RTI Surgical Inc (RTIX) Q1 2020 Earnings Call Transcript

Image source: The Motley Fool.

RTI Surgical Inc (NASDAQ: RTIX)
Q1 2020 Earnings Call
Jun 30, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the RTI Surgical Business Update Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time.

I would now like to turn the call over to Mr. Jon Singer. Please go ahead.

Jonathon M. SingerChief Financial and Administrative Officer

Thank you. Good morning and thank you for joining RTI’s business update conference call. Joining me today on the call is Camille Farhat, our President and Chief Executive Officer. Before we start, let me make the following disclosure. 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 our management’s current expectations. 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 our statements concerning our expectations about future events that are made during this call. We make no guarantees as 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.

During the call, we will also present certain financial information on a non-GAAP basis. Management believes that non-GAAP financial measures taken in conjunction with U.S. GAAP financial measures provide useful information for both management and investors by excluding certain non-cash and other expenses that are not indicative of our core operating results. Management uses non-GAAP measures to compare our performance relative to forecast and strategic plans to benchmark our performance externally against competitors and for certain compensation decisions. Reconciliations between U.S. GAAP and non-GAAP results are presented in tables accompanying our earnings release, which can be found in the Investors Relations section of our website.

Now, I will turn over the call to Camille. Please go ahead.

Camille I. FarhatPresident and Chief Executive Officer

Thanks, Jon and good morning everyone. As you all likely aware, we have been very busy since our last call in January. The goal of our call today is to provide you with an update on all developments in the business, both completed and ongoing, before providing an overview of our recent financial and operational performance. Specifically, we will review the filing of our 2019 Form 10-K, as well as the 2018 Form 10-K/A as part of our completed financial statement restatement, which Jon will discuss in more detail, also, the status of the sale of our OEM business, an update on Spine as we prepare to go forward as a pure-play global spine Company, the impact of COVID-19 on our business, and our first quarter 2020 performance.

Starting with the status of the sale of our OEM business, as we announced previously, we amended the purchase agreement with Montagu, adjusting the total consideration to $440 million from $490 million. All required government and regulatory approvals have been received and the last remaining step in the process is shareholder approval. As of the time of this call, applicable shareholders should have received by mail a proxy statement related to the annual meeting and the OEM transaction and Annual Report. The Company will be hosting its 2020 Annual Shareholders Meeting on July 15. As part of this meeting, we’ll also be holding a special meeting of stockholders to vote on, among other things, the approval of the sale of the OEM business. Assuming shareholder approval, we expect this transaction to close soon after the shareholder vote on the 15th.

Turning to our separation efforts and a brief OEM business update. While COVID-19 has caused some disruption in our efforts to prepare for the separation of the businesses, we are close to completing the process. While I will discuss the impact of COVID on our business and our response to the pandemic in more detail shortly, I wanted to provide a brief update on the specific impact within OEM. During the pandemic, we have continued to operate this business with care and diligence to preserve its long-term attractiveness. We have supported as many ongoing procedures as possible and have maintained our efforts to deliver innovation to customers. Given the contractual nature of the OEM business, the short-term impact has been less severe than in our Spine business.

A silver lining in the delay in collection [Phonetic] is the fact that we have been able to achieve broader, more comprehensive progress toward separation. And as a result, we expect there will be fewer entanglements and transition service agreements or TSAs post close. We have been able to fully separate our enterprise systems, including many of the key back-office processes, and are currently practicing operating as two independent businesses.

Our teams have shifted to working together as strategic partners, with our Spine business placing orders with OEM and OEM fulfilling those orders to ensure our relationship will continue to operate smoothly and without disruptions once officially separated. Given what we believe is the imminent closing of the transaction, our remarks today will generally be focused on our Spine business.

After the close of the transaction, RTI will be a global pure-play spine Company with what we believe are strong fundamentals, a redefined balance sheet and leverage profile, and exciting long-term growth prospects. Concurrent with the transaction, we plan to pay off our outstanding long-term debt and after transaction expenses, we’ll have approximately $100 million to $125 million in cash. As we continue to move toward closing, we are evaluating the appropriate capital structure of the Spine business.

Looking back at the progress we have made as part of our multi-year long-term strategic transformation, we have completed Phase 1, which includes reducing complexity, driving operational excellence, and accelerating growth. Phase 2 of the transformation is creating value as a pure-play global spine Company. At the highest level, our goal will be to deliver double-digit top line growth with gross margins approaching 75% by focusing on the stabilizing and building of our foundation, driving new product innovation, and being acquisitive.

As we continue to build out our foundation in preparation for a transition toward becoming a high growth business, we have focused on assembling a strong management team with deep spine experience and track records of success. In December of 2019, we announced the appointment of Terry Rich as President of Global Spine. Terry has significant experience in delivering innovation and driving growth in the spine and orthopedic space. In June of this year, we announced the appointment of two key members for the team; Scott Durall as Chief Commercial Office and Bryan Cornwall, Executive Vice President, Research and Clinical Affairs, who together bring over 50 years of experience in the medical device industry.

In addition to adding talented experienced leaders, we are refueling our leadership team to reflect our ongoing refueling focus to become a leader in the global spine market. In addition, in early May, Stuart Simpson joined the Board of Directors and was recently named Vice Chairman of the Board. Mr. Simpson brings decades of industry experience, which will be valuable in supporting RTI’s strategy as a pure-play global spine Company.

Beyond stabilizing and building a foundation for growth, we are investing in a strong innovation pipeline and are committed to a rapid cadence of new product introductions. In 2020, we continue to expect double-digit new product releases or launches to set the stage for growth in 2021. We have already begun to generate momentum with seven products were — that we have both received CE Mark and filed for 510(k) approval in the first half of the year. Our new introductions will be a combination of hardware and biologics from our ongoing relationship with legacy RTI, our existing design center in Germany, and new innovation competencies to be built by our growing spine leadership team.

We are confident our current R&D pipeline supports the ongoing launch of double-digit new product introductions. We are finalizing our plans for the remainder of the year and looking to 2021 and beyond. We anticipate we’ll be prepared to provide a more comprehensive view of our innovation and acquisition approach during our second quarter call after the close of the sale of the OEM business.

Shifting gears to an update on COVID, including the operational and financial impact the pandemic has had on our business. As a Company who develops, manufactures, and commercializes primarily elective procedure-based products, the unprecedented condition surrounding COVID caused the significant disruption to our business, particularly within the global spine portfolio. As you are well aware, the spread of COVID-19 caused many hospitals and other healthcare providers to refocus their care on the surge of the COVID-19 cases, to postpone elective and non-emergent procedures, to restrict access the facilities, and in many cases, reallocate scarce resources to their critically ill patients.

Our decision-making in response to the pandemic was guided by a focus on four pillars; prioritizing employee safety, managing inventory levels in the global supply chain, preparing for the sale of the OEM business, and long-term positioning of our Spine portfolio for growth as highlighted earlier.

First and foremost, our top priority was and is to keep employees and their families safe. By mid-March, all applicable employees were working remotely, an action that after a short transition period has caused a little to no disruptions to effectiveness or efficiency. Our next priority was to maintain appropriate inventory levels across our global supply chain inclusive of our OEM partners. Our goal was to ensure RTI and our partners were able to continue to support procedures during the pandemic. While the majority of procedures performed with our products are elective, and in many cases those procedures were either delayed or deferred, there were certain volume of elective procedures being performed in addition to those procedures considered more emergent or necessary. Throughout this time, we reduced the capacity at our key manufacturing facilities, but made sure there was no interruption in supporting the production and delivery of products needed for existing surgeries. At facilities that remained open, we implemented safety measures, including appropriate social distancing and local safety mandates. To be able to efficiently and effectively continue delivering products to customers, we also focused on securing our supply chain of key manufacturing inputs and PPEs, so that we had the adequate materials necessary to safely maintain production.

In addition to closely evaluating the supply chain, we prioritized activities that were necessary to support the upcoming sale of the OEM business. We continue to invest in key separation activities and building certain competencies to ensure we would have two strong businesses prepared for long-term success when the impact of the pandemic was mitigated. We continue to invest in key development projects and targeted leadership positions for both the Spine and OEM businesses. Our goal was to balance the operating actions above with long-term capital strength. We wanted to exit the impact of the pandemic and the close of the OEM sale with a strong balance sheet to support long-term innovation and growth.

As a result, we implemented cost reduction initiatives, including salary reductions for members of the management team, including Jon and myself, either furloughing or reducing the hours of over 500 of our U.S. based employees beginning in early April, and limiting our domestic manufacturing activities to pick, pack, and shift for most of the month of April.

As hospitals have been through various stages of reopening throughout the country, we have progressed in our reopening process. We are pleased to say that the vast majority of our employees have returned to work. To maintain social distancing and minimize the potential risk, we have staggered our employees’ return to our various offices and facilities, our remaining employees will return in conjunction with the ongoing return of elective procedures. From an expense reduction perspective, reduced senior management salaries will continue until all employees have returned to work.

Turning to an overview of our first quarter performance. For the first quarter of 2020, revenue increased 5% to $73.7 million, primarily driven by the annualization of the Paradigm acquisition. We began seeing the impact of COVID-19 in the international business early in March and domestically in the second half of the month, resulting in an estimated 20% drop in procedure volumes between the beginning and the end of the quarter.

In April, we continued to experience a steep decline in procedures of somewhere between 60% and 70% of normal across the portfolio of direct products. We did see a more rapid return in May and June than we initially anticipated, with May’s volume nearly doubling versus April and June approaching levels we saw earlier in the year. It is difficult to assess whether the performance in May and June represents a trend or the impact of pent-up demand.

In June, eight of our Top 10 states are experiencing average daily sales in the range of 80% to 90% of their levels from January and February. However, several of these states are seeing significant rise in now new COVID-19 cases, so it remains difficult to project expectations for the balance of the year. The situation remains fluid and we continue to actively monitor procedure volumes and managing operations accordingly.

The world looks much different today than it did at the beginning of 2020 when we last provided you with an update not only within the RTI organization, but throughout the global healthcare industry. We, as a Company, have faced a variety of significant challenges in addition to operating through a global pandemic. In spite of these challenges, we continue to believe that the underlying dynamics of our long-term strategy remains strong and we continue to be very bullish in our ability to move forward and create significant shareholder value as a global pure-play spine Company. We greatly appreciate all the effort that each and every one of our employees has given during these uncertain times, and we also want to thank our investors for their patience as we work to come out of the other side of the COVID and move to the next phase of our transformation.

With that, I would like to hand the call over to Jon to provide a financial review.

Jonathon M. SingerChief Financial and Administrative Officer

Thank you, Camille. Before jumping into an update on our first quarter performance, I’d like to discuss our recently filed financial statement restatement. On June 8, we filed our Form 10-K for the year ended December 31, 2019 and completed our previously announced financial statement restatement.

Earlier this year, the Company made the decision to launch an internal investigation into certain accounting matters. The most notable of those matters was the Company’s past revenue recognition practices for certain contractual arrangements with certain OEM customers. In basic terms, we determined that revenue for certain invoices have been recognized earlier than it should have been based on the terms of the contracts with our customers and agreed-upon delivery windows.

The Company has completed its investigation to these matters and has opted to restate certain of our historical financial statements for the fiscal years ended December 31, 2016, 2017, and 2018, as well as selected financial data for the years ended December 31, 2014 and 2015 and related disclosures for the quarterly periods for such years each on a Form 10-K/A and restated condensed consolidated unaudited financial statements for the quarters ended March 31, 2019, June 30, 2019, and September 30, 2019 reflected in our 2019 Form 10-K.

The previously announced investigation by the SEC remains ongoing and the Company is continuing to cooperate with the SEC in its investigation. I want to recognize the hard work of our internal finance organization as we work through the restatement and audit, which was compounded by the impact of COVID-19. It was a herculean effort by an incredibly dedicated team of professionals.

Turning to Q1 performance briefly, global revenue for the quarter ended March 31, 2020 was $73.7 million, $3.7 million or 5% growth compared to $70 million for the prior period first quarter. OEM revenue was $46.6 million, growing $1 million or 2% compared to $45.6 million in the prior period. Global Spine revenue was $27.1 million, growing $2.7 million or 11% compared to $24.4 million in the first quarter of last year. Gross profit for the first quarter of 2020 was $40.5 million or 55% of revenue, a 7% increase compared to $37.9 million or 54% of revenue in the first quarter of 2019. Gross profit for the first quarter of 2020 included a $900,000 charge for the purchase accounting step-up of coflex inventory. Gross profit, adjusted for the impact of non-recurring charges, was approximately 56% of revenue for the first quarter of 2020.

Adjusted EBITDA for the first quarter of 2020 was $1.4 million compared to approximately $7 million for the first quarter of 2019. The decline in adjusted EBITDA was driven primarily by the inclusion of a full quarter of Paradigm’s operating expenses, audit and legal costs related to the SEC, an internal investigation, an incremental administrative investment to support the separation of the Spine and OEM businesses in anticipation of the upcoming sale of the OEM business.

Lastly, as it relates to guidance, given the overall uncertainty of the recovery of the business during 2020 as a result of COVID-19, we will not be providing forward-looking guidance at this time. We saw a more rapid return of elective procedures than we initially anticipated and are cautiously optimistic in expectations for the remainder of the year. However, the situation is still too fluid and it is too early to project current activity through the end of the year. We intend to provide a more detailed strategic update on the Spine business during the Q2 call after the sale of the OEM business.

Operator, I’d like to open the call for questions.

Questions and Answers:

Operator

[Operator Instructions] And our first question will come from the line of Matt Hewitt from Craig-Hallum. You may begin.

Matt HewittCraig-Hallum Capital Group LLC — Analyst

Good morning, gentlemen. Thank you for taking the questions. First one, how much of a challenge does the pandemic present from an access standpoint with your sales people being able to be visiting hospitals, visiting surgeons? And what does that mean as you start to look at later this year into next year with these product launches? You’ve got a pretty aggressive launch plan for later this year and into next year. I’m curious how this situation and access impacts that.

Camille I. FarhatPresident and Chief Executive Officer

Hi, Matt. It varies by hospital and hospital system and what I would say is we believe that everybody is becoming more accustomed to doing things remotely, and in some of the training sessions that we have held remotely, we’ve had more attendance that way. We continue to work with AdvaMed and the rest of the association to try to develop a standard approach to doing that. And we feel that that is not going to be impacting our growth opportunities and the ability to train surgeons on the new products that are coming out. However, as you get into the, what I’m going to call, the in and out of the surges that we have seen, hospitals may change their prioritization on the procedures. That is probably a bigger impact than the access question. But so far, I would say, we’re managing this very well. Terry and team are all over that and the digital way or remote way of providing training has been pretty, pretty welcome so far.

Matt HewittCraig-Hallum Capital Group LLC — Analyst

Understood. Thank you. And then I guess the second question from me. So, the shareholder vote is expected to occur on — or is expected to occur July 15. All the regulatory items have been crossed off the list. Why the delay until the end of August to close the transaction? Is it possible that that transaction could close much sooner than that?

Camille I. FarhatPresident and Chief Executive Officer

Yeah, go ahead, Jon.

Jonathon M. SingerChief Financial and Administrative Officer

Yeah, the end of August was the contractual end date. We’re planning to close the transaction reasonably close to the shareholder vote.

Matt HewittCraig-Hallum Capital Group LLC — Analyst

Okay, that’s great. And then the one that I get the most frequently and I’m sure you’ve gotten it quite a bit as well, but is there — as you look at it aside from the shareholder vote, is there anything that could go astray with this transaction? I mean, it seems pretty logical that the shareholders vote for this and it moves out, but what else could pop up that could prevent this transaction from closing? That’s it from me.

Jonathon M. SingerChief Financial and Administrative Officer

No, we’re — look, we’re actively working with the buyer on a daily basis to move the transaction toward close. And so, as we sit here today, we feel comfortable that we’ll have the shareholders’ support for the close of the transaction and we’ll move to close. And so we don’t see anything as of right now that could hinder the closing of the transaction, Matt.

Camille I. FarhatPresident and Chief Executive Officer

Just for kicks and giggles, Matt, when we closed Zyga, there was the snowstorm and we had to delay the close by one day because we couldn’t get to the filing. And then when we’re going to close Paradigm, there was a government shutdown and that delayed just a little bit. I’m hoping this one is going to go smoothly. So, outside of these, we believe that we should be OK.

Matt HewittCraig-Hallum Capital Group LLC — Analyst

That’s great. Thank you.

Operator

Thank you. [Operator Instructions] Our next question will come from the line of Jim Sidoti from Sidoti & Company. You may begin.

Jim SidotiSidoti & Company, LLC — Analyst

Good morning. Can you hear me?

Camille I. FarhatPresident and Chief Executive Officer

Hey.

Jim SidotiSidoti & Company, LLC — Analyst

I imagine you guys must be feeling pretty good right now. You’ve got a lot accomplished under some very difficult circumstances and maybe after you report the second quarter in a month or so, you can actually take a day off.

Camille I. FarhatPresident and Chief Executive Officer

That would be nice.

Jim SidotiSidoti & Company, LLC — Analyst

First question on reporting.

Jonathon M. SingerChief Financial and Administrative Officer

Camille has planned to take Labor Day off.

Jim SidotiSidoti & Company, LLC — Analyst

Mechanics. So, with the OEM business part of operations now, I assume that the — when you report the second quarter, the OEM business will be included in continuing operations, but by the September quarter, OEM — any residual OEM sales will be reported as a discontinued operation? Is that correct?

Jonathon M. SingerChief Financial and Administrative Officer

Yeah, the — from a GAAP accounting perspective, the triggering event is the shareholder vote, which will occur obviously after the end of the second quarter. So, you’ve accurately portrayed how it will be represented in the financial statements.

Jim SidotiSidoti & Company, LLC — Analyst

All right. And can you spend a minute just to describe the sales force now? You’ve made some pretty significant changes to management. Are you making changes at the direct sales level? Are you expanding that number? And are there any changes on the independent rep firm?

Camille I. FarhatPresident and Chief Executive Officer

Yeah, look, I mean, at the end of the day, we’re looking at the efficiency and effectiveness of our channel. Right now, we have been really driving an existing structure that has two channels, one for Novel Therapies and one for established therapies because the Novel Therapies require more hand-holding and more support and more reimbursement, etc.

We are continuing to stay in tune with that. There might be an opportunity where as we hear back from certain customers they have multiple people coming at them and there might be an opportunity to consider having merging the two together and being more synchronized more of a — an account orchestra conductor and then bringing product specialists underneath that. That’s something under consideration right now, but basically we don’t differentiate much between our direct employees and our distributors. We tend to focus more about the accounts we serve and how do we do that most effectively and train everybody who handles our products and represents our products in our therapies to be competent and to have the same customer care philosophy that we have as a Company.

Jim SidotiSidoti & Company, LLC — Analyst

And in terms of the size, are you — have you, do you have plan to add…

Camille I. FarhatPresident and Chief Executive Officer

Yeah, I mean, look, we don’t disclose that, Jim, but our opportunity is as we grow the business and as we look forward to the double-digit, we’re going to be reaching max of — in certain territories and we’re going to be opening new territories. And so, yeah, we do expect to have strategically aligned adds as Terry and team evaluate the best — the best path forward on the growth for the Spine business.

There are — let me just summarize it this way. There are a lot of opportunities for growth that we see it. We have highlighted. We believe again with the insight Terry is bringing to the Spine organization that that may necessitate some realignment in how we go to market and that could very well be newer territories, more people, but that’s something that is going to come as we mentioned earlier as we think through how do we want to execute the Phase 2 of the growth.

Jim SidotiSidoti & Company, LLC — Analyst

All right. Thank you and enjoy your Labor Day.

Camille I. FarhatPresident and Chief Executive Officer

Thanks, Jim.

Operator

Thank you. [Operator Instructions] Our next question will come from the line of Dave Turkaly from JMP Securities. You may begin.

Dave TurkalyJMP Securities — Analyst

Good morning, guys. Camille, maybe for you just to start off. I followed the spine world for a long time. I’m just curious is there a size, maybe a sales run rate in your mind that you think you need to be to be successful long term, given some of the big guys out there, given maybe contracts they have? Just thoughts on that market and what size you kind of aim RTI to be over time.

Camille I. FarhatPresident and Chief Executive Officer

Yeah. Look, we have — I’ll structure my answer around three parts. The first part is we’ve come a long way from being number whatever 14, 15 to being in the Top 10. So we do believe that size matters in this environment. At the same time, we also know what our size is and what we try to do to the point that you were talking about on how do you get on contract is we try to assemble a pretty unique platform on the spine side whether it is with the decortication with the acquisition of Zyga, whether it is with the 3-D PEKK technology and TETRAfuse in Fortilink or in ViBone and the stem cell side as well as the PMA that we have had with coflex. All of these have been helpful for us to what I’m going to call stay relevant in an environment in which we operate. Do we have enough scale? I don’t think so. Our strategy continues to be one of scale and differentiation. As we exit Phase 1 and as our Spine business now is about $120 million globally, we’re looking as to what is the best way to drive forward and I will tell you it will continue to be differentiation and sale, however — I’m sorry, scale. And then the reality, however, is we got to stay relevant and whether that is around the product itself, whether that is around the data or the total procedure, these are the things that Terry is bringing to our leadership team and helping us bias the direction of where we’re going to go.

But clearly, it will continue to be about scale and differentiation as to what is the ideal size, I don’t know, but I would say at least it would be double where we are today, would be our direction from a strategic perspective as we see it.

Dave TurkalyJMP Securities — Analyst

Thank you for that. Maybe as a quick follow-up, you mentioned new products. Can you tell us — like talk about what’s the most exciting — you had a number of biologics internally developed, some from partners. You’ve had some new metal implants, you got — I know there’s a lot happening and also tissue products side, I’d just love your thoughts on, is there any sort of a needle movers that we’re looking at in 2021? Thanks.

Camille I. FarhatPresident and Chief Executive Officer

Look, what — sure. Look, I would say that if you were to look back, we’ve come from a dry land of product development and if I could take you back to 2017, we basically bet everything on Fortilink. And that was my way of trying to assess whether the organization capabilities can do something that is unique and different. And then we said after that, that we were working on our product pipeline and our worldwide product plans and that we needed a couple of years to bring these to market. So, we spend 2018 on the four platforms I just mentioned in spine and now you’re seeing the benefits of what we have around the platforms.

Are there anything that is going to be radically different to the products that are on the markets? We’re partly trying to stay competitive and continue to gain an edge a little bit in where we are. We’re factoring in our customer input in many of the areas where they may have a preference toward a type of material, but they love our design and we leverage the same instruments, but give them their choice. That’s one part of what you see coming out. On the decortication, everybody loves the principle of arthrodesis and what we have, but they tell us that we needed to simplify the procedure. So, you’re going to see us move into a couple of more iterations now that we have also clinical data that fully supports how good that therapy is that we have and now we’re kind of simplifying the procedure and making that easier.

On the biologics side, I think we’re a little bit — we were a little bit behind on the DBM side and we’re going to be catching up on that and then really accelerating and we have a very exciting road map.

So, what I would say right now, there is nothing that would be totally disruptive to the market, but a lot of enhancements that are overdue in navigation of instruments. in extending our platforms, in refreshing some of our product lines that we’re doing, but we’re doing a lot of that and I would be very surprised if we had less than a dozen of these come Q4 that are ready in our sales force hands.

Dave TurkalyJMP Securities — Analyst

Yeah, got it. You take back — taking back to 2017, you could take me back to 2003, if you like [Indecipherable]. I’m looking forward to the close. Talk to you guys soon.

Camille I. FarhatPresident and Chief Executive Officer

Thank you very much, Dave.

Operator

Thank you. [Operator Instructions] Our next question will come from the line of Brandon Folkes from Cantor Fitzgerald. You may begin.

Brandon FolkesCantor Fitzgerald — Analyst

Hi, thanks for taking my question and congratulation on getting the filings up to date. Firstly, just on, you called out the recovery in revenue you saw in May and June. Can you just elaborate if you saw this across your portfolio? Or if it was any specific products driving that recovery? And then perhaps maybe can you talk a little bit about capital allocation priorities post-spin? I know you talked about investing for the next phase of growth? How should we see that versus bringing in additional products?

And then lastly, just to follow on an earlier question regarding the SEC investigation, does that at all pose any risk to delay in closing the transaction? I mean, just to confirm, is that staying with the SpineCo or does it go with the OEM business with some sort of indemnification agreement? Thank you.

Camille I. FarhatPresident and Chief Executive Officer

Sure. Let me take the first part and I think Jon is probably better suited to address the second part of your question. So, Brandon, like we said, the OEM business typically we get orders that are firm ahead of time. And so the second quarter impact for the OEM business were pretty limited. I would say there were some impact, but nothing really of significance. So, the return to the procedures that we saw and the uptick that we’ve seen in May and June is more specifically in our more what we’re calling the direct business. So, it’s more of the Spine and it’s more of the PRS business and the Sports business that we basically have. So that’s the answer to that first question.

Jonathon M. SingerChief Financial and Administrative Officer

Yeah. And I think we might also be seeing a higher level of procedures being performed in the ASC with the hospitals, because I think what you’re seeing is the surgeons want to do surgery. So, they’re, I’ll use the term, shopping their procedure to find a location that will allow them to serve the patient. Because we still have people in pain and so that’s the other trend that we’re seeing and that impacts then to a lesser degree product choice from a recovery perspective.

Camille I. FarhatPresident and Chief Executive Officer

And then the last comment I’d say is international, we were surprised to see Europe come back in the second part of June, was much more — much stronger than we thought in that space. Regarding your capital…

Jonathon M. SingerChief Financial and Administrative Officer

Yeah, from a capital allocation perspective, we’ll close the transaction with somewhere, we say between $100 million and $125 million. It’s probably between $115 million and $125 million in cash and it’s really our priorities align with what we outlined as the areas of focus. So building out the spine-specific infrastructure and it’s a little bit different than what we’ve historically experienced when we talk about that, because we will be essentially virtual with most of our manufacturing provided by third-party providers and we’ll have outsourced our distribution. So, when we talk about building it out, it’s really technology, both in support of procedure-based selling and systems to manage the business, and then, as we talked about clearly focused on continuing investment in innovation, we’ve got tremendous design center in Germany that we got in conjunction with the Zyga acquisition that we intend to continue to support as well as building out a spine-specific innovation competency under Terry and the team that he’s building leadership.

And then finally, I think, certain aspects of our strategy will be best pursued through acquisition. And so, we’ll continue to maintain some type — some portion of our capital reserved for the more aggressive growth investments that we intend to make to move the business forward.

And then, your final question around the risk of the SEC investigation, so, RTI Holdings, Inc., which is the public company that is under investigation, will continue to exist post the transaction. We’re just selling off a material portion of the assets. And so the investigation, although it relates to activity within the business that we’re selling, is of the publicly traded entity that will be continue to be RTI Holdings, Inc. So we will still be responsible for being responsive and maintaining the dialog with the SEC to move them through the investigation and hopefully bring that to a resolution.

Brandon FolkesCantor Fitzgerald — Analyst

Great. Thanks very much and congratulations again on getting everything up to date.

Camille I. FarhatPresident and Chief Executive Officer

Thanks, Brandon.

Operator

[Operator Instructions] Our next question will come from the line of Leon Cooperman from Omega Family Office. You may begin.

Leon CoopermanOmega Family Office — Analyst

Thank you. I add my congratulations to your accomplishments. Let me ask a question which I think is really very much at odds with the presentation. When you say that we are in the Top 10 spine company, basically — most industries I know that good industries don’t have 10 important competitors. So, has the Board with the management thought about the advisability of derisking shareholders by becoming part of a larger company in terms of improving our ability to compete? That would be one question.

And then related to that, you mentioned that to be relevant, you thought you’d have to double your sales base. How long do you think it would take for you to double your sales base exclusive of acquisitions?

And then the last question is can you detail us terms of the convertible preferred? Is it callable? What’s the conversion price? What flexibility you have to deal with it? Thank you very much and good luck.

Camille I. FarhatPresident and Chief Executive Officer

Thank you. Regarding the answer around the Top 10, the way we look at the market is there are Tier 1 companies and call that from Globus up to DePuy and Medtronic and then that’s what I would refer to as the big Tier 1 and then there is a gap between that Tier 1 and the Tier 2, where you see us play in it and let’s call these in the range of $100 million to $200 million, the Tier 2 we have.

And our strategy, at least through Phase 1 and as we are continuing to finalize and fine-tune our Phase 2 on a go-forward basis, is to become the destination for the independent distributor in that phase — in that Tier 2 group. We continue to amass very unique technologies and therapies and procedures in order to differentiate ourselves that will create value I think whether we’re a Tier 2 or not. We don’t have a goal or an intent as our strategy to be part of another company. However, when that presents itself, just like it did on the OEM side, we are not shy at making the right decision to unlock value for our shareholders. But we believe that we’ve made the right moves. We will continue to make the right moves, and to be a part of our strategy, as I said, we can be stand-alone through differentiation and scale. We have a strong balance sheet that will allow and support to do that, but if there is a conversation where we feel we can serve more patients and better through a different combination, we would be very open to that at that time should it present itself.

Regarding the second question on the organic growth, our target organically is to continue to drive growth consistently as we have said. We anticipate, I can tell you, easily in the short term in the next couple of years, it will easily be double-digit growth for this team driving with innovation and a lot of focus on productivity and number of patients treated with our products.

Regarding the last on the converts…

Jonathon M. SingerChief Financial and Administrative Officer

Yeah, I would just direct you to the public disclosures, because I think- — these are — yeah, I can give it to you at a summary level, but I think the question warrants review of our public documents, because it’s not — it’s a sophisticated instrument that has a number of different provisions. And so I’d rather you just — I think it’s best suited to just read directly through our public disclosures.

Leon CoopermanOmega Family Office — Analyst

Thank you for your responses.

Camille I. FarhatPresident and Chief Executive Officer

Have a great day. Thank you.

Operator

Thank you. And I’m not showing any further questions at this time. I’d like to turn the floor back over to Mr. Farhat for closing remarks.

Camille I. FarhatPresident and Chief Executive Officer

Thanks, Victor. And thank you for your ongoing interest in RTI Surgical. Despite the tumultuous environment we find ourselves in today, we are very proud of what we’ve been able to accomplish over the last few years and what the future holds for RTI. Clearly, the sale of the OEM business is a fantastic outcome, one that allows the Company to shift its focus to drive the acceleration of growth as a pure-play global spine business, leveraging its fundamental market position and balance sheet strength. We look forward to updating you on our ongoing progress on our next quarterly call. Thank you and have a great day.

Operator

[Operator Closing Remarks]

Duration: 46 minutes

Call participants:

Jonathon M. SingerChief Financial and Administrative Officer

Camille I. FarhatPresident and Chief Executive Officer

Matt HewittCraig-Hallum Capital Group LLC — Analyst

Jim SidotiSidoti & Company, LLC — Analyst

Dave TurkalyJMP Securities — Analyst

Brandon FolkesCantor Fitzgerald — Analyst

Leon CoopermanOmega Family Office — Analyst

More RTIX analysis

All earnings call transcripts


{%sfr%}

10 stocks we like better than RTI Biologics
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now… and RTI Biologics wasn’t one of them! That’s right — they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of June 2, 2020

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company’s SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

You May Also Like

About the Author: Over 50 Finance