dj Orthopedics, Inc. (DJO-NYSE)
2005 Interview with:
Mr. Leslie H. Cross, President and CEO
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A culture of continuous improvement, urgency and accountability coupled with a growth strategy to protect and grow its core Domestic Rehabilitation business, accelerated the growth of its Regeneration business and increase the size of its International business through geographic expansion and acquisitions, has dj Orthopedics solidly positioned in the non-operative orthopedics market

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Medical Equipment & Supplies

dj Orthopedics, Inc.

2985 Scott Street
Vista, CA 92083

Phone: 800-336-5690

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Mr. Leslie H. Cross
President and CEO

Interview conducted by:
Walter Banks, Publisher
December 15, 2005

Leslie H. Cross, 55, has been the Chief Executive Officer, President and a director of dj Orthopedics, Inc. since its incorporation in August 2001. He served as the Chief Executive Officer and a Manager of DonJoy, L.L.C., the predecessor of the Company, from June 1999 until November 2001, and has served as President of dj Orthopedics, LLC, the Company's wholly-owned operating subsidiary, or its predecessor, the Bracing & Support Systems division of Smith & Nephew, Inc. (the "BASS Division") since June 1995. From 1990 to 1994, Mr. Cross held the position of Senior Vice President of Marketing and Business Development of the BASS Division. He was a Managing Director of two different divisions of Smith & Nephew, Inc. from 1982 to 1990. Prior to that time, he worked at American Hospital Supply Corporation.  Mr. Cross earned a diploma in Medical Technology from Sydney Technical College in Sydney, Australia and studied Business at the University of Cape Town in Cape Town, South Africa.

Company Profile:
dj Orthopedics is a global medical device company specializing in rehabilitation and regeneration products for the non-operative orthopedic and spine markets.  Marketed under the DonJoy and ProCare brands, the Company’s broad range of over 600 rehabilitation products, including rigid knee braces, soft goods and pain management products, are used in the prevention of injury, in the treatment of chronic conditions and for recovery after surgery or injury. The Company’s regeneration products consist of bone growth stimulation devices that are used to treat nonunion fractures and as an adjunct therapy after spinal fusion surgery.  Together, these products provide solutions throughout the patient’s continuum of care.  The Company sells its products in the United States and in more than 40 other countries through networks of agents, distributors and its direct sales force.  Customers include orthopedic, podiatric and spine surgeons, orthotic and prosthetic centers, third-party distributors, hospitals, surgery centers, physical therapists, athletic trainers and other healthcare professionals.  For additional information on the Company, please visit

CEOCFO: Mr. Cross, we last spoke two years ago, please tell us about your position in the marketplace and any changes that have taken place in the direction of your company?
Mr. Cross: “dj Orthopedics is the largest publicly traded orthopedics company that focuses exclusively on non-operative products. We think that this is important, because when you think about the large orthopedic companies; the metal companies, the companies that sell total hips and total knees; if you take the top three or four players in that market, they make up about 75% market share. In our segment if you take the top three or four players, they probably make up less than 50% market share. Therefore, this is a much more fragmented industry, where we think that there is a great opportunity to continue to grow our business through product line extensions and or acquisitions, but staying out of the metals or orthopedics market. We still today have over 600 products and since we last spoke two years ago, we made a strategic acquisition that actually changed the growth and profitability profile of the Company. We acquired the bone growth stimulation device business from OrthoLogic Corporation. This was a significant acquisition for us in that we bought two products to accelerate bone healing in patients. One is used when a patient is not achieving a union after a fracture; 90 days after the fracture the patient is showing no signs of healing. Our device is used for 30 minutes a day externally, to treat the patient to accelerate the healing of the fracture. The second device is used for a patient that is recovering from spinal fusion surgery, which is one of the fastest growing surgical techniques today. About 20 to 30% of the patients are at risk of not achieving this complete fusion because they possess certain risk factors for proper healing.  These risk factors could be cause by obesity, poor bone density, smoking, diabetes, alcoholism, or some form of those factors. The surgeon would prescribe our device to be used immediately post surgery, to accelerate the fusion. A failed fusion is a big problem for everybody. So these are two new products and when we bought the business it was about $43 million of revenue and is one of our fastest growing segments now. In our financial reports we call it our Regeneration Division and we actually do report the results in our filing. It is high margin, about 90% gross margin and double digit growth; so it’s a very exciting product diversification for us. This past August, we acquired the orthopedics soft goods business from Encore, which is a diversified orthopedics company. Through that acquisition, we were able to add about 50 to 60 new products to our range, focusing in the area of patient safety devices and patient positioning devices, as well as some cervical bracing and patented unique ankle bracing. Hence, the company still continues to grow through accelerating our core rehab business and doing these accretive tuck in acquisitions.”

CEOCFO: And you see that as a growing segment of your business over the years.
Mr. Cross: “Absolutely, and the reason for it is that with the aging population there will be more fractures and spinal fusion surgeries is forecasted to be growing at around 8% a year, just the procedures itself. Therefore, we think that will be a potent growth engine for our company as we go forward and if you look at our results you will see the very positive impact that business has had on our results over the last two year.”

CEOCFO: Is your rigid knee brace still your flagship product?
Mr. Cross: “Our ACL knee brace, the DonJoy DefianceŽ knee brace, DonJoy is the brand name, continues to be our flagship product that we sell to the orthopedics surgeons. This year 24 of the 25 division one NCAA football programs wear the Defiance to prevent injuries. It is still an important part of our business, but today it is only about 30% of our business. Therefore, we really have increased our product portfolio and diversified from being just a knee brace company.”

CEOCFO: Is there any one product that makes up most of the 30% or is it a total diversification?
Mr. Cross: “There are really three product categories in our rigid knee bracing. First, we have the ligament knee bracing under the DonJoy brand, which is used to protect the knee either from injury or after injury when the knee has been reconstructed. The second area is osteoarthritis knee bracing, what we call OA bracing, which allows the patient to delay surgery, not to have to take any anti-inflammatory drug and still remain active. In the third rigid knee brace we have our post-operative knee brace that is used immediately post surgery, to deliver a protected range of motion. So you can see that we are diversified in that category as well.”

CEOCFO: Where do most of your new products come from?
Mr. Cross: “We really come up with new products three ways; one is our own internal research and development, where we actually find a need in the marketplace and design a product to meet that need. The second is surgeon inventors, where a surgeon inventor will approach us with an idea because of our reputation. That idea could be as simple as a drawing on a cocktail napkin or well thought-out, prototyped and even patented device, so it covers that whole range. In the third area, new products will come from enhancements to existing products. Therefore, it is a balanced approach. We launched about 12 new products last quarter and it is about that same number every quarter, between 8 and 15 new products. And that is through one of those three approaches.”

CEOCFO: How do you reach potential customers, whether it is the college football programs or orthopedic surgeons, and do you have business in hospitals?
Mr. Cross: “On our DonJoy knee brace brand, we focus on the orthopedics sports medicine surgeon and we make sure that surgeon is aware of our offering, our innovation and our quality, so when they seen a need for the product, we will be their first choice. Each college team has a group of orthopedic surgeons who work with the student athletes and they will work with them through the athletic trainer who is employed by the University. Therefore, we reach into the Universities and the student athlete through the orthopedic surgeons and the athletic trainer and that is how we get that exposure.

We have another brand called, ProCare, which is our hospital brand and how our products reach the acute primary care setting. In that area we have distribution partners; for example Henry Schein, Cardinal Healthcare and others. They will be moving all of the supplies that hospital requires, into the hospital and as part of that delivery they are taking our products in under the ProCare label.”

CEOCFO: Is your ProCare brand sold outside of the United States?
Mr. Cross: “Our ProCare brand is sold mainly in the U.S., outside of the United States we focus mainly on the DonJoy brand.”

CEOCFO: Tell us about the team that you have put together to market your DonJoy brand?
Mr. Cross: “We have about 300 sales representatives here in the U.S. selling the DonJoy brand; these are independent reps that solicit orders on our behalf. We then take the order, ship the product, collect the money and pay a commission and we make up about 70% of the income for these independent reps. They are very tied to us; we feel that they are a part of the company and they feel like they are a part of the company.”

CEOCFO: Have most of your reps been with you awhile or do you tend to change often?
Mr. Cross: “A number of our independent reps have been with the company as long as I have. We do see some turnover and as a mater of fact, it is healthy to see some turnover, because we always want to push the bottom performers to improve their performance. That is always our goal, and so if after some time they can’t catch the leaders, then we do make changes and we probably change somewhere between 15 & 20% a year as a result of continually trying to get the tail to catch up with the head. We have a culture of continuous improvement, urgency and accountability and we expect our sales partners to have the same culture.”

CEOCFO: In 2003, your international business was growing faster than your domestic was; has that changed?
Mr. Cross: “Our international business continues to be one of our fastest growing segments. Last quarter we reported over 16% year-on-year growth, which is good strong growth and has been a continuing position for us over the last two years. One thing that we also talked about in 2003, was trying to do some international acquisitions. The problem with our international business is that it is rapidly growing, but it is still too small at only 12 to 13% of our total business. Therefore, our vision is to do some international acquisitions to continue that growth and also to be a larger portion of our business.”

CEOCFO: When you talk of acquisitions, are you referring to products alone or other complete operating businesses?
Mr. Cross: “It will take two directions; one will geographic expansion and what I mean by that is having our own subsidiaries in those markets of the world where there is good demand and reimbursement for our products and that could be acquiring distributor in Spain for example. The second leg of that is product expansion and we would like to buy some European manufacturers, who manufacture products that our customers use, but are not available from us today. Therefore, we are actively looking at both of those.”

CEOCFO: You were in Germany, the U.K. and Canada; have accomplished any further geographic expansion?
Mr. Cross: “Since we last spoke, we’ve opened our own subsidiary in Scandinavia, which covers all of the Nordic countries and a French subsidiary. So our geographical expansion has continued with those two additional markets.”

CEOCFO: What do your reps tell potential customers to get them to choose dj Orthopedics’ products?
Mr. Cross: “We talk about product innovation, patented technology and good clinical or scientific support for how our devices function, and why the patient is safe in our devices. So we take a three-pronged approach at that.

CEOCFO: I noticed that you just signed a new three-year contract with Novation, the contracting arm for VHA Inc. and the University HealthSystem Consortium (UHC), for cold therapy products.
Mr. Cross: “We have a division within the company here that focuses on getting these GPO or national buying groups contracts, so in fact in the last couple of years we’ve added a number of these large contracts. Further, that is why we have seen such good growth in our rehabilitation business, so the Novation contract is just another one of these large GPO buying group contracts, but it is an ongoing process. In addition, that wasn’t just a one-up; if you look at our press releases over the last period of time you’ll notice that we are consistently adding or renewing these large buying group or GPO contracts. That is a very important part of our strategy.”

CEOCFO: As your business continues to grow, how do you as CEO manage such a large diverse global company?
Mr. Cross: “The first step is to surround yourself with great people and we do have a great team here at the company. I’ll tell you how you run the business is that we have a sense of urgency, accountability and continuous improvement; but talk is cheap. The way we do it is that every functional manager in the company has to put together a quarterly management by objective, we call it a functional plan; and present it to the leadership of the company for approval. Hence, people here are being held accountable; not just for what we achieve in the year, but what we achieve every quarter as part of this continuous improvement. So we don’t wait until the end of the year to review our functional leaders and we’ve also tied our bonus program to these quarterly functional plans. We pay a portion of our bonus every quarter, based on achievement of what our shareholders expect, which is our operating income and based on the achievement of these functional leaders quarterly management objectives. So there’s a very good drum beat here within the company and because we a re a small management team, with these quarterly reviews, it really allows senior management to stay on top of all of the process and the projects that are under review or development within the company.”

CEOCFO: And by this, you are also able to keep a check on spending?
Mr. Cross: “There are two numbers that you have to watch in a business: sales and spending. If you look at the amount of cash that we generate, that cash shows the quality of the earning and I think the management of the process of turning revenue into cash.”

CEOCFO: Could you tell us about the financial position of the company?
Mr. Cross: “The company is doing well; we reported revenue growth of around 16% last quarter. We continue to have our cash EPS growing consistently faster than our gap EPS, we continue to generate free cash flow and reduce our debt payment. In fact, our leverage now of our debt to EBIDA, is one times, so clearly we have capacity to do acquisition through the cash that we generate or by conservatively adding debt to our balance sheet. Therefore, we are in a position to be able to execute on our strategic vision.”

CEOCFO: Is most of your investor relations work done in house or do you have an outside PR firm that you work with and is attracting investors a focus for you?
Mr. Cross: “We do have an in-house investor relations person, Mr. Mark Francois, who is always available to talk to investors and we actually see increasing our shareholder base as one of our responsibilities to our current shareholders. Vickie Capps, our chief financial officer, and myself attend a number of healthcare conferences and probably in the season, attend one per month. We try every quarter to go out and do a non-deal road show with one of the banks that cover the company and certainly, Mark and Vickie in particular are always available to talk to investors. We hold an annual investors day, which is not that common for a company of our size. Increasing our shareholder base and communicating with our shareholders is one of the things that we hold each other accountable for, because it is important to our current shareholders, to be able to create that kind of liquidity and interest.”

CEOCFO: Do you have float available for potential investors?
Mr. Cross: “The float right now is probable about 22 million shares or more than 95%.”

CEOCFO: In closing, could you address potential investors and answer the question; why dj Orthopetics?
Mr. Cross: “I believe investors should think about our company and they should hold us accountable to see that we are managing the company in the way that we said that we would. We have three legs to our strategy; one is to protect and grow our core rehab business. We are the market leader and obviously everyone out there, when they wakeup in the morning, is thinking about how to take share away from us. It is the franchise that we build the company around and we had said that we would like to see that core rehab business grow to around 7%. Between 6 and 8% is the vision for the growth of our core rehab business, which is our first strategy. Our second strategy is to accelerate the growth of our Regeneration business, because that is the highest margin segment that we have and it is in the highest growth market that we are in.  We have said to our investors that we would look for double-digit growth and we should be able to deliver that as our strategies gain traction. The third leg of our business in to increase the size of our international business and as I said; it is the fastest growing segment of our business and it is not large enough. Therefore, we are very focused on trying to find some international acquisitions that will be accretive to us, give us new products and geographical expansion. As investors watch the progress in the company, these are really the three gages that they should be looking at to evaluate whether we are managing this business as we said that we intended to do.”


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“We really come up with new products three ways; one is our own internal research and development, where we actually find a need in the marketplace and design a product to meet that need. The second is surgeon inventors, where a surgeon inventor will approach us with an idea because of our reputation. That idea could be as simple as a drawing on a cocktail napkin or well thought-out, prototyped and even patented device, so it covers that whole range. In the third area, new products will come from enhancements to existing products. Therefore, it is a balanced approach. We launched about 12 new products last quarter and it is about that same number every quarter, between 8 and 15 new products. And that is through one of those three approaches.” - Mr. Leslie H. Cross


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