RTI Biologics' CEO Presents at Acquisition Announcement Conference (Transcript)

Jun.13.13 | About: RTI Surgical, (RTIX)

RTI Biologics Inc. (NASDAQ:RTIX)

Acquisition Announcement Conference Call

June 12, 2013 08:30 am ET

Executives

Wendy T. Crites WackerDirector of Corporate Communications

Brian K. Hutchison – President and Chief Executive Officer

Robert P. Jordheim – Executive Vice President and Chief Financial Officer

Roger W. Rose – Executive Vice President and Chief Commercial Officer

Caroline A. Hartill - Executive Vice President and Chief Scientific Officer

Analysts

David Turkaly – JMP Securities

Matthew Hewitt – Craig-Hallum Capital Group

Matt V. Dolan – ROTH Capital Partners LLC

Chris Cooley – Stephens Inc.

Jayson T. Bedford – Raymond James & Associates, Inc.

Bill J. Plovanic – Canaccord Genuity, Inc.

Neil Joseph Gagnon – Gagnon Securities LLC

Operator

Good day, ladies and gentlemen, and welcome to the RTI Biologics acquisition announcement. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, today's conference is being recorded.

I’d now like to turn the conference over to your host, Ms. Wendy Crites Wacker. Please go ahead.

Wendy T. Crites Wacker

Good morning and thank you for joining RTI Biologics for our conference call to discuss our acquisition of Pioneer Surgical Technology. RTI President and Chief Executive Officer, Brian Hutchison will discuss the transaction, strategic rationale and financial implication. Rob Jordheim, Executive Vice President and Chief Financial Officer will also be available to address the questions during Q&A at the end of the call.

Before we begin, let me make the following disclosure about forward-looking statements. This communication contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management’s current expectations, estimates and projections about our industry, our management’s beliefs and certain assumptions made by our management. Words such as anticipate, expect, intent, plans, beliefs, seeks, estimates, variations of such words and similar expressions are indented to identify such forward-looking statements.

In addition, except for historical information, any statements made in this communication about growth rates, new product introductions, future operational improvements and results, or regulatory actions or approval or changes to agreements to distributors also are forward-looking statements. These statements are not guarantees of future performance and are subject to risks and uncertainties, including the risk described in public filings with the U.S. Securities and Exchange Commission.

In addition, these statements are subject to risks associated with Pioneer’s financial condition, business and operations and the integration of Pioneer’s business with ours. Our actual results may differ materially from the anticipated results [profected] in these forward-looking statements. Copies of the company’s SEC’s filings may be obtained by contacting the company or the SEC or by visiting RTI’s website or the SEC’s website.

This presentation shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state or other jurisdiction in which such offer, solicitation or sale would be unlawful prior to the registration or qualification under the securities laws of any such state or jurisdiction.

Now, I’ll turn the call over the Brian Hutchison to get us started.

Brian K. Hutchison

Good morning everyone. This morning we announced that RTI Biologics is acquiring Pioneer Surgical Technology for $130 million in a cash transaction. We are really excited about the combination of our two businesses that I will detail in this presentation. We believe that this transaction significantly advances our strategic goals while being financially attractive. We expect this acquisition will be accretive to cash earnings per share and free cash flow in 2014, excluding one-time related items. The transaction will be funded through a combination of cash on hand, a new credit facility and a concurrent private placement of convertible, preferred equity from Water Street Healthcare Partners.

The merger agreement has been approved by both companies Board of Directors. The merger is subject to customary closing conditions and regulatory approvals and we expect to close in the third quarter of 2013. After the closing, I will continue to serve as President and CEO of the combined company, and Rob will continue to serve as the Executive Vice President and CFO. The remainder of the executive team will be made up of current RTI management team and some members of the current Pioneer senior leadership team. Our headquarters will remain in Alachua, Florida.

Let me give you a little more color on the financing of the transaction. RTI has received the commitment from TD Bank and Regions Bank for a five-year $80 million senior secured facility which includes a $60 million term loan and a $20 million revolving credit facility. Additionally, RTI has agreed to a $50 million private placement of convertible, preferred equity with Water Street, a leading healthcare focused strategic private equity firm.

The convertible preferred equity and preferred stock initially will be convertible into RTI common stock at $4.39 per share giving Water Street, 16.8% ownership in the combined company. We are very pleased to have Water Street involved in this transaction. As a healthcare focused firm, strategic private equity firm, they have a strong track record of leading transformational acquisitions that have created market-leading healthcare companies of greater long-term value.

Through this agreement, we will be able to leverage their extensive operating experience, industry knowledge and network of relationships in the medical product sector. We have agreed to appoint two directors designated by Water Street to the Company’s Board of Directors, effective at the closing of this transaction. The addition of the Water Street appointees brings RTI’s total number of Directors to 10 members.

Over the past few years, we have been clear about our strategic initiatives and we believe this acquisition advances our business across all of the strategies. Our acquisition of Pioneer creates a diversified global surgical implant company, well positioned for growth in orthopedics and biologics markets.

Strategically we’ve focused – we have discussed diversification of our business outside of Biologics or remain committed to our industry-leading natural biologics portfolio. This acquisition diversifies our business into metal and synthetic devices.

Pioneer also brings with them an attractive second generation synthetics biologic platform that we believe enhances our current offering.

We have also discussed our goal of expanding our direct business as a percent of our overall revenue. As you recall, we’ve been in the process of starting two new direct distribution forces in surgical specialties in spine to add to our successful sports medicine direct business. Pioneer has well-developed distribution network that will be additive to our existing distribution, and will provide significant cross-distribution opportunities. Importantly, we will have an additional distribution capability for our upcoming launch of map3 this year.

Pioneer has established international distribution network that is complementary to our existing international operations. The combination of the two will allow the company to enhance its international reach and provide a platform for new growth opportunity.

Financially, the acquisition benefits the company by raising RTI’s organic growth rate and providing revenue growth opportunities from distribution of the combined portfolio across multiple channels. In addition, the addition of Pioneer’s medical devices will improve RTI’s current gross margin profile.

Let me spend a few minutes describing Pioneer a little more fully, for those of you who are unfamiliar with the Company. Pioneer was founded in 1992, and has growth rapidly through the development of innovative metal and synthetic implant in the biologic, orthopedic, spine, trauma, and markets. The company is headquartered in Marquette, Michigan and internationally is based in Houten, The Netherlands. The company’s primary manufacturing facilities are in Marquette and Greenville, North Carolina. Currently, Pioneer employs about 300 people in the U.S. and Europe.

Financially, Pioneer has built a well-diversified revenue base and has been experiencing strong and consistent revenue growth. 50% of Pioneer's business is in spine, 30% is in trauma, 15% is in biologics, with 5% from cardiothoracic. In 2013, Pioneer generated $88 million of revenues and has been growing revenues by an average of 12% annually.

This next slide gives us a little more color on the breadth of Pioneer's product line. We’ve done extensive clinical diligence on this portfolio and we’ve received very positive feedback. These are very high quality products that will fit well with RTI’s high standards and current industry-leading portfolio.

Pioneer has a full fusion portfolio including products for the cervical, thoracic and lumbar spine. They have lateral products, as well as tools for minimally invasive surgery. In Pioneer's biologic business, they have a diversified offering including exciting second generation bioactive synthetic as well as DBM and allograft implant. Pioneer's trauma and cardiothoracic portfolios will be exciting new areas of focus for RTI.

The trauma portfolio includes a comprehensive trauma and reconstructive cable system used in a broad range of trauma procedures. The cardiothoracic portfolio features an industry-leading cable and plating system used to close the sternum after major cardiothoracic surgery.

Let’s look at how the combined company will move us closer to some of our strategic goals. Importantly, this acquisition adds metal and synthetic devices to our existing natural biologics portfolio. Strategically, this diversifies our business and gives us the ability to serve our customers with a larger portfolio of implants.

On a pro forma basis, for the last 12 months ending March 31, 2013 total revenues would have been $263 million with the 68% of the revenues coming from allograft and xenograft implants and 32% coming from metal and synthetic devices.

We’ve spoken for sometime about our desire to directly control the distribution of our implants and we have illustrated success through consistent growth of our direct sports medicine business, since it’s inception in 2005. This is important for RTI for the long term because it gives us more visibility to end markets providing stability for the business and as well as better margins. We have stated that our strategic goal is to have direct distribution contribute around 60% of our revenue in the next five years. This acquisition accelerates our path for that goal with pro forma direct revenues for the last 12 months ending March 31, 2013 at 47% of the total revenue.

Another part of our strategic plan has been to increase our international business. This acquisition gives us an expanded global footprint including growing distribution in China and a broader portfolio of implants outside the U.S. The combined company will have distribution in 47 countries with facilities in Germany and the Netherlands.

This transaction also improves our financial profile by providing immediate increases in the scale of our business, stronger revenue growth profile and enhanced margins. We’ve stated that our goal has been to improve gross margins in the 50% range and beyond. On a pro forma basis for the last 12 months ended March 31, 2013 the combined business with a gross margins of 56%.

Thank you for taking the time to discuss the acquisition of Pioneer. We are enthusiastic about the combination of the two business and prospects for the future. In particular, we’re excited about this transaction because it advances so many of our corporate strategic goal, diversifies our portfolio, our revenue opportunities and our customer base. It provides us with great platform in which to grow and enables us to leverage the expertise of a knowledgeable healthcare investor to grow the company.

With that I’d like to open up the call to questions. Allie?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Dave Turkaly of JMP Securities. Please go ahead.

David Turkaly – JMP Securities

Thanks, and congrats on this. Brian, just quickly, from a strategic standpoint, we all know that you had two big new launches coming. And I just wonder if you could expand a little on the timing, was there anything going on with Pioneer that made this more urgent? Or why exactly now – why is now the right time for this deal?

Brian K. Hutchison

Well, Dave as you all know deals take a long, long time and we’ve been looking at Pioneer often on as well as our entire BD process for – while we’ve had BD in place now for over two years and we’ve been looking at Pioneer for probably a year and steadily looking at it for six months. There is no relationship to our current launch plan of Porcine Dermis, or really map3 that made us do this quicker.

Now clearly because of the spine business associated with Pioneer it gives us a natural place to go with our map3 for spine. As we’ve said to you many times we expect to take map3 to foot and ankle first, we – none of them has changed. So there are no changes to our plans, but this does allow us to access the spine and we’re excited about that.

So overall there is not a strong correlation between our organic business development and this particular acquisition other than as we have said consistently, we’re looking for our base business to grow, we’re looking to add organic product development, we’re launching two exciting new products right now which we are excited about and then the third element is M&A and the timing of this just happened to work out to be now.

David Turkaly – JMP Securities

And it sounds like these guys had a solid direct business, maybe like 65% of their revenues. Did you say in the presentation now, like, how many reps they are bringing in, are those people primarily spine-dedicated reps today?

Brian K. Hutchison

We didn’t mention that and they are primarily dedicated to spine. They are all distributors. So they have very few actual employees that would be classified as direct sales people, they do have marketing people, but most of their distribution is done by independent distributors and the number is approximately 200.

David Turkaly – JMP Securities

And then a last one, just quickly if I, I know it mentions accretive in 2014. Could you share with us, perhaps, off of what base? I am looking at, I think, a consensus number of something like – I don't know $0.30 in earnings or is that accretive to what number in 2014 should we be thinking of? Thanks a lot.

Robert P. Jordheim

Dave, this is Rob here. If you look our consensus earnings per share for 2014 is around $0.25 per share. I guess if you look at on a non-GAAP operating basis and that mean factoring our purchase accounting adjustments or certain purchase accounting adjustments, one time integration costs, one time transaction costs, where you end it’s about neutral to slightly dilutive in 2013 and modestly accretive to that number in 2014.

David Turkaly – JMP Securities

Thank you very much.

Operator

Our next question comes from Matt Hewitt of Craig-Hallum Capital. Please go ahead.

Matthew Hewitt – Craig-Hallum Capital Group

Good morning. Thank you for taking the questions. I just wanted to dive into the distribution a little bit more. You talked about the extensive distribution for Pioneer. That’s one of the areas that you’ve been growing your direct sales force. I think you were up to 16, if I am not mistaken, last quarter. You are adding 200 independent sales reps. How is this going to help you drive your direct business if you are bringing on a bunch more independent distributors?

Brian K. Hutchison

Matt these are very different. The 16 that you referred to, is our general surgery business. This acquisition has no impact on our general surgery group. That group will continue on its path. They’ve launched Porcine Dermis. They are focusing on general surgery. So they have Porcine Dermis bovine pericardium and human allograft for general surgery applications. And that is totally dedicated to that group. Separately, the Pioneer group brings 200 people that are dedicated to spine and if you follow the spine model most small spine companies do not use direct employees. They use the distribution model. So in that way we will be very similar to them.

In that area all we have are a few leadership people, more marketing people than anybody dedicated to the sales effort in spine, so this will be a new area for us. And as you recall, in presentations we have talked about building a direct spine sales force. We didn’t have a product portfolio where it really gets started. The focus would have been map3, once we have it. We now have this direct segment.

So in essence we will have five selling organizations. We will have our direct business in general surgery that I just mentioned. We will have our direct business in sport orthopedics. We will have this new direct business in spine. We will have an international segment and then finally we will have – don’t go by this pilot, it’s not meant to be a name. But it will be basically a segment that controls all of our OEM customers, which in this combined company is – potentially are approaching a $100 million in revenue for us.

So we still need to pay close attention to all of our commercial customers because we fully expect to continue to try to maintain and grow those relationships as well.

Matthew Hewitt – Craig-Hallum Capital Group

Okay. But do you anticipate this transaction causing any problems with your existing partnerships/distribution agreements?

Brian K. Hutchison

Well initially, we expect that there will be some confusion and a possible concern. I think we’ve demonstrated to all of our commercial relationships that we do not share their designs with anyone else. We would not violate any of those confidentiality rules that we have with them. So we hope that we can maintain as many of them as possible over the long-term, once we can get through the initial phase of this.

Matthew Hewitt – Craig-Hallum Capital Group

All right, thanks. I will jump back in the queue.

Operator

Our next question comes from Matt Dolan of ROTH Capital Partners. Please go ahead.

Matt V. Dolan – ROTH Capital Partners LLC

Hi, good morning guys. Thanks for taking the questions. Brian, I wanted to just touch on your vision of the combined business, and how the revenue progresses from here? It sounds like a lot of the strategic rationale for the deal is the ability to cross-sell products. So can you walk us through what those sales leverage points might be and perhaps quantify, can Pioneer continue to grow at 12% and how does that affect your growth rate going forward?

Brian K. Hutchison

Well, if you recall Matt, I think you and I’ve had this conversation where we talked about the base business – meaning our base allograft business growing in low single digit, low to mid-single digits it’s growing basically with the donation in the United States. Then we’ve talked about layering on our organic product development to try to help us drive our growth rate closer to double digit. And then of course, we talked about M&A.

This particular acquisition, I do believe, will continue to grow at the top line in excess of 10%, possibly 12%. We expect that it will help us grow our entire business faster at the top line while improving gross margin. So that was absolutely part of the strategy here. So we believe that this company has great portfolio products on the market today and a solid pipeline of products to come in the segments they are in.

Matt V. Dolan – ROTH Capital Partners LLC

Okay. And again, you mentioned accretion next year. Maybe you can just tell us, are there any cost synergies that you’ve considered into the valuation of this deal? Where do those come from, and maybe how much? That would be helpful.

Robert P. Jordheim

Yeah, Matt, this is Rob. In the valuation of this deal, there is some cost synergies as well as some revenue synergies that Brian alluded to. From a cost synergy standpoint, we are going to look at the areas where there is duplication and things like that. But I will tell you that the deal stands alone without significant cost savings. Obviously, we’re going to trying to get those where we can, but the deal as it stands today, it doesn’t need a lot of cost synergies to be successful.

Matt V. Dolan – ROTH Capital Partners LLC

Can you tell us what Pioneer's operating margin profile looks like?

Robert P. Jordheim

Yeah. From an operating margin standpoint they are roughly in the mid-single digits at this point in time, and the gross margins are up where it is around 70%.

Matt V. Dolan – ROTH Capital Partners LLC

Okay. And then I might have missed the last question. But, Brian, do you see with your current distribution relationships are there any immediate channel conflicts that you foresee or anything we should be thinking about with your OEM or distribution business?

Brian K. Hutchison

I will let Roger address that.

Roger W. Rose

Matt, there are some of our sports medicine ortho distributors that do distribute to various spine lines. And we will be working with them individually one by one. I wouldn’t characterize this as a lot. It’s a small piece of that business.

Matt V. Dolan – ROTH Capital Partners LLC

So nothing material in terms of your existing book of revenue?

Roger W. Rose

No.

Matt V. Dolan – ROTH Capital Partners LLC

Okay. All right, thank you.

Operator

Our next question comes from Chris Cooley of Stephens. Please go ahead.

Chris Cooley – Stephens Inc.

Good morning guys, thanks for taking the questions. If I could, just, when you look at the Pioneer business, you just alluded today you think – they can sustain 10% plus growth going forward? Could you help us kind of back into that when you look at the portfolio? A lot of metals there, which I would assume have a lower growth rate.

So help us think about kind of the balance of the spine mix right now, and those relative growth rates and what gives you confidence that they can sustain at 10% plus growth rate going forward? And just as kind of a clarification, will the independent distributors brought on from Pioneer have access to map3 and would that be considered – and I have one other follow-up after that. Thanks.

Robert P. Jordheim

Hey Chris, this is Rob. To the first point of our question, on the 10% growth rate, when you look at the mix of products within Pioneer, obviously we all know about this spine metal market growth and that’s growing kind of in that flat to single digit growth rate. Pioneer has been successful to grow faster than market based on their product portfolios, so we would expect that to continue. Aside from the fusion product area, they’ve been very successful in the biologics. The growth rate in the biologics has been upwards around 40% to 50% year-over-year. The trauma has also been double digit growth and when you look at international, international has been showing great growth and we feel there is a lot of opportunity there.

So we feel that the 10% growth rate is certainly achievable based on the portfolio and based on what we can add to that portfolio. With respect to this map3 stem cell product, absolutely, their sales force will have access to it.

Chris Cooley – Stephens Inc.

Okay, great. And then, just in terms of the structure, as we kind of trend back into your accretion expectations for next year, obviously you have cash on the balance sheet right now. Just kind of your thoughts on the two components for the debt and how we should assume that going forward?

Robert P. Jordheim

Well, kind of what we have been trying to do is we want to maintain a certain amount of cash on the balance sheet and then added on top of everyone to maintain a certain amount of liquidity, so we've benchmarked kind of where the liquidity number needs to be for the next few years. And what I will tell you at this point, we will be in a net cash position in the next three to four years, which we think is very fast.

Chris Cooley – Stephens Inc.

Okay. Thank you so much.

Operator

Our next question comes from Jayson Bedford of Raymond James. Please go ahead.

Jayson T. Bedford – Raymond James & Associates, Inc.

Good morning and congratulations on the deal here. Few questions; the $88 million in revenue I think you mentioned for Pioneer, is it all derived from Pioneer manufactured products or are there other revenue sources in there?

Brian K. Hutchison

It’s all Pioneer products.

Jayson T. Bedford – Raymond James & Associates, Inc.

Okay. And then, you mentioned the growth over last year. Is that all organic? I think you said 12%. Is that all organic or has there been anything acquired in there that would lift that growth?

Robert P. Jordheim

Jason, this is Rob. That would be organic growth.

Jayson T. Bedford – Raymond James & Associates, Inc.

Okay. The modest accretion that you talked about in 2014, that assumes 10% plus growth in Pioneer, is that right?

Robert P. Jordheim

Correct.

Jayson T. Bedford – Raymond James & Associates, Inc.

Okay, and then, just a last couple here. Rob, I think you said operating margin in the mid-single digit. I think on the slide deck, it looks like EBITDA margins 15%, what’s the big delta there?

Robert P. Jordheim

While the spine business had heavy investment in what we call instrumentation which is the device that’s used to put in the implants, so when you factor out the amortization of that particular item, that’s where you get the EBITDA jump.

Jayson T. Bedford – Raymond James & Associates, Inc.

Okay, okay. And then, just in reference to an earlier question, some of your bigger OEM agreements, obviously, I am taking Medtronic here. When does that current contract expire?

Robert P. Jordheim

The current contract expires in 2014. Now we’ve been in dialog with them about renewing and extending.

Jayson T. Bedford – Raymond James & Associates, Inc.

When would you expect to be able to disclose renewing and extending?

Robert P. Jordheim

I really couldn’t put a timeframe on it.

Jayson T. Bedford – Raymond James & Associates, Inc.

Okay. Thank you.

Operator

Our next question comes from Bill Plovanic of Canaccord. Please go ahead.

Bill J. Plovanic – Canaccord Genuity, Inc.

Great, thanks. Good morning, can you hear me?

Brian K. Hutchison

Yes, Bill. Good morning.

Bill J. Plovanic – Canaccord Genuity, Inc.

Couple of questions here; first, when do you expect the deal to close?

Brian K. Hutchison

As fast as possible, we’re going to ask for early termination of Hart-Scott-Rodino and if that’s successful then we could close in early July.

Bill J. Plovanic – Canaccord Genuity, Inc.

And if you don't get early termination of HSR?

Brian K. Hutchison

I think it’s a 30 day period just for that. So we’ll be out till mid to late July.

Bill J. Plovanic – Canaccord Genuity, Inc.

Okay. And then, what type of interest rate do you think you will end up paying on that debt? Is that like 5%, 6% debt or how should I think about it?

Brian K. Hutchison

Well it’s based on an EBITDA senior leveraged debt ratio, but what we’re looking at from an interest rate standpoint is substantially lower. We’ll get LIBOR plus, 1 to 1.75 based on debt ratio. So I think if you really want to look at, be around somewhere around in that 2%, 2.5%.

Bill J. Plovanic – Canaccord Genuity, Inc.

So 2% to 2.5% all-in?

Brian K. Hutchison

Yeah.

Bill J. Plovanic – Canaccord Genuity, Inc.

Okay. And then, you gave us the EBITDA and the operating profit for Pioneer. What was Pioneer's free cash flow?

Robert P. Jordheim

From a free cash flow standpoint, it was about $5 million.

Bill J. Plovanic – Canaccord Genuity, Inc.

Okay. And then, you mentioned the revenue and expense synergies. Obviously, if we look at this, it sounds like, as we talk about 10% growth for 2014, you’re not putting any revenue synergies in. Is that correct?

Robert P. Jordheim

For 2013, we’re not putting any revenue synergies in, but we’re for 2014.

Bill J. Plovanic – Canaccord Genuity, Inc.

And then, to what extent, tell me how much are we talking about?

Robert P. Jordheim

Well, less than $10 million in 2014.

Bill J. Plovanic – Canaccord Genuity, Inc.

And as we think about expense synergies, same question there. How much should we think about in 2013, and how much in 2014?

Robert P. Jordheim

From an expense standpoint, we are going to be looking in 2013 maybe $0.5 million to $1 million and in 2014 that number will double. But as I said before, we’re going to look for expense synergies and areas of duplication and things like that, but we are also going to look to invest in the business to grow it.

Bill J. Plovanic – Canaccord Genuity, Inc.

Okay. We have seen Pioneer on the conference floors. How broad is their product offering in the spine business, in the metal side of the business?

Brian K. Hutchison

It’s a solid portfolio, Bill and there are things in the pipeline to come.

Bill J. Plovanic – Canaccord Genuity, Inc.

Okay. And then my last question. I think somebody asked this in the beginning, I forget who it was. I know you have been looking at acquisitions for a long time, but does this acquisition signify that you are not as excited about the hernia repair product?

Brian K. Hutchison

No, definitely not. We are very excited about out prospects there and I feel like that business segment will do very, very well.

We’re certainly going to continue to drive that and they actually have some idea, they are suggesting for M&A as well. Obviously, we won’t be chasing things too quickly. We want to get off the ground and get our group driving revenue, which we think we will do with the product line we have and then we’ll continue to add to that as we go forward.

So that business segment will continue to be a strong focus for us. The gross margins in there are very, very exciting as well.

Bill J. Plovanic – Canaccord Genuity, Inc.

Okay, great. Thanks. That's all I had.

Operator

Our next question comes from Neil Gagnon, Gagnon Securities. Please go ahead.

Neil Joseph Gagnon – Gagnon Securities LLC

Gentlemen.

Brian K. Hutchison

Good morning.

Neil Joseph Gagnon – Gagnon Securities LLC

What kind of balance sheet does Pioneer have? What are you assuming in the way of their balance sheet?

Robert P. Jordheim

In terms of what, Neil? In terms of just asset or. . .

Neil Joseph Gagnon – Gagnon Securities LLC

No, I am thinking of debt really.

Robert P. Jordheim

Well debt, all the debt that they currently have is going to be paid, it’s a cash free, debt free deal. Any debt that’s issued will beyond the combined company and that’s the $80 million credit facility.

Neil Joseph Gagnon – Gagnon Securities LLC

 All right. Rob, when you were giving those numbers before, the operating margin of the company, was that after paying a significant interest rate on that debt?

Robert P. Jordheim

Not on the operating side, no. What the financial strength is about 2% to 2.5% which we feel is good. I am sorry, are we talking about (inaudible).

Neil Joseph Gagnon – Gagnon Securities LLC

Now I am wondering what they had. Do they have a significant interest expense?

Robert P. Jordheim

Not that significant, their debt was about $14 million.

Neil Joseph Gagnon – Gagnon Securities LLC

Okay. So the current owners will take care of making that go away?

Robert P. Jordheim

Yes.

Neil Joseph Gagnon – Gagnon Securities LLC

On the allograft that they are buying now, will you be able to take over that supply?

Brian K. Hutchison

Neil, this is Brian. In some cases, we could and in some cases, we actually want to leverage the relationships they have. They are with products that we don’t currently make and we think that suppliers they have are capable of making those particular grafts so we’ll continue with that. Certainly, we’ll supplement it with things that we can add to the portfolio as well, but I want to look at it more as an incremental thing than a replacement thing.

Neil Joseph Gagnon – Gagnon Securities LLC

Okay. Brian, as you and the team were considering the whole acquisition of Pioneer, could you balance for me, please, how much are you excited about products that they have, and how much are you excited about distribution capability that they have?

Brian K. Hutchison

That’s a really good question. Early on, I was excited about the distribution capabilities and we’ve looked at a lot of companies in these spaces and through the six months of really focusing on this. I became very excited about the products themselves, the quality of the products, the surgeon reaction to the products and what’s in the pipeline behind these current products. They have got some very, very capable people in R&D, very, very focused, energetic people who have got some great ideas and the ability to bring some products forward that we think surgeons and patients will want. So we got excited about the product line through the process, so at the end of the day, I am excited about both.

We have got a good opportunity to enhance distribution and frankly give our current sports medicine folks access to some great second generation synthetic biologics that they have never had before. So there are significant opportunities here that for us to all get excited about. The proof is in all the execution that’s in front of us, but we are really excited about those possibilities.

Neil Joseph Gagnon – Gagnon Securities LLC

Good. The last question; did you have any relationship with Pioneer before this? Were they a distributor for you in any way?

Brian K. Hutchison

They were a customer, have been for many years.

Neil Joseph Gagnon – Gagnon Securities LLC

They were. All right, so you have known about the organization?

Brian K. Hutchison

Yeah.

Neil Joseph Gagnon – Gagnon Securities LLC

Good. Brian and team, thank you.

Brian K. Hutchison

Thank you, Neil.

Operator

We have a follow-up question from Matt Hewitt of Craig-Hallum Capital. Please go ahead.

Matthew Hewitt – Craig-Hallum Capital Group

Thank you. Quickly, first, you mentioned that that you are going to be leveraging their allograft suppliers. Are they having, or have they had any issues with the FDA, and where does RTI currently sit in the re-inspection process?

Brian K. Hutchison

Carrie Hartill happens to be in the room. I will let her address that with you.

Caroline A. Hartill

Okay. So to answer the first part of your question first, we clearly know who the current suppliers to Pioneer for the allograft that they are receiving are, and that includes RTI. The other suppliers to our knowledge do not have any specific enforcement actions pending. And that’s as far as we know based on what’s public information. And then, we have also fairly closely interrogated the way that Pioneer oversees those allograft suppliers. So we have a pretty high level of confidence that there is no liability there.

Relative to RTI, we are still eagerly anticipating the FDA revisit. We are ready for them, we have been ready for them now for several months and we don’t drive their timetable, they do.

Matthew Hewitt – Craig-Hallum Capital Group

Okay, thank you.

Operator

And with no further questions at this time, I would like to turn the conference back over to Mr. Brian Hutchison for closing remarks.

Brian K. Hutchison

Thank you. Thanks again for joining us today to discuss the acquisition of Pioneer. We look forward to seeing many of you in the coming months including at the Canaccord Genuity Annual Growth Conference in Boston, August 14, 15. We will also update you on our progress during our second quarter earnings call at the end of July or beginning of August. Thank you.

Operator

Ladies and gentlemen, this does conclude today’s conference. You may all disconnect and have a wonderful day.

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