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

Thank you, Karylle. Good morning, and thank you for joining the Integra LifeSciences third quarter 2015 earnings results conference call. Joining me today are Pete Arduini, President and Chief Executive Officer; and Glenn Coleman, Chief Financial Officer.

Earlier this morning, we issued a press release announcing our third quarter 2015 financial results and increasing our 2015 full-year guidance. We also posted a presentation on our website which we will reference during the call today.

You can find this presentation at integralife.com under Investors, Events and Presentations in the file named Third Quarter Earnings Call Presentation. If you would open that file up to slide two, please reference our Safe Harbor statement covering the forward-looking statements we will make on today's call.

As well, please reference the reconciliations of non-GAAP financial measures at the end of the presentation beginning on slide 12. And now, I will turn the call over to Pete..

Thank you, Angela, and good morning, everyone. Turning to slide three, let me start with some of the highlights from the third quarter. Our reported sales increased 14.6% over the prior year to $226.4 million with another solid quarter of 7.2% organic sales growth led by our regenerative products in both segments.

Outside of regenerative products, sales of our Titan Shoulder and of our Precision Tools and Instruments franchise also contributed to growth in the quarter. Organic growth through the first nine months of 2015 was roughly 7.7% and we are now increasing our expectations for the full year to between 6% and 7%.

International sales in the third quarter increased about 18% on a constant currency basis, reflecting the addition of MicroFrance and investments that we have made in our channel and commercial infrastructure over the past few years.

We were particularly pleased to see strong Instruments growth in Europe as we transitioned to a direct sales model during the quarter. We also made significant progress in China as a result of the channel and infrastructure investments that we've made over the last few years.

Below the top line, we achieved our financial objectives while making key investments to fuel our growth. With our performance in the third quarter, we remain on track to meet our full-year 2015 targets.

In addition, our adjusted net earnings remained strong and in line with our expectations while our year-to-date free cash flow conversion improved significantly and exceeded our expectations. Please turn to slide four in the deck where I'll review some of the third quarter's business accomplishments relative to our long-term strategy.

It was a busy and successful third quarter for Integra. We spent much of our time focused on the integration of TEI into our Orthopedics and Tissue Technologies segment.

Despite some of the normal integration and transition-related challenges associated with any acquisition, TEI product sales were up versus the prior-year's results and performed in line with our expectations. During the first 12 weeks, we focused on integrating the commercial organizations including aligning the sales channels.

We convened the TEI sales team and parts of our Orthopedics and Tissue Technologies team for a national sales meeting to accelerate our integration and commercial plans with a particular focus on education, cross-training and alignment of the channels.

During the third quarter, we also showcased the combined portfolio of our Integra Regenerative Technology products alongside PriMatrix and SurgiMend at several national conferences. Overall, we are pleased with the progress to date on sales force integration, brand positioning and marketing strategies.

In October, we closed the acquisition of the Salto ankle and Futura toe product lines from Tornier.

Combining a product having the clinical experience of Salto with the upcoming launch of our Integra two-piece ankle positions Integra to be a leader in the expanding total ankle replacement market, which is one of the fastest-growing subsegments of extremities orthopedics.

In early August, we completed a very successful offering and used the $220 million in net proceeds to pay for a portion of the TEI acquisition. We also announced the expansion of our credit facility from $900 million to $1.1 billion with favorable terms.

These financing transactions helped to optimize our capital structure and increased our capacity for future investments and potential acquisitions. Recently, the data from our DFU clinical trial called the FOUNDER Study was published in the online edition of Wound Repair and Regeneration.

The data from over 300 patients and 30 sites showed closure rates with our products that were 59% higher than in the control arm.

Importantly, the study showed a median number of one application, which is significantly fewer than current products on the market, delivering a better experience for the patient and a more cost-effective solution to the payer and provider.

We're on track with our plans for a final PMA approval and continue to move forward with training, commercial preparations and final manufacturing ramp-up for a mid-2016 launch. In August, our new collagen manufacturing center started commercial production.

This new, state-of-the-art collagen manufacturing center will be the location where the vast majority of our collagen products will be manufactured in the future and will provide Integra with the capacity to support projected revenue growth over the next 10 years.

The costs associated with operating this facility are running about $2 million per quarter, which is right in line with our estimates. So far, 2015 has been a very productive year for Integra. We continue to focus on consistent execution and delivering on our commitments, acquisition integrations and new product introductions.

It's been about 18 months since our last Investor Day, and we're looking forward to discussing our long-term strategies in more detail. We hope many of you can join us in New York for the event on Thursday, November 12. Now, I'll turn the call over to Glenn to provide a more detailed review of our financial results and update our 2015 outlook.

Glenn?.

Thanks, Pete, and good morning, everyone. We are pleased with our third quarter top line results posting sales of $226.4 million or 14.6% growth over the prior year, and organic sales growth of 7.2%. Both our reported and organic revenue came in better than we expected.

Adjusted earnings per share of $0.75 was at the higher end of our guidance range for the quarter and reflects a 15% increase in adjusted net income offset by a higher share count due to the equity offering completed in August.

Finally free cash flow conversion for the first nine months of 2015 of 80% was well ahead of our prior target for the full year and up from 23% a year ago. Year-to-date higher operating cash flow was driven by higher cash earnings, improving working capital and lower capital expenditures all of which contributed to this important metric.

Now moving on to our segment revenue performance in the third quarter, please refer to slide five where my commentary and changes in year-over-year results will be focused in constant currency unless otherwise noted.

Reported sales in our Speciality Surgical Solutions segment were $147.1 million in the third quarter of 2015, up 7% from the third quarter of 2014. On an organic basis, sales grew almost 6% over the prior-year quarter while the acquisition of MicroFrance contributed about 4% to sales growth.

These increases were somewhat offset by unfavorable foreign currency translation of about 3% in the segment.

The organic growth was largely driven by increased sales in our dural repair franchise, which grew in the mid-teens in the quarter, benefiting from higher volumes with existing customers and increased penetration outside the U.S., including countries like Brazil and Japan.

Sales in Precision Tools and Instruments were up about 5% excluding MicroFrance. We continue to see strength in our Cranial Stabilization product, including our recently launched MAYFIELD 2, as well as prior sales of our specialty surgical instruments as we are now selling direct in parts of Europe.

We are now at our one year anniversary with MicroFrance in the portfolio and remain on track to our initial expectations as the execution and integration have proceeded as planned. NeuroCritical Care and Tissue Ablation continued to see declines due to lapping a strong capital replacement cycle and a large multi-unit order in the prior-year period.

International sales were up 21% in the third quarter driven by the incremental sales coming from the MicroFrance acquisition. Our move to a direct sales channel for instruments in Europe had strong results in China and Latin America.

Our international sales can sometimes be lumpy as a result of some large orders where timing can impact growth, which was also the case this quarter where we benefited from a few sizable orders in Latin America.

Finally, we're raising the lower end of our 2015 segment revenue guidance for Specialty Surgical Solutions by one point to 5% to 6% reported growth, reflecting the stronger than expected performance in dural repair this year. Please turn to slide six for the third quarter segment results for Orthopedics and Tissue Technologies.

Reported sales were $79.4 million, an increase of 32% over the prior-year third quarter, consisting of strong organic growth of 10% and contributions from acquisitions of 25%, offset by about three points of currency. Regenerative Technologies, the largest franchise in the segment, led the overall growth, increasing 17% excluding sales from TEI.

Sales of our Integra Skin products were up over 20% in the quarter close to our growth (10:40) portfolio including recently launched products such as ThinSkin. We've also made significant channel investments such as the additional skin specialists and are seeing increased market acceptance for advanced wound care products in the U.S. market.

Sales of our Titan Shoulder product continue to gain momentum in the third quarter and grew both year-over-year and on a sequential basis. We believe we're on track to exit the year with about a 2% share in the shoulder market. Global sales of our Lower Extremities products continued to trend down in the third quarter as expected.

We made some channel investments earlier this year and are in the midst of refreshing our Lower product portfolio with investments in R&D.

We're also enhancing our Lower Extremities portfolio with new additions such as the Futura toe, Salto ankle and the new Integra two-piece ankle, which we believe will return this part of the business to growth by mid-2016. The acquisition of the Salto and Futura product lines accelerate our entry into the U.S.

total ankle replacement market and broaden our foot and ankle offering with market-leading brands. That said, revenues were declining during the divestiture process and are now on a run rate well below the 2014 reported sales of $15 million. As a result, we expect first year revenue to be in the $7 million to $9 million range.

Due to the reduced and declining revenue base and the investments we believe are needed to refocus and turn the ankle program back to a growth trajectory, we do not expect any contribution to net earnings in year one.

However, we believe the combination of this product line coupled with the expected launch of our two-piece ankle will help to accelerate our top line growth and begin contributing to earnings late in 2016 and beyond.

Turning to full-year 2015 guidance for Orthopedics and Tissue Technologies segment, we are raising the lower end of our revenue guidance by one point to 21% to 24% reported growth. Let me now walk through the updated total 2015 consolidated revenue guidance on slide seven.

Based upon the segment changes that I just reviewed, we're raising the low end of our previous consolidated full-year guidance range by $8 million to a new range of $878 million to $885 million. This guidance range reflects a stronger organic performance in the business during the third quarter, in particular our regenerative products.

As a result, we're also increasing our organic growth rate (13:14) to the full-year 2015 to 6% to 7% up from our previous guidance of 6%. With that change, the implied organic growth range for the fourth quarter is expected to be in the low single digits as we previously communicated.

That being said, we do not see the low single digit organic growth in the fourth quarter as representative of our revenue run rate on a go-forward basis. That wraps up our revenue guidance and discussion. I'll now discuss our third quarter results and the rest of the income statement, and for that, please turn to slide eight.

GAAP gross margin was 62% down 60 basis points from the prior-year's third quarter while adjusted gross margin was 67%, a decrease of 30 basis points. The slight decrease in gross margin percentage was primarily due to the operating costs associated with the startup of a new collagen manufacturing center and DFU validation costs.

Together, these items reduce our adjusted gross margin by about 100 basis points in the quarter. For the full-year 2015, we expect GAAP gross margin to be between 63% and 63.5%, down 50 basis points from our prior guidance, mainly due to projected technology amortization expense related to the recent acquisitions.

Our adjusted gross margin outlook remains unchanged and is expected to be in the range of 67.5% to 68%.

This implies a sequential improvement in gross margin in the fourth quarter of over 100 basis points, which we expect to come primarily from a full quarter contribution from the high-margin TEI portfolio and lower manufacturing costs compared to the third quarter.

Now looking at operating expenses, R&D in the third quarter increased 25% to 6.2% of sales, about 50 basis points more than the prior-year quarter, and sequentially, R&D spending was up nearly $2 million from the second quarter. The increase is largely due to higher spending on product development and clinical studies for key products.

We expect R&D spending as a percent of sales to be between 5.5% and 6%, up slightly from our prior guidance of 5.5%.

Reported SG&A expense increased 260 basis points over the prior year to 50.1% of sales, mainly due to a one-time charge to close out an international pension plan, cost related to the spin-off of SeaSpine and transaction-related cost for the TEI and Salto acquisitions.

Adjusted SG&A expenses in the third quarter of 2015 increased 50 basis points as a percentage of revenue. This increase reflects new channel investments in the base business, as well as higher costs resulting from folding in the TEI business at a higher SG&A spending level. Our 2015 guidance for reported SG&A and adjusted SG&A remain unchanged.

In the third quarter, our adjusted EBITDA margin was 21.1%, reflecting a decline of 160 basis points over the prior-year quarter.

As Pete mentioned earlier, we funded several key investments in the business to fuel our future growth, including the product validations for DFU and the operating costs for a new collagen manufacturing center, which reduced gross margin.

Overall, we remain on track to be slightly under 23% adjusted EBITDA margin for the full year of 2015, which represents a significant improvement over the prior year and essentially puts us on track to our long-term targets two years ahead of schedule while still funding and investing in several key areas, which will fuel our growth for 2016 and beyond.

We also received about $1.8 million from SeaSpine under the Transition Services Agreement, which is a benefit recorded in other income below the EBITDA line. We expect this amount to decline significantly in the fourth quarter and be negligible in 2016.

Based upon our outlook for the full year, we're raising the low end of our 2015 adjusted earnings per share guidance by $0.05 to a new range of $3.05 to $3.10, which reflects 9% to 11% growth versus the prior year despite a 3% to 4% headwind from currency.

Our adjusted net income is expected to grow 17% to 19%, offset by the dilution from the higher share count from our recent equity offering. Implied in our fourth quarter outlook is a slight decline in adjusted earnings per share compared to the prior-year fourth quarter.

This is largely due to a combination of a higher share count, a record quarter of profitability in the prior-year fourth quarter, which included an adjusted EBTIDA margin over 25% and a commitment to certain commercial investments we need to make as we head into 2016.

All this considered, we expect to end 2015 on a positive note with a record year for organic revenue growth of 6% to 7%, a record year for adjusted gross margin of about 67.5%, adjusted EBITDA margin at nearly 23% and double-digit earnings growth while hitting our strategic business objectives.

Turning to slide nine, our cash flow from operations nearly doubled from the prior-year nine months. Free cash flow conversion for the nine months of 2015 was 80%, which is well ahead of our target for the year and up from 23% in the year-ago period.

Over the last nine months, cash earnings have been driven by higher operating cash flows and lower capital expenditures as we wrap up large capital spending programs such as our ERP system. We are raising our guidance for operating cash flow and now expect $95 million to $105 million for the full year.

And we're reducing our CapEx spend to about $30 million, which would result in a free cash flow of $65 million to $75 million. As a result, we now expect free cash flow conversion to come in around 65% for the full year 2015.

Finally turning to slide 10, I'd like to update you on our capital structure after the successful follow-on equity offering and the $200 million expansion of our credit facility to $1.1 billion, both of which were completed in August.

We issued a total of 3.8 million shares and raised just under $220 million net of fees, which was used to finance a portion of the TEI acquisition. Under our current capital structure, we have a net debt of about $660 million, a leverage ratio of about three times net debt to EBITDA and a borrowing capacity under our revolver of about $585 million.

These recent financing transactions have enhanced our capital structure, which combined with a rapidly improving free cash flow profile, sets us up very well to support our long-term growth plans including high-return strategic M&A. And with those final comments, I will now turn the call back over to Pete..

Thanks, Glenn. I want to just take a few minutes to recap our third quarter highlights and 2015 key priorities. We were very active on the transaction front in the third quarter.

We completed the SeaSpine spin-off on July 1, closed the acquisition of TEI on July 20, raised $220 million in equity in August and announced the acquisition of two product families from Tornier. The integration of these acquisitions is proceeding as planned and the transition services with SeaSpine are winding down.

These changes in portfolio mix enhance our relative scale and important target markets, while expanding our commercial organizations can bring new technologies into the Integra portfolio. The team is energized about the new Integra and the opportunities that lie ahead.

We've been hitting our milestones with respect to our DFU strategy and are looking forward to the new product launch planned for mid-2016. At our Investor Day, we'll provide more detail about our market strategy and launch plans for DFU.

Our teams have been laser-focused on execution and I'm really proud of the fact that we've not only met or exceeded our 2015 goals, but we're also closing in on our current 2018 financial targets, including 5% to 7% organic growth and 23% EBITDA margins and we will update our long-term goals and targets at our Investor Day meeting on November 12.

In addition to providing our new long-term outlook, the management team will address in detail our growth opportunities and optimization strategies across the business and highlight a number of products and technologies in our internal R&D program.

A lot has changed at Integra over the last 18 months and we're at an important inflection point as we guide the business towards our next phase of accelerated growth. With that, operator, please open up the lines for questions.

In an effort to accommodate everyone, we ask that you limit yourself to one question and one follow-up, after which you may rejoin the queue. Operator, you can now open up the lines..

Thank you. And we'll take our first question from Travis Steed with Bank of America..

Hi. Good morning..

Good morning, Travis..

So I appreciate you aren't going to give 2016 guidance yet, but can you maybe walk through and quantify some of the investments needed next year, and are you still committed to double-digit EPS growth next year with the equity offering and higher spending levels?.

Yeah. So, Travis, it's Pete.

I'll give some comments and our plan is next week we'll give obviously our longer term views and give a little bit more of a peek about how we think about 2016, but I would just say this relative to 2016, a lot of the key investments that we've needed to make both on the acquired side as well as some of the organic investments are already well in place.

If you think about our channel, you know we talked about adding 75 resources this year, we're almost there. We still have some to execute on. And we plan on finishing that out this year. Many of those reps are in our regenerative world which take 9 to 12 months to become productive.

And so their capabilities start really picking up in the first part of – first half really of next year and start having a bigger benefit as we get in through mid-year. Product-wise, I think we're in a really good position.

Obviously, some of the acquisitions such as MicroFrance and even TEI, we'll have a lot of the key integration done, we'll have a lot of channel worked out, a national sales meeting, extra KOL work, all that's added expense that we're spending right now that we believe we'll be able to roll into next year.

Probably the biggest added expense will be around on the ankle, and part of that is with KOL development, we need to add some other specialists and focus in the field for the Salto but also our new ankle.

And so, that piece will take probably a larger component of investment than any of the other new products, but in the spectrum of overall investments, we feel from year to year it's not a significant increase.

You know, our broader expectations are that when you think about the profile for 2015, how the year has shaped up, that growth range that's 6% to 7%, we see that range coming into 2016 to be very similar.

And clearly, the fourth quarter that we've been talking about quite some time with the harder comp isn't indicative of how we view our go-forward growth. And so, you'll get some more color about products and programs and channels and all that next week, but that's kind of how I would frame that up.

Glenn, I don't know if you'd like to add anything else..

No. I think that's right. You know, relative to, are we committed to double-digit growth, absolutely. That's still part of our long-term plan. So EPS-wise, yes, we're committed to double digits moving forward..

Great. Thanks for the color. Just one follow-up on your NeuroCritical Care and Tissue Ablation business.

Was the reason that it was down in the quarter due solely to tougher comparisons or has there been a slowing in the market for capital?.

No. It's really – it's more comparison. So just to remind you, and we're going to have this same issue in Q4, which is part of our headwinds in Q4, we came out with our first replacement in critical care monitors in 15 years in the last 18 months. They've been highly successful.

Last year was some of our biggest conversions in the second half of that installed base, but once you work through that conversion, then the uptake growth is more about market levels. So that's what we're comparing to last year. I would say on our ablation products, the market has been rather stable, we don't see any major changes there.

And with some of the new indications and features that we have approval, we think that we're going to see some nice uptick as we go into next year. But Q4, it was a record capital year for us last year.

We're teed up to have a good year this year, but from an overall growth standpoint, that clearly will be one of the challenges as far as Q4 comparators..

All right. Great. Thanks a lot..

Yep..

We'll take our next question from Chris Pasquale with JPMorgan..

Morning, Chris..

Morning. Thanks. Pete, I want to start with the Specialty Surgical business. The dural repair franchise performed very well again this quarter, and it really continues to kind of outpace what we think underlying market growth is in that space.

You called out international as a big contributor there, how much of the recent strength has been expansion into OUS markets where you didn't have a presence before and where are you in that process?.

Yeah. Chris, I would say think about it this way. Probably about a third of the growth is coming from the international expansion, and candidly, we need to see that pick up and be a bigger portion of it, but it's probably about a third.

And I would say, roughly two-thirds of it is increased confidence in existing users taking it to more cases in their current portfolio. So a neurosurgeon that might use this for lower skull cases that traditionally used it there.

After seeing some of the clinical work, and other areas starting to use it in other parts of the head when they're doing closures. So that's where a majority of the growth has come. What we need to do to keep growth moving forward is to adopt new users which we have good plans, it's a slower process.

But that's also why we see once you have your current user go into broader application areas within the same indication, that takes your uptick up pretty quickly. Then the new users is what expands it.

And that's why, as we've communicated, we expect to see that slowdown into the mid to high single-digit kind of growth range as opposed to being into the teens or even higher. We're obviously very pleased about that, but we're also very realistic that that will slowly settle out.

And as we think on a go-forward basis, we think that mid single to high single digits will be a good growth area for us. But again, that's predicated on bringing new users into the portfolio, which we've got a good start on. But that hasn't been the core driver to date, it's been an expansion of the product with existing users..

Thanks. That's helpful.

And then just turning to the Extremities business, how do you expect to position the Salto ankle alongside your own? Are there obvious differences between the two platforms that would make them suited for different patient segments or is it just going to be a physician preference issue?.

Yeah. Good question, and we're going to give some more color and detail next week, but in short, physician preference is part of it. They each have different tools. They have different approaches at some level, so there's a part of that. And so we feel quite fortunate to have two platforms in really the fastest growing market within all of extremities.

That being said, the Integra ankle, which you're going to hear more about, has been designed with an eye for new instrumentation, which is about different shared instrumentation. A much more simplified approach to actually launching, or excuse me, doing the procedure.

When you think about the Salto, though, it probably has the highest percentage of history in clinical data of any ankle out in the marketplace, so an unbelievably good track record of data. It also has a very nice revision product.

And so some physicians are looking for as they start into a procedure based on the age of the patient, they typically don't want to start until they have a revision product. Many of the other ankles in the marketplace have no revision options at all. And so the Salto we have the revision product as well. So we see a version of preference.

We also have revision that someone who might take a look at data and also a preference that may associate back with a product that I want to learn, that I can do a highly reliable ankle and do it quite expediently and I'm a new surgeon entering into this.

We think we have different solutions that can meet different personalities and situations, so more to come and we'll talk about that at the Investor Day on the 12th..

Great. Thanks..

We'll take our next question from Matt Taylor with Barclays..

Hi, guys. This is Young Li in for Matt. Thanks for taking our questions.

The first one is, I guess, can you expand a little bit more on your Latin American business? It sounds like a few sizable orders helped, but other than those orders, how's that market doing for you?.

Yeah. So I'll comment and Glenn, if you want to jump in. So our Latin America business, just to remind you, is all distributor based. It is a marketplace that we're in the midst of really optimizing how we think about specific market areas. And just recently, we've added a country manager in Brazil and also in Mexico.

It's a good core growth market, albeit some of the interesting changes that are happening potentially in Argentina or Brazil relative with the economy, our product business has been reasonably very robust.

The way it works with some of the larger orders is, Glenn used the word lumpy, you know you heard the term many times in this business, really it gets back to where there are larger tenders by government hospitals that make an acquisition and have like a sizable buy and then that will decrease maybe in the following quarter.

We see that happening within Latin America, it's not untypical, but we're pretty optimistic about our potential to grow the product lines that we have, particularly in regenerative and our neuro platforms.

I don't know, Glenn, did I miss anything in particular?.

No. I think just to add some additional color, our growth rate in Latin America this quarter was very good, it was over 20%. Again, some of that had to do with some lumpiness in the orders, especially around our dural repair franchise.

So we probably had $1 million of incremental orders above and beyond the normal run rate in Q3 so that adds about two points of international growth to put it into context. But certainly that market is a growing market for us and becoming more relevant, but still relatively small in terms of the overall Integra revenues.

But a fast grower for us and an area of opportunity as we move forward..

Okay. Thanks. And I guess the second question on your M&A objectives going forward, you've got a lot of initiatives on your plate, but also a lot of capacity on the balance sheet.

So can you just give us an update on your thoughts for doing more tuck-in acquisitions over the next year or two versus doing something that's more transformative with more scale?.

Yeah. I would say, you could still define it's very much as a tuck-in focused player, very focused in our three broader clinical areas that sit under our two global divisions.

So the Specialty Surgical area, which can bring us into a lot of different areas of cutting technologies to sealing technologies or glues, if you will, to our world within Regenerative. TEI represents a great example of that of other advanced tissue solutions so other technologies that can exemplify that in the care areas that we planned.

And then the last area is within small bones orthopedics with our product lines, and I think obviously the Tornier acquisitions outline that. So we would expect to do if they line up to that to do a few deals next year that can line up into that area.

I would also say as we're expanding and have more capabilities now outside the United States, we also are interested in looking at opportunities either in distribution expansion or in technologies internationally, and that's an increased focus for us as well as we think about M&A.

So I would characterize it as similar to what you've seen thus far and very much focused in the areas that we've articulated..

All right. Great. That's very helpful. Thank you..

Yep..

We'll take our next question from Glenn Navarro with RBC Capital Markets..

Hi. Good morning, guys..

Good morning..

Good morning, Glenn..

On Salto, you gave us an update on the revenue projections we should be thinking about for next year and I'm assuming that the slowdown in sales, I'm assuming that was expected and not a major surprise as you went through you due diligence, and I'm assuming it's more a function of just distributors dropping the product knowing that it was going to be sold.

So I'm wondering if you can comment on that. Can Salto get back to its previous run rate in 2017? And then I had a follow-up on the upper extremities..

So, Glenn, this is Glenn. I'll comment on this and see if Pete has anything to add, but relative to how we see the revenue growth in the first year, $7 million to $9 million, that's lower than the 2014 run rate. It was expected.

We saw the drop-off in revenues prior to the actual divestiture, so from our perspective, totally expected, we paid less than one-time sales for the actual assets so we got it at a very good price, and we do see this turning back to a growth profile as we get into next year as we make investments in the ankle.

So having marketing, some sales specialists around this area, doing more medical education and so forth, all going to be necessary. But we see this returning to growth at some point in the back half of 2016. I'm not going to comment on whether we can get back to the levels of 2014 revenues. Out in 2017, I think it's too far out, I think.

We can say we expect to stabilize and grow this in the back half of 2016 with the right levels of investment..

Yeah. Glenn, the only thing I would add to Mr. Coleman's comments here are the fact that we feel very good about the product, I think, for what we paid for it and also what we've found as we've taken the product in. Some of the transition took quite some time and so users were switching to the alternative product.

Now as we're kind of stabilizing that, as Glenn said, adding our own capabilities in, we've got confidence that going into the second half of the year we can grow it. And then in compliment with our own ankle, we think that actually adds significantly to our long-term outlook because immediately, we become a key player within the ankle market.

So it's a really nice boost for us and we think it's just a really nice fit at the right time for the team. And again we'll talk a little bit more in detail about this next week..

And as a follow-up on the upper extremities, Titan has had another good quarter. And I was wondering if you can provide a little bit more color behind Titan's performance in the shoulder market.

Was Titan's performance due to the market coming in better? Did you see any disruption because of the right Tornier deal or was this just better execution on your part? Could be all of the above, but I'm just curious if you can give a little bit more color. Thanks..

I would say, Glenn, simply put, we believe it's better execution by our team and we're taking share. We get constant feedback now that from an elegant design of instrumentation that we really have the best in the industry on the design as far as simplicity, ease of use and fit between the Titan Shoulder and the reverse.

Customers like our overall design. Yeah, there was some disruption, but you know candidly, our side, it's more of convincing new users that might have used someone else that this is a platform that you really want to get good at and you want to ride out for the next five to seven years. And I think we're starting to make some traction in that vein.

At the same time, and again we'll speak about this some next week is, we actually have a nice pipeline coming together of glenoid solutions as well as other novel approaches to the shoulder, and we'll give some more updates on that, and I think that's going to also help customers increase confidence that we're a serious shoulder company and someone hat you want to connect with to develop your practice..

Okay. Great. Thank you..

Let's take our next question from Larry Biegelsen with Wells Fargo..

Good morning. Thanks for taking the questions. Just a couple of quick ones from me. Any update on the current situation with the Integra ankle outside the U.S.? And then is MicroFrance, it laps next quarter, is that accretive to growth? Thank you..

Yeah. Larry, look relative to the Integra, we'll be separating ourself from that product as we move into 2016. There will be some tail down working through some inventories, but that will be something that happens very early within the overall year.

And as we've talked about, we also have plans with our Integra ankle, that it will be a product that will have global launch components to it, obviously, both U.S. and select markets around the world.

Your second part of your question was related to?.

MicroFrance. So, Larry, relative to MicroFrance, yes, we're lapping that now in the fourth quarter. We see this as a low-single digit growing business year-over-year as we get into 2016, so it'll be not growing as fast as the rest of the Integra portfolio, but we are expecting to see some growth out of MicroFrance..

Pete, let me just ask this follow-up on Integra given that you're separating, in 2016 you have the option to buy the Salto outside the U.S. They, I believe, believe have a three-piece, so I assume that would increase the likelihood that you would exercise that option, I would imagine.

And just lastly, Pete, on what can we expect at the analyst meeting on DFU just in terms of the strategy and any kind of long-term projections? Thanks for taking the question..

Sure, Larry. That was a good question. I would say, look, we have the option because we want to see to how things play out and so we'll see how things go out of the next year if we decide to exercise the option.

One of the interesting trends that we're seeing worldwide is that two-piece ankles are starting to be preferred in many cases even over a three-piece because of their simplicity. And candidly, not a lot of data is showing that you're seeing significant clinical differences between a three and a two.

But having an option to make that decision, we feel we're in a good spot. So we'll decide as we get further into this.

Relative to DFU, I think you're going to hear about how we're thinking about channel, you're going to hear about how we think about product portfolio, you're going to hear about how we think about marketing position, you're going to hear even how we think about our product packaging and positioning relative to how that makes a difference within the outpatient world.

So we plan on trying to give a pretty broad and detailed overview with some clinical speakers as well as giving you some more detail that in the past, I would say, at least while I've been here in the role, we haven't given as much that level of discussion.

So we hope that you'll think it's a quite rich and detailed overview of how we think about the diabetic foot ulcer space and our strategy within it..

Thanks for taking the questions, guys..

We'll take our next question from David Lewis with Morgan Stanley..

Good morning..

Good morning..

Pete, just a quick question here on – there's clearly a lot of underlying momentum in the business, but I wonder if you could just provide some color on the progression of organic growth this year? So organic growth is going to decline three quarters in a row based on guidance, and I know the driver really is larger comparables, but specifically, the third quarter was your easiest comp of the year and you had lower growth in the second.

And then your fourth quarter has obviously lower growth on the hardest comp of the year, so basically you had sort of declining momentum into the third quarter, but you have improving momentum into the fourth quarter. Just help us understand sort of what's going on an underlying basis would be helpful..

So look, David, I would say if you characterize the year, when we take a look at our organic growth, we've made a lot of good investments.

We did at the end of last year as well on some channel expansion as well, and we also had some nice products that were brought into the portfolio probably by mid-year 2014 that started having bigger impacts and influence really in the first half of the year.

I think this discussion we talked about on dural repair is very much one of the key drivers which is our current user base by taking it into more of their applications, has picked up faster than we even really estimated, and that's where we saw some very nice increases in the first half. I agree with you.

We continue to see ongoing growth in that area, but what's really going to determine the underlying go-forward basis is our ability to bring out new products that are relevant and we feel very, very good about that. Our skin portfolio in our medium to small sizes in our inpatient world is actually accelerating.

We think there's some very good underlying market dynamics associated with the acceptance of these regenerative technologies in a broader set of cases. And again, this is without even launching our diabetic foot ulcer product. You think about the launch of our ankle product, our shoulder continuing to accelerate.

All of those are good items to continue to accelerate through this year. Relative to our profile, you know sometimes that happens obviously with a company of our size, how we think about the growth profile.

But compared to the last two years where we were growing roughly 2%, 3%, to be over-doubling that from an organic standpoint and having a good confidence and view that going into next year we see that growth continuing, we think we've got a really nice profile, again, led by new products from an organic standpoint, products in the portfolio that we've launched previous years that we still have a significant amount of ramp-up.

Shoulder is a good example, 2% share, there's still plenty of runway and ramp-up and growth within there. And then the right investments on channel, both domestically and internationally, and we are now starting to be able to get some more traction outside the United States. So when I look at all of those together, that's kind of how I see it.

At the same time, in third quarter, you got to obviously take into account the spinout of Spine, the acquisition and integration of a couple deals, we had a lot of things going on. Does that have some level of a distraction factor? It does at a minimal amount.

But I think when we talk about our overall growth profile, we feel very good about our capabilities as we go forward..

Okay. Very helpful, Pete. I think that's good clarity. And then maybe a question for Mr. Coleman. I think Pete said Mr. Coleman. I like the sound of it, so I thought I'd go with it. In terms of free cash generation, you're getting closer to 100%.

What are the big drivers next year as it relates to free cash flow improvement?.

Yeah. There's a couple. I think first we're going to have higher cash net earnings relative to our year-over-year performance. Again we're committed to double digit earnings growth and so you'll see that coming through. On working capital, we think there's opportunity to improve our inventory turns.

We've seen some of that improvement here in the back half of 2015, but that's clearly an opportunity for us as we get into 2016 in terms of generating more cash. And then finally, capital expenditures. You've seen the decline in capital expenditures.

We've gotten some of the larger capital projects behind us in terms of the ERP system which is winding down in 2016, and the new collagen manufacturing center was a big outlay of cash over the past couple of years and now that's now complete. So the combination of those items are really starting to generate a higher free cash flow conversion for us.

And again, when we look at 2015, we're now projecting about 65%, and then that will go up from here. So we feel really good about the progress we're making around cash..

Great. Well, thanks very much..

Thanks..

We'll take our next question from Matt O'Brien with Piper Jaffray..

Hi, everyone. This is actually J.P. (47:56) in for Matt. Thanks for taking the questions. I've got to ask one on gross margin. I think you called out the ramp in the collagen manufacturing center kind of being 100-basis point headwind.

How should we think about that going into next year? And then I'm just trying to get at how quickly can that get to 70% in terms of on an adjusted basis?.

Yeah. It's a good question. Relative to the third quarter, you saw the decline in our gross margins. It was very much expected between the collagen manufacturing center and also the DFU validation cost. So those are kind of the two big items. As we go into Q4, the DFU validation cost will be behind us.

So obviously, we still have the cost for the new collagen manufacturing center, but the DFU validation costs will no longer be in our P&L moving forward. That was kind of a one-time item in Q3. We see improving gross margins as we get more capacity going through that facility.

So between our private label business and increased volumes from our Skin business including the launch of our DFU product in 2016, the more volumes we can get through that facility to absorb the costs, the faster we'll see the ramp in our gross margins in 2016.

Relative to when we get to 70% adjusted gross margins, I think you'll hear more about that at the Investor Day in a week or so. So I will just ask you to wait a week or so before we can get some more color around how we can look at our long-term targets and profitability going up the next couple of years..

Sure. Thank you. And then just one more. You touched on a little bit in terms of there's a lot of moving pieces in the quarter with TEI and Salto and maybe "dis-synergies" there.

Is there a way to quantify that? I mean 10% growth is a great number, but could it have been 8%?.

So when you're saying – just if you repeat your question one more time. I don't know if we followed you.

You're saying about the total growth for the quarter, non-organic?.

Yeah. Yeah. So were there any dis-synergies from the TEI integration and maybe Salto that maybe....

Well, I would say – I wouldn't say dis-synergies, but you know, I mean if you're asking the question, if we had already integrated these guys in Q2, could you got had a stronger Q3? The answer I'd always give you post an acquisition is, yes, because you're going to get more capabilities. So we spent time integrating, we spent time training.

If you actually looked at time in the field, we actually had less time in the field for sales people because we had them out training and doing what we needed to do to get them up to speed, so absolutely.

At the same time, how that plays forward is your competency and capabilities increase and that's why as we go into next year, we feel really good about our continued overall growth.

And I think Q4 should be a more, I would say, settled quarter from any of those types of disruptions, but it also is a big quarter relative to our comparisons results to last year. But we think that from a standpoint of any other major changes and things of that nature, we're in pretty good shape.

We've done a lot of the, let's say, investments and changes that need to take place..

Thank you..

We'll take our next question from Jayson Bedford with Raymond James..

Hi, Jayson..

Hey, Pete. Thanks for taking the questions. Just on the quarter, the top line looked good, but the bump in spending was a little higher than we expected, and I realize you're stepping up the R&D investments here, but it looks like this elevated level of spending kind of spills over to the fourth quarter.

So the question is, I'm just wondering, was there any dilution associated with TEI or transitory type costs that will ultimately fall off?.

You know, look, there's some commercial costs, some that I mentioned from some of the ramp-up and training and some of those kind of items that we clearly have. There were some added KOL work that we had to spend on specifically as we brought the ankle into the portfolio, that's one aspect.

And then the other cost components are really more from a gross margin standpoint, which were associated, Glenn talked about, with the plant, where we had validation work and things that went on in the third quarter as well for DFU that are completed now and won't continue on.

But there really aren't – I don't see any other major outliers or items that carry over into Q4, Glenn?.

No. We had methods that we were anticipating having a higher level of investment in the second half of the year around R&D and selling. So we're spending right in a line in accordance with our plans and they were previously communicated. So we're happy to be spending more money in R&D and clinical studies as well as adding more sales capability, so....

Clearly, the amount of sales folks that we were adding this year, you know, we started out with very few in the first quarter, started ramping it in second, bringing more of those on. Q4 brings a full quarter in many cases of that complement onboard.

And so that obviously runs at a higher cost base and not necessarily bringing their full productivity of revenue through yet. But as Glenn said, it's exactly how we thought about the profile this year when we started the plan..

Okay.

On TEI, now that the deal is complete, can you give us an idea of the potential accretion here in the first year under Integra?.

You want to give a shot at it, Glenn?.

Yeah. Sure. So in the first full year, what we've said is, it'll be slightly accretive because of the equity offerings so we netted that out relative to how we think about the increased profitability from TEI.

So TEI is obviously a very accretive acquisition with the profitability profile that it brings with high gross margins and high EBITDA dollars, but it's being offset by a lot of the share dilutions.

So we look at it as kind of net and we expect the first full-year net of the equity issuance to be slightly accretive to our earnings per share, and then it will grow from there as we get into 2017..

That's helpful. Maybe just last one.

On DFU, when can you start selling into the VA?.

Well we can, with existing products, we can start selling into the VA space today and we are just beginning to do so. With the DFU product that's designed for the outpatient location and stuff and all the new packaging, we'll talk more about that next week, but that will be in beginning of next year..

Okay. Thanks, guys..

Thank you..

We'll take our next question from Steven Lichtman with Oppenheimer and Company..

Hey, Steven..

Thank you. Hi, guys..

Hi..

Pete, can you talk about the opportunity that you see looking out over the next few years in the new markets that TEI brings you including soft tissue repair and reconstruction as well as in second-degree burns?.

Yeah. So, Steve, it's a good question. I mean I think, look, from a burn standpoint, it's a market that we know well. It's a market that we have deep expertise in and the complement between second and third degree burns is very strong.

And so we believe that with the product technology we picked up at TEI and our current technology, there's lots of areas that we can continue to focus on innovating and growing within that space. We are so very excited about the new areas that it has taken us into, which is broader plastics and reconstructive work throughout the torso.

So whether it be the possibilities to move into the breast area with the proper types of clinical studies to the businesses that exist today within hernia, which we believe from a fully regenerative product that it's absorbed into the body.

It's really the way of the future of how to think about many of these procedures as opposed to leaving synthetics in the body for life. So we're quite optimistic about it. We've already had some good synergistic discussions between the TEI R&D team as they've become part of the Integra R&D team, and we see some pretty cool stuff that could integrate.

We'll actually give some glimpses into how we think about some of those synergies and opportunities actually next week at the investor meeting, but I'm pretty optimistic about it. It gives us some opportunities to expand into different areas that really can benefit much more broadly with the regenerative technologies that we now hold..

Great. Thanks. And then tax rate guidance touched down a bit.

Glenn, with international really picking up, do you see the tax rate as an additional lever over the medium term?.

Yeah. Listen, I think from a medium-term perspective, we're probably still looking at flat, maybe down slightly.

And what you saw this quarter in terms of a slight reduction in the tax rate, which also is flowing through our full year, is some additional tax benefits we're getting from the MicroFrance acquisition coupled with some higher R&D tax credits.

So those combination of items have resulted in a lower tax rate for the quarter and the year, and as we look out over the medium term, we're obviously looking to do some additional things around the tax rate, but I wouldn't expect a meaningful improvement in the tax rate in the short term..

Okay. Got it. Thanks, guys..

Thanks..

And we have no further questions in queue at this time. I would now like to turn the conference back over to management for any additional or closing remarks..

Thank you and I'd like to thank everyone for attending the call and your questions that you presented. I'd also like to take a few minutes to kind of reinforce a couple key messages. First of all, again, as we stated, we're raising the low end of our revenue and earnings guidance for the full-year 2015.

Second, we closed the TEI and Salto acquisitions and our integration efforts are on track to our plans. Third point is our internal product development is progressing well. We're going to talk more about that next week.

We also published the strong DFU results from our FOUNDER Study, which is on track for a DFU launch in mid-2016, as well as we're quite excited about our controlled market release for our two-piece ankle, which is going to happen towards the end of this year.

Despite an increase in our commercial and R&D investments in the second half of 2015, we are on track to meet our 2015 profitability targets and that really positions us well for success in 2016 and beyond. And lastly, we're looking forward to seeing many of you next week. Again, Thursday, November 12, in New York for our Investor Day.

We think it's going to be a really good session that digs into deeper clinical R&D and some of the market questions that many of you have been asking about. So again, thank you for listening and we look forward to speaking with and seeing all of you in the near future. Thanks..

Thank you..

This does conclude today's conference call. Thank you all for your participation. You may now disconnect..