Orthofix Medical Inc. (OFIX) Q3 2008 Earnings Report, Transcript and Summary

Good afternoon. My name is Vanessa and I will be your conference operator today. At this time, I would like to welcome everyone to the Orthofix International Third Quarter 2008 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer period. (Operator instructions) As a reminder, ladies and gentlemen, this conference is being recorded today November 6, 2008. Thank you. I would now like to introduce Mr. Dan Yarbrough, Vice President of Investor Relations of Orthofix. Mr. Yarbrough, you may begin your conference.

Thanks, Vanessa. Good afternoon, everybody, and thank you for joining us today to discuss Orthofix International’s financial results for the third quarter of 2008. During this call, we will be making forward looking statements that involve risks and uncertainties. All statements other than statements of historical fact are forward looking statements, including any earnings guidance we provide and any statements about our plans, beliefs, strategies, intentions, expectations, objectives, goals or prospects. Factors that could cause actual results to differ materially from these forward looking statements made by us on this call include the risks disclosed under the heading “Risk Factors” in our 2007 Form 10-K and subsequent then you Form 10-Qs filed with the SEC. With me today on our call is our President and Chief Executive Officer, Alan Milinazzo, our new Executive Vice President and Chief Financial Officer Bob Vaters, our Group President North America and President of Orthofix Spine, Brad Mason, and our Executive Vice President of Finance, Tom Hein. And with that, I’ll turn the call over to Alan.

Thanks, Dan, and good afternoon, everyone. There’s a lot to cover on this afternoon’s call, but the key aspects of our discussion will fall into four distinct categories number one, revenue growth; number two, operating costs reductions; number three, balance sheet valuation adjustments; and number four, cash generation and liquidity management. We will review each of these in detail and describe the steps we have already implemented or that we are about to implement to address these critical elements of our business. During September, we also announced that Bob Vaters has joined Orthofix as our Executive Vice President and Chief Financial Officer. For the past two years, Bob has been in the private equity business investing in healthcare companies. Prior to that, he was a senior executive at Inamed Corporation having been Executive Vice President, CFO and Head of Strategy during their extremely successful run and ultimate sale to Allergan in March of 2006. I am pleased to have Brad and Bob along with Tom Hein on the call today to not only go through the third quarter results, but to also talk about how we expect some of our recent activities and initiatives to benefit us as we move into 2009 and beyond. Let’s move to third quarter results starting with the top line where total revenue was up 7% over the prior year. Sales of our orthopedic products grew an impressive 29% reflecting broad based growth across various products categories as we continue to successfully execute our current U.S. and international growth strategies. In the U.S., we are focusing on our long bone stimulation business and the expanded use of biologics in the orthopedic setting. We also continue to narrow our focus on fixation platforms and products that we believe will provide us with the best margin and…

Thanks, Alan, and good afternoon everyone. Although I’ve only been here for just seven weeks, it’s been an extremely busy time, and I also have a lot to cover today. I will start out by providing some additional detail on specific items highlighted in the earnings reconciliation, which is included in today’s press release. Additionally, I’ll discuss the unfavorable impact of foreign currency fluctuations as well as the R&D costs incurred in connection with our collaboration with MTF. I’ll then talk about our expected fourth quarter interest expense and restructuring costs. Finally I will wrap up with a discussion of items impacting our cash position, its related availability and our plans to manage expected working capital needs. Starting with the impairments at Blackstone, there were two components to the charge. First a $289.5 million pretax noncash charge which includes amortizing intangible assets, trademarks and goodwill. Second, an increased inventory reserve of approximately $11.5 million. First I’ll take a few minutes to discuss the accounting for the Blackstone payment. When we provided new projections for our lenders as part of our debt refinancing, the projections related to Blackstone differed from the original projections used in our purchase accounting and triggered an impairment assessment of the goodwill and intangibles. Testing involves a two step process to determine whether an impairment charge to goodwill and intangible assets is required. The first step test determines if the fair value of the business is greater or less than the book value. We used a valuation firm who determined Blackstone’s fair value using a methodology heavily weighted on expected discounted cash flows versus market comparables. The valuation determined that the fair value of the business was less than the book value. As a result, a second step was required which involved valuing the assets and liabilities.…

Thanks, Bob, and good afternoon, everyone. As Alan mentioned, the sports medicine stimulation and orthopedic division in North America continues to perform beyond expectations and well above the growth rates in their respective market segments. The transition of leadership in the sports medicine business for me, to Bradley, has been well received by the employees, distributors and customers. I expect the strong momentum at BREG to continue. The ongoing success of these businesses in North America is a top priority for me. Not surprisingly, however, since our Investor Day two months ago in New York, most of my attention in North America has been on the Blackstone business. Initially, I was focused on the assessment and reorganization of the senior leadership team in Blackstone’s facilities in Massachusetts and New Jersey and also in the field. I’ve been very impressed with the talent and passion for the business that I found. It is a strong group that we can definitely leverage and build upon. I made several organizational changes that have already had a very positive effect and the team is now reenergized and focused on our key priorities. My next area of focus and where I had spent much of my time was with our customers and distributors that have been impacted by significant changes in leadership and priorities over the last eighteen months. I am extremely pleased that they have remained loyal and are once again excited about the future prospects for Blackstone and our ongoing relationship with the company. My third priority is the release of the new products in the pipeline and focusing the new product development team on our management portfolio going forward. During the third quarter we continued to move forward with a number of new product related initiatives. We obtained FDA approval for two…

Thanks, Brad. I’ll ask the operator to open the phone lines for some questions in just a minute, but before we do, I want to give you a brief update on the MTF project for the development of a new stem cell based allograft. I’m happy to report that we continue to be extremely pleased with the status of the project and that we are on schedule relative to the key milestones embedded in the critical path for completion and commercialization of the allograft. Importantly, during the transition to our new product, we believe we will have adequate supplies of our current stem cell based allograft to meet the growing demand through the end of June next year when our distribution rights expire. And we’re also confident that we have reduced the risk of having a material amount of excess inventory of our current product at that point in time. At this point, operator, I think we’re ready to open the line up for some questions.

(Operator instructions) Your first question comes from the line of Vincent Ritchie [ph] from Wachovia. Vincent Ritchie – Wachovia: Gentleman, thanks for taking the question. Bob, welcome. First question is on Blackstone, can you guys kind of give us where your gross margin are there, and then with this move where you think those are going?

How’re you doing, Vincent? It’s Alan. Obviously gross margins at Blackstone this year have been lower largely for a couple of reasons. One was the mix. So obviously we sold more biologic products and we sold more products internationally than we sold domestically. So the gross margins have been well below the normal that we would expect for Blackstone. So our overall company margins in fact have been impacted by those margin reductions. So we are sub 70% margins overall given the blend of the biologics and the international business. As I think Brad begins to move some of the business back into the traditionally strong metal area, we’ll see an improvement in the gross margins. Brad, I don’t know if you want to comment at all as well?

No, I think that’s exactly right, Alan. I think particularly the mix and as we transition on the biologic side, that is going to have a significant improvement particularly in the latter half of 2009.

And this is Bob. I’d just add one thing, when you look at the overall gross margins of the company, you really have to keep in mind the increased inventory reserve of $11.5 million is affecting this quarter’s cost of sales. So going forward, you probably have to make some adjustments. Vincent Ritchie – Wachovia: Okay, great. And then just kind of piggy backing on that, Brad can you kind of give us just an outline of what your strategy is going to be? With Blackstone clearly moving into Texas now, this sounds like the distribution platform is a little bit more stable than it has been, where do we go from here?

It’s Alan. One further point I’d add to that is, you’ll know when you get a chance to read the release, but obviously McKinney is where we have our spine stimulation business base as well. So as I think Brad begins to executive on that plan of bringing the stimulation customer base alongside of the Blackstone customer base to some of those synergies. This will be just another opportunity to create a dialog between the two groups. Vincent Ritchie – Wachovia: Okay, great. And just a further question on, last question on Blackstone, with writing down the trademark, are you going to keep the Blackstone name?

My preference over the next few years is probably diminish the name, and we will be focusing on Orthofix spine which is who we are. Vincent Ritchie – Wachovia: Okay. And I have one last question for you guys, your other businesses have been doing pretty well, orthopedics has been phenomenal, sports medicine after seeing some double digit growth starting to come back a little bit towards what we see with the market rates, what are you seeing in those markets and how do you think you can exploit them, maybe exploit is not the best word, but execute and grow the business accordingly?

Vincent, let me just correct you because we noted that the growth rate actually when you take out the pain management and the infusion pump business, it is actually more like 10%. So we’re actually growing well north of the market growth rates in sports medicine for the lines that we compete in. So we’re very proud of what’s going on at BREG, and again we do consider ourselves taking share every quarter there. I think Brad, certainly when he was responsible for the business, I’ll let him common in a second, was enhancing the distribution strategy, which was already good. I think it is moving towards great. And then the addition of those products, fusion of course, Kodiak another one, but then we’ve added a couple of new products, back bracing products et cetera that really should help us continue to have double digit growth may be low double digit growth for the sports medicine business. Brad, do you want to conclude that?

Yes, absolutely. I think that’s right. We added the back bracing line this year. We are about to introduce a complete line of walkers, which is really a market that we have not capitalized on, and it is a large market opportunity, as well as the sockets we introduced over the summer. So we have a lot of momentum going into 2009 and I think you will see the growth rates that you’ve seen in the past, over the past several quarters continue. Vincent Ritchie – Wachovia: Great. Thanks for taking my questions, guys.

Thanks, Vincent.

Your next question comes from the line of Raj Denhoy from Thomas Weisel Partners.

Hi, Raj. Raj Denhoy – Thomas Weisel Partners: Just wondering if I could ask (inaudible) on Blackstone as well, can you talk about the distributor turnovers? Are they continuing, have you stabilized your distribution base at this point?

Actually we’re very stable at this point, Raj. The only turnovers we have are by our choice, and there are very few of those. I’m very, very pleased with the distribution system we have out there. Perhaps a little bit of a change from what you’ve heard in the past is my focus is on the independent distributors. We are really not – it is not the right move to date to move more toward a hybrid. Our independent distributors have the relationships already in place and as we expand into geographies that we don’t currently play in, we want to get those relationships out of the shoe as opposed to waiting for them. So I’m very happy with the distribution as it stands. Raj Denhoy – Thomas Weisel Partners: But you mention that you’re still saying some but it is by choice. Are you still in this quarter, for instance, did you turn over any distributors or take them in and make them more direct?

Nobody went more direct. I think there might have been one in the quarter – one or two in the quarter, and again that is by our choice. That’s a small percentage. Raj Denhoy – Thomas Weisel Partners: What I’m trying to get at is, this is the second quarter where we’ve seen implant, spine implant growth was negative in the quarter again and I’m trying to get a sense of when we might see that turn? Do you have a sense of when we might start to see positive results coming out of spinal implants and biologics?

Yes, Raj, I think – it’s Brad’s plan, one is still stabilizing distribution was critical for us. I think we can say we’ve done a good job there especially in the past four to eight weeks there. I would look for revenue to continue to be soft through this year. I would expect that we’ll start to see some improvement early next year as some of the product launches take hold because the distribution piece seems to be settled. As we said, now we’ve got the new products to layer into that. Additionally, we have sufficient inventory of Trinity, so there is no longer a question from some of our distributors who hadn’t sold the product to go ahead and get started opening up new accounts. So all of the elements are there for us to begin to level off and grow. But recall we had a good year last year until Q4 so you might see some favorable comps for example in December. But I would say over the next – look for sustainable growth early in 2009 and look for improvement to that as we go through 2009. Raj Denhoy – Thomas Weisel Partners: Okay, fair enough. And then just kind of a broader question, there was some – you had written in the release about how you conserve cash in the quarter by reducing investments in inventory and CapEx, primarily at Blackstone, and just kind of a broader question, because obviously you’ve seen your company’s share price get hit pretty hard and the value of the company deteriorated quite a bit on what’s basically 20% of your business, the spinal implant site of it. Orthopedics, sports medicine everything else seems to be doing quite well. And I am curious if – maybe I’m reading too much into it, but is there a move on the part of the company which may be diminished your exposure to Spine for some time here and maybe redouble your efforts in some other parts of the business that are doing better?

Raj, absolutely not. We I think from our standpoint, we’ve gotten hurt this year by a couple of things from a timing standpoint. Certainly some decisions we made to build inventory with an expectation and we’ve talked about this in the past, an expectation that we would see an improvement in the back half of the year. So, the Osiris announcement in May, again recalling that we were on plan and actually slightly ahead of plan for our spine business, implant business in Q1. At the end of Q1, we were ahead of plan. So it really kind of hit us hard and fast, we’ve already build a lot of inventory. We already made a lot of investments in infrastructure. So as rapidly as we’ve fallen, I think Brad is beginning to see the pieces come back together again to stabilize the business. So a lot of those extraordinary investments had already been made. So the fact that we actually started to normalize the spend really just reflects that that investment was over to set us up for expansion. So in my mind not at all would say we are at all discounting our opportunity in spine, we feel very good about it, but those investments really have already been made. Raj Denhoy – Thomas Weisel Partners: Okay, fair enough. That’s all I’ve got, thank you.

Thanks, Raj.

Your next question comes from the line of Peter Bye from Jefferies and Company. Peter Bye – Jefferies and Company: Hi, guys. Thanks. You went through some of the cost savings that some of the initiatives would give you, could you give us a sense of what the charges for those are going to be, that you’re going to incur, and what percentage or our how much is going to be cash versus noncash and maybe how that will spread out as you execute them?

Yes, probably the best thing Peter is to look at the table that we’ve attached in the press release, but essentially… Peter Bye – Jefferies and Company: So there is not going to be charges going through in 2009 for these, the McKinney facility move, I think that is done through mid 2009. I mean I am just looking – trying to – I know you are not giving 2009 guidance, but you did give us some sense about what about 2009 cost savings would be, so…

Sure, I didn’t realize you’re talking specifically about Blackstone. What I said in the script is that in fourth quarter we’re going to have a $900,000 expense. In 2009, we’re going to have $3.3 million expense, and then in 2010 we’re going to have a net operating cost reduction of approximately $2 million, and then after that we’re going to save $5 million annually thereafter. Peter Bye – Jefferies and Company: Was there one or two others too that you mentioned?

Yes, we had a restructuring internationally that will save approximately $1.2 million in 2009 and obviously form a reduction that we’re making.

Those expenses though, Peter, were really material to us in the numbers we gave you. So the operating pickup for next year is what Bob just gave you but the expenses are not – we’ve really passed through that at this point in time. Additionally, we talked about, I think maybe the third thing you’re thinking of is the orthopedic improvements we have made, and those were really captured in that $5 million expense that we talked about earlier. We called it out earlier in the discussion. So that’s $5 million we spent actually earlier in the year, so at this point in time, nearly all you’re talking about are the expenses that Bob alluded to for Q4 with Blackstone at $900,000 and then nothing material for the international that’s already been done and absorbed. Peter Bye – Jefferies and Company: Okay. Then you are talking about a re-pickup maybe in Blackstone in the first half of 2009 and then acceleration, I understand some of the products you have on the come line that are internal. But I mean I guess just may be looking at objectively with your acquisition of Blackstone, you wrote down 95% of the cost almost, I mean it’s a lot of noncash, and internal development program, you just junk, what if one was just going to say, hey, MTF, I am going to call it upside, can Blackstone still grow next year without replacement for Osiris?

Yes, let me just go back for a second, Peter, just make sure I’m clear. So relative to the overall Blackstone performance, we look at the market opportunity here and I think there is several of us, several who are new to the game here, look at this market. We think this is a really, really good market for us given the strength of our stimulation business which grows every quarter well in excess of the market, you know the fact that we have got 1,200 spine customers there that we can leverage. We are at 1% market share on the metal and implant business, so we think the upside for us to grow the business is really big. Will MTF be an important part of that, certainly it is an important part of that. Having a biologic product, we’ve said all along we thought it was important to us, but it isn’t the only trick that we’ve got in our bag. Again the stimulation product and I think a key part of this, Peter, goes back to what attracts these distributors. And Brad said it well, these independent distributors are the guys that have the relationships. So provided we have a good product portfolio, the simulation attracts those folks over tremendously, some of the new metal products, the Firebird line, the minimally invasive line, the ProView system, these all attract distributors over. So from our standpoint, yes, MTF is very important and we look forward to that product, but we have other things that we can bring to the market. Peter Bye – Jefferies and Company: Okay, thanks. I’ll jump back in queue.

Thanks, Peter.

Your next question comes from the line of Spencer Nam from Summer Street Research. Spencer Nam – Summer Street Research: Thank you for taking my questions. Just couple of questions, first of all, on this MTF partnership, clearly based on your statement that programs are moving forward, but in terms of more specific aspects, what sort of – I mean what could we – if we want to imagine kind of where the process in terms of development of a new product, I mean where – can you guys us a little more clarity on the way exactly the situation is right now, I mean do we have a prototype or do we have a signs down, I mean how should we think about that?

Spencer, there are only two phases to this project, there is a development phase, which is what we are in the middle of, and then there’s a commercialization phase. And so we’re right on track with regard to where we thought we would be at this point in the development phase. It doesn’t make sense to go into a lot more detail other than to tell you, we are in this first phase which is development and we are on track. Second phase, commercialization phase, will happen likely early next year and we will continue to do launch in the second half of the year. So from where we sit, we feel very good about that project. Spencer Nam – Summer Street Research: And do you guys have sort of a – two questions related to that, do you have sort of a deadline for development phase kind of like when you think it is going to end, or is there something that you can share with us, number one? And number two, is there something more of an internal clock that you guys are working towards but probably don’t want to talk about openly?

Yes, we really don’t want to go into a whole lot of detail expense rather than tell you we were excited when we entered into this relationship with them MTF and we are even more excited having had the opportunity to work with them. They’re very energized about this project, they are on track, their people are engaged. We had a debrief from the MTF organization to the full Board Of Directors at Orthofix because the full Board is very involved in the business and will participate and update some projects like that. And so from where we sit, we’re in the middle of the development process, we are on track. There are certain milestones that we’re monitoring internally, and all I can reinforce is that we are on track in all those milestones. Spencer Nam – Summer Street Research: Great. And then one related question, is the – have you guys done the work on IP side to feel comfortable that the IP may not be an issue once the product hits the market or is there something that we should be still watching for?

No, it is a great question. We have taken what we feel are the appropriate steps on the intellectual property side, and we don’t feel we’ll run into any IP issue related to this new allograft. Spencer Nam – Summer Street Research: Great. And then final question is on Blackstone restructuring, and this obviously is a big announcement in my view. And clearly if the execution turns out positively or successfully, you could potentially see a lot of benefits from this, but in terms of actually executing these, could you provide us some timeline in terms of milestones next year, milestones the following year, what kind of – you know how should we think of that as – is that a sort of the middle of the line kind of a timeline, are we talking aggressive timeline, how do you guys put together those kind of milestones and can we expect you to deliver the deadline?

Spencer, this is Brad. Yes, I will say that the timelines are approximate at this point. We have them in mind as we develop this project and the Gantt chart for this project. However there are some things that are still a little bit unknown, we have a new building to build and there can be some variance with that. But as we sit here today, our expectation is that, and this is somewhat dependent on how quickly we can migrate to the Oracle system, but we expect that July 1 date of 2009 plus or minus a little bit, but let’s talk about that date for the Springfield plant to move into the McKinney facility. Meanwhile the new building in the Dallas area will be under construction and is expected to be completed approximately the middle to the end of the first quarter of 2010. That could vary depending on the circumstances, but that is our expectation. Once that building is completed, we will move the McKinney facility into that. And then subsequently within approximately 60 days, meaning may be April 1 or so of 2010, we will move the Wayne group into that facility. Spencer Nam – Summer Street Research: Great, thank you very much.

Okay, thank you.

Your next question comes from the line of James Sidoti from Sidoti and Company. James Sidoti – Sidoti and Company: Good afternoon, can you hear me?

Hey, Jim. We got you. James Sidoti – Sidoti and Company: Hi. I’ve got a bunch of questions. First one, I want to continue about the charges at MTF. You said on the last call, it’s going to be about $5 million this quarter and $5 million next quarter, but based on the results and the guidance, it sounds like those costs are going to be pushed out, so do you expect to incur most of those costs in 2009?

No, we expect to incur some in Q4 and then the balance in early 2009. It is just a matter of timing, Jim, of when their capital purchases come in et cetera. James Sidoti – Sidoti and Company: So, if you would incur $500,000 in the fourth quarter, $500,000, you said total was around $10 million, would that mean it’s $9 million that will come into 2009?

The cost associated with the development, Jim, versus some of the milestone payments, they’re two separate things. Some of those payments go directly for the development activities and some of them are just cash milestone payments for MTF. So, don’t think of $10 million as just pure R&D expense. James Sidoti – Sidoti and Company: Okay, all right. And then on amortization, now that you have written this down, I went back to my model, back before you acquired Blackstone, you were running around between $6 million and $7 million a year for amortization costs, should we assume you’re going to go back to that now?

Essentially after the effect of the impairment, we will reduce operating expenses from amortization to the tune of about $14 million next year. James Sidoti – Sidoti and Company: So there will be a $14 million reduction?

Yes. James Sidoti – Sidoti and Company: From your 2008 number, so is that a good number, so $67 million?

Well, it is not necessarily from the 2008 number because don’t forget we already start to have a reduction in the fourth quarter. James Sidoti – Sidoti and Company: Okay, so…

But it is from – it is an annual number from what the annual number was before the impairment. James Sidoti – Sidoti and Company: Let me try it this way, what would the amortization charge be in the fourth quarter?

Jim, the amortization charge – Tom, why don’t you – do you have that number?

Yes.

And Jim I just think essentially for your model purposes, yes, the answer is yes to your question.

And it will drop about $3.3 million from the current run rate the first three quarter, so fourth quarter will be down about $2.3 million, or it will be in the range of $3.7 million. James Sidoti – Sidoti and Company: $3.7 million, so if it is $3.7 million in the quarter, and then you assume – you annualize that, you run them in, so you’re still running around $15 million a year on that line?

No. It might make sense for us Jim if we can, maybe we could just call you back after the call, we will go through it. James Sidoti – Sidoti and Company: Great, that’d be good. Then just a couple more questions on the debt, with the restructured agreement, when is the first payment due, first large payment?

Well, we have regular payments, but there has been no change in the amortization schedule. The current amortization schedule is $825,000 of principal paid per quarter. James Sidoti – Sidoti and Company: Okay, so it is straight at $825,000 per quarter?

Correct, unless Jim we make a discretionary prepayment. So for example, this year, we made $8.6 million is discretionary prepayments in the first nine months of the year. James Sidoti – Sidoti and Company: Okay. But there is no balloon payment or anything we’d do?

Not anytime soon. James Sidoti – Sidoti and Company: So, when is the first one due, is that out four, five years?

The first balloon payment is literally at the last quarter of the agreement, that is five years out. James Sidoti – Sidoti and Company: Okay, so five years. And what is the covenant that you are closest to now with the re-negotiated agreement.

We are in good shape on all the covenants right now. James Sidoti – Sidoti and Company: Which one is the one that we should be watching?

I mean one of the benefits of renegotiating the covenants in the third quarter was not only did we liberalize, if you will, the EBITDA definition, but we also upped the leverage covenants. So at this point, we have good run rate on all our covenants. James Sidoti – Sidoti and Company: Okay, all right.

Obviously, the more EBITDA and the less debt you have, the better it is. James Sidoti – Sidoti and Company: Right, so what is it now, the debt to EBITDA?

I am sorry, what is the covenant? James Sidoti – Sidoti and Company: Right.

Four to one. James Sidoti – Sidoti and Company: Four to one, that’s right.

We are obviously operating below that right now. James Sidoti – Sidoti and Company: Okay. And then on the staff at the facility in Wayne, New Jersey, you know a lot of the engineering people, a lot of marketing people there, how many of those do you think you’re going to bring to Texas?

Well that remains to be seen Jim. We are obviously offering relocation packages to a number of individuals. The key senior management, we don’t think there will be any issue with. I assure we are concerned about the ingenious engineers and they are important to the group, and our expectation is that we will get as many of them as possible in the Texas area, and I’m hopeful of that, and we’re doing everything we can to see that that happens. James Sidoti – Sidoti and Company: And how does that impact any R&D projects you’re doing now or most of the ones that you had complete?

There is really no impact at this point. If you think about this, this is seventeen months out before this would be in effect, before we would ask anybody to move. So no… James Sidoti – Sidoti and Company: Okay, so that facility is going to be open for the next year and a half.

That is correct. James Sidoti – Sidoti and Company: Okay. And then how about the direct sales people that you had hired at the beginning of the year? Are they still – where are they working on, are they regional or are they still on staff?

We still have a couple on staff and some have moved into different positions, but they are spread around the country in different regions at this point. James Sidoti – Sidoti and Company: Okay, so it sounds like you’ve migrated away then from putting those people in place?

I have Jim. It is a significant expense upfront that for us right now doesn’t make sense. So my experiences with the independent distributors and I know those guys inside out, I know how to work with them, and I think right now they are our best opportunity. James Sidoti – Sidoti and Company: Okay, and then …

Jim let me go back for just a second if I can, because on Brad’s comments about the consolidation, this is a very well thought out plan. I think Brad and the team have done a great job (inaudible) Blackstone management of putting together a good plan to minimize the risk. We are moving this business into arguably our most solid business and most synergistic business in Texas. However, the seventeen months Brad talked about, along the way, there are going to be phases that we described earlier. So marketing, communications for example where we can get some synergies, we have redundancies between two groups, we now have a lot of common group. That will move very quickly. Importantly the IP area which for us we have been flying the plane blind to an extent here with this Epicor system and so as we migrate over to Oracle, that can be done much faster and will give us much better visibility to the business. So some of these functions, finances and another ones can be done relatively quickly, and we won’t disrupt up a lot. Again we’ve retained the people who were necessary for the transition, as well as receiving – in Texas, we have got a highly qualified group. So I just want to make sure I circle back because at seventeen months, that is the end of the process, but along the way, Brad was alluding to a number of different activities and functions that would move at various points in time. James Sidoti – Sidoti and Company: Okay, so it is seventeen months to complete it?

Completion, correct. James Sidoti – Sidoti and Company: Okay. And what do you expect for the tax rate in the fourth quarter?

Fourth quarter, roughly the same range as the full year, Jim. James Sidoti – Sidoti and Company: Okay.

Full year guidance, excuse me. James Sidoti – Sidoti and Company: All right. If you could just get back on those amortization charges, so I can –why would it just go back to where it was before you acquired Blackstone? What else is in there now?

Let’s come back to you, Jim. Let us come back to you, that’d be great. James Sidoti – Sidoti and Company: Okay.

Okay, thank you. James Sidoti – Sidoti and Company: Thank you.

Your next question comes from the line of Stan Manny [ph] from Manny and Family [ph]. Stan Manny – Manny and Family: Hi, gentlemen.

Hi, Stan. Stan Manny – Manny and Family: I’ve tried going through the statement, but I think I’m going to have to have my lawyer to look over, there are so many footnotes. I guess I’ve got a simple question, I don’t know if you can address it, but I think it needs to be addressed, and that is improved cash generation and debt pay down, debt that you’ve got when I look at other companies, the covenants and everything, it seems to be a really egregious tough agreement that you’ve got. So what I would like to kind of get some feedback on is cash generation debt pay down and then possibly getting another bank that doesn’t have restrictive cash and et cetera and high rates on the agreement relative to where we are going into 2009. So I think I’d like you to talk to that if it’s possible?

Well as to the last point, I’d certainly welcome an introduction to the bank that doesn’t have restricted covenants, if you would like to introduce them to me. But realistically, Stan, what we did in the third quarter is we’ve liberalized our covenants. We increased the leverage covenants, we broadened the definition of EBITDA. We excluded certain things like the impairment from that definition, and we got ourselves more room, if you will. In addition to that, most of our outflows were in the first nine months of the year, so we substantially reduced the cash outflow in the beginning of the year to the point where we’re getting very close to breakeven. And since the end of the third quarter, we’ve actually had somewhat of a cash build up. Obviously, the more EBITDA we generate, the more debt capacity we have. But the interesting thing about your point is, our credit agreement today is actually much more lenient than it was in the initial credit agreement we did when we bought Blackstone. Stan Manny – Manny and Family: Well, that doesn’t tell me anything, that just means that the debt agreement that was negotiated was not a great negotiation. So let’s not go back, I’m looking at agreements in companies that I cover that are much, much better and lenient than that, and the conditions are probably maybe not as bad, but I mean the agreement you’ve got is a really expensive, difficult agreement, which I hope you’re able to get, and that is why I’ve asked cash generation improvement and debt pay down, which gets you to the point where you can get the noose from around our neck.

And I appreciate that, and I’ll remind you that we have paid down $8.6 million as a voluntary prepayment? Stan Manny – Manny and Family: And when does that occur, is that a recent?

That happens throughout the first nine months of the year. Stan Manny – Manny and Family: I’m talking about the recent events, we haven’t paid down anything in the last quarter, right? Correct?

Stay tuned now, because what we have done is we’ve rolled over all our debt through the end of the year. So at the moment, we are locked in our debt towards the end of the year. But there’s no reason we can’t pay down debt in the fourth quarter with our excess cash balances. Stan Manny – Manny and Family: And are there any covenants in there that has ratios improve or you pay down that the rate, the LIBOR plus 4.5% decreases? And is there a chance in January that you can – half of the loan can be renegotiated downwards?

Stan, obviously, as we pay down debt, we benefit in terms of to dealing less EBITDA, so look at it this way. We have for every $4.00 of debt, we have to have $1.00 of EBITDA. So, the more EBITDA, the more debt capacity we have.

Okay. Stan, let me also just throw in here, recall that earlier this year or so, Bob alluded to the pay down, recall that we’ve also had $8.5 million dollars for MTF, $7 million for Trinity inventory, which is critically important to us to maintain that relationship through the middle of next year. So we’ve had a number of extraordinary cash outlays his year that have compromised our debt repayment. But I also want to remind you, we brought this business two years ago, we had a $330 million term B loan, we brought that down to $290 million over the past eight quarters, and we have still absorbed some of these extraordinary cash items. I know you’re very familiar with this, so we do believe that we are returning to a point where cash flow generation will allow us to make debt repayments on our schedule. So from our standpoint, we’re very focused on cash generation and debt repayment to put us in a better position should we want to renegotiate a credit agreement down the road. Stan Manny – Manny and Family: You could.

Should we want to, that’s right. We could if we are in a better position, which again I think what we’ve tried to describe today is that the sort on the cash requirements of the business that we laid out which were extraordinary this year, we have cleaned out most of them, or have called out all of them. So from our standpoint, as we generate cash from operations, or if we are able to pick up some cash from other areas, it will go towards debt repayment. We do feel that the noose as you say from an interest burden here. Having said that, we are very pleased that we’ve got this thing done when we got it done and we’re very mindful of maintaining that ratio, but also with an eye towards buying down the debt. And that is something that we will look to do every quarter we can. We just can’t commit that we can do it every quarter. Stan Manny – Manny and Family: At this point?

At this point. Having said that, we expect as we move through this phase, we will return to more of a normal cash flow business. So the extraordinary items I just listed and we listed earlier, there won’t be another MTF agreement next year. We won’t have to buy – remember, Trinity inventory, this process for us of moving from Osiris to Trinity, we no longer have to buy inventory for the new stem cell based product. Stan Manny – Manny and Family: So that will generate cash, and you can use it up?

Exactly. And then of course you know the announcement that we did earlier this year about the orthopedic divestiture, those were extraordinary expenses. So we do feel as though the normal cash flow that you have experienced in your time with Orthofix will start to return to that. As I said, our intent is to buy down debt when we can. Stan Manny – Manny and Family: Okay. Question, if you back in the $11 million plus into your cost of sales, put it back into your gross margin, the margin still comes three, three and a half points lower than normal. Can someone kind of tell us when we can return to normal since in listening to the call it seems like you have done things that will improve cost structures, especially around the company. So I would have expected that gross profit margins when they are normalize should come back to where we are plus some into 2009. So can you explain the difference and obviously there are things we don’t see that are in there, will now disappear?

Yes, you are exactly right, Stan. A lot of the things we talk about today really go at operating expenses, items that – things that we’re doing to go at the gross margin. So for example we have talked about moving some of our high cost manufacturing out of the UK and into Mexico. So those things will continue to be done. I think as Brad gets his arms around the Blackstone business, the opportunity for looking at the manufacturing plan which is all currently outsourced, maybe you could bring some of that in-house to our Texas facility, those could exist. But the delta to answer your question specifically, the delta once you … Stan Manny – Manny and Family: – this quarter, yes.

Yes, the delta really is – it is mixed. It is a combination of – it is the negative mix that we feel from the international sales. We had some business that we talked about in the orthopedic side to some of our distributors. So even though the top line numbers were very strong, some of that business wasn’t at a normal gross margin rate for us. And then the Trinity sales, which had re-accelerated are coming in at nearly almost below 50% margin. So in 2009 that will actually go to virtually 100% gross margin. So that doesn’t explain all of it, Stan, but it probably gets you most of the way there. Stan Manny – Manny and Family: So without committing we should in 2009 expect a dramatic reduction in footnotes and odd items and more return to our more normal excellent gross margin in 2009, one should expect that?

Stan, this is Bob. As the new CFO, that’s my number one goal. Stan Manny – Manny and Family: Okay, gentlemen. Thanks.

Thank you, Stan.

We have reached the allotted time for question. I will now turn the call over to Mr. Milinazzo for closing remarks.

Thank you, operator, and thanks everyone for dialing in today. Despite some of the challenges that we’ve had this year, I think in Q3 we were able to put to rest some of the issues that have been outstanding for us. Although we are disappointed to report the impairment charges, we now feel as though we could move forward encumbered with the business. I am optimistic that the core businesses of the company, the sports medicine, orthopedic and stimulation businesses are outperforming our plans, and certainly outperforming the market growth rates. And some of the things that we’ve outlined today would put the company in a much better position in the very near term relative to cash flows. So thanks for dialing in, and we look forward to talking to you again after this call. Thank you.

This concludes today’s conference call. Thank you for your participation. You may now disconnect.