RTIX

RTI Surgical, Inc. (RTIX)

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RTI Surgical, Inc. (RTIX)

Q2 2013 Earnings Conference Call

August 06, 2013 8:30 a.m. ET

Executives

Brian K. Hutchison – President & Chief Executive Officer

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

Thomas F. Rose – Executive Vice President, Administration & Corporate Secretary

Caroline A. Hartill – Executive Vice President & Chief Scientific Officer

Robby Lane – Executive Vice President, Global Commercial

Wendy Crites Wacker – Director, Corporate Communications

Analysts

Kyle Rose – Canaccord Genuity, Inc.

Chris Cooley – Stephens, Inc.

Dylan – Craig-Hallum Capital Group

Jason Bedford - Raymond James

Brian Gagnon - Gagnon securities

Presentation

Operator

Good day ladies and gentlemen, and welcome to the RTI Surgical Q2 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session with instructions to be given at that time. (Operator Instructions)

I’d now like to turn the conference over to your host for today, Ms. Wendy Crites Wacker. Ma’am, you may begin

Wendy Crites Wacker

Good morning and thank you for joining RTI Biologics for our second quarter 2013 conference call. Today, we will hear from Brian Hutchison, President and Chief Executive Officer; and Rob Jordheim, Executive Vice President and Chief Financial Officer. Also joining us this morning for Q&A are Tom Rose, Executive Vice President of Administration; Carrie Hartill, Executive Vice President and Chief Scientific Officer; and

Before we start, let me make the following disclosure about forward-looking statements. The earnings and other matters we will be discussing on this conference call will involve statements that are forward-looking. These statements are based on your management’s current expectations, but they are subject to various risks and uncertainties associated with our lines of business and with the economic environment in general.

Our actual results may vary from any statements concerning our expectations about future events that are made during the course of this meeting, and we make no guarantees as to the accuracy of these statements. Accordingly, we urge you to consider all information about the company and not to place undue reliance on these forward-looking statements.

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

Brian Hutchison

Good morning, everyone. Thank you for joining us today. Today I’ll start with an overview of the second quarter, then Rob will review financials. Tom will discuss our acquisition of Pioneer Surgical Technology and update guidance for the remainder of the year.

As detailed in our press release issued this morning, we reported second quarter revenues of $42.3 million, in line with our expectation and meeting our second quarter guidance of $42 million to $43 million. Our sports medicine business decreased 13% compared to second quarter 2012, however increased 11% on sequential basis. The sports medicine team continued to face competitive pressure in the second quarter.

As we mentioned on the last call, we anticipated that revenues in the first half of the year would be negatively impacted by as much as $6 million. Our estimated were accurate. As we sit at the midpoint of the year, we believe it will take longer than originally anticipated to recover this component of our business to previous levels.

Our team is focused and committed to turning the tide customer by customer, showcasing our superior safety record and high quality implants. Over the second quarter, we started to see customers returning and we’ve been bringing on new accounts since the beginning of the year. Additionally, we continued to expand our sports medicine business outside of the knee by introducing solutions for foot and ankle as well as shoulder surgery.

At the end of May, we had the successful launch of our new Fenestrated Matrix HD allograft. This implant, along with our non-Fenestrated Matrix HD allograft is subject to the CMS Q code approved last January which will assist in reimbursement. These implants are used primarily in soft tissue repair procedures, including Achilles augmentation, tendon repair and rotator cuff augmentation, among others.

Second quarter spine revenue increased 15% compared to second quarter 2012. The increase was primarily related to a large stocking order from one of our commercial distributors, as well as higher overall demand from all of our customers. As we mentioned on the first quarter conference call, we are experiencing favorable comparables year over year in the first half of 2013. We expect the comparables will normalize over the second half of the year.

Second quarter surgical specialties revenues decreased 19% compared to second quarter 2012. The decrease in revenues is primarily due to declines in hernia revenue from our commercial distributor, and lower than anticipated revenues from our newly created direct distribution force. In March, we launched our direct surgical specialties team and introduced our Cortiva human dermis implant and our Tutomesh and Tutopatch bovine pericardium implants.

Over the second quarter, our teams started to see market demand shift away from allograft towards xenograft, particularly porcine dermis. This market shift has led to lower than anticipated revenues from our allograft dermis implant for the first half and the full year. In June, we had our first human implantation of our Fortiva porcine dermis implant and began commercial distribution in the U.S. We had a number of cases using our Fortiva implants in June and [update] that number in the first month of Q3.

Additionally, we expect to receive CE marks in Europe for Fortiva by the end of Q3. We’re looking for a strong second half for direct surgical specialties, primarily on the strength of our Fortiva porcine dermis product. However, we do not expect the uptake in Fortiva to outpace the lower than anticipated allograft dermis revenues.

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