dj Orthopedics, Inc. (DJO)
Interview with:
Mr. Leslie H. Cross, President and CEO
Business News, Financial News, Stocks, Money & Investment Ideas, CEO Interview
and Information on their
rigid knee braces, soft goods, specialty and other complementary orthopedic products including cold therapy and pain management.

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A full range of innovative products, a large R&D facility and the best sales force has made dj Orthopedics the clear market leader

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Healthcare
Medical Equipment & Supplies
(DJO - NYSE)

dj Orthopedics, Inc.

2985 Slott Street
Vista CA 92083
Phone: 800-336-5690

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Mr. Leslie H. Cross
President and
Chief Executive Officer

Interview conducted by:
Diane Reynolds
Co-Publisher

CEOCFOinterviews.com
June 2003

BIO OF PRESIDENT/CHIEF EXECUTIVE OFFICER

Leslie H. Cross, 51, 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 orthopedic sports medicine company specializing in the design, manufacture and marketing of products and services that rehabilitate soft tissue and bone, help protect against injury and treat osteoarthritis of the knee.  Its broad range of over 600 existing products, many of which are based on proprietary technologies, includes rigid knee braces, soft goods, specialty and other complementary orthopedic products including cold therapy and pain management.  These products provide solutions for patients and orthopedic sports medicine professionals throughout the patient's continuum of care.

CEOCFOinterviews: Mr. Cross, please tell us about dj Orthopedics.

Mr. Cross: “dj Orthopedics is a company that specializes in Orthopedic Sports Medicine. We are in the area of rehabilitation to injuries of the extremities or helping patients recovery from the injury or the surgery that takes place. Our products range from highly sophisticated custom knee braces as seen in the NFL and NCAA sports etc, to ankle braces and arms slings in emergency rooms in the hospital setting. There is a complete product range of about 600 products that make up our rehabilitation, orthopedic sports medicine rehabilitation product range.”

CEOCFOinterviews: Do you also provide products to prevent injuries?

Mr. Cross: “Yes, a number of our products are used prophalactically to help prevent injuries. An example of that would be of the top 25 NCAA football programs last year, twenty one of those teams used our knee braces to brace their offensive linemen to prevent injuries. It has become apart of standard equipment now in College football. Motorcross, skiing and a lot of extreme sports participants use our products to prevent injury. It is a small segment of our market; the majority of our market consists of people like you and I who are recovering from some kind of injury or from surgery related to that injury.”

CEOCFOinterviews: Do you do sell your products on a global basis?

Mr. Cross: “We are a worldwide company and about 14% of our revenues derived from business outside of the United States. We are growing and if you look at our quarterly report, you will see that our international business is growing much faster than our domestic business and it is becoming more important. We distribute directly to Germany, the U.K. and Canada where we have D.J. Orthopedic subsidiaries and throughout the rest of the world, we utilize a network of independent distributors. One that we are very excited about is our new distributor in Japan who has started with us earlier this year and has really done an outstanding job for us.”

CEOCFOinterviews: With all of the turmoil that is happening on a global basis, do you feel this is affecting the company in any way?

Mr. Cross: “Not really, our markets tend to be in the sports medicine and the sports medicine and healthcare markets in those countries are stable and doing well. In addition, I think the currency has helped us. The Euro has made us even more competitive in Europe and the same as in the U.K. and Australia as well.”

CEOCFOinterviews: How do you get the word out?

Mr. Cross: “Our customers are the orthopedic sports medicine surgeons. There are 13,000 orthopedic surgeons in the U.S., and roughly 5,000 of them state that the focus of their practice is sports medicine, so, it is a well-defined customer group. In the U.S., we have more than 250 independent representatives that work on a commission basis to promotes these products to the orthopedic surgeons. Of course, we also attend many of the orthopedic meetings and conferences. We do regular mailings and some journal advertisements, but we have really grown the business by developing a relationship with these orthopedic sports medicine surgeons.”

CEOCFOinterviews: How do you keep track of the inventory of your products?

Mr. Cross: “We are a just in time manufacturing organization. We try to run with 14-21 days of finished inventory. We set our demand for tomorrow’s production run based on what we sell today. We have a tightly controlled inventory. There is no doubt that 600 products are probably a few too many and every year we go through a product rationalization program where we do exactly what you are describing. We look at what products are accelerating our growth and what products are not selling so that we can obsolete those products and so it is an ongoing process.”

CEOCFOinterviews: How often do you go back and take a product and say, “gee, now we can do this just a little bit better?”

Mr. Cross: “Our flagship knee brace which has a patented Four Points of Leverage design, has just been improved with a new version that has a patented ForcePoint hinge that has a patented hinge, which really de-accelerates the knee as it goes into full extension. That I believe is the 13th or 14th improvement of this product that we have introduced in roughly as many years. We are constantly looking for ways to make our products more comfortable for the patient, that is lighter weight, stronger and adding some new and patented features to it like the hinge I described.  It is an ongoing process. We launched in the first quarter five new products, we launched eight in the second quarter and we have a pipeline of more in the coming year. Some of those are truly are new products that will take us into the new segments and some of them are product line extensions to round out our product lines for customers, so it is a continual process.”

CEOCFOinterviews: With any new brace there are copycats, how are you protecting your design?

Mr. Cross: “We have a fairly robust portfolio of patent protection but that is only part of the way that we protect our products. Another way is by our size of distribution and through our continuous product innovation. Patents alone aren’t necessarily what protect the product. We are clearly the market leader in knee braces with roughly 40% market share and probably 20 competitors worldwide. We have the largest product range, the largest R&D facility and largest sales force. So, when you package all of that together that is how you protect your franchise not just through patented property.”

CEOCFOinterviews: How much do you spend on research and development?

Mr. Cross: “We spend a lot less than you would expect. We spend about a few million in R&D and our products don’t require a lot of investment. A new knee brace, for example, will take us about six months to a year to develop and launch with the total cost including R&D and tooling a few hundred thousand dollars. It is a good business, and having that continued stream of new and updated products is the key to growing in this business.”

CEOCFOinterviews: Are you using your website for market and ordering purposes?

Mr. Cross: “We don’t have a shopping basket facility on our website. Our products are professional products that are prescribed by physicians for the most part and the patients need the ability to be prescribed the correct product for whatever their injury or condition is. It needs professional fitting and instruction so we don’t sell retail or directly from our website.”

CEOCFOinterviews: What is your financial position?

Mr. Cross: “Our revenues were up 6% and on a daily growth rate we are on a 5/4/4 reporting period so the holidays are always affecting what kind of billing days we have.  On an average daily growth rate our revenues were up to 8%, and I think we reported our net income went up 14%.”

CEOCFOinterviews: Do you see this revenue growth continuing?

Mr. Cross: “We haven’t given any guidance’s, as you know; we have just gotten out of a phase called ‘performance improvement’. This was our first profitable quarter in a year and until we’ve gotten another couple of quarters behind us, we aren’t looking to provide any specific financial guidance. However, what I would tell you is that now that the cost cutting and efficiency part of the performance improvement is mostly behind us and we have demonstrated that in our results.  The company is now focused on accelerating the growth of our business in the United States. As we have said before, we are not happy with the growth level in the US and we will be focused on accelerating that throughout the rest of the year.”

CEOCFOinterviews: Where are your manufacturing facilities?

Mr. Cross: “We have two manufacturing locations, our major facility of over 725 employees is in Tijuana Mexico, that is responsible for the vast majority of our production volume.  We also have a small plant here in San Diego with about 150 employees.  San Diego is a very unique economic environment and people really appreciate it.  Just an hour south of our corporate headquarters here in Vista, California, we have world-class labor at very economic rates. Because of this positive economic situation, we have focused our manufacturing initiatives in Mexico, and we support these manufacturing initiatives with our US engineers out of our R&D and manufacturing facility here in San Diego.”

CEOCFOinterviews: With your new desire to see your sales and more revenue coming out of the US, this will increase your manufacturing; will you be able to fulfill the demand once this growth takes place?

Mr. Cross: “We have built a very robust manufacturing operation in Mexico and we are already carrying this 14-day inventory.  We can quickly respond to any blips in demand that we what we see in the actual sales. In Mexico, as we have scaled up our operations over the past year, we have built in additional capacity which we can rapidly tap into.”

CEOCFOinterviews: I know that originally this company was started in 1978, when did you come on board?

Mr. Cross: “I came on board about 14 years ago.  I came into the company as one of the sales managers and ended up being the senior V.P. of Marketing and Development and onto the roll of the President of the company about six or seven years ago.”

CEOCFOinterviews: What has been the biggest challenge over the 12 years that you have been there?

Mr. Cross: “Many. We were a division of Smith & Nephew, which is an English Healthcare company. Being a small division of a large company it is hard to get the attention that you need for working capital and distribution, etc. Smith & Nephew is still a great company and we are still good friends, they’ve done and incredible job, but we made a decision to approach Smith & Nephew to buy the business from them. They agreed because they wanted to focus on core businesses and then I had to go out and raise $200 million dollars to buy the company and that was quite a unique challenge.”

CEOCFOinterviews: That seems to be a very big challenge in itself.

Mr. Cross: “Yes it was and we were very lucky that we partnered with JP Morgan Capital Partners, formerly Chase Capital Partners, one of the largest private equity firms in the world and they have very good knowledge of the healthcare industry. We could have fallen in partnership with some companies that wouldn’t have been as patient and understanding as JP Morgan has. I think we have been very lucky in that regard.”

CEOCFOinterviews: Would you say that your business is almost economy proof?

Mr. Cross: “I certainly say it is resilient, because people are going get injured. However, although, it is still called sports medicine, injuries to the extremities, those injuries also occur in the workplace and everyday activities. One of our investors uses one of our products because she sprained her knee getting out of the hot tub. Hardly a sports medicine injury, but we call it that.  As we get older and continue to golf, play tennis, ski and surf, and generally stay active to stay fit, we see an aging population experiencing what some orthopedic surgeons have termed “boomeritis”, staying fit as we age will ultimately takes its toll on our joints.”

CEOCFOinterviews: Are all of your products are non-surgical products?

Mr. Cross: “Our products are all non-surgical products that are used either before the surgery, or used to help the physician to manage the patient after the first 72 hours. This is the critical part after the surgery and then we have the rehabilitation products to give the patient protection and support on the road to recovery. The surgical products are devices to reattach and repair the injury and that is an area we are looking at getting into the future. We were looking at this area during the last 12 months and backed away from it to focus on our core rehabilitation strategy. However, in the future we will look for ways to enter the surgical fixation and surgical part of the sports medicine world as well.”

CEOCFOinterviews: They all go hand in hand.

Mr. Cross: “They do, because the same surgeon who makes the decision about using our product is the same surgeon who is doing the work.”

CEOCFOinterviews: What is that you feel makes this company unique over your competitors?

Mr. Cross: “We offer a full range of products. We were just awarded the Broadlane contract, which is the one of the largest national accounts in our industry.  One of the reasons why we were successful with that account is because we can bring the whole product range to them. They don’t have to sign contracts with four or five of our competitors to get the full range. That is one of the reasons why people buy from us. Also, the continuous flow of innovative products. Our competitors seem to have smaller product ranges. They are not quite as nimble at developing products across the whole spectrum. Additionally, the service that we provide, sets the industry’s standards and customer service and quality.”

CEOCFOinterviews: How much training do you give your sales staff prior to their going out selling the products?

Mr. Cross: “We have two formal programs in training our sales staff.  The rookie program applies to new sales reps who have recently come on board.  They have a lot of anatomy and physiology to learn, as it applies to our product range.  Every year we run what we call the “graduate program”, where the sales force comes in-house and that is a more extensive, in-depth understanding of our products. They learn the science behind new products that are developed.  The program is much more marketing and interactive, where sales people that have been successful over a period time of a particular sales group or product group actually lead the discussion and training. We have a website that is set up for our sales force called “repnet” and clinical papers and articles are posted for the representatives. Then we have five regional sales managers in the US who help train the sales reps on products, selling skills, and by riding along with them on sales calls, helping them build their relationships with the orthopedic surgeons.

CEOCFOinterviews: Can you further explain your relationship with your sales reps?

Mr. Cross: “Our reps are commission only, they do sell other orthopedic products, although, they do not sell the products that compete with our business.  In the round, dj Ortho business we accounts for about 70% of their income.   While they are independent and commission only, we are joined at the hip with our sales force.”

CEOCFOinterviews: From a potential investors standpoint. They are looking at this company from investment outlooks.   They just read and looked over your company and they are looking at you and saying, “why this company”

Mr. Cross: “I think orthopedics has been a space that has given a good return to the investors. That is the general orthopedic space. A significant number of orthopedic companies are public and the investors that are with those companies have done very well and so I think that makes our space intriguing. Our valuation compared to other companies is substantially lower because of the performance improvement plan we entered into last year. I think that people, who understand that there is an aging and active population out there, can see the future need for our products and a future need for our company.  I think the investor is going to want to see if we can deliver on what we said which is continuing to improve our gross profit, reduce our SG&A expenses and accelerate the growth of the US business.”

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