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Exactech Inc. (NASDAQ:EXAC)

Q1 2010 Earnings Call

April 28, 2010 10:00 pm ET

Executives

Bill Petty - Chairman, CEO

Jody Phillips - CFO

David Petty - President, Director

Analysts

Jeff Johnson - Robert W. Baird

Bill Plovanic - Canaccord Wealth Management

Robert Gold – Brigantine Advisors

James Terwilliger - Duncan Williams Incorporated

James Sidoti – Sidoti & Company

Operator

Good day ladies and gentlemen, thank you for standing by. Welcome to the Exactech Incorporated First Quarter 2010 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). This conference is being recorded today, Wednesday, April 28, 2010.

I would now like to turn the conference over to Chief Executive Officer, Bill Petty, please go ahead sir.

Bill Petty

Thank you, Elisa, good morning from Exactech. Spring has arrived in Gainesville finally and it has where you are or will soon. We will begin with the usual disclaimer. 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, and market acceptance of the company’s products, and the effects of government regulations and other factors. Results actually achieved may differ materially from the expected results included in the statements.

Exactech’s revenue for the first quarter of 2010 was $49.1 million, this is compared to $43.3 million in the first quarter of 2009 and it represents a 13% increase. Net income was $3.3 million which is $0.25 per diluted share, compared to $2.5 million or $0.19 per diluted share in the first quarter of 2009, this is an increase of 32%.

Excluding the expenses of $200,000 for the Department of Justice inquiry, net income was $3.4 million or $0.26 earnings per share. Just a little bit about the different segments, the revenue for our largest product segment knee implants was up 13% to $20.9 million for the first quarter, compared to $18.5 million in the first quarter 2009. Hip implant sales for the first quarter was $6.6 million, which was only a 1% increase from the $6.5 million in the first quarter of ‘09.

Biologic Spine revenue was up 4% to $7.4 million from $7.1 million in the same quarter last year. Extremity revenues increased to $7.1 million which is a 22% increase from last year’s revenue of $5.8 million. Our other product sales increased substantially by 31% or $7.1 million and this largely represents strength in the cement product line.

Now going to turn it over to Jody for some more details from the operational standpoint.

Jody Phillips

Good morning everyone and thanks for joining us. The first quarter represented another quarter of re-bond from the lower growth rates that we experienced in the first-half of 2009, specifically on sales outside the US where we experienced a 30% increase. The higher mix of outside the US business at 33% of total sales versus 29% in the first quarter of 2009, is the primary reason behind the drop in our gross margin percentage to 64% in Q1 of ‘10 versus 66.5% in Q1 ‘09. Although I will point out that this comparative gross margin of 66.5 during the first quarter of last year was by far the highest gross percentage we had during 2009 and actually if you look at the comparative gross margins for the balance of 2009 the average gross margin percentage was 62.4%.

Therefore on a go forward basis through the balance of 2010, we are confident that we can deliver the 50-100 basis point improvement that we have previously targeted. In reviewing our operating expenses for the first quarter, clearly the most notable item is the $1.2 million reduction in compliance and legal costs to 200,000 for the quarter, both of these are pre tax numbers compared to what was in the press release.

We currently expect around $1.8 million in total cost for 2010, related to compliance and legal costs. But again, we should reiterate that these are rough estimates based on timing and implementation factors related to the DOJ inquiry and these cost are difficult to project with certainty. The first quarter sales and marketing expense increase of only 5% serves as an offset to the gross margin impact of the higher international sales mix as a result of the lower gross margins in our independent distributor business with relatively lower sales and marketing cost.

As we progress through the next two quarters, we expect higher growth in our sales and marketing expenditures likely in the neighborhood of 15% to 20% type growth rate as we continue to start up various distribution operations outside the US. The research and development expenditure increase during the first quarter of 20%, while higher than our sales growth was consistent with our expectations and demonstrates our commitment to maintain a full product pipeline.

As a result of this P&L activity, operating profits increased 38% to $5.6 million and net income increased 33% to $3.3 million or $0.25 per diluted share during the first quarter. This result was approximately $0.02 better than the upper end of our guidance going into the quarter and it was largely a reflection of the higher than expected international sales growth.

As anticipated going into the beginning of the year, our inventory totals and our credit line increased by approximately $3 million each during the first quarter, we expect these increases to continue and possibly accelerate in the second quarter as we prepare for a number of expanding product line releases and expansion of distribution operations outside the US.

Although our (NYSE:AR) increased by $5.5 million the day sales outstanding actually decreased to 67 days in the first quarter as compared to 68 days in the first quarter of 2009. And all in all, we think the first quarter ended about where we expected from a balance sheet perspective.

I would like to take this opportunity to clarify one thing from our press release related to the purchase of hip assets from Tantum a German-based medical device distributor. We purchased the hip product line assets only and not Tantum the company itself. We are starting up our own direct operation in selling those product lines in the second quarter. The cost of the asset purchased was largely immaterial and the cost of that purchase was reflected in the balance sheet that you were looking at as of the end of the first quarter. We have increased our full year 2010 revenue guidance to $190 million to $197 million which represents a 7% to 11% top line growth primarily as a result of our performance in the first quarter.

Factored into this guidance is an assumption that the growth rate that we experienced in international sales for the balance of the year will not be as high as the first quarter, although we continue to expect to outperform the worldwide market. From a net income standpoint, we have increased our GAAP EPS guidance to a range of $0.92 to $0.98 again largely based on the out-performance of the first quarter of 2010. Our second quarter guidance of $46 million to $49 million in revenue represents a 6% to 13% increase in top line revenues and our second quarter GAAP diluted EPS guidance of $0.22 to $0.24 implies net income growth of between 8% to 18%.

These are all of the prepared comments that I have at this time, and again thanks for joining us and we look forward to your questions.

Bill Petty

Okay. For the question-and-answer session, David Petty, President will be joining us and Jody and I will continue to be here. So Lisa we are ready for the questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Jeff Johnson with Robert W. Baird. Please go ahead.

Jeff Johnson - Robert W. Baird

I guess that compared to you just want to start with some of the international transitions you are making this year. Any update, I think it’s going on in three different market that obviously it sounds like one of those market here is Germany, but any updates on how that process is transpiring at this point?

Bill Petty

I am going to ask David to respond to that Jeff.

David Petty

Yeah sure so we are precisely on our plan on all fronts and this German announcement as of now is certainly an important part of the overall process, because there is another market that we are working on that we are not really prepared to get into lot of detail on its most of the second half of the year. And of course it’s these things take time to enter the market and hire the people and all those things and we are doing all of that now. So the way I think we should be thinking about this is we are going to have some expenses in at least these two operations that we are talking about coming ahead of revenue and we will expect the revenue contribution to pick up in the fourth quarter and we’ll be looking at little bit of P&L pressure in the second and third quarter which I think is exactly how we characterized it when we were on the last conference call.

Jeff Johnson - Robert W. Baird

That’s helpful David and I guess a follow up there is you know how do we think about trying to track number one, any risk of inventory return over the next quarter or two if there is any risk to that and number two when will you start getting a comfort on what part of that distributed business you might retain in a direct manner going into the end of ’09 or into the end of ’10 and towards ’11?

David Petty

Well on the first question it’s hard to know precisely when we might or what’s the magnitude of any inventory returns there will be

Jeff Johnson - Robert W. Baird

Right.

David Petty

So again second half of the year we have baked into our revenue guidance and our bottom line guidance what we think the total net revenues are going to be and so we’re comfortable with sticking with that. And relative to the sales, we have to do, to build the highest quality organization with the very best sales representatives we can include and hire in both of those markets and as I said a moment ago, I think we are very well on our way to building a high-quality sales team.

And our experience when you have a very high-quality sales team you have a pretty good chance of developing the market the way you intend to.

Jeff Johnson - Robert W. Baird

Great, that’s helpful. Jody I guess may be a couple just modeling questions, if I could, one on the hip is that how do we think about hips and I guess the other line those were the two that just vary the most relative to my model, how do we think about hips over the next couple of quarters and do those cement strong sales continue in the other line?

Jody Phillips

I think if you go back and look at those on a sequentially basis it gives a little bit more of an outline of may be what to expect I think we can perform a little better in the hip and we are certainly working on that and the cement we certainly think we’ve gained some business there that should continue to benefit as go forward. So, we kind of expect something along the sequential trend line that we’ve experienced there.

Jeff Johnson - Robert W. Baird

Okay, great and just then the last one just on the DOJ expenses, can you review what you said in the prepared remarks, sort of its expectations for the year?

Jody Phillips

No problem. The current estimate is for total year, legal and compliance cost of $1.8 million. Now that’s after we recorded basically 200,000 pretax in the first quarter. So there is an implied 1.6 million in the last three quarters of the year there. But I will give you my cautionary statement. You know what is involved in that estimate it is just that an estimate.

Jeff Johnson - Robert W. Baird

Okay. So I thought I heard 8.1 as opposed to 1.8 million in your prepared remarks. So that’s why the level of confusion there.

Bill Petty

We are happy you heard it wrong, Jeff.

Jeff Johnson - Robert W. Baird

Exactly, thank you. So just a follow up question there then. If I exclude, if I streamline that 1.6 to rest of the year that’s about what 500 to 600 in Q2? If you can just straight line that? So XDOJ, EPS maybe down a bit the next couple of quarters in that with the investments in the international transitions and higher stock option expense, those are what I should be thinking about as my two levers there?

Jody Phillips

Certainly. The stock option expense, the higher stock option expense that we talked about in the last call is a factor there and the increased investment in sales and marketing activities outside the U.S. is a factor. I am kind of hopeful that we will be pretty much flat on XDOJ basis but it all depends on where we end out in the range of top line sales dollars.

Operator

Our next question comes from the line of Bill Plovanic with Canaccord Wealth Management.

Bill Plovanic - Canaccord Wealth Management

A couple more questions here. Just first what were U.S. knees growth? Not world wide but U.S. knees growth.

David Petty

As you know we don’t break out domestic and international Bill but we were comfortably above market growth rate domestically and significantly better than that internationally if that gives you a little bit more color.

Bill Plovanic - Canaccord Wealth Management

Yeah. Thanks. Trying make sure it was up year-over-year. And then can you just give us an insight into the timing of the purchase of this hip product and why you didn’t buy the whole searcher ship?

David Petty

By timing is required now or what was date? I don’t know but let’s maybe go a little bit bigger picture. This group was a distributor for Exactech and also were a manufacturer of hip products that would designed specifically for European market and really specifically for the German market. They also have a trauma business and principle owners of the company were financial people and they were ready to move on. So the story is basically they found buyers for the trauma business which Exactech has had no interest. But they were distributing our knee products and our shoulder products and they had their own hip product.

But officially, we bought the hip product and we then hired the people that were focused on the total joint part of the business and established Exactech like growth trend to create our own operation and incorporate the hip assets that we purchased into that operation to continue selling our knee products and our shoulder products and now benefit from the offering of the hip products in the German market. And the longer term vision is that these products that we’ve purchased may also be useful to us in our product offering in Europe and other parts of the world.

So with that a bit longer-term look and that to a supply and may be that enters the intensity question of when?

Bill Plovanic - Canaccord Wealth Management

Yeah. Is that then you said you weren’t really sure of the impact if that distributor had inventory that they would have to return to you. I mean wouldn’t you know you would have know that at the closing, considering that they were cutting the company up, wouldn’t you?

David Petty

Yeah, I said definitively that we know that we’re not going to take a return of inventory. And so we do know that. I mean, getting all the detail we want here, we were operating on consignment models in that particular market. So that there is no inventory return effect there.

Bill Plovanic - Canaccord Wealth Management

And then you know what. So now you’re going to be quickly capture the end market revenue, dollar revenue and I mean from a cash flow standpoint, there’s no different because you’re doing it as you found it any way. So be a ballpark what was the annualized revenues, what’s the impact to your kind of top line by starting with yourself when effect, you’re bring over the people that were distributing the product anyway.

David Petty

Well, first of all, we don’t get into specific revenue by market and secondly I'll just go back to say that this is in our plan and it’s in our guidance for the year, in terms of expectations for revenue.

Bill Petty

Bill, another thing about your comment as this market is real competitive, we are excited about this development, we to be honest, we are very small, have been very small at the German market, it’s a very important market. Certainly, the biggest market in Europe. So we see this is an opportunity to build a substantial presence in Germany where we haven’t had a lot of things going on.

Bill Plovanic - Canaccord Wealth Management

I think it’s a great deal for you guys. And then with the DOJ I think that we thought that this would have been kind of nailed down by now and we’d be working out on the monitoring cost. It’s already tight to cut down the DOJ, but is there anything at the seeking point in-light its haven’t been resolved and moved onto kind of a next level?

Bill Petty

Bill, I am with you. I would have thought it would have been resolved so many times over the last few months that I have lost count of them. Obviously when you are working with a large organizations like the federal government there they have lots of things they are working on and it’s not nearly as important to them to be timely as it is to us. I will say that from the standpoint of sticking points I do not believe there are any of this as you probably involved agreements not only with the Department of Justice, but also the Office of Inspector General as it be through all the other companies and we are hoping that we are kind of finishing up that last part of it. But again predicting exact time is difficult from the standpoint of the ongoing compliance cost, of course Jody’s estimates does include what we expect to be monitoring cost. But as you all know those are difficult to estimate as well.

Bill Plovanic - Canaccord Wealth Management

I understand, sort of final resolution of that. And then few questions, one, the number of distributors and agents for the year and then secondly on the accounts receivable it’s been a bit higher than a few years ago and I think it increased over the last year. Is this just a structural change with the business and your international distributorships and that’s kind of the levels we would be looking at going forward. And that’s all I have thanks.

Jody Phillips

Let me answer that last part first and I’ll let David talk about the agent and the reps. I don’t think there was a structural change in the accounts receivable, we certainly did take a little bit of deterioration in DSO’s in the first half of last year. But we felt part of that was due to the financial crisis specifically outside the US as on average our OUS business carries a little bit longer terms. So the higher growth rate in that area maybe contributed to the DSO increase. But we are hopeful that we can get that back down maybe in the lower 60’s over a period of time.

David Petty

Sales you can see the ramp still you asked about how we finished the year, which we reported on the last call at 243 reps and 43 agents and as we finished the first quarter at 258 reps and 45 agents.

Bill Plovanic - Canaccord Wealth Management

Great thanks for that.

Bill Petty

Thank you Bill. And Bill by the way our Elisa is the first one who’s ever pronounced your name correctly. We should all applaud her in our own little places.

Operator

Thank you, sir. Our next question is from Robert Gold with Brigantine Advisors. please go ahead.

Robert Gold – Brigantine Advisors

I just wondered if you could give a little specifics in terms of the swing factor that might get us to either the top or the bottom end of the revenue guidance range?

Bill Petty

It is very difficult to hear you could please speak up or turn up the volume a little bit.

Robert Gold – Brigantine Advisors

I am sorry, is that better?

Bill Petty

Yeah much better.

Robert Gold – Brigantine Advisors

I just was wondering, the guidance range in terms of Q2 and full 2010 for revenue, I was wondering what would be the swing factors you could point to in terms of meetings the top or bottom of those in the guidance?

David Petty

I think a lot of it’s going to have to do with you know to what extent the international business continues on a robust basis, is it anywhere near the two to three times market, or four times market that we experienced in the first quarter. Then that’s clearly going to put us near the upper end of those ranges and I think we’re dealing with both internal startups as well as independent distributors that’s just sometimes a little difficult to get a real sense of exactly what’s going on there but things certainly seem strong right now. But it’s largely going to be dependent on those numbers. We do think we can kind of continue with at one to two times the market growth rate with the business in the US.

Robert Gold – Brigantine Advisors

That’s helpful. Are you seeing anything, in terms of market dynamics, anything changing from where you exited 2009 in terms of either pricing or categorically any unit demands trends?

David Petty

Yeah, just big picture, domestically I think a lot of the analyst have already reported this that certainly, both the fourth quarter of 2009 and the first quarter of 2010, we’re seeing a little bit of a rebound from a pretty sluggish market for hip and knee replacement. For Exactech specifically the extremities part of our business has been very strong and we didn’t experience much of an impact from the difficulties in the economy in 2009 and we continue to see good growth there. So the macro picture, both domestically and internationally, the market seems to have bounced back a little bit. Happily in most of our business units, we are comfortably above market growth rates, both domestically and internationally. And you’ll note in the numbers that the exception to that, the obvious exception to that is the hip business which was relatively flat for the first quarter. So we feel like that business is down, we are comfortable with the things that we are doing here and obviously working hard to get that one above market growth rates like we are with all of the others.

Robert Gold – Brigantine Advisors

Okay. Appreciate that.

Jody Phillips

On pricing happily, we get a lot questions about it, pricing for Exactech remains, continues to remain stable.

David Petty

Yeah. On the last question, it is kind of interesting because I think most of the other companies have reported a lot of pricing pressure. I'm not saying, we don’t have it, I think in any business you always have pricing pressure. But I think and maybe we should be chastised for this but I think in some areas, our prices haven’t been quite as high as some of our competitors, and I think maybe that’s one of the reasons we’ve been able to maintain the stable pricing.

Robert Gold – Brigantine Advisors

Interesting. Okay, thanks. Appreciate that. I guess finally to the extent that you can comment on, what was the Forex impact on the top line during the quarter?

David Petty

It actually was a benefit to the international business. It was about a 3% growth impact on the international business so probably 1% worldwide.

Robert Gold – Brigantine Advisors

1% worldwide, okay. Great. Thank you very much.

Operator

Our next question comes from the line of James Terwilliger with Duncan Williams Incorporated. Please go ahead.

James Terwilliger - Duncan Williams Incorporated

Could you talk a little bit about what drove the growth in the other products line? I know you identified the cement as being strong area but could you add any more additional color to the 31% revenue increase in the other products line?

David Petty

Yes, a little bit. The other category includes the cement product line which has been very strong. But also includes the sales of instrumentation to international distributors. And some of our international operations, we are selling products that are not within the context of our core business unit here at Exactech. And so, we did see an increase in those products, the other products that are not core Exactech business unit products that some of our international operation sell and the cement. And those are the two main drivers of the growth in the other category.

James Terwilliger - Duncan Williams Incorporated

Okay, great. And my next question is could you talk a little about the recent hip system approval that you received in Japan and talk a little bit again. I don’t want revenue guidance from that but a little bit about the Japanese market, the product that was approved, the pricing in that particular market, and maybe the distribution infrastructure that you have in Japan to support this roll out.

David Petty

Okay, sure. So we’ve been in Japanese market since about 1998, working through a distributor. And in the beginning of 2008, we established an Exactech operation and continued the relationship with the distributor. And for the last two years, we have been working on further developing the Exactech operation in addition to our relationship with the distributor. And that’s important history to understand because about the time we entered the market, we gained approval for our Optetrak knee system and also for a cemented total hip system. A majority of market in Japan is for press fit hips or non cemented hip and for the entire relationship with the distributor, we never did seek approval for press fit hip. We began working on that shortly after we established our own operation, it’s a long process in Japan. And so the important thing to understand here is we’ve now gained approval for a press fit hip product which will complement the limited offering that we’ve had for hips and allow us to address the major important parts of the market in Japan for hip replacement.

And we expect to begin sales now in the second quarter. So we’ve really gained approval to sell products in a major segment of the hip market in Japan, number one. And number two, the pricing question you asked, pricing, end user pricing in Japan for hip is quite good.

Bill Petty

Just another couple of comments on that, I had the opportunity to visit our Japanese office in November and I think you asked a little bit about the structure and the team.

The team there is a great team, very experienced, came to us from another company. I’ll say what it was, it was Plus Orthopedics, came out of the acquisition of Smith and Nephew of Plus. And the, like in many countries outside the US, hips still represent a much larger proportion of hip and knee joint replacement than they do in the US. So our Group there has made great strides over the last year with just the knee product and the cemented hip product even before they have the new press fit hip. So I know that that team is very excited about getting us approval as are we.

James Terwilliger - Duncan Williams Incorporated

Okay, great. And I appreciate that. I’ve got another question as it relates to hips and you guys may not like this one but do you have any comment on the perceived clinical issues associated with metal on metal hips that has been discussed about here in the last two months in the marketplace? Do you have any comment as it related to your company or your opinion on the clinical issues with metal on metal hips and also any feedback from what you are hearing from the end users, the clinicians?

David Petty

Couple of comments about that, I think the most important and relevant one to this conference call is that we do not offer a metal on metal product. So essentially any negative perception by the market about metal on metal will not have a negative effect on Exactech. In fact, in a few isolated instances, a little bit of a positive effect in that customers who have become concerned or at least cautious about using metal on metal are looking at alternatives, including the cross linked polyethylene and ceramic options. And we do have all of those options in there, there are a few instances where we have been able to pick up business that we didn’t have before when those customers were preferring the metal on metal. You can comment on clinical side of it.

Bill Petty

I mean you are absolutely correct. At the most recent Orthopedic Academy annual meeting as well as the Orthopedic Research Society, there were a number of reports about concerns related to metal – metal, basically relating to osteolysis like problems and also a condition cause pseudo tumor, it’s not a real tumor, it’s not a real cancer, it’s just a very aggressive reaction to whatever debris ions are coming from the metal on metal articulation. The incidence is relatively low, that’s quite low actually, but of course the consequences are substantial. So as David alluded to, when he said we picked up a little bit of business, I know personally the surgeons and surgeon groups who were very committed to the metal on metal articulation for their total hip replacements who have gone away from that and then back to either ceramic or metal on polyethylene or to ceramic-ceramic. So I think the jury is still out on the overall issue, but there is no question that there has been again small but worrisome incidents of problems related to those articulation.

James Terwilliger - Duncan Williams Incorporated

All right, thanks a lot guys. I appreciate you taking the questions and again congratulations on a good quarter.

Operator

(Operator Instructions). Our next question comes from the line of James Sidoti with Sidoti & Company, please go ahead.

James Sidoti – Sidoti & Company

Question, in Germany, how many direct employees do you expect to add this year, between the employees you added as a result of the product acquisition and any additional hires?

Bill Petty

We are not going to add any more, we are going to ask the ones we’ve added to get the job done.

James Sidoti – Sidoti & Company

How many is that?

Jody Phillips

I think it’s 11.

James Sidoti – Sidoti & Company

11, okay. And then can you give me an update or give us an update on the roll out for the new knee system.

David Petty

Yeah, sure. The couple of new knee systems out there, as you know, Jim, the CR Slope was sort of a major effort for us last year. And we have a total of 80 set of inventory out in the market with the CR Slope. And with the PS Logic, we are at 59 sets available in the field.

James Sidoti – Sidoti & Company

Okay, and then what are the plans for the rest of this year? Is it to concentrate on the TS Logic or a combination?

David Petty

A combination though we are at a little bit further along with the CR Slope than with the PS Logic and our plans are to significantly increase the number of sets in the field with the PS Logic on a quarterly basis. For example, our intention this quarter is to get at least another 20 sets out there which is a 33% increase over what’s out there now.

James Sidoti – Sidoti & Company

Okay. And then how about the hips, what’s the plan for 2010 hips roll out?

David Petty

Well, we continue to build on our success with Novation Element hip as well as the direct anterior approach instrumentation. We have about 70 sets of the Element in service now and 40 sets of the anterior approach instrumentation. We also continue to build the inventory in the field to support demand for our Novation CFS press fit and cemented fracture stems stands and left with 75 systems in the field currently and we will continue to add to those throughout the course of the year.

Operator

(Operators Instructions). Our next question comes from the line of Jeff Johnson with Robert W. Baird, please go ahead.

Jeff Johnson - Robert W. Baird

Just a quick follow-up here. Jim went through most of the pipeline nicely there but on the shoulder side, the fracture plate and the press fit glenoid any updates there on the 510-K approvals?

David Petty

Those, we’re still waiting on the FDA, while we are starting to move with the platform fracture stem which was the third project that we had announced would be available this year.

Jeff Johnson - Robert W. Baird

Okay. And the fracture plate the press fit glenoid, with both of those I think they’ve been sitting now waiting the FDA, 510-K for like 90 days, a 120 days, any links about there?

David Petty

Yes, we got some -- specifically on the glenoid, we got some questions from the FDA. We’ve been in dialog with them on specific discussions related to indication and the surgical technique procedure and so our regulatory and engineering teams are working through that with the FDA and I have no way to be predictive of how that will turn out. And frankly, I just don’t know the details on where we are with this fracture plating system. I will say though that we are comfortable and confident with our guidance whenever those products are launched.

Jeff Johnson - Robert W. Baird

Okay. Regardless of whether they come out this year or not. Okay , that’s helpful. And then just lastly just on the spine side, still would expect to see a peakage [ph] or some cervical systems maybe at NAS [ph] this year?

David Petty

That’s right. And let’s just clarify the peakage we’re looking to see at NAS, we are probably not going to show the posterior cervical system at NAS but rather a little bit later near the very end of the year.

Jeff Johnson - Robert W. Baird

Okay. And anything from a pedicle screw standpoint?

David Petty

Not this year.

Operator

(Operator Instructions). Our next question is a follow-up question from the line of Bill Plovanic with Canaccord Wealth Management.

Bill Plovanic - Canaccord Wealth Management

Just a clarification question, spinal biologic, nice to see that it was up year-over-year. Spine, was that up sequentially? Is that starting to grow again?

Bill Petty

Bill, as we’ve been saying for a number of quarters, the growth there is in biologic, it’s not in spine. We were working hard on the product lines, we’ve talked about and we frankly don’t expect to see any major changes there until we begin to get these product lines out. Because as you know that's very important for also enhancing the sales and distribution network. So it’s those two things, products, sales and distribution that we are working to improve there but we are not willing to make large progress until we have the new product.

Operator

And ladies and gentlemen, this concludes the question and answer session. Dr. Petty, please continue.

Bill Petty

Sure. Thank you for all of your interest. We really appreciate your interest and support of Exactech and hope to continue to reward that interest and support. And special thanks to you, Elisa, you have been great. We will sign out now.

Operator

Ladies and gentlemen, this concludes the Exactech, Incorporated, first quarter 2010 earnings conference call. This conference will be available for replay after 12 pm Eastern Time today through Thursday April 29th, 2010 at midnight. You may access the replay system at any time by dialing 1800-406-7325 and entering the access code of 428 24 44. Thank you for your participation, you may now disconnect.

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