Angela Steinway - Head, IR Pete Arduini - President, CEO and Director Glenn Coleman - Corporate VP, CFO and PAO.

Matt Taylor - Barclays Capital Chris Pasquale - JPMorgan Larry Biegelsen - Wells Fargo Securities Jon Demchick - Morgan Stanley Bob Hopkins - Bank of America Merrill Lynch Matthew O'Brien - Piper Jaffray Steven Lichtman - Oppenheimer & Company Mike Rich - Raymond James.

Please stand-by. Good day, everyone and welcome to the Integra LifeSciences First Quarter Financial Reporting Conference Call. As a reminder, today's call is being recorded. At this time, I'd like to turn the call over to Ms. Angela Steinway, Head of Investor Relations. Please go ahead..

Thank you, Catherine. Good afternoon and thank you for joining the Integra LifeSciences first quarter 2015 earnings results conference call. Joining me today are Peter Arduini, President and Chief Executive Officer; and Glenn Coleman, Chief Financial Officer.

Earlier this afternoon we issued two press releases one, announcing the appointment of Keith Valentine as CEO of SeaSpine and the second providing our first quarter 2015 financial results and updated 2015 guidance. We also posted a presentation on our Web site, which we will reference during the call today.

You can find this presentation at integralife.com under Investors, Events & presentations in the file named First Quarter Earnings Call Presentation. If you would open that file up to Slide 2, please reference our Safe Harbor statement covering the forward-looking statements we will make on the call today.

As well, please reference the reconciliations of non-GAAP financial measures at the end of the presentation beginning on Slide 12. As a reminder, on April 13, 2015 we published an 8-K and posted a presentation on the Investors section of our Web site reconciling our new revenue presentation to the prior five segment view.

Our fourth quarter earnings presentation also reconciled the guidance from our prior segment view to the new one. Beginning now and going forward, we will only discuss our results and forecast in the current structure.

All of the results and forward-looking guidance we are providing today is based on the current Integra portfolio which includes the Spine performance for the full year.

Once the separation is complete we will begin reporting the Spine business on a discontinued operations basis which will have the effect of removing the Spine business for the full year and all historical periods from our continuing operations. And now I would like to turn the call over to Pete..

Thank you, Angela and good afternoon everyone. Referencing Slide 3, we had a successful first quarter with sales increasing 8.7% as reported and 7.3% on an organic basis. This is our second quarter in a row with organic growth above 5% and one of the highest in recent memory.

Revenue growth was strong in both Specialty Surgical Solutions and Orthopedics & Tissue Technologies which combined increased 9% organically. The acceleration in organic growth this quarter was primarily driven by our regenerative product sales. Globally Dural Repair, Skin and Wound sales were each up double-digits.

On a constant currency basis, international sales accelerated to 15% growth. Below the top-line, our adjusted EBITDA margin increased to 20.4% which reflects an improvement of 320 basis points over the prior first quarter, an excellent start to the year and ahead of our initial expectations.

The better than expected revenue and profitability drove adjusted EPS up more than 30% to $0.76 despite a currency headwind that reduced growth by 6 to 7 points. Free cash flow conversion in the first quarter reached nearly 90% with free cash flow of $23 million.

Our first quarter results are indicative of the operating performance that we can achieve on a constant currency basis as we progress towards our long-term goal of consistently delivering organic growth of 5% to 7%, adjusted EBITDA margins of 23% to 24% and free cash flow conversation north of 80%.

Before Glenn goes through the detailed financials, I'll point out a few of the operational accomplishments that we made during the first quarter. So please turn to Slide 4. The sequential acceleration in organic growth is largely tied to the successful expansion of our commercial team and new product introductions over the last 24 months.

Our broad portfolio of skin products used in burn and wound applications including newly launched Integra Meshed Dermal Regeneration Template and Integra Wound Matrix Thin experienced a healthy uptick during the quarter.

Our Shoulder line continued to advance as we passed the first anniversary of its full commercial release and adoption of the new Freedom Wrist is picking up as well. Previously we stated that we're expecting new products to drive about one quarter of organic growth in 2015 and we're on target to reach or exceed that goal.

We're also on-track for a full commercial launch of our diabetic foot ulcer product in mid-2016 and plan to increase resources in the second half of 2015 to support commercial operations, including clinical and regulatory affairs and reimbursement for the upcoming entry into the outpatient wound clinic.

In November of last year we announced that, beginning in the first quarter of 2015, we would begin integrating our prior five division structure into the three segments that you see today. That realignment not only optimized our organizational structure but has enabled us to reduce cost and support areas of the business.

Consistent with our guidance issued in February, we've redirected spending to important investments to build out channel infrastructure in International and Extremities markets, as well as to increase funding for key R&D projects. One of our priorities for 2015 is the completion of the spin-off of SeaSpine.

SeaSpine filed a Form-10 registration statement in early April. And we announced today that Keith Valentine is joining SeaSpine as CEO. Keith's 20 years of experience in the orthopedic industry and track-record of success in leadership roles makes him a great fit for the position.

Keith expertise should be invaluable to guide SeaSpine as it begins to investing growth, enhance its pipeline and leverage its orthobiologics and spinal fusion hardware portfolios. I'm excited about the progress with the separation and with Keith onboard we're confident that we will be able to complete the spin-off of SeaSpine in a timely manner.

Outside of completing the spine-off, we have the capacity to evaluate M&A opportunities which remains a focus for our team. So, now with that I'll turn the call over to Glenn to walkthrough our financial results and update our 2015 outlook.

Glenn?.

Thanks Pete and good afternoon everyone. As Pete mentioned, we’re off to a great start to the year and our first quarter results exceeded our expectations in both top-line growth and profitability despite the impact of unfavorable foreign currency translation.

Our first quarter organic revenue growth of 7.3% and adjusted gross margin of 66.6% drove higher than expected profitability and cash flow. In addition, our adjusted EBITDA margin rose to 20.4% and adjusted EPS increased more than 30% during the first quarter, resulting in a higher outlook for the full year.

Our operating cash flow result of $31.6 million during the first quarter was one of our strongest quarters in the last two years and puts us on-track to meet the free cash flow conversion guidance we laid out in February. Now I'll review our segment revenue performance in the first quarter beginning on Slide 5.

Sales in our Specialty Surgical Solutions segment were $140.1 million in the first quarter of 2015, up 10.1% from the first quarter 2014. Global sales in our Dural Repair franchise increased over 20% driven by DuraSeal and sales in new markets outside the U.S.

Precision Tools and Instrument sales, which include the former instruments product portfolio as well as our cranial stabilization and stereotaxy product lines, increased low single-digits, excluding MicroFrance. Sales in the U.S. drove the increase, while sales outside the U.S. posted a slight decline on a constant currency basis.

Our MicroFrance integration is going well and first quarter results were slightly ahead of our expectations, especially in France where the sales channel is direct. Neuro Critical Care sales had another strong quarter, with sales increasing low double-digits on continued strength in both disposables and capital equipment.

For the full year, we continue to expect sales growth of 2% to 6% within Specialty Surgical Solutions despite having a higher impact of unfavorable foreign currency translation. Of our three segments, this segment contains the greatest foreign currency exposure.

Moving to the Orthopedic & Tissue Technology segment shown on Slide 6, sales were $61.4 million representing growth of 12.4% over the prior year first quarter. Our regenerative technologies franchise led this robust performance with an increase of more than 20%, and was driven by demand for our broad portfolio of skin and nerve products.

Within upper extremities our shoulder and wrist sales also increased double-digits. Sales in lower extremities were down on a year-over-year basis may be due to a large international order placed in the prior year that did not recur in the current period.

The Metasurg acquisition, which was completed in December, is performing as expected and we're in the midst of transitioning the product portfolio from a distributor model to our direct salesforce. Once this is complete, we would expect to see an uptick in sales in the second half of 2015.

As a result of the solid start to the year particularly in new products within regenerative technologies, we're increasing our growth expectations for the Orthopedics & Tissue Technology segment to 8% to 12% in 2015, up from our prior guidance range of 7% to 11%.

Finally turning to Slide 7, sales in the Spine segment decreased about 3.1% on a year-over-year basis to $32.2 million. Hardware sales are down mid single-digits somewhat offset by roughly flat sales in orthobiologics.

While sales decreased in the first quarter the decline was not as pronounced as the one we saw in the fourth quarter of 2014 and we expect to control market release for our new expandable interbody device to shift into full market release in the second half of this year. We now expect revenues for the Spine segment to be flat to down 4% during 2015.

Slightly below our prior commentary calling for sales to be roughly flat. This slight reduction of our guidance reflects a somewhere light first quarter performance and a cautious outlook on growth recovery as we move closer to the spin-off.

We continue to believe that new product introductions, the strength of the orthobiologics portfolio and the future investment that we made in the business will return to a growth trajectory longer term. That wraps-up our revenue overview for the three new segments. Moving on to total company revenue, Slide 8 breaks down our revenue guidance for 2015.

Despite additional currency translation headwinds, we are raising the low-end of our sales guidance range by $5 million. Our full year revised guidance range is now $965 million to $980 million which implies reported sales growth of 4% to 5.5% over the prior year and a full year organic revenue growth at or above 5%.

We expect foreign currency to account for approximately a 3 point reduction on our reported growth rate. Our expectation for sales contribution from acquisitions and discontinued products remains unchanged. With respect to the second quarter of 2015, we expect currency exchange rates to reduce revenue by about $8 million.

We expect second quarter revenue to be in a range of $240 million to $245 million which assumes an organic growth rate of roughly 5%. Let me now move to our performance below the top-line. Please turn to Slide 9. Adjusted gross margin increased 150 basis points versus the prior first quarter.

The improvement was largely driven by favorable product mix, in particular the strong performance of our regenerative products and the benefits from our optimization initiatives.

Given our strong first quarter results and expectations for continuing favorable product mix for the remainder of the year, we're increasing our guidance for gross margin by 50 basis points from our prior guidance.

On a sequential basis we expect currency to have a negative impact on our gross margin during the second quarter, offset by favorable product mix. As we previously communicated we're anticipating additional costs for our new Collagen manufacturing center in the second half of the year.

This will likely leave the second half gross margin being slightly below what we report in the first half of the year. Moving to operating expenses, R&D in the first quarter was essentially flat with the prior year quarter, but decreased about 40 basis points to 5.4% of revenue. The prior year quarter included higher spending on the DFU study.

R&D expense increased sequentially from the fourth quarter and we expect to see a continuing ramp-up of spending for new product development and clinical programs throughout 2015. We're committed to increasing our investments in clinical studies and product development to drive growth.

We expect to exit 2015 with a higher and a greater run rate of R&D expense with full year R&D expense now projected to be between 5.5% and 6% of sales.

Reported SG&A expense increased over the prior year, mainly due to higher selling and marketing cost as we added commercial resources and incremental cost related to the spin-off as well as recent acquisitions.

Adjusted SG&A expenses in the first quarter of 2015 decreased 110 basis points as a percentage of revenue due to lower corporate G&A spending and better leverage of our cost base and higher revenues.

As we indicated in February we have plans to add 70 commercial resources during 2015 mostly in our international and orthopedics and tissue technologies selling organizations. During the first quarter, we made significant progress towards filing these roles and we’re still in the process of completing this investment.

In addition, we plan to increase spending in the second half of 2015 to build an outpatient chronic wound channel and the necessary support such as clinical and reimbursement expertise. We also expect to incur additional expenses for key SeaSpine physicians hired prior to the spin.

As a result for the full year 2015, we expect our SG&A to be at the upper half of our initial guidance range. In the first quarter our adjusted EBITDA margin was 20.4% up 320 basis points over the prior year quarter.

For 2015 we are increasing our adjusted EBITDA margin by 50 basis points and are now calling for an increase of 100 to 200 basis points over 2014.

Because of the solid first quarter performance on gross margin, the projected R&D ramp and ongoing additions to our commercial infrastructure in SG&A, we expect profit margins for the business to have a more gradual progression throughout 2015, than in the years past.

We're increasing our reported tax rate forecast to a range of 29% to 30% and our adjusted tax rate to about 32%, because we expect a higher proportion of U.S. based income for the remainder of the year. For the full year of 2015 we are raising both GAAP and adjusted EPS guidance of $0.10.

This equates to an adjusted EPS growth rate in the range of 6% to 13%, which excluding the effect of currency would be higher by approximately 5 to 7 points of growth. Looking at second quarter earnings we expect a greatest negative impact from currency this quarter.

We expect second quarter adjusted EPS to increase slightly on a sequential basis over our first quarter results. Turning to Slide 10, our cash flow from operations was $31.6 million and our free cash flow conversion was 58%, on a trailing 12 month basis an excellent result.

The improvement versus the first quarter of 2014 was largely due to higher net earnings, improvements in working capital and lower capital expenditures. These cash flow metrics were ahead of our expectations and demonstrated an improvement in our quality of earnings.

That said, we have yet to incur the majority of our cash obligations tied to the spin-off, and expect to have greater requirements on working capital, particularly in the second quarter. We are maintaining our guidance for 2015 cash flow from operations to be in the range of $80 million to $90 million.

We continue to expect capital expenditure between 40 million and 45 million and a free cash flow conversion of 36% to 45%. This guidance includes the cost acquired for separating the Spine business, with respect to impact cash by approximately $20 million.

With respect to shares outstanding we are now adjusting for the anti-dilutive effects of the bond hedge on our 2016 convertible notes. And I provided a reconciliation on our slide presentation. The first quarter impact was minimal at 30,000 shares.

Before I turn the call back over to Pete, I want to provide some additional details regarding the separation of SeaSpine. Both the hiring of Keith Valentine as CEO and the initial filing of the Form-10 registration statement represent important milestones in the path to completing the separation.

The next step in the spin-off will be to file the first quarter update to the Form-10 and respond to comments from the SEC. Shortly after filing that update we plan to publish and discuss, supplemental and financial information that will provide an initial look at Integra’s historical financials excluding the Spine business.

To insure the financial strength of SeaSpine and adequately fund their growth investments we're planning to spin-off the company with an increased range of $40 million to $50 million of cash on the balance sheet. This will also cover any expected liabilities for transaction costs, which may remain at the separation day.

We look forward to meeting with many of you as both management teams plan to participate in a number of investor conferences and marketing events during May and June. Overall the spin-off is proceeding well and we now expect to close the transaction sometime during the third quarter of this year.

And with those final comments, I'll now turn the call back over to Pete..

Thanks Glenn. We have a number of priorities that we're focused on in 2015 summarized on Slide 11. Our top objective is executing on our 2015 targets which includes delivering organic revenue growth of at least 5%, driving margin improvement, increasing cash flow and growing adjusted EPS with our first quarter performance we're off to a good start.

Our second priority is completing spinoff of SeaSpine and integrating our two division global structure. This change fundamentally restructurers the company and begins to position us for a new phase of growth.

As SeaSpine’s strategy and operations take shape as a independent company I am increasingly optimistic about the value this spin-off will create. With Keith onboard the registration statement filed and the R&D pipeline well-positioned and separation activities on-track, this new company will be in a great position to accelerate growth.

For Integra the spinoff will have multiple positive effects including the financial impacts of enhanced top-line growth profile, higher adjusted EBITDA margin and improved free cash flow conversion.

Separate from the changes to the financial statements, the spinoff will enable Integra to focus on two businesses, Specialty Surgical Solutions and Orthopedics & Tissue Technologies for scale, profitability and long-term growth.

Moving on our third initiative for 2015 centers on organic growth, we expect our R&D efforts to begin to support a stronger cadence of significant new product introductions. In 2015, we expect to see new product introductions drive roughly one quarter of our organic growth, which we're on-track to achieving in the first quarter.

We will introduce a new cranial positioning device, the MAYFIELD 2 next week at the American Association of Neurosurgeons Meeting.

In addition, Orthopedics & Tissue Technologies will be launching several new products to address disease states and enhance our product offering in lower extremities such as in external fixation system in second quarter and our two-piece ankle, which, as we indicated on our last call is scheduled for a limited market released in fourth quarter of 2015.

We made steady progress against our channel investments and we're on-track to our plans to add 70 commercial resources in 2015. These target additions will expand our sales organization, strengthen our international infrastructure and significantly benefit our enterprise sales effort.

These investments will result in both greater expenses and greater revenues as we progress through the year.

And finally, we continue to view M&A as a strategic priority to drive future growth while recently been focused on internal priorities like Spine spin-off, our business development team continues to evaluate acquisition targets within our areas of interest, which are wound care, extremities and specialty surgical.

We believe we have the right balance of investments in near and long-term growth opportunities to reach our goal of consistently delivering 5% to 7% top-line growth, 23% to 24% adjusted EBITDA margins, EPS growth of greater than 10% and free cash flow conversion over 80%. So with that operator, we would like to open up the lines for questions.

In an effort to accommodate a large number of callers, we ask you to limit yourself to one question and one follow-up, after that you can rejoin the queue. So operator, open the lines up now..

Thank you. [Operator Instructions] We'll take our first question from Matt Taylor with Barclays..

I just wanted to ask a question about some of the durability of the growth that you saw in the first quarter. You are raising, but really saw some exceptional organic growth this quarter.

How much of that was one-time, if there was any stocking and can you talk about what you expect in terms of the ongoing growth rate for, especially the Neuro business?.

Yes I would say, Matt, from a standpoint of ongoing capabilities I think, we feel pretty good about the underlying consistent business, there weren’t any major one timers but keep in mind that were things such as DuraSeal had a few weeks that didn’t lapse from last year. We didn't close the DuraSeal deal until later part of January.

We’ve got MicroFrance in there as well. But I'd like to look at and say on the Dural Repair franchise which has DuraSeal and DuraGen in there.

We had a very-very high performance above really what that market runs at and so we see that settling out at more of a market perform level which is, as we've kind of talked about is in the mid single-digit range. But we're very pleased across the board the Skin business which we put a lot of focus on with new channel, new tools, new products.

We see that continuing to be a strong double-digit contributor but the fact is in Q1 we had a just a bunch of larger, I'd say higher performance than we think it’s sustainable throughout the year but again when you still take a look at our ongoing run rate across the business, it's done well.

And even some of our new segments, the Precision Tools which has our Instruments and some of other devices such as MAYFIELD performed well within this quarter and we look at that and say with the launch of the MAYFIELD product we feel quite -- very good that that will continue to be a performer throughout the year.

And then Glenn, I don't know if you want to add any other comments..

Yes, Matt the only thing I would add is keep in mind that our Specialty Surgical business has the highest amount of foreign currency exposure, so if you look at the strengthening dollar, it's actually going to have an additional headwind for us in the second half of the year here, that was greater than we initially thought, so we are maintaining our guidance range despite the additional FX headwinds and if I look at the organic growth in the first quarter, Pete mentioned we'd a really strong Dural Repair quarter expect it to continue in terms of seeing growth but not probably to the same extent and levels that we saw in Q1 and then keep in mind MicroFrance is all acquired revenue in Q1 as we get to Q4 a year-over-year MicroFrance is going to be organic growth for us and that is a slower growing business versus the rest of our Neuro franchise.

So I'm expecting to see the Neuro organic growth rates come down a little bit in the back half of the year but in overall expecting to have a really good year for our Specialty Surgical business..

Yes, I mean that being said really across the board even though Spine, we didn't have obviously an uptick in the business, we actually had sequential improvement from the standpoint of how we think about a lot of the capabilities.

If you take a look at Orthopedics & Tissue, the teams really executed on the plans I had laid out and as we mentioned with Specialty Surgical it has been a good performance across the board and again a lot of it is then, a lot of hard work those teams have put in over the last few years and now we're starting to see some of the benefit of that in channel and product investments..

Thank you. Our next question comes from Chris Pasquale with JPMorgan..

To start off with, can you just give some more color on the Extremities performance in the quarter? What was the Upper Extremities growth rate? And if you adjust for that big order in the year-ago period for Lower, how did that business perform?.

Yes, so I would say, the Extremities business we had a very strong performance as we mentioned in the prepared comments within the Regenerative. And again Regenerative is a combination of not only Skin that goes into Wound and Burn.

Some of that touches into specific extremity areas such as tendon repair as well as also Neuro, all of those businesses performed quite well, so that spreads across there. Our Upper Extremities business primarily driven by the shoulder continued to perform well double-digits up significantly the new wrist as well.

I would say again that the area that we're still in the midst of working through to be able to drive up the growth is in the lower area, and we did have that one order but we also had, we had some supply challenges within the quarter that we worked through that. We'll be getting behind us.

A lot of our new launches are actually doing quite well, our new foot system and stuff.

And also the Metasurg acquisition, really Q1 was kind of a transition quarter meaning that we were going from their distributor structure into our direct force and didn't really expect to see much of an uptick but as we go through the next quarters, we will plan to see that increase..

And then any update on the competitive landscape around DuraSeal? I know when you did that deal there was an expectation that that could get more challenging. It seems like that has not happened, at least as quickly as expected.

Any update there?.

Yes, I’d say really there is no other competitor with a similar product on the market, we are aware that there has been another product that's actually been approved but haven't seen it come out to the market.

We were planning for this year to see another product come into the market candidly from around in the second quarter standpoint and we really factor that in about how we think about the guidance but we feel quite good about our product family and product line within DuraSeal, I mean just to remind you, we got indications for the Spine as well as the Cranial.

We actually have two products that have different characteristics, that give different positioning capabilities our DuraSeal and our DuraSeal Exact product.

And then we have got the largest as you know Chris, neurosurgical salesforce that it's in the OR theatre significant amount of time talking about a lot of our products but also between DuraGen as an onlay or DuraSeal as an adjunct to be on top of sutures.

We feel quite good about our position to be able to continue to grow but as I previously mentioned, I think the growth we had in Q1 was exceptional, we don't plan for that level of growth to go out through the year and our guidance reflects what we believe, we should be achieve as well as with a potential new competitor coming into the market..

Thank you. And we'll go to Larry Biegelsen with Wells Fargo..

Let me start, Pete, with DFU. Just a couple of quick ones, publication, timing, has it been accepted? How do you feel about fitting into the high cost bucket? And lastly on DFU, how do you feel about -- let's just say, DFU sales in 2016, is about $10 million the right way to think about it? Thanks..

So Larry, I'm not going to give you an estimate of what we think for 2016 at this point in time.

We'll just talk more about how we think about DFU as we get closer to the late fall period, we'll plan on having some more discussions about how we think about that but I'd tell you, we feel really good about all of our plans, our general strategy is on-track, we don't have a publication date yet to announce but as we've mentioned probably closer to the end of Q2, we'll have that and we will communicate that when that's available.

Our P&A submission as we've mentioned running on time and we're working with the FDA on kind of the planned intervals as one would think, the other part that Glenn and I both commented on which is quite important is a big part of having your DFU program be successful as we've seen from others that have been successful in the marketplace.

Is having the rate back room support structure for customers in the outpatient environment. And whether that be the teams that actually help providing insight on billing, provide support and structure on reimbursement. And so we plan to actually be investing and filling some of that out later this year.

As well as in the second half of the year, we plan on actually having some initial call points within to the veteran affairs area. So all those are on line and on-track and again we feel quite good about where we're with the product and being able to be on-track for that mid-year 2016 launch..

And the switching gears to Shoulders. In the first year, the launch, I think you said you captured about 1% share.

How should we think about that going forward, is about 1% share, incremental share, per year reasonable? And is there anything new in terms of disruptions on the competitor front from the mergers that are going on? Thanks for taking the questions..

Yes I'd say, I think the 1% a year is kind of the way we've been thinking about it, we used our first year took the product out we've had -- we have worked on some tweaks and instrumentation and implants which is a pretty typical route.

And as I have mentioned we've been quite cautious about how fast we ramp-up, we'll start ramping up here this year is really where we start ramping up our capabilities and more specifically for us in the second half of the year.

But we got a lot of great feedback about our instrumentation the simplicity of it and the ability that expands across our reverse and our traditional shoulder.

And so we feel very good about that capability there hasn’t really been any things that we've seen at this point that have been disruptive but obviously as acquisitions and integrations take place, we're a distributor base structure within the shoulder and where there is opportunities for us to expand our distribution reach we will be obviously looking to do what we can to drive more sales..

And we'll continue on to David Lewis with Morgan Stanley..

This is actually Jon Demchick for David. So on a very strong quarter, we saw that the gross margins were actually a lot higher than we would have necessarily expected. I thought there would be higher manufacturing costs and inventories. And that maybe didn't carry through as much as I thought it would.

Is there anything else that drove the gross margin line a bit higher on the quarter? And as we think about the rest of the year, outside of added facility costs, is there really anything that should drive margins lower?.

Sure Jon, I'll take this one.

So, our gross margin in the quarter were higher than we're expecting candidly driven by higher organic sales and those sales are really coming from our regenerative product so, if you look at our high margin products skin, DuraGen, DuraSeal al had really-really strong quarters and you saw that favorable product mix in our results and that's why you see the result relative to our gross margins being where they are at, but relative to how we see gross margins for the rest of the year, I mean I think Q2 would be pretty similar to Q1 but the second half for the year we're going to be turning on our new Collagen manufacturing center and we'll have some additional cost to bear relative to that start up and you're going to see those cost in Q3 and Q4, we have previously talked about some of those so, when we looked our gross margins first half to second half, you can expect to see probably a little bit of a decline in our gross margins in the second half for the year versus the first half because of that but nevertheless for the full year we're guiding our gross margins higher given the strong performance in the first quarter so we are guiding higher by about 50 basis points and part of that is the product mix that you saw in Q1 is expected to continue for the rest of the year to a certain extent.

Pete, I don't know if you have anything else to add..

Yes, I would just Jon, and as we've talked about, we are starting to see the benefits of a lot of the initiatives that we've been focusing on, so over seven plants that we've restructured now, we spent a lot of time with the moving to the three divisions which will ultimately be two, once SeaSpine is spun off to really right size what our corporate structure should be and so we're starting to see some of the benefits come through, obviously some in SG&A, some that are coming through the cost of goods, but we feel good about that, we're not at the end of that cycle, I think as Glenn said you have painted the picture appropriately for 2015, but we have plans going on here through the next few years to continue to be able to see those improvements towards the targets that we have laid out..

And just a quick follow-up on the Form10 that was published recently, you guys mentioned -- or warned -- that the SeaSpine Company may not, for the Form 10, may not show it as profitable as you actually view it as. I believe it showed a 60% gross margin there. Most Spine companies are probably in the upper 70s on gross margin.

I think you guys are probably somewhere in between, just given the product mix. I was wondering if you could give any sort of comment there..

Yes, so just relative to how we look at SeaSpine, what we said on the February call was the EBITDA margins of that business within our hands today is in low to mid-teens and so that is how it is within the Integra portfolio for EBITDA.

The gross margins of that business are pretty equivalent to the overall Integra gross margins though today, it's not significantly different. We assume that Form 10 though is a different picture relative to the profitability of the business because it includes a lot of allocations.

Most of those are below gross margin but there are some including gross margin as well and so the actual financial results and profitability that business in the Form 10 show a lower picture than, what I will say is the reality of that business and what they are going to be able to generate as a standalone company..

Our next question comes from Bob Hopkins from Bank of America..

So just a quick one on guidance, sorry if I'm missed this.

Can you just remind me for 2015, what was the FX EPS headwind from FX that you estimated at the end of last year for 2015? And how is that different now, three months later? What's the incremental hit?.

Sure so Bob when we came into the year, where we were expecting about a $25 million impact on our top-line, given where rates are currently we’re expecting that to be at $30 million now, so an additional $5 million on the top-line.

And then on the bottom-line, we're expecting EPS hit I will call it $0.12 or so on EPS and that's probably $0.03 higher now so we are expecting about $0.15 on our overall EPS number, so it an additional 5 million top-line and $0.03 on the bottom-line..

And just in terms of the EPS guidance change then, you're raising guidance by a little bit less than the beat. I assume that's just because of that extra currency hit..

Yes, so the way we look at it is we probably beat our expectations by $0.13 to $0.14 in Q1 and raised guidance by $0.10.

If we look at the rest of the year and we were expecting to be for Q2 and you’d probably expect this to be in total up $0.20 for the full year, but we raised guidance by about a dime and the other $0.10 is a combination of FX and then quite candidly we're going to be making some additional investments in our sales channel and the infrastructure that Pete mentioned relative to setting us up for DFU launch and the reimbursement back office function.

So I kind of look at it as, beating the first quarter $0.14, straight forward expecting to be for Q2 probably another six, but we're going to spend and incur headwinds of $0.10 and we are raising our guidance by the other $0.10, that's the way I think about our guidance..

Congratulations on landing Keith Valentine as CEO for SeaSpine. I think that's fantastic.

I'm just curious, is he going to be able to start directly after the spin? Are there any non-competes there that might limit his ability to get up and running from day one post-spin?.

Yes, now we believe that we'll have Keith up and ready getting going here at the beginning of May and at some point out Bob, within the next few weeks in the beginning of that period, we'll be getting out to speak from a company standpoint both from an Integra and SeaSpine so you'll get some exposure, as we've done our diligence and stuff, we are elated to have someone with Keith’s background and really experienced for taking a company that he grew up with obviously invasive his time at Medtronic, and bring it into a company such as SeaSpine.

So, now we feel quite good that he'll be ready to roll and I think he's pretty energized to get started..

Just to be clear, non-compete is not an issue for him personally.

He can just get started?.

Yes, of course, in California there's no major issues associated with non-competes..

Thank you. We'll continue on to Matthew O'Brien with Piper Jaffray..

I was curious, with all the integration that's ongoing right now from an acquisition, a reporting unit perspective, and then with SeaSpine coming up, if you're seeing any type of disruption within the organization right now, or if you saw it in Q1, that actually may have hurt results a little bit, even though they were quite strong.

Anything else to monitor throughout the course of the year as you go through this transition period?.

So, Matt I mean we're obviously at some level we've been at works in progress on a lot of activities.

So, we've had a lot of things going on, I wouldn't say that anything has taken place in the first quarter that has impacted the overall result I think everything has kind of lined up pretty well, I think, if you think of the acquisitions with the MicroFrance piece was tied with the Specialty Surgical Group.

We had the work being done for the smaller acquisition with Metasurg and OTT. Our corporate team in many cases carried a lot of the brunt of dealing with the Form-10 in a lot of the work that is associated with the spin and the Spine team by itself obviously as a part of being involved.

Probably had some of the most time that was observed being part of the spin-off and so that is kind of factored into how we think about the guidance and it's also one of the reasons that over the next year or so, with Keith's leadership the product pipeline that they have we think that SeaSpine can move back into a growth scenario but there really wasn’t anything in Q1 and I'd say as we look into the horizon of this year nothing major from that standpoint and we feel pretty good about our ability to kind of tackle both some of the structuring items as well as the growth items because we've been able to get the right people in the right roles and really segregate responsibilities to handle both..

And then on the gross margin line, performance in this quarter was quite strong. I know you're talking about the collagen manufacturing spend here in the second half, and then as you ramp up DFU, that may be somewhat of a headwind.

But thinking out a little bit longer term, with the growth in Neuro and some of these other higher margin type products is there any reason to think that you couldn't get several hundred basis points of additional gross margin expansion above where it's been over the last couple of quarters?.

Yes Matt it's Glenn. Clearly once we get through this year we're able to get additional capacity on our new facility that will help our gross margins as we observe those costs. We're still committed towards achieving a 68% plus adjusted gross margin as part of our long-term target.

So, yes over a period of time, I’d see us continuing to make some progress both in terms of additional cost reduction efforts along with the improved mix in some of the products that we're going to see growth in so we do see more improvement coming down the road and we're still committed to getting north of 68% on our adjusted gross margins..

But the 68% is not a ceiling?.

No, we're not there yet so, once we get there we'll talk about if there is any additional upside but at this point, we see more improvement, how much more improvement is to be seen in the future..

Thank you. And we'll continue on Steven Lichtman with Oppenheimer..

First, Pete, where do you see the biggest opportunities for international expansion and growth, both geographically and also maybe from a product category perspective?.

Yes so, Steve, as you can see we had a -- we felt a pretty good quarter kind of showing some of the initial capabilities for international to expand and I'd say that it’s really tight to the strategy which we have laid out there is still a significant amount of opportunity with specialty surgical and new markets to even bring DuraGen and DuraSeal to those markets what we called, the precision tools, which is a big chunk of instruments.

We're very small players still outside the United States and we're making some investments this year, actually in Western Europe to be direct in certain markets, which we believe is going to help accelerate growth and then on the orthopedics and tissue side it really does come down to our regenerative portfolio I mean we are significantly underrepresented in markets outside the United States we think we have a bit opportunity, you may ask why? We really haven't had the direct presence or the focus at that level and that's one of the things that the team is changing.

I'd say from a market standpoint, and nothing has really changed from what we've spoken about. We believe that China which had a great quarter for us we believe it's going to be a strong performer for us into the future, since we've made a lot of the significant investments that we have put in place there.

I mean just a few years ago, we had really zero employees on the ground and we'll have in the 20s there this year.

Japan is another market that again as in a growth market per se from a standpoint of broader economics but from our standpoint a lot of our products play extremely well within that market and then Brazil, will be an interesting opportunity growth for us as we go forward.

So, I'm pretty optimistic about the capability in our two division structure really there is a nice combination of being able to apply more resources thinking about international opportunities whether it be R&D or global marketing team to make sure we have the right products aligned to those businesses and I can tell you already we have a different vibe in our business even here in Plainsboro, how we think about the global market the way incentives have been aligned and the way we're focusing now..

And then secondly, you talked about increased efforts on the enterprise selling organization.

Can you talk about some of the activity that you're seeing in the field? Maybe some of the successes, particularly as you're moving now into the new divisional structure?.

Yes so it's a good question. So obviously our enterprise business actually crosses over all of the divisions and so when we want to represent one phase to a larger IDN.

We actually now have folks on the ground that represent geographical parts of the United States and specific accounts and they get those account teams together to talk about where the broader opportunities are for Integra and we take a look at customers that want to take a look at buying our broader portfolio or interact with us and we've actually made some very good progress on setting up the first level of contracts which in many cases are access contracts but we're starting to move into the next phase which gives us more broader access into not just GPOs but IDN contract areas and one of the upcoming calls we will probably give some more color on this but I feel quite good about how we got the Unites States covered now and the ability for accounts it is a very strong burn account that may not really know how much we've in neuro surgery the ability to actually contract and talk about our old portfolio and bring more products into the line.

We think for our broader wound strategy both in-patient, and out-patient a version of enterprise contracting will also be an important capability and so obviously we're quite happy with the structure we have built today..

And we will now go to Jason Bedford with Raymond James..

This is Mike Rich calling in for Jason.

Can you hear me okay?.

Yes, hi Mike..

So it sounds like the MicroFrance deal is off to a pretty good start. Can you remind us what the US/OUS mix is there? And related to that, you made comments about the importance of M&A going forward.

Do you feel like you need to add more product or more distribution outside the US? Or are you more US focused on the biz dev front right now?.

Yes I'd say just to remind on MicroFrance, there is roughly two thirds OUS and about a third U.S. with a larger portion outside the United States and France just because that was their core home country.

I'd say from a growth standpoint when you take a look at this revenue resource we're talking about adding -- actually, it's a pretty much about a 50:50 split between U.S. and OUS resources. And I think as we get into the diabetic foot ulcer launch that's going to be very a U.S. specific focus to begin for as we get in next year.

So that will be more of a U.S. focus but across our portfolio whether it be our thin skin you take a look at our products particularly the MAYFIELD 2 launch which we're talking about will be a very global launch. Our ankle products many of our other extremities launches now in the past we've thought about them maybe as a U.S.

first and then a couple of years later taking them to other markets outside the United States.

Now right upfront we actually categorize which markets we're going to go into so we can do close to simultaneous launches and so that drives incremental investments in certain areas and so I'd say you're going to see it ramping up in different levels of infrastructure outside the United States probably in a range of about similar to a 50:50 play U.S.

versus OUS..

And then I'm sorry if I'm missed this, but can you give us an idea of how the private label business performed in the quarter?.

We haven't really broken out the other private label business, we've some private label business candidly that touches multiple areas of the business but from a standpoint of it is historical standpoint, it's been on-track, it hasn't been really a drag for the business but it is something now that we really don't break out because it's not that sizable of a business any longer..

Thank you. And with no additional questions in the queue, I'd like to go ahead and turn the conference back over to Mr. Peter Arduini for any additional or closing remarks..

Thank you. So I'd like to thank obviously everyone for joining the call this evening and all of your questions. I’d also like just to take a minute to reiterate a few key messages from our prepared comments. So it's a great quarter and obviously great start to the year for Integra.

This is a second quarter of greater than 5% organic growth and our expectations for the second quarter for that to continue. Profitability increased 320 basis points, and our EBITDA margins were at 20.4% representing the benefits of the restructuring as we spoke about as well as the improved commercial focus within the portfolio.

We also plan to ramp-up the spending in the second half of 2015 and increase investments in areas for such as DFU and our R&D pipeline, which we'll believe will drive top-line organic growth, help us achieves scale and set us up for success in 2016.

The spin-off as you heard is well on-track and we're well positioned to create value SeaSpine as a separate public company and lastly we increased our guidance raising the lower end of our 2015 revenue range by $5 million and raising our EPS range by $0.10.

So again thanks for listening and we look forward to speaking with all of you here in the near future. Thanks again and have a nice time..

Thank you..

Thanks..

Thank you. And again ladies and gentlemen, that does conclude today's conference. Thank you all again for your participation..