Exactech's CEO Discusses Q3 2011 Results - Earnings Call Transcript

Exactech, Inc. ( EXAC)

Q3 2011 Earnings Call

November 2, 2011 10:00 a.m. ET


Bill Petty – Chairman, CEO

David Petty – President

Jody Phillips - CFO


William Plovanic – Canaccord Genuity

Jeff Johnson – Robert W. Baird

James Sidoti – Sidoti & Company

Chris Vicini – Eagle Asset Management

Mike (Lande) – Summer Street Research

Jim Quentin – Barrett & Company



Welcome to the Exactech Third Quarter 2011 Earnings Conference Call. During today’s presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions).

Today’s conference is being recorded November 2, 2011.

I would now like to turn the conference over to Dr. Bill Petty, CEO. Please, go ahead.

Bill Petty

Thank you, and welcome to all of you to the Exactech quarter three conference call. As I always do, I will begin with the forward-looking statements statement.

This release contains various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

They represent the company’s expectations or beliefs concerning future events of the company’s financial performance. These forward-looking statements are further qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements.

These factors, include the effect of competitive pricing, the company’s dependence on the ability of third-party manufacturers to produce components on a basis which is cost effective to the company, market acceptance of the company’s products, effects of government regulation, and other probable effects. Results actually achieved may differ from the expected results included in these statements.

For the third quarter Exactech's revenue were 47.3 million, which is a 13% increase is over the 42 million in the third quarter of 2010. Net income however, was down 12% to 1.3 million, or $0.10 per diluted share compared to 1.5 million or $0.11 per diluted share last year. Excluding the compliances expense of 1 million, the net income increased to 19% to 1.9 million or $0.15 per share.

Specifically related to our different product platforms, our Knee Implant revenue for the quarter increased 15% to 17.9 million, Extremity revenue increase 34% to 9.8 million. Hip Implant revenue increased 22% to 8 million. Biologics and Spine revenue however decreased 15% to 5.4 million, and other products were flat at 6.2 million.

Now to discuss just briefly the nine-month 2011 performance. For the first nine months, revenue was 152.3 million, which is an increase of 10% compared to the same period last year. Net income for the first nine months was down 10% to 7 million, or $0.53 per-share, compared to 7.8 million or $0.59 per-share in 2010. Excluding the compliance expense, the compliance expense of 3.7 million, net income increased 13% to 9.4 million or $0.71 a share.

For the segments for the first nine months, Knee Implant revenue increased 7%, or 59.9 million. Extremity Implant revenue increased 34% to 28.9 million. Hip Implant revenue increased 19% or 24.4 million, and Biologics and Spine revenue decreased 10% to 18.4 million. Our other product revenue increased 2% to 20.7 million.

Certainly, we are pleased with our top line performance as we continue to advance our market share. We are not as pleased with the bottom-line performance. Jody will comment a little further on that in a few minutes. These issues were related primarily to shift between domestic and international business, and also some non-recurring expenses, which impacted this to some extent.

So I’m now going to turn it over to Jody, and let Jody give some of the operational and financial information.

Joel Phillips

Good morning everyone, and thanks for joining us for the third quarter 2011 conference call. The third quarter results were in line with our expectations at the revenue line, but were below our expectations in net income, primarily due to the OUF mix as compared to the U.S. sales, coupled with an increase in cost in our European direct operation.

I know that many of you are interested in the currency impact, so I’m going to outline some of those numbers as they relate to the Q3 revenues. When we look at revenues on a constant currency basis for the third quarter, the total revenues were 10% growth versus the reported 13. When we look at knee revenues, that was a 12% constant currency growth versus a reported 15. Hip revenues were 19% constant currency versus a reported 22. Extremity revenues were 33% versus a constant currency 34%. Biospine revenues were down 16% on a constant currency basis versus the reported down of 15%.

Our versed margins expanded during the quarter by 110 basis points to 68.5, primarily due to a higher mix of OUF business that was conducted through our direct channels as compared to our traditional distributor base business.

As we now begin to annualize the sales ramp up through these direct channels, we expect lower quarter-over-quarter gross margin percentage increases, likely in the neighborhood of 50 to 100 basis points for the fourth quarter of 2011, as well as the first half of 2012.

The total operating expense increase of 20% to 30.3 million for the third quarter was impacted by currency conversion as well. Approximately 900,000 of this increase was due to currency on a constant currency basis. The operating expenses increased 17%. The largest driver of the sales and marketing increase was the ramp up of cost in our direct operations in Spain, Germany, and Japan, which accounted for 1.8 million of the $2.3 million increase in sales and marketing expenses for the third quarter.

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