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Exactech Inc. (NASDAQ:EXAC)

Q2 2009 Earnings Call

July 29, 2009; 10:00 am ET

Executives

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

Joel C. Phillips - Chief Financial Officer

Analysts

Gerard Holt - Thomas Weisel Partners

William Plovanic - Canaccord Adams

Jeffrey Johnson - Robert W. Baird

James Sidoti - Sidoti & Co.

Erica Selin - Noble Financial

Chris Sassouni - Eagle Asset Management

Scott Ellison - PearlDiver Technologies

James Terwilliger - Duncan Williams

Operator

Good morning ladies and gentlemen, thank you for standing by. Welcome to the Exactech Inc. second quarter 2009 earnings conference call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions)

I would now like to turn the conference over to our host, Bill Petty, CEO of Exactech. Please go ahead, sir.

William Petty M.D.

Thank you Brandy and welcome to everyone to Exactech’s conference call. I will begin as usual with the disclaimer and then move into my remarks followed by Jody’s remarks and then we’ll open up for the 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, and 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, market acceptance of the company’s products, the effects of government regulations and other potential effect. Results actually achieved may differ materially from expected results included in the statement.

Exactech revenue for the second quarter of 2009 was $43.3 million compared to $43.7 million in the second quarter of 2008, which represents a decrease of 1%. Net income for the quarter was $2.6 million, our earnings per share up 20% compared with net income of $3 million and $0.24 in 2008. Excluding the DOJ inquiry related cost of $1.2 million for the quarter, net income was $3.4 million or $0.26 EPS.

Going into some of the product segments our knee implant revenue decreased by 7% to $18.9 million from $20.5 million. Hip implant revenue increased 18% to $6.7 million from $5.7 million. Biologic and spine revenue increased 4% to $6.9 million from $6.6 million. Extremity implant revenue increased 29% to $5.1 million from $3.9 million. Our other products revenue was down 18% to $5.7 million from $7.0 million, primarily due to lower instrumentation revenue.

To look at the first six months of the year briefly, 2009 revenue was $86.6 million, which is an increase of 4% over $83.5 million for the first six months of 2008. Net income for the first six months of 2009 declined to $5.1 million compared to $5.8 million for the first six months of 2008. Net income for the six months excluding the legal expenses of $2.6 million was $6.7 million or $0.52 EPS.

Compared to 2008, knee implant revenue was lower by 4% to $37.4 million from $39 million for the six months. For the six months, hip implant revenue increased 10% to $13.2 million from $12.0 million. Biologic and spine revenue increased 5% to $13.9 million from $13.3 million. Extremity implant revenue increased 42% to $10.9 million from $7.6 million; and the other products revenue for the six months period decreased as it did for the quarter but decreased 3% to $11.1 million from $11.5 million for the six months.

For Exactech, the Knee product sales as I mentioned decreased in each of the last two quarters. Knee implant revenue decreased 7% to $18.9 million from $20.5 million for the quarter. As you know, some analysts have suggested that decisions about total knee replacement surgery have been impacted more than other elective surgery decisions by the current economic situation. Because knee implants are our largest business segment representing 44% of our revenue, this certainly reduced our overall performance.

One of the bright spots for Exactech this quarter was our hip implant sales, which benefited from continuing success of our Novation hip product line. Hip revenue increased 18% in the second quarter, compared to the second quarter of 2008.

We continue to see market-leading growth in our shoulder segment, achieving 29% growth to $5.1 million from $3.9 million last year. Biologic and spine revenue increased 4% compared to last year’s second quarter. We experienced lower instrumentation sales during the second quarter, causing our other products segment sales to decrease 18% to $5.7 million.

Looking at the international and domestic breakdown, our U.S. sales increased 1% for the quarter to $29.2 million, compared to $28.8 million in the second quarter of ‘08. International sales for the second quarter decreased 5% to $14.1 million compared to $14.9 last year.

The international sales decrease was largely due to the lower European stocking orders as compared to the second quarter of 2008 and the impact of currency exchange rates. International sales represented 33% of total sales compared with 34% in the second quarter of 2008.

For the second quarter of 2009, total international revenue included an unfavorable foreign currency impact of approximately $800,000. On a constant currency basis, international revenue increased 1%.

Now I’m going to ask Jody to give a little more on financial details. Jody.

Joel Phillips

Good morning everyone, and thanks for joining us. Initially I would like to discuss our gross margin percentage. During the quarter, our gross margins decreased slightly from 62.6% to 62.3%. This was primarily a result of lower production volumes associated with the $1 million reduction in inventory that occurred during the second quarter. We are currently projecting considerably higher production volumes for the next two quarters.

Our year-to-date gross margins are 64.4% as compared to 62.7% for the first six months of 2008. So we do feel as though we are on track to deliver the full year of 50 to 100 basis point improvement in gross margins that we projected at the beginning of the year.

We were pleased with an operating expense increase of only 4% for the quarter on a GAAP reported basis and 1%, when adjusted to exclude the impact of DOJ inquiry related expenses. Specifically, lower administrative and insurance expenses were the drivers of the cost control. As adjusted to exclude the DOJ expenses, our operating profit for the quarter decreased 10% from $6.2 million to $5.6 million and our net income decreased 3% to $3.4 million.

From a balance sheet perspective, we ended the quarter with $3.7 million in cash with $14.8 million outstanding on our $40 million credit facility. Due to the inventory reduction and effective management of our forecasting and inventory purchases, we are in a better balance sheet position than we originally projected at this point in the year. Originally we projected to be about $5 million more into our credit borrowing by the end of the second quarter.

We expect inventory receipts and balances to increase modestly through the balance of the year, but we are optimistic that we can continue to perform better on the cash flow management side of things than our original projections.

Based on our year-to-date sales performance, earlier this month we updated our full year 2009 sales projections to a range of $167 million to $173 million. The most significant area of change in the sales projection is in our international sales, where we are experiencing a notable currency and economic environment impact.

Our sales guidance for 3Q ‘09 of $38 million to $41 million assumes a decrease in international sales of between 2% to 8% as compared to the third quarter of 2008, as we continue to have a material impact to currency exposure. The projected impact of currency on 3Q ‘09 international sales is expected to be approximately a reduction of international sales growth rates of around 5%.

From a net income standpoint our full EPS updated range of $0.92 to $0.96 on the diluted per share basis is exclusive of DOJ inquiry costs and assumes modest gross margin improvement, and increased operating expenses as a percentage of sales, as we continue with our core development and product launch activities, despite the somewhat softer revenue projections.

Those are all the comments that I have at this point and again, thanks for joining.

William Petty

Brandy, we are ready to open up for questions.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from the line of Gerard Holt with Thomas Weisel Partners, please go ahead.

Gerard Holt – Thomas Weisel Partners

I guess to some may argue that, over the last given all the compliance issues of the larger orthopedic companies, that this has been maybe the largest window of opportunity for small companies to gain market share in orthopedics, but it actually looks like Exactech might be losing share here. So can you just help reconcile that, just give us a sense of what we can expect, maybe in 2010 when things turn around?

William Petty

This is Bill speaking. I’m a little puzzled by your first premise as to why that would be. Certainly, we would like to see a future where all companies are playing by the same rules and I think all companies want to do that and all companies want to follow the law, but I don’t personally understand the premise of the window of opportunities.

Your second question, I think from the standpoint of me, and I have looked at some of the competitors reports, and I could see why one would interpret that as the loss in market share and I’ll ask David Petty to address that a little bit more. I think, pretty much in all of our other competitive product segments, certainly hip and extremity would suggest that Exactech is gaining market share in those areas with a growth of 18%, 29%, I haven’t seen anyone else report those kind of numbers.

David do you have further comments about that?

David Petty

Yes. I’ll go back all into the spirit of the question, which is you asked about 2010 and we’re not going to be specifically predictive about growth rates for the future and we never do.

I think the reality here is what drives the growth and customer acquisition, is really is having good technology that improves our consultation. That’s something that the tenant for Exactech as it always has been.

When we think about the launch of our CR Slope Knee and the eminent launch of our posterior stabilized PS Logic version of the Optetrak Knee, both of which has been very well received, and in combination with the local file instruments or instruments presentably invasive, approaches of the knees for tibia and the patella. I think those are the things that are the real drivers of what should make us feel good about our future and acquiring customers with the knee.

A couple of other points; we look at the data and understand what the market trends are and I think you accurately observed that it would appear that our growth rate compared to what the market is lower. When I look at the data specifically by customer, it appears that our customer base is down more than what the market data is showing, and I have no explanation to that.

When we look at the Exactech Knee revenue and compare it to the market, it’s not because we are loosing lots of customers to the competition because our existing customer base happens to be down more than the market. In fact, what we are doing and what our strategy is is to use the new technologies of the new product launches to go out there and develop more new customers, and we’ll work very, very hard to do that.

I personally feel optimistic that Exactech will do that with our knee line, which has been a flagship product for us for many, many years.

Gerard Holt – Thomas Weisel Partners

So what you are saying is the company’s knee surgeons, their volumes appear to be a bit lower than the broad base of volumes...

William Petty

If I look at our data and look at the market data, that is a conclusion that I draw from that. I don’t know why; I think the other thing that’s important to note is that, we do have a relatively small customer base as a smaller player in this market. So maybe we are more subject to volatility within our customer base than our competition is and I think that’s just the numbers game.

David Petty

I think that that particular issue, we have just absolutely no explanation for it, because with the competitors we see numbers, of course with our own customers we needed some very specific detail and let’s just say for discussion sake, lets say the knee market is flat. When we look at our customer data and in fact talk to our customers, their patient load and operative load is certainly on the negative side of flat. That’s just another way of putting it.

Gerard Holt – Thomas Weisel Partners

Okay, and just now looking at the spine, I know you don’t break out the spine and biologic revenue specifically, but it looks like revenue here is on the spine side flat to down versus last year if we make a couple of assumptions. So can you just talk about what’s going on in that business, if it’s more difficult to integrate that Altiva deal that you thought, and how that can ramp up?

David Petty

We have of course discussed these issues before, and before we made the acquisition, there was certainly some loss of customers, and then the first six months afterwards there was loss of customers as well, based on some actions that we thought were essential and appropriate in order to begin to build a base, to have the kind of spinal units that Exactech wanted to have.

We believe as we have said before that that has stabilized, but it’s also true that the way you build your sales portion, and the way you build your customer base is that you improve your products, you bring new products to market and that takes some time to do. We believe they were on track for that. We are adding spinal customers now and we will continue to stay on that track, and we are optimistic about it.

There’s no question to take a business that the year before we acquired it, if I remember correctly, had about $12 million in business. When for various reasons, almost half of that business goes away, then you begin to build a kind of company that you want to have, so that’s what we are doing.

We are adding customers at this time, and we believe that we will begin to see growth in the spinal units in the coming quarters. I guess the other thing that you can assume from the assumptions you’ve made, that our biologics growth is pretty strong.

Gerard Holt – Thomas Weisel Partners

Okay. Then just lastly Jody, can you go back and discuss the growth margin issue, just a little bit confused on why that was weak, given what the correlation is between the instruments and the gross margin?

Joel Phillips

Sure it’s not so much an instrument issue as it is just our production volumes during the quarter. We’re probably about 70% of what they were in the three prior quarters, and that was just due to us delivering inventory. So we did have some variances that ran through this quarter, that on a prospective looking basis we don’t think we will be facing.

So some of the margin improvements that we’ve been experiencing in prior quarters, we think we took a one quarter rest from it and hopefully we’ll get it back at least to flatter improving margins on a go forward basis.

Gerard Holt – Thomas Weisel Partners

Okay, thanks a lot guys. I appreciate it.

Operator

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

William Plovanic – Canaccord Adams

Great. Good morning Bill and Jodi, and David.

Joel Phillips

Good morning Bill.

William Plovanic – Canaccord Adams

A couple of questions here; looking at the shoulder, the shoulder revenues were down got sequentially. I know that with a very strong quarter year-over-year, but I’m just curios as to why we would have seen that just on a sequential basis?

William Petty

Yes Bill, that’s your observance to pick up on that and we’re still happy with the 29% growth for the quarter. All I can say is for whatever reasons, we had a fairly slow start to the quarter and it seemed to pick up as the quarter went along, and we just didn’t catch up by the end of the quarter, to keep that subsequence growth rate going.

So on the other hand, I think we finished strong and still feel very good about the momentum in the shoulder business, which I think will be augmented as we get into the forth quarter with the launch of the fracture plates and maybe even the new fracture platform system at the very end of the quarter at Q1.

William Plovanic – Canaccord Adams

And then, were there any competitive products launched in the quarter that you are aware of?

David Petty

I know this Biomed has a new shoulder out, and we’ve heard something about that, but as I’ve mentioned, with 29% growth we figure we’re better than twice the market growth rate. We are aware of what the competition is doing, but we are also very focused on telling our story and continuing to take customers from anyone, whether it’s Biomed or anyone else.

William Plovanic – Canaccord Adams

Okay, and then I’ll ask my obligatory question on distribution, where were you as you exited the quarter?

William Petty

In terms of the number of agents and reps?

William Plovanic – Canaccord Adams

Correct.

William Petty

Yes, 38 agents and 236 reps.

William Plovanic – Canaccord Adams

Okay, and what are your plans for the next say twelve months there?

David Petty

Well as we’ve said all along, we understand that we need to grow our sales organization and we are focused on doing that, but at the same time, we’re also very focused on the qualitative approach and making sure that we continue to improve in the quality of the sales organization.

So like in any sales organization, there will be additions, but we also may make changes and substitutions where appropriate and we really want to continue to drive that production, the rev number up, while at the same time continuing to add high quality people in taking that number up.

William Plovanic – Canaccord Adams

Okay. Then, you’ve had some kind of negative headwinds over the last 12 months with the HPG pricing discount that went into effect. I was wondering if there is any way you could quantify that, and if you kind of remove that from the prior year, I’m just trying to find out kind of what the underlying growth is taking that pricing impact away.

David Petty

Well. I’m not sure I’ll answer that precisely, but I’ll tell you this; if you look specifically at the first half of this year, taking the HPG out of it, we actually have modest pricing gains, at least in our knee line. As you know that pricing or that contract anniversary as of July 1, from a comparative basis, the HPG will be less important going forward.

I think the important point here is when you look at the whole business for hip and for knee domestically, in the phase of what we request and the pressures in hospitals, but in the phase of all that our pricing is quite stable.

William Plovanic – Canaccord Adams

Okay. Then the DOJ spending for the quarter was a little more than we were looking for. Any outlook on that at all for the balance of the year, and kind of where do you think you are in the process with them at this point?

William Petty

As you know Bill and everyone, based on the advice of our attorneys I have to be quite careful about what I say, but I will say the following. We and I are working very hard to be as cooperative as possible with the government, to reach a resolution to this situation, because we recognize that it’s important for our business, it’s important from a financial standpoint as you have just pointed out. So we are doing everything we can to try to get to a resolution as quickly as possible.

Beyond that as you know, it’s very difficult to predict timing or additional costs. Certainly, the cost in this last quarter were very high, higher than they have been in at least many other quarters, and we would hope we don’t have to repeat those kinds of cost, but it’s very difficult to estimate, because it depends on what demands are made from the standpoint of having the right legal representation.

William Plovanic – Canaccord Adams

Okay. I’m going to ask one more and I’ll jump off. Can you quantify and qualify your surgeon customer base at this point in time? From a quantification obviously the number you have, but from a qualification, would you say that your surgeons are high volume guys or are they more of the guys doing a half a dozen and dozen implant a year.

David Petty

It’s both Bill, it’s absolutely both. I think the more important thing for us to pay attention to is the relative change in terms of numbers of customers by product line. I’d like to figure out a way to do that, that we would be comfortable communicating. We have very high volume surgeon customers, and we have surgeon customers that only don’t do as many and I don’t really have the stratification of that at my fingertips.

William Plovanic – Canaccord Adams

Alright, great. That’s all I had. Thanks

David Petty

Thank you Bill.

Operator

Your next question comes from the line of Jeff Johnson with Robert W. Baird. Please go ahead.

Jeffrey Johnson – Robert W. Baird

Thanks. Good morning guys.

David Petty

Hi Jeff. Good morning.

Jeffrey Johnson – Robert W. Baird

Just wondering here on a couple of things; David going back to your comments on the customer base there, and you have both high volume and low volume guys. If you strip out HSS or some of your high volume guys, are you seeing the slow down in demand more on your low volume guys, because that’s something we are hearing from more of our low volume surgeons, and I don’t know if that fits with what you’re seeing at all?

David Petty

We’re seeing it in both and maybe that’s our issue. As I said earlier Jeff, I just can’t explain why when we look at the relative production of our customers versus what you guys are reporting for the market, that we seem to be affected more, but maybe you’re on to something, because higher volume ones are also down with a few exceptions.

William Petty

Jeff, let me just comment, and David can correct me if I’m wrong, but I believe I recall that there was a time when this whole economic situation started having an impact where what you said was true for Exactech.

The lower volume people seem to notice it early, and in fact I remember a meeting we had with some of our higher volume people who said they weren’t seeing an impact. Then a few months later we had a meeting with our higher volume people and they were seeing an impact. So I think that’s why David answers, we see it in both, but there seem to be that little bit of sequencing along the lines you were suggesting.

Jeffrey Johnson – Robert W. Baird

Yes. I would agree Dr. Petty, and it still seem to us the smaller guys are struggling more, whether they are losing some patience on the margins, the bigger guys or not, but that’s helpful. Thank you.

Jody, I guess and I think about your hip business, last year I think if my numbers are right, that business was probably marginally profitable, not hugely profitable, but there were so many moving parts last year as well. How do we think about profitability of hips if that’s going to be your big growth driver here over the next few quarters? Is profitability as your in-sourcing some of the manufacturing, much better on the hip business this year than last.

William Petty

Couple of things going on there. Last year there was a disproportion amount on the hip revenues that were international, that were at lower margins, so I think this year there is more of a balanced US and OUS. So I think that gives us a little bigger chance of higher profitability.

We have made some significant strides on our cost reductions of our flagship Novation tapered stem. If you look at it on full year basis, I expect at least on a percentage of profit stand point we are going to do considerably better on our operating profits with our hip products in 2009, than we did in 2008.

Jeffrey Johnson – Robert W. Baird

Okay. If hips as a percentage of profit ticked up, then the other things would be ticking down which would be purely due to how they shape out as a percentage of revenue.

William Petty

I’m not sure I follow.

Jeffrey Johnson – Robert W. Baird

Yes, that wasn’t very clear. Is the level of profitability on any of your other product lines getting better or worse this year relative to last year?

William Petty

No, I think they are the same. You can tell by the reports. Obviously that knee is a little bit higher; so as our knee mix goes down, just to percent of sales, that puts a little bit of pressure on our overall profit, but I don’t know that any of the other groups or segments are moving in terms of their operating profit percentage; like the hip potentially is getting to some improvement in 2010.

Jeffrey Johnson – Robert W. Baird

That’s helpful. As I look at hips, it’s kind of a mid $6 million a quarter run rate the way to think about the next few quarters or seasonally should we still think of a tick down in Q3 relative to Q2 on an absolute dollar basis.

William Petty

You know we are not going to go into quarter-by-quarter projections about products, but certainly we would expect our normal seasonality in the third quarter. So you’ll see a tick down in the hip, and then fourth quarter it should be back into that neighborhood.

Jeffrey Johnson – Robert W. Baird

Okay great, and then last two questions. On the operating margin, last year in the second quarter, I don’t see you breaking out DOJ cost, but they were in the model. If I try to make some assumptions around that, it seems like operating margin this quarter would have been down maybe, I don’t know, 100 to 150 bips, somewhere in there. Is that how we think about the next couple of quarters at the operating line. I know you’ve given some guidance on gross margin, but thinking about it at the operating line?

William Petty

Yes, because of those comments I made about our operating expense percentage, we are expecting that to be higher. Because we are projecting slightly lower revenues than we originally projected and we strategically have elected not to pull back on any of our project development or product development efforts or our product launch efforts. So there is going to be a little bit higher operating expenses and that’s going to move the operating profit percentage down.

Jeffrey Johnson – Robert W. Baird

Okay, great. Then just the last one; if knees were down 7% reported, hips were up 18%, is it fair on a constant currency basis to think of that decline being kind of 4% to 5% in knees and hips would have been up 19% or 20% or how do we just aggregate the currency impact there?

William Petty

There is very little of that currency impact that is relative to hips, that’s relative to knee and to other. I think the knee segment you’re in the ballpark, but it also has a very pronounced impact in our other reporting segment as well.

Jeffrey Johnson – Robert W. Baird

So, if there was an $800,000 drag from currencies, put that 50-50 in knees and other.

William Petty

You are in the neighborhood.

Jeffrey Johnson – Robert W. Baird

Thanks guys, that’s all I’ve got.

William Petty

Thanks Jeff.

Operator

Thank you. Our next question comes from the line of James Sidoti with Sidoti & Company. Please go ahead.

James Sidoti – Sidoti & Co.

Good morning Jody, good morning Dr. Petty. Is it possible that the DOJ investigation distracted some of you guys out in the field at all and could that be part of the reason that the growth is so slow in the quarter.

David Petty

Certainly that’s possible that they could have some distractions. Of course as we do here internally, it’s hard for me to comment on whether or not that would affect their regular work.

James Sidoti – Sidoti & Co.

Then if you look at your sales last year, you had a lot of stock internationally, and that that could give tougher comps this year going forward, but could you give us a sense, those new customers that you opened up last year, have they started to reorder, how is that going and where do you expect that to be if you look out into 2010?

David Petty

Yes. To answer your question, they are reordering. I think there were two major new markets and actually lets say three major new distributors last year, and one of them is really going just like they’ve planned, and one of them is doing well, but a little slower than planned and one of them is substantially behind the plan.

So, we are working hard to help the one that’s behind their own plan, to start to sort of turn those things around. We feel very good about the future really in all three of those major markets, and those are the markets that really affected those numbers and the instrument stocking that they did.

James Sidoti – Sidoti & Co.

My last question is back to DOJ. I mean it’s on pace to cross $5million this year. Can you give us some sense, is that all consulting cost that we work people on, and should you settle this investigation, does most of that go away or will there still be some residual cost.

David Petty

Would you repeat that Jim?

James Sidoti – Sidoti & Co.

Okay. If you look at this year’s number there’s going to be about $5 million of costs in the DOJ investigation. Once that investigation is settled, do any of those costs stay with you or do you think a large majority of those costs will fall off.

William Petty

Okay, I understand the question. The ongoing issue will be compliance cost. The other companies talk about those, and of course the other companies had monitoring costs as you know. We are not to the point that we know anything about monitoring costs.

From the standpoint of internal compliance, we believe that we’ve pretty much done all of the work on that. We are practicing all of those processes that we have enhanced through our learning, through this process. So I actually think we can see ourselves becoming more efficient. We think that process is very effective now, but we are working to make it more efficient.

So, I personally don’t see those internal compliance costs going up substantially from where they are now, but I can’t really estimate or predict about any potential outside monitoring cost.

James Sidoti – Sidoti & Co.

All right. Thank you.

Operator

Thank you. Our next question comes from the line of Jan Wald with Noble Financials.

Erica Selin – Noble Financial

This is actually Eric Selin on for Jan. A lot of our questions have been answered, but I was wondering if I could get a little bit more of the details on the Biologics and spine history. I just wanted to make sure that we do know exactly what we are preparing to for our previous years for Q3 and Q4.

William Petty

Oh, that’s a tricky one. The Q3 comparative for the Bios buy-in segment is $6.1 million for Q3 ‘08 and $7.0 million for Q4 ‘08.

Erica Selin – Noble Financial

Okay. With that where we would think that we probably can get some growth off of those, assuming that your Biologics need to be on the stronger side?

William Petty

We certainly expect growth out of that combined segment, and there is no reason to expect that the Biologics growth will not continue, and we think there’s some potential on the spine number from what we experienced in the second quarter.

Erica Selin – Noble Financial

That’s definitely great news. Thank you very much.

William Petty

Thank you, Erica.

Operator

Thank you. (Operator instructions). Your next question comes from the line of Chris Sassouni with Eagle Asset Management. Please go ahead.

Chris Sassouni – Eagle Asset Management

Yes. good morning. Could you just review for us again the schedule of new product launches that are scheduled for Q3, Q4, and into Q1 of next year. Just to make sure that the schedules appear to be about on track or perhaps they’ve deviated from what we have talked about in the last couple of quarters.

David Petty

Yes sir. This is David. I’ll be happy to do that. I think I’ve already mentioned on this call, that we have already launched the CR slope products under the knee line and in the second half of this year we will be launching the PS Logic Optetrak Knee. Also we’ve begun launching in the last quarter, and we’ll continue for the next two quarters what we call LPI tibial and patellar instrumentation.

With the hip as you know, we’ve launched in the fourth quarter of last year and continue to see a real positive response from our anterior approach instruments in our Novation element hip stem. In the second quarter, we’ve just launched an enhancement to our Novation hip stem as well as the Novation CSF or fracture system.

We have in the pipeline for hips, of course metal technology that will be part of the revision of the tabular system, and that I don’t have the precise date, though I’m certain it’s beyond the first quarter, which is beyond the scope of your question. We’ll look that up at another time.

The shoulder line; we had very ambitious schedule for our fracture plating system, as well as a new glenoid system. We had intended to launch those in the third quarter. Our people are telling us now that it would be in the fourth quarter. There is also what we call a platform fracture stem, which is placed for late Q4 or early Q1.

In the Biologics line, we are imminently now this month, launching the accelerate bone marrow aspirate concentrate system; something that perhaps we’ve not even talked about off call yet. We have a sports medicine version of the accelerate PRP for platelet concentrate system, which we’ll be launching late in the third quarter. This is a system that allows for using smaller volumes of blood to creates platelet concentrate and can be an office based system, whereas the system we are using now is more commonly used in the hospital setting.

With the spine, there are three projects waiting for launch in the first half of next year. One is upgrade to our existing medical screws system. We also have a posterior cervical system and a peak inter-body cage slated for the first half of next year.

Chris Sassouni – Eagle Asset Management

Thank you. I appreciate it.

Operator

Thank you. Our next question comes from the line of Scott Ellison with PearlDiver Technologies. Please go ahead.

Scott Ellison - PearlDiver Technologies

Good morning. Just a quick question on the hip revenues. You’ve attributed your gains to the Novation product lines. Is it fair to say that that’s mostly due to procedural volume picking up?

William Petty

No, it’s new customers. In our case it’s new customers, absolutely. It’s new customers who are interested in the anterior surgical approach to the hip, and we have developed a set of instrumentation that we think has had some real advantages over other systems on the market. We are using that surgical technique in combination with Novation element stem to reach more new customers.

Scott Ellison - PearlDiver Technologies

So then do you feel that that’s kind of a sustainable increase in volume through rest of the year and into 2010?

William Petty

We feel good abut the response so far, and we are sort of early days in the launch of the product.

Scott Ellison - PearlDiver Technologies

Wonderful. Thank you.

Operator

Thank you. Our next question comes form the line of James Terwilliger with Duncan Williams. Please go ahead.

James Terwilliger – Duncan Williams

Hey guys. Most of my questions have been answered, but I’ve got one quick question. As it relates, when you pick up these type of new customers, what makes a new customers use an Exactech product. What gets you in the door and then secondly, once you’re in the door and I know it’s difficult with lower procedural volumes, but how can you be product pull through, inspite of cross-sell some of your other orthopedic lines into that orthopedic surgeon?

David Petty

That’s probably a question that has enough complexity, that I don’t think I could do justice to it entirely on this conference call, but just will make the point that we believe that orthopedic surgeons above all want to do good job taking care of their patient. Our philosophy is to identify, meet the surgeons to do a better job with the muscular skeletal problems for the patients.

I think the number one thing is you have to have the technology or the surgical technique that the surgeon believes will help them do a better job for his or her patient. We do have a few of those in the bag we think, in each of our product lines, and certainly when we enter the upper extremity market with the launch of the Equinoxe Shoulder, that’s a very good example of the technology that draws surgeons to our company.

Once we established the customer relationship with them, you’re absolutely right, then we have the opportunity to point out the relative merits of our other products, whether that be Optetrak Knee or others, and that’s exactly how it works, and that’s exactly how we do it. Judging from the quarter we have just reported, we need to be doing more and more of that.

James Terwilliger – Duncan Williams

Well thanks. And I want to go back. I know this has been talked about, the hip number was a very, very nice number. Could you get back; and I missed some of the call, could you get back and talk a little bit about what drove the upside there in the hip business this quarter?

David Petty

Again, I think that it is the positive response to several products that we’ve launched over the last two or three quarters, notably under the Novation brand name with the press fit stem, the diminished stem and a fracture stem, a combination with the acetabular cup that we lunched last year. I think those are the things are driving the hip revenue growth.

James Terwilliger – Duncan Williams

Then lastly, if you look at the knee business, and again the amount of procedure to be done, there is another implant to be sold, but these procedures are more delayed. Is there anything in your history from running this company for years, where you’ve seen this type of procedural decline in the knee business, whether you’re just kind of pushed off or pushed back six months, nine months, twelve months. Have you seen this type of cycle before?

William Petty

This is Bill speaking, and I will speak hardly for Exactech and also partly from the 35 years experience of being a surgeon who did a lot of hip and knee replacements. The answer is yes, we have seen it before.

I have not seen it before to this severity or to this length, and of course in the current economic situation, you hear that in a lot of business, a lot of financial institutions, we’ve not seen this before, we’ve not seen this since 1930s or whatever. So yes, we’ve seen a similar pattern, but it’s usually been not as deep and not as long.

In my experience as a surgeon, I would say that patients typically would not put an elective procedure such as a hip or knee replacement off for more than say somewhere between four and eight months, and we’re already there. So that’s one of the reasons I would say that it seems a little longer.

Just to comment on it a little further; usually the symptoms from these problems get worse. They don’t get better on their own, and they slowly get worse, so you probably reach a point that even though there are external reasons that you may not want to go ahead, you’ve reached a point that you are getting to be quite disabled, and feel that you need to go ahead.

So with some patients, I mean we should be at that point now, but like everything else in this economy, it seems that the return is going to be a little slower, and I even envision a time when there might even be a little blip on the upside of these that have been put off. That just makes sense from the commonsense stand point.

I mean the only reason that shouldn’t occur is if the person dies or they decide just to go to a wheel chair or stay on crutches and be crippled, and I think both of those are bad alternatives. So we’re hopeful that it’s been longer and deeper and maybe I spent too long answering the question, but that is kind of what I see.

James Terwilliger – Duncan Williams

No, I really appreciate it. Thanks for taking the questions and I think the quarter is better than it looks. Thank you for the questions.

William Petty

Thank you.

Operator

Thank you. (Operator Instructions) At this time there are no further questions. I would like to turn the call back over to Dr. Petty for any closing remarks.

William Petty

Thank you Brandy, and thanks to all of you for excellent questions and for your continuing interest and support of Exactech. I hope you have a great day and great rest of the week. Bye.

Operator

Thank you. Ladies and gentlemen, this concludes the Exactech Inc. second quarter 2009 earnings conference call. Thank you for your participation. You may now disconnect.

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