more like a 32, 33, or just too difficult at this point?

Tom Rose

I think it is kind of difficult, but at this point in time it is more in the 35%, 36% range.

Bill Plovanic – Canaccord Adams

Okay and then your international was very strong, how much of that was sell-through was how much of that stocking?

Brian Hutchison

It is all sell-through, very, very little stocking in the quarter.

Tom Rose

I think the international distributors they are still having problems with liquidity, so we are not seeing a lot of stocking orders. And so I think some of what we saw in Q1 was some pent-up demand from the second half of last year, but they are just starting out the year well and our optimistic and have got some new sales strategies to hopefully keep their success going throughout the year.

Brain Hutchison

And some of what they would describe is that hospitals in Europe right now have money because their budgets just started, so there is good things going on right now. Can’t predict later in the year for now.

Bill Plovanic – Canaccord Adams

Okay, but when you say all sell-through I mean are those stocking distributors are those direct reps?

Brian Hutchison

There is combination of both. We have direct reps, as well as distributors in Europe depending on just different countries. We have a third group in Germany.

Bill Plovanic – Canaccord Adams

And I mean that was a pretty big bump sequentially, was that bump because of selling to the stocking distributors or was it the direct reps?

Brian Hutchison

No it is more through our hospitals, direct reps.

Bill Plovanic – Canaccord Adams

Okay. And then as we look at the Mentor relationship did they order in this first quarter, do you expect them to order in the second quarter, and is that – have you, are you just going to use the sports medicine sales force or how are planning on kind of augmenting that business?

Brian Hutchison

Well we did order in Q1 and in Q2 and it appears on an orderly transition, as far as that is concerned. We will let you know this quarter, which direction we are going to go, we have options and we are exploring those options right now. So, we will certainly let you know this quarter because the agreement ends in June. So, we will have something in place prior to that.

Bill Plovanic – Canaccord Adams

I mean it ends on June 30?

Brian Hutchison

Yes correct, well 27.

Bill Plovanic – Canaccord Adams

Okay and then, if I – again a housekeeping and I passed this one up, I look at your other income line it was actually income rather than an expense, was there any one-time items in there this quarter?

Tom Rose

There was about a $100,000 of FX gain in their line during the quarter. This should be – it is one-time.

Bill Plovanic – Canaccord Adams

And then you had some interest income and that offset your expense ratios.

Tome Rose

Yes it is correct.

Bill Plovanic – Canaccord Adams

Okay and I will ask the – two last questions, one the membrane tissue products in the access inventory, remind us again, which products those are and then the last question you know general ortho revenues were pretty high I think, we talked about whenever you have excess inventories that those numbers typically go up is that anything we should expect for this year and that is all I have, thank you.

Tom Rose

Okay. The general ortho numbers, majority of that line is our component of our international businesses and we expect that to up this year, but not significantly, what was, you know again had nice first quarter. On the question relating to the membrane in inventories obviously we have increased the on-process tissue for membrane significantly, we’ve increased the in-process membrane tissue fairly significantly as well. One of the things to point out is that many of you know the Tutoplast process for the membranes actually has about a 90 day cycle.

So, versus, which is much longer even then the – our BioCleanse cycle, which is about 30 days. So, both of those events have contributed partially to the increase in tissue. I think the on process tissue is a build up in anticipation of demand that we have from our customers on the in-process build up, you know we have never of initiatives to try to reduce that amount of time and investment in inventory, but it is not going to happen overnight.

Bill Plovanic – Canaccord Adams

It does seem very helpful, thank you very much.

Operator

We will go next to Greg Brash with Sidoti & Company. Please go ahead.

Greg Brash – Sidoti & Company

Good morning guys.

Brian Hutchison

Good morning.

Tom Rose

Hi Greg.

Greg Brash – Sidoti & Company

Curious on the spine business is that, are you coming up a pretty easy comp from ’08, but has that historically been much weaker than the fourth quarter because it was down a decent amount sequentially and you mentioned that procedure volumes are pretty healthy?

Tom Rose

In Q4 Greg there was, I’d mentioned in our Q4 comments that we had some fairly significant launches of new products to both – to two other distributors and they were in the range of a 1.5 million, 2 million in total. So, if you remove those Q1 looks more of a normal, you know close to normal run rate, but Q1 is not a – normally with this spine business Q4 would be one of the largest quarters in orders.

Greg Brash – Sidoti & Company

Okay that is helpful. And then on the bone graft substitute side, you are talking about average revenue per unit was down, I didn’t catch the number.

Tom Rose

I believe it is right here in front of me. Average per unit was down about 35% and it is all directly related to the unit volume of the new Zimmer Dental product. The great success is in the quarter, but that is a 1 CC item in a fairly low average sales price.

Greg Brash – Sidoti & Company

Okay and then just looking at all your businesses in general, how is pricing holding up, are your distributors facing any pressure on you to lower price or just sort of locked in through your contracts to a certain prices?

Tom Rose

Actually pricing is holding up very well and I would go further to say that in this year's – as we execute this year's plans that we will have price increases in almost all of our businesses.

Greg Brash – Sidoti & Company

You don’t expect any push back from price increases in this environment?

Tom Rose

We are getting there. And again many of our – you got to go business by business, but even with our larger distributors the new spine distributors, obviously it is early in the game with all of them, so we got very firm pricing strategies in place. On the membrane side, most of those continue to be not meeting the ultimate demand of our customers and we are getting closer as we increase the amount of inventories and processing capabilities, but because of those phenomena we are just not seeing pricing pressures right now.

Greg Brash – Sidoti & Company

Okay and just one last one, just curious how many additional products you plan to launch throughout the year?

Tom Rose

Brian mentioned sports med products in the first quarter, we mentioned a few new products in spine to new partners. There is a still about another at least ten individual products that will be taking to the market throughout the year, pretty balanced quarter by quarter and the – none of which are going to I don’t think significantly impact the forecast people have on hand right now.

Greg Brash – Sidoti & Company

Okay thanks a lot.

Brian Hutchison

Thank you.

Operator

Our next question is from Matt Menze with PearlDiver Technologies. Please go ahead.

Matt Menze – PearlDiver Technologies

Good morning thank you for talking my call. Just a question in the spine business, it was a few quarters ago, but I was wondering if any in a controversy over BMP had caused any additional orders in allograft from any of your distributors?

Brian Hutchison

Well I don’t think it is directly related to BMP at all, but we are seeing a renewed interest in our putty products for spine from a number of our distributors. So, we think it plays an important role in this space for both cervical and lumbar. So we see that happening, but I wouldn't say, I mean I can't directly correlate it to things that are going on with the BMP.

Matt Menze – PearlDiver Technologies

Okay thank you.

Brian Hutchison

Thank you.

Operator

We'll go next to Jayson Bedford with Raymond James. Please go ahead

Jayson Bedford – Raymond James & Associates

Good morning guys just a few questions. First on the Matrix HD product, is that opening any doors for your sports medicine reps because it gives them a little more products threat?

Brian Hutchison

Yes Jayson it is, it is opening doors with a group of surgeons and it is being used well beyond just sports individuals. It is being used in revenue-constrictive cases as well.

Jayson Bedford – Raymond James & Associates

Okay. Are your sales forces still largely found directly in the sports main channel, all right.

Brian Hutchison

Yes they are.

Jayson Bedford – Raymond James & Associates

Okay just on the spine revenue, is it is fair to say that this is the low point for the year and then secondly the Zimmer business as it relates to their Abbott Spine business any indication that you may get a piece of its business?

Tom Rose

Jason this is fair to say this should be the low point for the year in spine. With respect to the Abbott business, you know their integration activities continue and we have not adjusted any of our expectations yet for expansion of orders relating to that acquisition by Zimmer.

Jayson Bedford – Raymond James & Associates

So that is not in the guidance?

Tom Rose

That is correct.

Brian Hutchison

Correct.

Jayson Bedford – Raymond James & Associates

Okay. And then on the breast reconstruction strategy can you give some indication if you are leaning one way or the other, what would be preferable, distributor versus a direct basis and then I guess if you went direct how large would the sales force be and will that change the guidance in any ways?

Brian Hutchison

Jayson it would be unfair for me to give any leaning because all the parties that are involved in this are on this call. So, it wouldn't be a good idea to do. But we believe that we will have a solution in place that we can talk about by the end of this quarter and we plan to do so. So, we feel very, very comfortable that we have the tissue in hand to be in that space and fully intend to be there.

Jayson Bedford – Raymond James & Associates

Okay and then ASCI lab, I think you mentioned they started, I think you started in the ASCI lab this quarter, nothing in the first quarter and then do you expect, are we looking at a big stocking over here in the second quarter?

Tom Rose

Again that – looking at large stocking orders with these folks, ASCI labs for example, you know we are replacing actually another supplier and so as they I'm sure they are running down to supply some of the previous inventory as they convert to our implants. So, I don't think we are going to see large stocking orders, but as we go through the year, the ASCI lab will be a late size distributor for us. Again that is large – again you got to look at their market share compared to the other distributors that we are working with and kind of calibrate your expectations there, but they had a nice business that we are again replacing another supplier.

Jayson Bedford – Raymond James & Associates

Okay thank you.

Brian Hutchison

Thanks Jayson.

Operator

And we will go to Brooks West with Craig-Hallum Capital. Please go ahead.

Brooks West – Craig-Hallum Capital

Good morning.

Tom Rose

Good morning Brooks.

Brooks West – Craig-Hallum Capital

Couple of things. Brian any update on the xenograft, hernia repair product, and timing launch strategy etcetera?

Tom Rose

There is really not lot to say in the US, we are still doing very well with it in Europe and we will continue to distribute it there. The US plan is coming together, but we are not ready to talk about anything out there yet.

Brooks West – Craig-Hallum Capital

Can you give us a sense of how big of a product line that is for you in Europe?

Tom Rose

It is a growing product line, but probably in the hernia business in Europe, probably a $1 million a year for us right now.

Brooks West – Craig-Hallum Capital

And is that still something we might see this year launched in the US.

Tom Rose

The general strategy that we talked about was clinical data from studies that were being done in Europe of being finalized, we were planning on working with selected surgeons on implanting their product in the US, you know sometime this year, those initial implants combine with the clinical data, kind of set the stage for the next step in the strategy.

Brooks West – Craig-Hallum Capital

Okay and that was, if I remember right that was just assembling some retrospective data, was there or is there some forward looking study that you kept going on?

Brian Hutchison

No you are correct on that, we are looking for some retrospective data.

Brooks West – Craig-Hallum Capital

And then Brian can you give us just an update on the general status of the Medtronic relationship, do you feel like you are back on track there and how you might see that relationship in particular progressing this year?

Brian Hutchison

I think we are on track there to a much better relationship than we have had in the long-time. I feel very comfortable with the interaction that I am seeing from both companies and the interest level in both companies and I am excited about the possibilities there. So, I feel very comfortable with that going forward.

Brooks West – Craig-Hallum Capital

Great and then I will be the bad guy and Kade [ph] will get mad on me, but any – give you the chance to comment just on how the Street has your model progression throughout the year, you did reiterate your annual guidance.

Brian Hutchison

We are sticking with that.

Brooks West – Craig-Hallum Capital

Okay

Brian Hutchison

No quarterly guidance.

Brooks West – Craig-Hallum Capital

Thanks guys.

Brian Hutchison

Thank you.

Tom Rose

Okay, Brooks.

Operator

We will go to Brian Gagnon with Gagnon Securities. Please go ahead.

Brian Gagnon – Gagnon Securities

Hi you got a couple of those. Tom, can you go over the progression and how gross margins should move with higher revenue?

Tom Rose

I guess the (inaudible) if you got a look at my dialogue on this in past conference call and I guess I still stick with the – a very liner potential increase in gross margins as we grow our revenues to the $50 million to $55 million level per quarter and in our internal models, we see with current mix and current assumptions, you know gross margins peaking at that $50 million to $55 million per quarter. At that 55%, 56% range. And so again quite a linear from where we are today as revenues grow and –

Brian Gagnon – Gagnon Securities

Excuse me you are saying 55% to 56% gross margin at $50 million to $55 million in revenues?

Tom Rose

Per quarter that is correct.

Brian Gagnon – Gagnon Securities

Got it. Okay, one other point on these earnings per share; I thought the $0.02 and then that $0.11 to $0.13, I think you have got, is that all GAAP, are those GAAP numbers?

Brian Hutchison

Yes, they are.

Brian Gagnon – Gagnon Securities

Okay, and how much is the stock expense per quarter?

Tom Rose

We did disclose it in the cash flow statement, it is about 400, 000, 450,000 per quarter for the remainder of the year – for this quarter and remainder of the year.

Brian Hutchison

Yes, each quarter.

Brian Gagnon – Gagnon Securities

Right. Is there any other amortization related to the Tutogen acquisition?

Tom Rose

The amortization related to Tutogen remained significant adjustments to our intangibles at December 31 and we actually lowered the amortizable, roll down the amortizable intangibles. So that is averaging about a $100,000 per quarter this year.

Brian Gagnon – Gagnon Securities

So I guess there is non-GAAP, I guess we should add roughly a 0.5 million a quarter?

Tom Rose

That is correct.

Brian Gagnon – Gagnon Securities

Good.

Tom Rose

Thanks.

Brian Gagnon – Gagnon Securities

Thank you.

Operator

That does conclude our question and answer session. I will turn the conference over to Brian Hutchison for additional or closing comments.

Brian Hutchison

Thank you all for joining us this morning and as always you can find out more information about RTI by contacting our Investor Relations department. Thank you and have a good day.

Operator

That does conclude today’s conference. Thank you for your participation.

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