Exactech, Inc. Q1 2009 Earnings Call Transcript

May. 1.09 | About: Exactech, Inc. (EXAC)

Exactech, Inc. (NASDAQ:EXAC)

Q1 2009 Earnings Call

April 30, 2009 10:00 am ET

Executives

William Petty M.D. – Chairman & Chief Executive Officer

Joel C. Phillips – Chief Financial Officer

Analysts

Raj Denhoy – Thomas Weisel Partners

William Plovanic – Canaccord Adams

James Sidoti – Sidoti & Company

James Terwilliger – Duncan Williams

Christopher Sassouni – Eagle Asset Management

Anoop Mehtr – Canaccord Adams

Jeffrey Johnson – Robert Baird

Operator

Ladies and gentlemen, welcome to the Exactech, first quarter 2009 earnings conference call on the 30 of April 2009. Throughout today's presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator instructions) I would now hand the conference over to, Dr. Bill Petty. Please go ahead, sir.

William Petty M.D.

Thank you, David, and welcome to everyone to this conference call. As usual, I will start with the SEC disclaimer and then make a few remarks and ask Jody to make some additional remarks. And then Jody Phillips, David Petty and I will respond your questions. This release contains various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. They represent the company's expectations or beliefs concerning future events of the company's financial performance.

These forward-looking statements are further qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements. These factors include the effect of competitive pricing, the company's dependence on the ability of third-party manufacturers to produce components on a basis which is cost-effective to the company, market acceptance of the company's products, the effects of government regulation. Results actually achieved may differ materially from the expected results included in these statements.

For the first quarter of 2009, Exactech revenues was $43.3 million, which was a 9% increase over $39.8 million for the same quarter in 2008. Net income was $2.5 million, which represented $0.19 per diluted share, compared to $2.8 million, or $0.23 in the first quarter in 2008. The net income did include pre-tax legal expenses and costs of $1.4 million related to the ongoing Department of Justice inquiry. Net income excluding these DOJ inquiry costs increased 12%, $3.4 million, which represent $0.26 earnings per share.

Going to the segments, our knee implant revenue was flat at $18.5 million. Hip implant revenue increased 3% to $6.5 million. Biologic & spine revenues increased 6% to $7.1 million, and shoulder revenue increased 57% to $5.8 million. Our other products revenue segment increased 19% to $5.4 million, and this includes $2.3 million from our French distributor, which we acquire in April of 2008.

Our international revenues increased 9% from $11.5 million in 2008 to $12.5 million in the first quarter of 2009. International sales for the quarter continue to represent 29% of total sales, which is identical to the percentage in the first quarter of last year. U.S. sales increased 9% to $30.8 million compared to $28.3 million in the first quarter of 2008.

Overall, our financial results for the quarter were within our expectations as our company performed well, considering the current environment. The slowdown in our major segments was offset by strong results in our extremity revenues and continued favorable comparisons in international sales.

I’m now going to ask Jody to make some additional financial comments. Jody?

Joel C. Phillips

Good morning everyone and thanks for joining us. I would like to give a little bit more of visibility on some of the operating items and discuss how we see some of these items spending through the balance of the year.

Starting with the gross margins, clearly we were pleased with the gross margin percentage improvement during the quarter, from 62.9% in the first quarter of ’08 to 66.5% in the first quarter of ’09, this was significantly better than the 50 to 100 basis points improvement that we have been projecting and can be explained by a number of factors. As I mentioned in the release, the stable mix of U.S. and international growth afforded us the ability to realize some of the benefits of our cost reduction efforts that we have been working on to the last couple of year, and specifically versus the first quarter of 2008, when our international growth was relatively higher.

Also, there was a reduction in our outside the U.S. instrument sales of $1.4 million during the quarter, and these higher sales in the first quarter of 2008 carried little to no margin. So on a comparative basis, clearly higher implant sales and that benefited our overall gross margin percentage.

On a go-forward basis, we continue to feel that the 50 to 100 basis point improvement is likely, and there's even some upside potential to that gross margin improvement. Total operating expenses increased 20% for the quarter on a GAAP reported basis and 15% when adjusted to exclude the impact of the DOJ inquiry expenses.

As adjusted, our operating profit for the quarter increased 15% from $4.8 million to $5.5 million. In the other income and expense area, our interest expense for the quarter was 144,00 as we experienced slightly lower borrowing than we expected and some pretty favorable interest rate due to the current LIBOR rates that are in the market. I will also point out that we did not have any hedge gains in the first quarter of 2009 like the $486,000 that we experienced in the first quarter of 2008. That was a positive 2-penny impact in the first quarter of ’08 that we did not have any comparative in the first quarter of 2009.

In total, although the resulting GAAP net income decreased 12% to $2.5 million the average of the net income increased 12% to $3.3 million from $3 million in the first quarter of 2008. Our balance sheet perspective, we ended quarter with $2.4 million in cash, with $14.3 million outstanding on our $40 million credit facility. Our total debt, facility related to all our term debt and including the credit line or total debt outstanding was $23 million as of the end of the quarter.

Our total inventory increased from $61.9 million a year-end to $63 million as of the end of the quarter, and this was slightly lower than our expectation, we do continued expect inventory to increase another $3 million or $4 million between now and the middle of the year. Based on the first quarter sales performance and our assessment of the economic and inventory environment we have updated our full year 2009 sales projections to a range of $176 million to $184 million.

The most significant area of change in the sale projections is in our international sales, where we are experiencing a notable currency and economic environment impact. Our sales guidance for the second quarter of 2009 of $44 million to $46 million, assumes a decrease in international sales of between 5% to 15% as compared to the second quarter of 2008.

During the second, we will have a more pronounced, comparative exposure upon the anniversary of our French distributor acquisition, as about 10% of our revenues will be denominated in European currency. The projected impact of currency on our 2Q '09 international sales growth is an approximate reduction of international sales by around 7%.

From a net income standpoint, our full-year EPS updated range of $102 to $108 exclusive of DOJ inquiry costs, assumes the gross margin improvement and maintaining operating expenses steady as a percentage of sales, as we continue to pay close attention to our operating activity.

The second-quarter guidance of $26 to $28 diluted EPS assumes slightly higher gross margin expansion than we expected later in the year, as again, we will be comparing against some international stocking activity from the second quarter of 2008, that had lower gross margins.

In summary, there were a lot of moving parts on a comparative basis, but when you dig through the details and recognize that we are in what we believe to be a short-term market slowdown, we think we’ve delivered pretty strong operational component.

Thanks again for joining us.

William Petty M.D.

Thank you, Jody. David, we're happy to open up for the questions now.

Question-and-Answer Session.

Operator

Thank you. (Operator instructions) And the first question comes from Raj Denhoy from Thomas Weisel Partners. Please go ahead.

Raj Denhoy – Thomas Weisel Partners

Hi good morning guys.

David W. Petty

Hi Raj.

William Petty M.D.

Good morning.

Raj Denhoy – Thomas Weisel Partners

I wonder if I could just ask kind of a structural question. We're looking at kind of the second quarter now where your hip and knee growth has lagged the market. And obviously there's a lot of dynamics happening out there with slower procedure volumes. I'm curious why your growth has slowed. Is there something structurally happening out there that makes it more difficult for you to gain share? Really what can we point to there?

David W. Petty

I think Jody alluded to it a little bit, and this is David by the way, Raj Good morning. And let's speak about the first quarter specifically, and we I think reported this about a year ago now that our first quarter of last year had significant stocking activity internationally relative to a distribution change and also new market entry. And so that created some tough comparisons for us in both the hip and the knee. And speaking about hips specifically, and am not going to give the precise numbers, but I will just suggest that that our domestic hip growth in the first quarter of 2009 was substantially higher than the market, but we were dealing with the tough comp on international stocking from last year. So we feel good about what we are doing with our hip business. We have all noted that everybody, yourself included, is acknowledging a slowdown in the knee market in general, which obviously affects Exactech. And when you have the comparisons from a very strong first half, and I don't want to limit my comments about this to only the first quarter, but also include the second quarter, then we know we've got some tough comps in there. Fundamentally in our knee business and our hip business, we're launching new products. We feel good about our existing customer base. And we also note that though the market itself appears to be down at least in our world, that being down appears to have stabilized, meaning that we're not noting any additional deterioration. And in the face of that, of course, our strategy is to continue to add new customers domestically. And eventually, as we get into the second half of the year, reap the benefits of all of this activity a year ago and adding to our international distribution network. So in other words, we expect all that stocking activity to translate into real market growth outside the U.S. in the second half of the year.

Raj Denhoy – Thomas Weisel Partners

So then is it fair to say that you are in fact still gaining share? Can you point to new surgeons coming on board in the first quarter here?

David W. Petty

Certainly. We have new surgeons in our customer base in hip and knee domestically. It's harder for us to see that level of detail internationally, but that's in the face of a general slowdown. And so the other way to think about that is when the patients come back in a meaningful way, if we have a favored customer base, we should see a greater effect of the return of the patients.

Raj Denhoy – Thomas Weisel Partners

Okay. Not to belabor the point, but has the pace of that share gain though slowed at all recently?

David W. Petty

Sure. I mean look at our numbers a year ago and look at them today. The pace of the share gain is – we were, for all of 2008 and specifically in knees, twice the market growth rate, and we've just reported flat knee in a market that's low single digits. And so yes, maybe it's certainly come down from that double the market rate. But again, we feel like, fundamentally, our knee and our hip business is sound considering the challenging environment we're in.

William Petty M.D.

This is Bill. Just to be clear, you were asking about customers and then you ask about share. And David certainly answered that as to what we normally consider share, and that is measured by the dollars that we are selling. If your question related to has our ability to add customers slowed down, I think the answer to that is no. I think we've been able to continue to add customers at an important rate for Exactech.

Raj Denhoy – Thomas Weisel Partners

The reason I ask, I mean if you look at the growth rates of some of the smaller players in the industry, yourself, Wright Medical, even put Smith and Nephew on that list, the growth rates of those companies has seemed to start to lag the overall market. And I just wonder if there's some dynamic happening where as the market maybe gets a little slower, if surgeons are just less willing to change, but it doesn't sound like that's the answer from you guys.

David W. Petty

Not at all, we note with the addition of our CR Slope Knee as well as the Novation element hips, since we're talking about hip and knee, and the anterior approach instrumentation for hips, that in fact, yes, we are adding new customers based on those technologies.

Raj Denhoy – Thomas Weisel Partners

Okay, fair enough, just one last one. The Spine and Biologics division, I don't think you broke out spine in particular, but that was, I believe, flat on the fourth quarter. I'm curious what your thoughts are there. I mean we're well into the acquisition now. When you are expecting at some point to start to see the benefits of that on those lines, and when can we expect that?

David W. Petty

Yeah. And you will recall and we talked about this a year ago, when we reported our first quarter of revenue for spine and of course now Spine and Biologics is reported together, and that's the way it's going to be going forward. But specific to spine we made reference to the fact a year ago that as we made that acquisition, we knew at the time that there was going to be some shifting and even loss of customers through that acquisition that was planned by Exactech and that's created for us an erosion in the revenue for the first half of 2008, which we reported in the third quarter of last year had stabilized.

And so that's something we're going to deal with for the first two quarters in our Spine business. We, as I said, stabilized that business erosion, if you will in the third quarter of last year and now we’re working hard to develop the sales organization and the product pipeline to start returning to growth in the spine business. And by the way, our Biologics growth rate remains strong.

Raj Denhoy – Thomas Weisel Partners

Okay. Thank you.

David W. Petty

Thanks Raj.

Operator

Thank you. And the next question comes from Bill Plovanic from Canaccord Adams. Please go ahead.

William Plovanic – Canaccord Adams

Thank you. Can you hear me?

David W. Petty

Yes Bill. Good morning.

William Petty M.D.

Good morning.

William Plovanic – Canaccord Adams

Good morning. So couple questions. You gave us a little color on the hip business, being that the domestic grew a lot more than the market. I was wondering if you could give some color on the knee business U.S. versus o-U.S.?

David W. Petty

Okay. Bill, our knee business in general was not above the market for domestic. Okay, And again we have some of that international comparison stuff to deal with. And while I note that, I will also say again that during that time, we've also continued to add customers. It's just that when we analyze the database, it appears that in general, our knee customer base has slowed more than our hip customer base. And we're not entirely clear as to why that happened. We fully rely on analysts like you to tell us what's going on out there. The knee business has slowed down more than the hip business.

William Petty M.D.

William I was asked that question by an internal person a few days ago; is there something about patients who need hip surgery that that's different from patients who need knee surgery. In other words, might they be more willing to put off knee surgeries compared to hip surgery? I had never thought about that. I did think about it and I could not come up with an answer. I don't know the answer and I haven't heard anyone else give the answer either as to why knee has slowed down more than hip.

William Plovanic – Canaccord Adams

Okay. Was U.S. knee actually down year over year?

Joel C. Phillips

We don’t have those numbers right in front of us, Bill, and it's been our practice not to break them out. But it was certainly I think, the last time I looked at it, it was definitely below the market growth rate.

William Plovanic – Canaccord Adams

Okay. And then the gross margin, I think you said that 100 to 250 basis point improvement. Was that on a year-over-year basis for all of '09 versus '08?

Joel C. Phillips

Here's what we've kind of guided consistently to, is 50 to 100 basis point improvement for the full year. Obviously, we did better than that in the first quarter of '09 and we think there were some one-time items there that won't necessarily result in a 260 basis point improvement that we experienced in that quarter. But we do look at our gross margin percentage in the second quarter of ’08 was significantly lower than it was for the balance of last year, we think we can do a little bit better than that 50 to 100 basis point in the second quarter of ’09 improvement, and then maybe at the lower end of that range for the second half of 2009.

William Plovanic – Canaccord Adams

Okay. And then on the extremities, I mean that was another stellar quarter. And I guess the question is, was that off of a product line extension? Is that just continued adoption, getting new surgeons? What's really the driver of that business at this point?

Joel C. Phillips

Bill its continued adoption in giving new surgeons and the reality that that reverse system in combination with the primary Equinoxe system that we launched in 2005, just continues to. We continue to demonstrate meaningful advantages over other systems in the marketplace and we have more and more customers added to the customer base on a quarterly and monthly basis. I also point out with that product line that we are launching two additional products in the third quarter one being a fracture plate for the proximal humerus, which is a good complement to the line, as well as a press fit in Glenoid and later on the year probably more likely fourth quarter of what we call a platform fracture stem that will allow the application of the reverse components in a fracture setting, which is also becoming a more popular clinical indication. So we feel comfortable, if not confident, at staying double market growth rates in our shoulder line for the foreseeable future.

William Plovanic – Canaccord Adams

Your domestic shoulder has surpassed your domestic hip at this point likely

David W. Petty

You know I don’t have that in front of me, but it will, we will throw that challenge out to the hip group to make sure that they keep moving it up.

William Plovanic – Canaccord Adams

The other way to say that is we're absolutely proud of the way our shoulder program is working.

William Petty M.D.

We're also very pleased with how the hip program is going domestically, as David has pointed out. Not giving specific numbers, but our domestic hip growth was pretty robust in the first quarter.

William Plovanic – Canaccord Adams

And then just lastly, any commentary or color you could give on the sales force numbers growth year-over-year sequentially or any metrics such as that? And then I know guys are little big for this, but any quantification of the growth in your customer base sequentially year-over-year in terms of other surgeons are utilizing your products in the U.S.

David W. Petty

Yeah, okay so the sales organization is relatively stable from what we last reported around 220 reps in our extent what we call our core business out there. Though I will note that, that we have made while that number remains static, we have made what I consider meaningful qualitative improvements in the sales organization through some investments that we made and we are excited about that. As far as the customer base goes in general the customer base is increasing, definitively increasing. When you look at the shoulder plus the hip plus the knee and I've referenced a couple of times on this call new customers that have come to Exactech based on anterior approach in Novation element as well as to see our slope in the knee and certainly with the Equinoxe program.

William Petty M.D.

And Biologics too, is a good point as well. We continue to add customers with our Optecure of product line as well as our accelerated PRP. I don’t have the precise numbers of how the customer base is growing and I think that’s an important question, because it’s an indicator of the overall stability and health of the company.

William Plovanic – Canaccord Adams

That’s all I had. Thank you.

William Petty M.D.

Thank you.

Operator

And the next question comes from James Sidoti from Sidoti & Company. Please go ahead.

James Sidoti – Sidoti & Company

Good morning Dr. Petty can you hear me.

William Petty M.D.

Yes Jim, we hear you a lot and clear.

James Sidoti – Sidoti & Company

Great. I just want to be clear now. As you indicated that you had some stocking orders in the second quarter of 2008 as well.

David W. Petty

That’s correct. I think we referenced it on the call, last year with somewhere around $1.5 million to $2 million.

James Sidoti – Sidoti & Company

Right, so we’re probably and that was primarily instrumentation and knees?

David W. Petty

It was combination of instrumentation and implants for both hip and knee, probably on equal between the two.

James Sidoti – Sidoti & Company

You probably have at least one more quarter where your knee growth is going to look a weaker than it actually is because of the comp?

Joel C. Phillips

That’s probably correct.

William Petty M.D.

It’s true for hip as well.

James Sidoti – Sidoti & Company

Okay. And then when we get to the third and fourth quarters, it will be a more apples-to-apples type number.

Joel C. Phillips

That’s correct.

David W. Petty

That’s correct.

James Sidoti – Sidoti & Company

And then just question on the expense side the sales and marketing number was up a little bit higher than I had expected. Was there’s something?

Joel C. Phillips

Well remember, you've got the full cost of the French distributor running through there now. That's probably the most significant increase in that area. There’s nothing really fundamentally changed with the rest of our sales and marketing operations.

James Sidoti – Sidoti & Company

And then my last question is, are you still planning on launching a new uni-knee by the end of 2009.

David W. Petty

What we had talked about with that in the past, Jim, what we called Arthro focus which is an early intervention uni. And we are doing modest clinical activity with that outside the US. But we are before the FDA now, and that product is not cleared. And it's difficult for us to comment on when the product might clear. So we have not included that product in our plans for revenue for at all period. For 2009 or 2010 until we have learned with the FDA to not plan on anything until we have the clearance.

James Sidoti – Sidoti & Company

Okay, great. And then I'm sorry, I lied I have one more question. The legal expenses, if you look relative to the last quarter were up quite a bit. Is there any way to predict quarter-to-quarter, how they will play out?

William Petty M.D.

The answer is no, Jim if you go back and look for the last six or seven quarters. Six quarters I guess where we had substantial expenses they have been quite variable, by quarter of three times, so it’s very difficult to predict that. Obviously this last quarter is I guess the top of the range. At least we hope that’s the top of the range, but its difficult to predict.

James Sidoti – Sidoti & Company

Okay, all right. Thank you.

Operator

The next question comes from James Terwilliger of Duncan Williams. Please go ahead.

James Terwilliger – Duncan Williams

Yeah, hi guys, I've got a couple of quick questions. First of all, your extremity number was a great number. Could you talk a little bit more about the two products that’s you are going to launch in Q3. And then could you give me the geographic launch of those products, is it U.S., Europe? Where is that going to be going worldwide? And then talk just a little bit more about what’s happening in the extremity products with that nice number.

David W. Petty

Okay, I will start with the last one, and I think I’ve already said it. What we believe is happening with that growth rate and extremities is specific to our shoulder business total and reserve shoulder replacement, wherein we think our sales force is doing a good job demonstrating real meaningful clinical advantages for patients with our system things that cannot be done with other shoulder products. And it’s the strength of the technology and the effectiveness of the sales organization that is driving that the growth. And so when we think about the new product launches in the context of the current success, these can be viewed as line extensions, particularly the Glenoid, which I mentioned is a third-quarter product which is something that will offer another option to surgeons who have a particular preference in doing shoulder replacement. The fracture system is a complementary product that deals with a different clinical that we don’t treat right now when surgeons elect to use a plating system for fracture and the proximal humerus. And so that will allow the Exactech customer base, who already call upon the Exactech sales person for various indications of problems with the shoulder to use that system, and it’s not a declaration that Exactech is going to enter the trauma market and compete with [Synthese], but rather that we're going to take advantage of an existing customer base that trusts us and our product line and pick up revenues with that revenue product line.

William Petty M.D.

It's geographic

David W. Petty

Geographically, no, we are not prepared to, honestly I don't know what the geographic detail is in the United States wouldn't want to talk about it if I did, but let’s just say that the launch that I’ve referenced is meant to be domestic in 2009 and move into international in 2010.

James Terwilliger – Duncan Williams

Okay, thanks. Could you talk a little bit about the visibility of what’s you are seeing in the Biologic & Spine business?

David W. Petty

Well, okay I don’t know what do you mean by visibility I think we’ve already referenced that we are dealing with a little bit of customer base erosion in the first half of 2008, in our comparison in our spine business, but remember we report Spine and Biologics together and I’ve mentioned that our Biologics business is very strong and its very strong based on the continued acceptance of our Optecure DBM Bone Paste, as well as our accelerated Platelet Concentrate System that's a PRP system which is being used. Increasingly in conjunction with our total knee, primary total knee business as well as other applications and we also intend to launch in the second half of this year a bone marrow aspirate concentrate system, which will allow surgeons to use autologous stem cells and various surgical procedures, most notably in the spine. So we feel good about that launch to complement what's been good growth in our Biologics business so far this year.

William Petty

And just a little bit more color on the spine. We have I'd say significant development efforts, and we probably, not probably, we know we will not see increased revenues from those during 2009, it will be 2010, but we feel very good about those and other major effort that David has mentioned is improving both the quantity and quality of our sales force in the Spine. So it's a strong business development program, but because we did frankly just loose some business for reasons that we knew we were going to back when we made the acquisition we are still very positive about Spine and think in the future it will be a significant contributor for Exactech.

James Terwilliger – Duncan Williams

Okay, thanks. My next question is really about some of your group purchasing contracts with Premier and HealthTrust. Are you pleased with how that relationship is going? And could you provide any visibility in terms of how that working out with HealthTrust and Premier?

David W. Petty

Well, we think that it's important for Exactech to continue to develop our organizational competence related to the economic buyer in our business, and that's going to become increasingly important. It's an important part of our strategy. And the signing of those contracts were a strategic intention that we think makes a lot of sense to our company going forward. We have seen market its share increase within those buying groups. And that was our intention. Of course, we had some business going into it so we took a little bit of a price decrease in some existing business, but we think that’s well worth it. And this was our long-term strategic plan.

James Terwilliger – Duncan Williams

Okay, in terms of a prices decrease, we're hearing the procedural volumes have declined recently looking back six months. Are you seeing any competitors out there? Is anyone out there in the market getting aggressive on price? In terms of a competitor taking price discounts to maintain market share?

David W. Petty

We've not been losing business based on price. And since you referenced six months I can tell you that our pricing has been stable in consecutive quarters from Q4 to Q1.

James Terwilliger – Duncan Williams

Okay, great. And then lastly I'm going to jump. Could you go back to the gross margin number of little bit? It was a great number. Could you talk a little bit? I know you have significant cost savings as you are bringing some of the manufacturing in-house. Could you update us there as well as was it a product mix issue? Was it a U.S. versus international issue? I know you touched upon it previously. Could you go back there and provide just a little bit more color.

Joel C. Phillips

Sure. You know, we have significantly increased our level of internal manufacturing over the last two, two and half years from about 40% to around 65% currently of our knee and hip implant products. We have made pretty steady cost reductions along the way. Some of those benefits frankly have not been reflected in the gross margin percentage line because it was a time period where our international sales were growing higher than our U.S. sales. So, this is probably the first quarter in about six quarters where our U.S. sales has released growth has been at least equal with international growth, and so you are seeing the impact of those cost productions now. And then also some of that stocking activity in the first quarter of 2008, as I mentioned in my comments, there was about $1.4 million in instrument sales in the 1Q '08 sales numbers that had relatively no margin. And so there was significantly less of that during this quarter and a higher percentage of implant sales.

James Terwilliger – Duncan Williams

All right. And my last question is the R&D number going throughout 2009, how should we be looking to model that that, the R&D expenses for 2009?

Joel C. Phillips

We're still expecting that number to increase about 50 basis points from where we were in the first quarter of this year. We had some project expenses that have moved a little bit, so we do still expect it to go up and be in the neighborhood of $6.8 million to 7% of sales.

James Terwilliger – Duncan Williams

All right. Thanks, guys. Thanks a lot.

Joel C. Phillips

Thank you.

Operator

Our next question comes from Chris Sassouni from Eagle Asset Management. Please go ahead.

Christopher Sassouni – Eagle Asset Management

Yes, good morning. I was wondering if you alluded to some of the new products, but could you just go down through a list of the new products that you have slated come out either late this year or early next year, even if the timing isn’t exactly right, just to give us a clear notion just so I'm not missing any of the new products that are slated to come out.

David W. Petty

Sure. So I've mentioned the CR slope, which is an important launch currently for our knee line. We also, in the second half of this year, we will launch under the Optetrak brand in our knee line, what we are calling the PS Logic System, which is an evolution of our flagship and fundamental technology of posterior-stabilized knees. And this advancement has been developed in collaboration with the Hospital for Special Surgery, which has allowed us to extend our license agreement with HSS for another decade, and we are happy about that. We also, in the second half of the year, will be launching additional instrumentation for what we call LPI, or minimally invasive surgical procedures for knee replacement, specific to the tibia and patella instrumentation. There are also various ancillary line extensions both in instruments and implants throughout the course of the year that are probably not significant enough to enumerate for the knee. For the hip, I've already mentioned the current launch of our Novation element stem and the associated anterior approach instrumentation. In the current quarter, we are launching what we call the Novation CFS or it's a fracture system, which we expect to help contribute to revenue growth throughout the rest of year. As well as an updated version of our high-end cemented system under the Novation trade name. And then since you asked about the longer term, by the first quarter of next year, we should be in the early stages of evaluation of a revision acetabular system as well as a bone conserving press fit hip stem that we will call LPI Prime. For the shoulder, we've already mentioned the fractured plate and the press fit glenoid for the third quarter and in fourth quarter probably late fourth quarter, I think I also mentioned earlier a platform fracture stem for the shoulder line, which will allow the use of the reverse shoulder components in conjunction with a fracture system.

Christopher Sassouni – Eagle Asset Management

This platform fracture stem system that you say is in Q4, that's Q4 of ‘010.

David W. Petty

That's Q4 of this year, and I do say late Q4, so thinking about revenue contribution is probably more realistic to think about 2010.

Christopher Sassouni – Eagle Asset Management

Okay. And then are you up and running in the new facility in Sarasota?

David W. Petty

Sure we are. Sure we are. I mean as with any startup, you start slowly and build from there. But yes, we are actively producing instrumentation there.

Christopher Sassouni – Eagle Asset Management

Well, when will they see the impact of it being vertically integrated versus you outsourcing it?

Joel C. Phillips

It will be a gradual impact over a series of time. It's primarily focused on our instrumentation supply and it's as much a risk mitigation and supply assurance measure as it is a cost-reduction effort. But as David alluded, there are parts that are slated for production this quarter. And it will be significantly ramping up over the next couple of quarters.

Christopher Sassouni – Eagle Asset Management

And then final question is, if you didn't have the impact of the legal expenses, what would you expect your free cash flow to look like going through balance of this year and into next year.

Joel C. Phillips

What you're forcing me to do is make a projection on the legal expenses there.

Christopher Sassouni – Eagle Asset Management

But you didn't have the legal expenses at all. If that didn't even enter into the picture.

Joel C. Phillips

Okay, if we didn't have those, depending on how you calculate free cash flow, we're looking at around. I think you would probably be looking at about $17 million or so, if you exclude the impact of taxes and interest. And if you include that, you be looking at around $8 million. Now that's dependent on a CapEx number at around $16 million. And we did $4 million in the first quarter, I think there was still probably a little UK or a little pound impact this quarter, so I think that $15 million CapEx number is still pretty good.

Christopher Sassouni – Eagle Asset Management

So you are saying that if we take cash flow from operations minus CapEx, that to get to that $8 million number you're looking at $23 million in cash flow from operations? Or is it - what's the delta between the $17 million.

Joel C. Phillips

The delta there was taxes and interest $ 9 million in taxes and interest.

Christopher Sassouni – Eagle Asset Management

Okay.

Joel C. Phillips

Okay.

Christopher Sassouni – Eagle Asset Management

Thank you.

Operator

And the next question comes from Anoop Mehtr from Canaccord Adams. Please go ahead.

Anoop Mehtr – Canaccord Adams

Actually my questions were all answered. Thank you very much.

Joel C. Phillips

Thanks.

Operator

Thank you. (Operator Instructions) And the next question comes from Jeff Johnson Robert Baird. Please go ahead.

Jeffrey Johnson – Robert Baird

Thank you, David. Good morning.

David W. Petty

Good morning.

William Petty

Good morning, Jeff.

Jeffrey Johnson – Robert Baird

Congrats on a good quarter here. Dr. Petty, I guess you're in a unique position as a practitioner and a business guy or a businessman here. We floated the theory over the last week or so on the knee side that if you look at penetration rates in Knees at least in the U.S. penetration rates of younger patients have moved up maybe 500 basis points over of the last five or six years were as penetration rate to those younger patients on the hip side have stayed relatively stable so, and you loose maybe commercial insurance converge in the younger patient the Medicare patients, over the last six months to nine months with rising unemployment rates, that that might be the reason knees seem more impacted than hip here. Any credence in that from your side of the table?

William Petty

I know you reason about that and your rise mode of about that kind of thing that I am but let me just try to give you – and this is just my opinion.

Jeffrey Johnson – Robert Baird

Sure.

William Petty

I mean data back this up. I don't know that it's so much an insurance issue. I've had some thoughts for a file that – since we are comparing lets say the under 65 to the over 65.

Jeffrey Johnson – Robert Baird

Right.

William Petty

We just use that as an arbitrary number the over 65 person if they are retired they don’t have to worry about losing their job and lets say you have a bad knee and you really are tired of putting with it but you don’t want to lose your job either and if you take six weeks off, eight weeks off, ten weeks off you come back maybe they decided – they can do without you. And I think that particular issue may have something to do with the younger people being a little less – a little more than reluctant to take the time off from their job to have the elective surgery. So just throw that into your same thing maybe the insurance but again I think you know more about the insurance issues that I do.

Jeffrey Johnson – Robert Baird

Following up on that do you then see in the younger patient population that difference between anger recovery on hips versus knees. I guess I am just trying to figure out in your comments there would they be more reticent to take off time for the knees versus the hip?

William Petty

I think my stock was more and I don’t have to data to back this up but kind of following up on your backdrop so when you ask a question what we are seeing the ages that total knees are done moving down over the last number of years and maybe that there are just more younger people who normally would be getting knees than hips.

Jeffrey Johnson – Robert Baird

Fair enough, fair enough and then Jody a couple of questions for you I guess if I could the next quarter obviously when you get into the France medical fully anniversary it is when currency will begin pretty more as you discuss but I think there is still probably a little U.K. or little pound impact this quarter. Do you quantify that at all?

Joel C. Phillips

It was about $1.25 million impact on our revenue growth so I think it would be in that have the percent 1% neighborhood.

Jeffrey Johnson – Robert Baird

Yeah, okay that’s we had it and so does that take that out and I would assume that couple be split pretty evenly between hips and knees more so than biologics and spine is that fair?

Joel C. Phillips

That is going to be largely on knees, merger on knees.

Jeffrey Johnson – Robert Baird

Okay that’s helpful, but as I take that out and then take out just the incremental France medicals at the other section there, we're getting organic revenue growth for you guys kind of in that 3% to 5% range, probably settling in right at 4%. So number one, is that a fair number? And number two, as I then look at your second half of the year guidance, it looks to me organically you guys are guiding somewhere in the low teens, maybe 13%, 14% upwards of north of 20%. And if you could just step us on how we should think from 3% to 4%, 3% to 5% this quarter, upper teens to low 20 next or in the back half of the year, how we should think about you managing that ramp.

Joel C. Phillips

I think you write on with your numbers and the key difference in that ramp is the comparative stocking activity that will continue through the second quarter and in the second half of the year. We don't have that comparison plus we think we are truly getting the traction from those markets that we started in the first half of last year. So that's why we’re expecting significantly grow higher organic growth rates in the second half of this year versus the first and second quarter.

Jeffrey Johnson – Robert Baird

Okay. And the stocking activity you referenced in Q1 of ’08 and Q2 of ’09 that’s in the first quarter of this year and second quarter of this year, 500 basis point or so of a drag if we try to quantify that and think about how it comes out in the back half of the year.

Joel C. Phillips

It was first and second quarter of '08.

Jeffrey Johnson – Robert Baird

Right, and the impact it's had in the first and second quarter this year.

Joel C. Phillips

Right. 5 basis points or 500 basis points is probably in the neighborhood.

Jeffrey Johnson – Robert Baird

Okay, great. And then last two questions. One of your competitors has talked about some purchasing habit changes maybe in the international distributor channel. And I know you guys have tough comps there, so it's maybe hard to disaggregate that. But if it weren't for the tough comps, do you see those distributors less willing at this point to take on the credit risk of buying inventory, things like that? Any comment there?

Joel C. Phillips

Right, I think we’ve been experiencing some of that for the last couple of quarters. I think we're seeing our distributors be a little more cautious with their inventory levels. And I really don't, that's obviously depending on what happens in the economic environment, but I don't see that precipitating in the second half of this year.

Jeffrey Johnson – Robert Baird

Okay. And then one of your competitors has also referenced maybe some slowdown in the U.S. on DBM Bone Paste demand, things like that. Are you seeing any of that in your business and how do we think about that, how that could maybe play out the rest of the year?

David W. Petty

I guess we're taking it from them because we're not seeing that at all.

Jeffrey Johnson – Robert Baird

You're not seeing it. Great. Thanks, David. Thanks, guys. That's all I have.

David W. Petty

Thanks Jeff.

Operator

(Operator instructions). Okay, there appear to be no further questions.

William Petty M.D.

Thank you, David, and thanks to all of you. We appreciate your interest and your support of many very good questions and we hope you have a great day and a great rest of the week. Thanks.

Operator

Thank you. This concludes the Exactech first-quarter 2009 earnings conference call. Thank you for participating. You may now disconnect.

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